Why Netflix Prices Will Climb Further

Though Netflix seems to be expecting a loss of perhaps a million subscribers as a result of its recent price changes, it is virtually certain that retail prices will grow in the future. The reason is simple: Netflix content licensing costs are certain to grow dramatically.

Up to this point, Netflix costs have hinged principally on the cost of acquiring the DVDs it rents, as well as postage costs and the normal overhead a business requires. Netflix already is signaling that its future business will be defined by TV programming, not movies. That means the licensing cost profile will change, even if Netflix does not continue to invest in original or exclusive programming. And Netflix certainly will do that.

Put simply, Netflix now will have to bid for content in the same way that programming networks do, and that will be expensive. And those costs necessarily will be passed along to customers. In fact, Netflix executives seem to signaling that the movie rental business, especially in the form of DVD rentals, will be a thing of the past.

Some will fault Netflix for making a risky pricing move. Others might say the move is a bold signal that Netflix is about to get into a new business, not simply based on streaming instead of DVDs, but a change of business from "movie rentals" to "television."

Netflix is betting it can primarily become a provider of streamed TV content, instead of a provider of movie content. Some might say the difference is that where Netflix used to compete with Blockbuster Video, in the future it will compete with Hulu. At a secondary level, where Netflix used to compete with premium cable TV networks such as HBO, in the future it might start to compete with cable TV.

Netflix chief content officer Ted Sarandos says the company ran into trouble with its forecasts for streaming video and DVD rental subscriptions because it’s still adjusting to the decision in July to turn them into separate products. “Being able to precisely forecast and predict the behavior of that many people on a fairly radical change is something we’ll get better at all the time.” Forecast miss

The key point is that Netflix is about to embark on a business model change much more substantial than simply "how" movie content gets delivered to its customers. Netflix now will try to become a substantial provider of TV content. Some would argue that is the real challenge.

Although “the DVD business has a long life in middle America,” Sarandos says “it’s just not part of our future.” That's a clear signal.