What You Need to Know About Netflix's Price Hike

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NetflixNetflix (NFLX) sent shockwaves through the living room yesterday after revealing that it will separate its mail-served discs and data-slurping streaming service into two distinct pricing plans.

The initial reaction by many of the service's 23 million subscribers has been outrage. Members who had been paying $10 a month to receive unlimited streaming and continuous DVD rentals with one disc out at a time will have to pay $16 a month to keep the Internet videos and red mailers coming once the new pricing kicks in come September. Pricier plans that include more DVDs or Blu-ray discs out simultaneously will also be going up by $6 a month.

Couch potatoes may be ready to take a battering ram to Netflix -- or at the very least kick over their ottomans -- but there's no need to panic. Flinging the remote at the flat screen in a fit of rage will be far more costly than anything that Netflix is springing on its subscribers.

Let's tackle some myths and shake off some demons surrounding this deal. Here are four things you need to know about Netflix's price hike.

1. Not Everybody Will Pay More

The new $16 plan consists of paying $8 a month for streaming and $8 a month for DVDs. The retiring $10 pricing that includes both services never included a way for stream-free technophobes to save money by sticking exclusively to optical discs.

They have a choice now.

Streaming continues to grow in popularity among Netflix subscribers, but roughly one-third of its 22.8 million subscribers aren't taking advantage of the Web-delivered video offering. If they don't intend on making the cyberspace leap anytime soon, their monthly bill can go from $10 to $8 by simply sticking only to the disc-based plan.

The same can be said for the tech-savvy fans who consume gobs of streaming content as they use their Netflix discs as Mountain Dew coasters. If they don't look forward to rectangular red mailers being delivered to their door on a routine basis, they can simply pay just $8 a month for only the streaming plan. Yes, this exact plan has been available since January, but those who didn't bother switching now have a bigger financial incentive to do exactly that.

2. The Move Isn't Part of Some Elaborate and Evil Plot

Conspiracy theorists may argue that Netflix planned this all along. Was this a Trojan horse that gestated for four years before springing up and erecting tollbooths? No. Netflix is simply responding to market forces. It obviously feels that it has the pricing elasticity and the stickiness in both its discs and streams to break out this new strategy now.

Streaming was introduced in 2007 at no additional cost to existing subscribers. The value proposition of unlimited discs and digitally delivered flicks has made Netflix one of the country's most popular premium subscriber services.

Those adjusting their tinfoil hats will argue that this was Netflix's plan all along. Including streams at no additional cost has inspired home theater specialists to hop on the platform with aplomb. All three video game console makers offer Netflix streaming through their systems. Several Blu-ray players and DVR boxes come with built-in access to Netflix's digital offerings. Several component makers even have a shiny red Netflix button featured prominently on their remote controls.

3. People Will -- and Do -- Pay for Streams

Netflix expanded outside of the United States by rolling into Canada last year. Instead of building out a network of regional distribution centers to provide overnight postal delivery, Netflix chose to launch exclusively as a streaming service.

In just seven months, Netflix has landed 800,000 Canadian subscribers. Success north of the border finds Netflix ready to expand into 43 countries through Latin America and the Caribbean later this year. Europe, or at least the United Kingdom, is likely on tap for next year.

There are limitations to streaming. Only some of Netflix's library is available digitally, and that catalog may never include the freshest releases. If a studio can milk $5 through pay-per-view or $20 for an outright sale, why devalue its product by making it part of an $8-a-month buffet line?

However, now that Netflix's digital vault has grown into the tens of thousands, it's not as if subscribers will suffer from a lack of streaming choices.

4. There Are Alternatives

No one is telling subscribers that their monthly Netflix bills have to go up by as much as 60%. There are other ways to consume celluloid these days, and the new pricing may find at least some of the service's subscribers looking elsewhere.

Some members may decide to stick with one of the two offerings and find cheaper substitutes for the other service. Those who choose to continue streaming through Netflix may turn to Dish Network's (DISH) Blockbuster, NCR's (NCR) Blockbuster Express, or Coinstar's (CSTR) Redbox to fill their disc needs for newer releases that aren't available through Netflix's digital vault.

Those who decide to subscribe only to the DVD plans can lean on Hulu, YouTube, and whatever on-demand freebies their cable or satellite television provider offers. Online shoppers who are already paying $79 a month for Amazon.com's (AMZN) Prime program for free two-day shipping on most items also now have access to thousands of videos that can be streamed at no additional cost.

Netflix obviously hopes its 22.8 million domestic subscribers choose to stick around, enjoying the broader streaming content it will be able to acquire if die-hard fans don't flinch at the price change. At the very least, it's about to learn if it's the DVDs or the streams that its customers value the most.

So please put that ottoman back in place. The next few weeks for Netflix may prove to be even more interesting than anything it has to feed your flat screen.


Longtime Motley Fool contributor Rick Munarriz owns shares in Netflix.


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