January 3, 2014 at 6:24 p.m. PST
Netflix is market testing new pricing tiers. The new, reduced pricing structure accounts for the number of simultaneous streams. Netflix stock was down slightly on the news, raising concerns over an increasingly competitive streaming video landscape. The stock ended up recovering, closing at 0.08% over its opening price.
The New Pricing Tiers
Currently, Netflix users can view two simultaneous streams with the basic streaming subscription, priced at $7.99 a month. This allows families and friends to share one Netflix subscription. This practice is encouraged by Netflix, as they allow users to create multiple profiles for one account. Netflix even offers four simultaneous streams for $11.99.
The new pricing structure would reduce the cost for many people. It would offer one stream for $6.99 a month and three simultaneous streams for $9.99. It’s unclear whether the new pricing structure would replace the $7.99 and $11.99 options for 2 and 4 streams, respectively.
The new pricing is currently being market tested in a few regions. It may only be rolled out to certain locations.
Netflix has to be careful about pricing, as the last major change to their subscription price caused their stock to plummet. Netflix stock has more than recuperated and CEO Reed Hastings is getting a 50 percent raise in 2014.
Why is Netflix Stock Flat?
The market moves in mysterious ways. While rumors of the new pricing tiers have not caused the stock to plummet, Netflix did lose some steam on an otherwise positive day for the market. The stock did end up recovering, but the momentum indicates that the new pricing tiers may have spooked a few investors.
One would think that a more affordable and competitive Netflix would increase investor confidence. However, it demonstrates concern over the competitive landscape. Netflix is now competing with Amazon and Redbox in what’s becoming an increasingly crowded video streaming market. There are other players, such as Hulu and Crackle, however, their offerings are more complimentary to Netflix, as opposed to competitive. There’s also the possibility that Apple could reinvent television as we know it, perhaps offering some streaming service of their own to supplement a la carte iTunes purchases.
With Netflix stock at an all time high, some investors are taking their money and running. While Netflix is poised to dominate streaming video, uncertainty can spook some investors. News of the pricing tiers had limited effect on Netflix stock, unlike the 2011 dive caused by the introduction of new pricing tiers.
If anything, it seems Netflix has learned its lesson. They’re trying to build revenues by growing membership. They will likely need to increase prices some time in the future, however, radical price changes are unlikely. This is good for both stock holders and subscribers.
The Future of Netflix?
The future is uncertain. Amazon is the 700 pound gorilla. They’re very good at selling products and services at a loss to dominate markets. People are familiar with the Apple e-books pricing scandal. What many don’t know is that Steve Jobs was trying to stop Amazon from dumping e-books at a loss. Kindles are similarly priced below cost.
Amazon makes money in other ways. They are well diversified. They can afford to sell certain products at or below cost in order to dominate a market.
Amazon offers free streaming video to their Prime subscribers. The Amazon Prime service also offers free two-day shipping on millions of items and access to 350,000 e-books — all for the low price of $79/year. That’s less than $7 a month. It is unclear whether Amazon Prime subscriptions are sold below cost. Given that an Amazon Prime subscription offers much more than streaming video, they are competing with Netflix and offering services that can’t be matched.
The other problem for Netflix is that they aren’t vertically integrated. The move to produce their own content is a step in this direction. Netflix, however, does not run their own data center. Netflix streaming services are hosted by Amazon. This reminds me of the tactic Leyland Stanford used to acquire land from farmers. He owned the railroads and priced crop transportation at a level that bankrupted farmers. Then he purchased their land for much less than it was worth.
In today’s modern, regulated economy, it’s much more difficult to be a robber baron. Still, the fact that Netflix depends on Amazon for their most essential services puts them in an awkward position. It’s not illegal to raise prices for such services. Eventually, Amazon could put a strangle-hold on Netflix, making it difficult for the streaming video provider to increase profitability.
I wouldn’t write Netflix’s obituary just yet. Netflix has some amazing original content, and developing these products can differentiate them from their competitors. Amazon is also developing their own original content, but so far without as much success as Netflix.
Data center operations are a major concern for Netflix. The company needs to improve on vertical integration. As it stands, one of their biggest competitors is in a position where they could damage Netflix. With Netflix gradually phasing out DVD-by-mail rentals and moving to streaming exclusively, hosting their own data center only makes sense. Economies of scale have made Amazon hosting more cost-effective than running their own data center. As data center demands increase, it may be a logical step for Netflix to host their own content. After all, 4K video is going to take up a lot of bandwidth!
There’s another way to look at this. Perhaps there is a symbiosis. Amazon makes money by hosting Netflix. Wiping them out could impact their profitability. No one is sure how this will play out, however, Amazon has a history of dominating markets by selling products at or below cost. The market still loves Netflix, however, the new pricing tiers indicate that Netflix is revising its strategy for an increasingly competitive streaming video market.