Streaming Isn't There Yet

A time might come when it would make sense for Netflix to charge a significant premium for its streaming, but the service has not yet reached that point. Although its streaming library has grown significantly over the past few years, a huge portion of desirable movie and television titles remain unavailable by stream. Using my own Netflix queue as an example, just 3% of my selections are available by stream -- and less than one-third of my queue's titles were released in 2010 or later. If Netflix wants customers to pay a lot more for streaming, then it needs the quality of its service to better reflect its cost.

Netflix Doesn't Need the Money

The oddest part about this rate hike is that Netflix doesn't really need the money. It recently increased its fees (announced last November) by between 7% and 17%. Moreover, its profits have been strong over the past couple of years. And in the first quarter its profit soared 28%. It may want additional revenue to acquire more licensing to stream more titles, but a big rate hike like this may do more harm than good.

Netflix May Lose Money

In fact, this pricing change could easily cause a decline in Netflix's revenue. Last night, when I got home from work I told my wife about the rate hike. She was coincidentally watching an old Diane Lane movie she found scouring the Netflix streaming library. But without taking a beat, she said, "Oh, we can cancel streaming. It isn't that good." If you don't think a service is worth its price at the moment you're using it, that's a pretty bad sign. Many subscribers will agree that streaming isn't worth the extra money at this time.

How much could Netflix lose? Let's do a quick analysis. According to one estimate, about 80% of Netflix subscribers currently have by-mail service that includes free streaming. Of that portion, let's say half cancel streaming but keep by-mail service. Remember, many people don't use streaming at all. In particular, if you don't have an Internet-ready device connected to your television with a Netflix widget, then streaming is far less attractive. Through Netflix's new pricing, by-mail only service will be about 20% cheaper than the current rate that includes free streaming.

If you assume that all of its revenue comes from subscribers, then its first quarter revenue would decline by 8% to $661.1 million from $718.6 million. This would reduce its profit of $60.2 million by $57.5 million, or by 95%! Netflix will have some subscriber growth as well, but the assumptions above aren't crazy. If a large portion of subscribers shed their streaming, then Netflix could see a huge hit to its profits. And remember, this assumes that no subscribers cancel altogether. Some will.

Terrible Timing

Let's imagine for a moment that Netflix's streaming service is robust enough to warrant a big rate hike. Even then, putting that rate hike in place now is a pretty bad idea. The economy remains weak, as Americans are still nervous about the future. Inflation has also been squeezing Americans' budgets. As they look for ways to save money, Netflix just gave them an easy one: don't pay more for video streaming unless you really can't live without it. By dumping the service, not only will you escape the big fee hike, but you'll actually save money on your by-mail subscription service under the new plan.