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Netflix: Increased Prices, Damaging Deal News, and Big Stock Drop All in One Day

| September 1, 2011
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In July, after the infamous Netflix price hike for those customers who want the option of both streaming movies online and receiving DVDs in the mail, some tech pundits told KQED Radio’s Michael Krasny that the Los Gatos company’s new pricing plan was meant to incentivize customers to ditch the discs and go totally digital.

That may be a much harder sell now. The cable network Starz said today it won’t renew a deal, expiring at the end of Feb, 2012, which gives Netflix customers streaming access to newly released films from the Sony and Disney catalogues. Starz is a pay cable network that owns the TV and online rights to those studios’ movies.

From the LA Times:

Premium cable network Starz Entertainment will end its deal to provide movies to Netflix, a surprise decision that will deprive the popular online video service of its most valuable source of recently released movies…

Starz, which controls pay-cable rights to movies from Walt Disney Studios and Sony Pictures, signed its current agreement with Netflix in 2008. At that time, online video was watched by only a small number of tech-savvy young people and the estimated $30 million per year the cable network received was seen as new revenue that would have little impact on its traditional television business…

The only other recently released movies Netflix gets for its streaming service come from Paramount Pictures, Lionsgate and Metro-Goldwyn-Mayer via cable channel Epix. HBO, which has offerings from 20th Century Fox, Universal Pictures and Warner Bros., has refused to partner with Netflix.

Update 4:35 p.m. Our news intern Nick Fountain just talked to Gartner media analyst Mike McGuire about Starz’ announcement:

“One could be cynical and think that what we’re seeing is a couple of folks negotiating in the press,” McGuire said, noting the deal doesn’t expire until next February. But if the relationship does end up severed, he said, “with Sony and Disney removed from the mix, one has to wonder if there wont’ be some issues for the customers of Netflix at seeing what could be important titles from those studios not being available to them.

“But we’re going to see more [developments] like this as these online services are having to battle with a lot of the incumbents over licensing and content rights.”

McGuire said some of the immediate drop in Netflix shares today may be due to programmed trades, “where people were saying if the Starz things go this way or that way, sell. But I think the savvy investors are going to wait to see what actually transpires between now and February, 2012.

On whether the Starz announcement was timed for the same day that Netflix is raising prices for some customers, McGuire said, “Is that coincidental? Probably not.”

Listen to the interview below:

Audio: Mike McGuire on Netflix – Starz Pt 1

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Mike McGuire on Netflix – Starz Pt 2

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Mike McGuire on Netflix – Starz Pt 3

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Here’s the press release from Starz:

Starz Entertainment has ended contract renewal negotiations with Netflix. When the agreement expires on February 28, 2012, Starz will cease to distribute its content on the Netflix streaming platform. This decision is a result of our strategy to protect the premium nature of our brand by preserving the appropriate pricing and packaging of our exclusive and highly valuable content. With our current studio rights and growing original programming presence, the network is in an excellent position to evaluate new opportunities and expand its overall business.

Netflix shares have dropped over eight percent after-hours since the news broke.

Ironically and either coincidentally or intentionally enough, today is the day that Netflix users get hit with the big price hike — as much as 60 percent for dual streaming/mail customers.

AP has run this helpful article on how to navigate the new price scheme:

How to prepare for Netflix price increase

The toughest choice most Netflix customers usually face is figuring out which movie to put at the top of their queues.

But millions of Netflix subscribers will be wrestling with a new dilemma as they decide how to respond to price changes that will hit the video service’s existing customers beginning Thursday.

The new system will impose substantially higher rates on customers who want to keep renting DVDs through the mail and enjoying the more immediate gratification of streaming video over high-speed Internet connections.

Here are a few factors for Netflix subscribers to consider:

Find out which day of the month Netflix bills you.

Click “Your Account & Help” on the top right, then look for the next billing date in the center. That is when the new rates take effect. For example, if Netflix doesn’t charge you until the 22nd of each month, you still have another three weeks before being charged more to have both DVD rentals and Internet video. If you usually get billed on the second day of each month, you will need to make a change promptly to avoid being charged more.

Know the new prices.

For the first time since it introduced Internet streaming in 2007, Netflix is offering DVD-only plans. For $8 per month, customers can rent an unlimited number of DVDs per month, with a maximum of one disc out per time. DVD-only plans allowing two discs out at time will cost $12 per month and three DVDs at a time will go for $16 per month.

The cheapest package that combines Internet video and DVD rentals (one disc at a time) will cost $16 per month — up from $10 per month under the old system.

The price for an Internet-streaming only plan remains $8 per month.

If you’re among the customers who want to keep just one of Netflix’s entertainment options, assess what you like to watch on the service and how you watch it.

Internet streaming is more convenient because there’s no waiting for video to be delivered by the U.S. postal system. It also enables viewing on personal computers, tablet computers and phones, besides television sets. The negatives: It requires high-speed Internet access, which isn’t cheap, and Netflix’s streaming library is about one-fifth the size of the 100,000 selections in the DVD section.

DVDs remain the best way to see the latest movies after they have ended their run in theaters. In some cases, Netflix must wait four weeks after DVDs go on sale in stores before they can mail them to customers, but that’s far better than Internet streaming where the wait can last several years.

Internet streaming is better for watching good documentaries (which sometimes are available at the same time as the DVDs), catching up on past seasons of TV shows and enjoying older movies.

If you like to watch series such as “The Wire” and “Curb Your Enthusiasm” that have previously been shown on HBO, stick with DVDs because those titles have never shown up in Netflix’s streaming library.

Before abandoning Internet streaming, remember it is probably going to keep getting better because it is Netflix’s top priority. Netflix has left no doubt that it intends to spend big bucks to make its streaming library more compelling.

Keep some perspective. Sure, a 60 percent increase sounds outrageous, but it’s only $6 more per month to have your DVDs and Internet video, too. Most people could cover that cost by cutting out one or two visits to Starbucks or some other store each month.

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