When Netflix began to offer streaming movies as part of its online rental plan back in 2008, most people didn't seem to care much. In the intervening three years, however, streaming popularity exploded -- thanks to the proliferation of set-top boxes, multimedia phones and video game systems that could be used to view the content from the comfort of a couch (or pretty much anywhere with a smartphone) without waiting for a disc to arrive in the mail. As many as 5 million subscribers now stream their content instead of using the more traditional mail-order service. This has been a boon for the company since it saves them the cost of postage and shipping fees.
Netflix has been at the vanguard of the streaming movies movement, but things are changing. Competitors are trying to horn in on the action, including Amazon.com. The Internet retailer is offering free streaming services to those customers who sign up for its Amazon Prime program. Apple's iTunes store has been streaming content for a while now, and Facebook could be a potential competitor as well, with their recent deal to stream Warner Bros.' 'The Dark Knight,' possibly opening the floodgates for more movies on the social networking site. This says nothing of the studios, television networks and Hulu -- all who stream content too.
While all of those things are potentially damaging to Netflix's market share, there's a much darker and dangerous menace lurking on the horizon: studio licensing fees.
As Edward Jay Epstein points out in his editorial piece over at The Wrap, Netflix has increasingly become a thorn in the studios' sides. When the company started their streaming services, places like Starz sold them the rights to make the films viewable online for incredibly cheap prices, not realizing that it would catch on and impact their other revenue streams in dramatic ways. DVD and Blu-ray sales are down and one has to wonder why anyone would pay for premium cable TV channels -- which cost more per month than Netflix's streaming plan and don't offer much in the way of viewer control aside from a few On Demand selections -- when thousands of movies are available at the viewer's convenience. Hollywood now realizes they've made a huge mistake -- and the time of reckoning is at hand.
When Netflix made their streaming deals with the studios back in 2008-2009, they were all made for a three-year period. The first wave of those partnerships expires later this year, and it's safe to say that Netflix will not be getting a sweetheart deal this time around. Studios like Starz want "pricing parity" in a new contract, which means Netflix will be paying what the pay-TV networks are charged to air the same titles. To put it in perspective, Netflix got the Starz streaming deal for $30 million. Epstein explains this was 1/20th of what someone like HBO pays. When this math is factored into all of the Netflix studio deals, it means the company is looking at paying over half a billion dollars more per year for the right to stream movies.
Where will the company get this money? That's easy, in theory. The answer: you. Netflix has two options to offset the increase in licensing fees: acquire new subscribers, or raise prices (because the third option, scrapping streaming entirely, seems out of the question at this stage of the game). Raising the price of streaming services isn't likely to sit well with cash-strapped consumers who are watching the price of gas hit $4 a gallon as salaries remain stagnant, but let's be honest -- $8 a month for all the movies and TV shows you can stream is a pretty sweet deal. Netflix has increased the quality of their streaming content dramatically since the service launched (although the horror and action sections are still a bit of a bad direct-to-video movie wasteland) and the convenience factor alone seems to make the service worth $10–$12 a month minimum. The question is, do consumers agree? When the company announced the streaming only monthly plan late last year, it was accompanied by a price hike for physical DVD rentals. People seem to have accepted those increases, so perhaps this will work out too.
Taking a step backwards and lessening the number of streaming titles to keep the fees in range with where they are currently isn't an option. With more places offering streaming services, the onus is on Netflix to continue to move forward, not retreat. If Netflix wants to continue to be the leader in this field, it's going to come at a cost -- and it appears that at least some of that cost will be passed on to the consumer.
Will you stay with Netflix if they raise their prices, or does Amazon or one of the other options seem better? How much would you be willing to pay for Netflix's streaming service as it's currently set up? Become part of our completely unscientific research study by commenting below.