Netflix’s Inevitable Split

Netflix announced this morning that it is changing its pricing structure for DVD and streaming videos. Starting Sept. 21, unlimited movie streaming and DVD-by-mail will be separate options costing $7.99 a month with the option of combining the two for $15.98 a month, or double what a standard Netflix subscription now costs. The announcement comes as a surprise to those that thought that Netflix would eventually kill off its DVD-by-mail business and only offer streaming video.

It was inevitable that Netflix would change its pricing structure. The company started as a DVD-by-mail operation at $7.99 a month and operated with that as its primary business model until the unlimited-streaming option became available in 2008. It is a wonder that it took this long for Netflix to unbundle the two options and make them separate sources of revenue.

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Several things pop out about this announcement. Foremost, Netflix is not going to kill off its DVD-by-mail business any time soon. We had reported in January that it looked like DVD-only would not be a route that Netflix would choose, but it appears they have reversed course. Jessie Becker of Netflix explains the rationale on Netflix’s blog:

“[W]e have realized that there is still a very large continuing demand for DVDs both from our existing members as well as non-members. 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. Creating an unlimited DVDs by mail plan (no streaming) at our lowest price ever, $7.99, does make sense and will ensure a long life for our DVDs by mail offering.”

Netflix is restructuring its infrastructure to reflect the split between streaming and DVD divisions. Andy Rendich, Netflix’s chief service and operations officer, will lead the DVD-only division.

If successful, the move will help Netflix expand its user base from its approximate 23.6 million subscribers, as well as increase revenue from existing members who want both the DVD and streaming options. Increased revenue will help Netflix build the war chest it will need for innovation, device expansion and, most importantly, content partnerships with movie studios and content producers.

Netflix launched streaming-only in the U.S. in November, 2010. As international expansion began and the company looked to serve every possible customer, a split like the one announced today was necessary. With it come pricing changes that Netflix devotees will have to learn to deal with.

What do you think? What Netflix subscription is right for you? Are you willing to pay almost $16 to get both DVDs and unlimited streaming?

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