Netflix Goes the Wrong Way

You may have never heard anyone proclaim that Netflix is too expensive, but that's not stopping the leading premium video service from rolling out a cheaper plan. 

Netflix is starting to test a subscription offer that will set new users back just $6.99 a month. There are two potentially major sacrifices that folks looking to shave a buck off the traditional $7.99 per month plan will have to make. The first difference is that the account can only be used by one person at a time. Netflix's flagship plan can be shared by two people streaming content on different devices simultaneously. That's probably not a deal breaker to folks who live by themselves. The second distinctive feature of the new test offer is that streaming video is only available in standard definition. This might be a higher hurdle to clear, but it may make sense for folks with limited bandwidth or who can't tell the difference between high-def and standard definition.

Those two differences will likely push most folks who receive the test offer to stick to the original $7.99 per month plan. Saving three pennies a day isn't so compelling. It's not like the recent $11.99 a month plan that allows up to four devices to stream Netflix content at the same time. 

However, this sends a wrong message to investors by suggesting that average revenue per subscriber may inch lower as customers consider the cheaper tier.  

"We introduced our streaming only plan at $7.99 in 2010," Netflix wrote in its quarterly letter to shareholders back in April. "We've been adding more content to the service ever since, and are very happy with membership growth at this low price point."

The comment was in response to the common analyst suggestion that Netflix increase its price in the fashion that pay TV slips through its seemingly annual increases. Without that, the fear is that Netflix's upside is capped by the low price point as it maxes out its addressable market. 

Anyone pulling up a stock chart on Netflix can argue that the limitations of a low price ceiling hasn't kept the stock back. Shares of Netflix nearly quadrupled last year! However, unless Netflix introduces a long overdue pay-per-stream platform for new releases or current TV shows the way that its rivals or pay TV providers do, investors will start to worry about average revenue per user shrinking as the number of DVD subscribers continues to contract.

Netflix may have its heart in the right place with this new plan, but it sends the wrong message.

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Longtime Fool contributor Rick Munarriz owns shares of Netflix. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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