Netflix Will Raise Prices

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Netflix will raise prices

Long-time Netflix subscribers are in for a surprise next year. The video streaming service will be raising rates for loyal customers.

I logged in to my Netflix account to manage my video quality settings. The account management screen displayed an ominous message: “Your plan price is guaranteed through at least May 9, 2016”.

Netflix maintains the price increase is necessary to keep up with inflation. As technology matures, however, the cost of hosting, video production and other technologies decrease in price. As Netflix gains more members, they achieve a greater economies of scale effect. This should, at least, keep the price constant for people subscribing to the same service. It makes sense to charge more for Ultra HD or multiple screens.

Technology Costs Less Over Time

Remember when computers were first available to consumers? The first home computers couldn’t do much. They typically had 16 – 64 KB of RAM and programs were loaded using a cassette tape. They were expensive. Computers like the Commodore 64 and Atari 800 cost as much as $1000 when they launched. This was back when you could buy a can of coke (in a vending machine) for 25 cents and a $40,000 annual income was considered upper-middle class. Compare that to today, where for less than $200, you can get a computer with far greater capabilities.

Decreasing costs of technology are not limited to home computers. Servers and high-end audio and video production computers have also become less expensive and more capable over time. Tape Op featured an extensive forecast of audio engineering advancements. As time progresses, the cost to produce audio projects has decreased. Indeed, someone with a personal computer, audio interface and some decent mics can produce music with professional results. The capabilities are beyond what major label studios could produce decades ago, at much higher costs.

Technology is getting cheaper and better. Netflix has diminishing data center costs in the future. Furthermore, the cost to produce movies and TV shows also decreases. Of course, certain types of blockbuster movies seem to spend a tremendous amount of cash. If you look at the results, they accomplish what was once impossible. But your typical movie or TV show can be produced for much less these days. This is why there is a proliferation of TV shows and independent movies. There are more shows than anyone can possibly watch. There is no scarcity. The cost of acquiring content has also decreased considerably. Netflix is not getting the blockbuster Hollywood movie that was in theaters last month and cost $300 million to produce. The majority of their programming is relatively inexpensive.

Netflix does face some increased costs. They must pay higher salaries for employees. The price of commercial real estate is also increasing. Both costs are staggering in the San Francisco Bay Area.

The decreasing cost of technology outweighs increasing costs of facilities and employees. Netflix is not a software company. They don’t even run their own data center. With the infrastructure in place, they can add additional content and subscribers without a linear increase in employees and facilities. At best, this means subscribers’ rates should at least remain constant. However, as Netflix grows their subscriber base, they will realize a greater economies of scale effect. (continue…)

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UPDATE: It has been confirmed that Netflix will raise the price of its most popular, 2-stream HD plan from $7.99 to $9.99 in May 2016. This puts the price in line with what new subscribers have been paying since October 2015.

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