Netflix Hikes Prices: What Consumers and Investors Need to Know

Netflix Inc. NFLX announced Tuesday that the price of its services - DVD mail delivery and online video streaming - would increase for all members by September. The move has ramifications across the media and content distribution industry, and investors and consumers quickly devoured the news and its implications. First: Netflix had to increase prices because content owners like movie studios are realizing the strong potential of video streaming. Companies such as Sony SNE will demand more for the content they produce, and companies like Netflix will be forced to pass on the higher prices to customers. Second: The increase in price will force consumers to take a hard look at their entertainment budget and how they consume their media. Between iTunes songs, digital cable, high-speed internet delivering online video, and others, the possibilities are endless. The average person's discretionary income, however, is not. Third: The media entertainment industry is continuing to change as content producers and distributors agree to terms. Pricing is still being worked out, and companies will take some time to figure out what consumers are willing to pay for. Between music, TV shows and movies, a lot remains to be determined with how online streaming will ultimately work. Investors and consumers should consider the following: 1. Expect difficult negotiations for both sides of the table. The future profitability of all companies involved will depend on the agreed terms, and it will certainly affect stock price. 2. According to the New York Times, "For millions of customers, the shift in price might change the daily calculus of an entertainment diet made up of a myriad of choices: cable television packages, online streams, Redbox rentals and iTunes downloads. The price increase spurred complaints from thousands of Netflix customers on Facebook and other Web sites, some of whom said they may now rely less on physical DVDs and more on online options." 3. Netflix has 20 million customers in the United States. How many of those people can afford a doubling in the price they pay for videos? 4. How will competitors like Hulu and Comcast CMCSA fare? Will consumers jump to new alternatives? 5.Will big players like Google GOOG or Microsoft MSFT get involved?