Netflix Price Increase Will Help Amazon

Douglas A. McIntyre

No one knows how many new customers will come into the premium streaming video market in the next several years. It is already crowded with competition that includes Inc. (NASDAQ: AMZN) and Apple Inc. (NASDAQ: AAPL), which have tens of millions of clients for their abundance of other products and services. Each can market video products to these bases. And the old world competition of pay TV fielded by cable and satellite television has held its own in subscriber counts. Cable has the leverage that offering broadband bundled with video brings.

At the center of all this skirmishing is Netflix Inc. (NASDAQ: NFLX), which has 35 million paid members in the United States. As it adds new ones, it plans to charge them more than the $7.99 it makes current customers pay, by as much as a dollar or two. Current members will be spared for now. The increase may allow Amazon to pick up customers that Netflix might otherwise have gotten.

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Amazon keeps its video subscriber count a secret, along with nearly everything else it does. Its video service pricing is complicated because it is tethered to other services that are part of what its calls Amazon Prime. For $99 a year, up from $79 recently, members get Prime Instant video from a library of tens of thousands of moves and television shows. Members also get “free two-day shipping” for many items. This only has value to people who buy products from Amazon’s inventory of millions of products. Members also can get free books through the Kindle Owners’ Lending Library, which assumes that members have a Kindle.

Amazon also has the capital to launch original shows of its own, the way that Netflix has. The plans are risky, because new shows may not bring in many news customers, and they compete with scores of shows created for the broadcast and cable networks.

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In most industries, price increases curtail some customer additions. Netflix cannot be sure where those barriers are or how many potential customers will react to them. A dollar or two does not seem to mean much, until frugal consumers face it. Amazon’s package may be more attractive to some consumers, at least those who care about “free shipping.” Netflix is taking a risk, and it is a big one. Netflix may have been better off keeping prices low while the war for market share in its industry is still in relatively early stages.