Last week, Netflix announced price increases to customers, their second such move in the past year.

I covered the last Netflix price increase back in December when they raised prices from $8.99 to $9.99 for the unlimited, 1-at-a-time plan. A $1/month price increase, particularly at a time when shipping costs were increasing, seemed reasonable. And I doubt they lost many customers over the move.

This time around, Im not so sure.

Netflix is no longer bundling its DVD-by-mail and unlimited streaming options.

Before the price increase, you were able to get unlimited, 1-at-a-time DVDs and streaming for a combined $9.99.

Youll now have to pay $7.99 for each separately about a 60% increase over the old plan if you get both.

The silver lining is that if you never used streaming, you will now only pay $7.99 for the DVD plan (a $2 decrease). The streaming-only price stays the same at $7.99.

From a Business Perspective

I understand the desire for Netflix to want to separate the two services out from a revenue/profitability standpoint. They will make more money (if they dont lose a significant amount of customers first). Investors agreed by bumping 3% after the announcement.

I decided to dig into Netflixs annual report to find out why. One key to this puzzle can be found in the following statement:

Our business has and continues to evolve rapidly. In 2010, we passed a significant milestone with the majority of our subscribers viewing more of their TV shows and movies via streaming than by DVD. Going forward, we expect we will be primarily a global streaming business, with the added feature of DVDs-by-mail in the U.S.

My belief is that Netflix wants to separate the two completely so it can emphasize the streaming only option more to grow their subscriber base as it will undoubtedly lead to higher margins compared to DVD customers. Im sure it costs much less to stream 4 movies a month than it does to buy, house, ship, and, return ship 4 DVDs a month. This move is to push less profitable customers who were heavy users of the combined plan to one or the other plans (better yet, both).

Its a margin game. That makes sense.

The Big But

The problem I see is that Netflixs streaming only option significantly lags behind when it comes to unique titles. If you want to stream last years summer blockbuster, youre going to find it. If you want something a little more rare, youre going to have to get the DVD shipped to you.

The lack of catalog is why most of their customers ended up in the streaming/1-a-month combo plan. And now Netflix will be charging those customers 60% more. And those customers are pissed (as evidenced by over 5,000 mostly outraged comments on their blog).

The danger in this move is that it might drive customers who wanted both DVDs and streaming to find other options (i.e. the good ole library, Red Box, Blockbuster, Amazon, Hulu) or just cancel the service altogether.

My Personal Take on these Netflix Changes

Ultimately, I view any form of video entertainment as a luxury. Cable TV is a luxury, going out to the movies is a luxury, Netflix subscriptions are a luxury. This isnt food, or fuel, or electricity, its video and you have a choice.

If you dont like the price increases, switch to one of the two plans or cancel altogether. If you select both, theres really no room for complaint. Its a luxury and having the choice of both DVD or streaming makes it even more of a luxury. As Netflix says in their statement: members can easily choose to change or cancel their unlimited streaming plan, unlimited DVD plan. You might be wise to take them up on that.

If youre a Netflix customer, express your intentions in the following poll:

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