

We predicted that a lackluster streaming library would get Netflix into trouble, but now that managers have made it more expensive to rent DVDs, the problem is exacerbated.

First off, I'm going to say it: I told you so.

Two weeks ago, I wrote that people who watch a lot of movies via Netflix's streaming service are starting to find holes in the selection . In some genres, such as action films, the titles are bottom of the barrel. I predicted that this was going to become a bigger issue in other movie categories as people started working their way through the library.

I had no idea that Netflix was only going to exacerbate the problem by making it more expensive to rent DVDs. Sure, subscribers can supplement the streaming service with disks as a way to fill out the dead spots in Netflix's selection. But that's bound to be less appealing with the new pricing structure-- now many customers are threatening to quit the service .

Yesterday, the company announced a price hike and said one reason for it was that Netflix subscribers continue to order DVDs at a high rate, one that the company didn't anticipate. CNET's Don Reisinger has more details about the new plans, but it breaks down like this: There are no longer any hybrid plans that offer access to DVDs and Internet streaming. There's one plan now for DVDs and a separate plan for streaming. Each costs $7.99 per month (for one disc at a time). To access discs and Web video, people have to pay for both plans and that means $15.98 a month.

Seeing red


Now Netflix finds itself awash in angry comments, which are appearing on Facebook, Twitter, the company's own blog and even on newly created Web pages, as ticked-off subscribers rip Netflix on this issue. For instance:

 Someone named Bob Meyer wrote this in the comments section on Netflix's blog: "I hope the streaming selection gets a whole lot better. I've been buying a lot of videos from Amazon Instant Videos because Netflix doesn't have them, maybe I need to switch to Amazon for my streaming, too."

 A Mitch Bartlett wrote: "This price change wouldn't be so bad if you put more movies on streaming. Right now the streaming option is loaded with stuff nobody would ever rent."

 And someone who identified herself on Netflix's blog as Beth Case wrote: "It's no longer worth (being a Netflix subscriber) with the limited streaming catalog. At least before if it wasn't available on streaming I could probably get it on DVD. Not worth $16 for ONE DVD at a time and streaming."

Streaming movies over the Internet is Netflix's future. Streaming is cheaper for the company than shipping DVDs through the mail, and for subscribers, streaming is far more convenient. Netflix, which now has more than 23 million subscribers, has credited Web distribution for the service's rapid growth the past two years. CEO Reed Hastings has said that moving the business model to streaming would save money and that the extra cash would be used to acquire more and better films and TV shows.

Related links
 Hollywood wants share of Netflix's windfall
 Netflix spooks Hollywood more than ever
 Netflix subscribers now equal Comcast's
ZDNet--Netflix's pricing backlash: Follow the money, churn rates

The costs of content are going up for Netflix as the six top Hollywood movie studios have begun to play hardball. This is no trumped-up excuse. I've written extensively about this and so have many others.

But for Hastings and his management team, which has led the company on a charmed run the past two years that saw Netflix jump to a huge lead in the Web video sector and a long run-up in the company's share price (Netflix shares closed trading Tuesday at $291 a share), the fee increases appears to be their first real miscalculation in a long time. They appear to acknowledge that they misread the demand for DVDs and they certainly appear to have mishandled preparing customers for the price hike.

"We have realized that there is still a very large continuing demand for DVDs both from our existing members as well as non-members," wrote a Netflix manager on the company's blog. "Given the long life we think DVDs by mail will have, treating DVDs as a $2 add on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs."

People are going to get angry anytime a favorite service raises prices by a large amount, and in this case, the price of a subscription for some Netflix customers will go up by 60 percent. But the reality is that Netflix's price for streaming a disc rental is $16, far less than a cable subscription, which can run over $100.

Amazon and YouTube, which both offer better selections than Netflix in some genres, charge by the rental. At YouTube, visitors can rent movies for $2.99 and $3.99. The prices are similar at Amazon. If you jump to these other services for their selection, I don't blame you, but if you're doing it just because of Netflix's rate increase, you might want to pause and do the math.

You would only need to rent five movies a month at YouTube's and Amazon's prices before you would be paying more than Netflix's new $16 DVD/streaming fee. These other services also don't have as many options for watching streaming video on a television set.

The fact is, Netflix is still the best deal around.


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