I’m sure many of you are aware that Netflix announced a price hike a couple of weeks ago that seemingly came out of the blue.
Netflix will no longer offer a $9.99 package of DVD-by-mail and unlimited streaming, the company said in a statement today. Instead, more than 23 million subscribers will pay $15.98 monthly beginning Sept. 1 if they choose both options, or $7.99 for just one.
Some people have speculated that this attempt by Netflix to kill off, or sell off, their mail-order DVD business by making it prohibitively expensive. They think that most people, when faced with this price hike, will choose the streaming option and leave optical media behind even though there are a lot of titles that are not available via streaming on Netflix.
I’m not so sure that this is what’s going on.
Content costs and new competitors: As streaming video gets more popular, Netflix is facing two headwinds: studios and potential rivals.
Netflix was able to score comparatively cheap streaming deals when the service first launched, but now content providers want to be paid more for the content they’re providing. One analyst predicts Netflix’s streaming content licensing costs will rise from $180 million in 2010 to a whopping $1.98 billion in 2012.
If that prediction is true, and Netflix faces a ten fold increase in how much it spends on licensing streaming content, I think they are positioning DVD rentals as an emergency parachute if it becomes prohibitively expensive for them to offer the same size streaming library at the same price.