Netflix price rise draws user ire, investor glee

LOS ANGELES Wed Jul 13, 2011 4:18pm EDT

A DVD rental from Netflix is seen against the company's website in Medford, Massachusetts in this July 25, 2008 file photo. REUTERS/Brian Snyder/Files

A DVD rental from Netflix is seen against the company's website in Medford, Massachusetts in this July 25, 2008 file photo.

Credit: Reuters/Brian Snyder/Files

LOS ANGELES (Reuters) - Netflix Inc's hefty price increase provoked an unprecedented outpouring of outrage on the Internet, but Wall Street cautiously welcomed the move, sending its shares up nearly 3 percent on Wednesday.

Thousands of subscribers complained on Netflix's official blog with many threatening to cancel subscriptions after the fast-growing video service raised prices by up to 60 percent for users of both its streaming and DVD-mail service.

Many said they would consider options such as Hulu, the Internet video service owned by Comcast Corp NBC Universal, News Corp, Walt Disney Co and Providence Equity Partners, or even Redbox, whose once booming kiosk-rental service had been eclipsed by online, instant Web offerings.

"Who's genius idea is this crap?" said one comment on the Netflix blog, which promised to cancel service. "Your streaming selection sucks and the Red Box is looking better and better these days!"

The higher prices clearly stirred passions among the company's subscribers, but Netflix brushed off the criticism as expected from a vocal minority.

"We knew there would be some people who would be upset," company spokesman Steve Swasey said.

The increase amounts to $6 a month for one DVD at a time plus unlimited streaming.

"To most people, it's a latte or two," he added.

The company expects some cancellations, Swasey said, but he declined to say how many.

Some industry analysts argued the higher prices should make up for cancellations, in part by driving customers toward more profitable Netflix plans.

Subscribers who cancel are likely to be in lower-priced plans, with one DVD at a time, who turn in more DVDs, said Goldman Sachs analyst Ingrid Chung.

"Gross margins should benefit as we believe that the majority of lower-priced (subscribers) were less profitable for Netflix," Chung said in a research note.

Lower-priced subscribers also might be drawn to the streaming service, "which has very incremental margin," wrote Chung, who has a "buy" rating on Netflix shares.

The new prices take effect immediately for new subscribers and in September for current customers.

Netflix's price rise comes as it finds itself writing increasingly large checks for the rights to the movies and TV shows its customers expect to find from its streaming service.

In one such deal, Netflix renewed on Wednesday a multi-year agreement with Comcast Corp's NBC Universal, giving it rights to stream previous season hits such as "The Office" and Parenthood" from NBC and series, including "Keeping Up with the Kardashians" and "Psych", from its cable networks. The financial details were not disclosed.

Netflix said on Tuesday it was raising by 60 percent the monthly price of a plan that lets subscribers watch unlimited movies and video online and get DVDs by mail.

The price for unlimited streaming plus rental of one DVD at a time will run about $16, up from about $10. Subscribing to just streaming, or just one DVD at a time, costs about $8.

One comment on the Netflix blog was more accepting.

"If you can improve your streaming selections it would be a benefit. I now pay the price of both anyway so I don't see a downside for me," wrote a person identified as "Scott."

While customers vented on the Netflix blog and Facebook page, the company's shares rose 2.6 percent to close at $298.73 on Nasdaq.

(Reporting by Lisa Richwine and Paul Thomasch; editing by Andre Grenon)

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