If Netflix is piracy's antidote, it must be wary of price increases: Peter Nowak

Don't bite the hand that feeds you...

Don’t bite the hand that feeds you…

To the surprise of virtually no one, Netflix is raising prices. And soon – within the next few months in some places, according to financial results released by the company on Monday:

Our current view is to do a one or two dollar increase, depending on the country, later this quarter for new members only. Existing members would stay at current pricing (e.g. $7.99 in the U.S.) for a generous time period. These changes will enable us to acquire more content and deliver an even better streaming experience.

That “generous time period” could be two years, if the Irish experience is anything to go by. Netflix raised its subscription price in Ireland by one euro to €7.99 in January, which resulted in “limited impact.”

While few observers believed such low subscription costs could be sustained for long, Netflix does have to tread carefully. The streaming service straddles a fine line between expensive cable TV services at one end and free file-sharing at the other. It’s only been a few short years since the company emerged as Hollywood’s antidote to that perceived scourge. Over that time, it has converted more than 35 million potential file sharers into customers who are at least paying something for some of the shows and movies they watch. While file-sharing used to account for the largest share of Internet traffic, it’s now Netflix that accounts for about a third of all bandwidth usage.

The conundrum, however, is that many of those people signed up precisely because Netflix was a veritable bargain. Complaints about poor selection, especially in Canada, continue to dog the company even though it is producing its own growing catalog of quality programs, including House of Cards and Orange is the New Black. Producing content, however, is considerably more expensive than simply licensing it, an issue that Canadian broadcasters are only too familiar with.

Escalating content costs could turn those value-conscious customers off, especially if Netflix can’t ramp up its quality correspondingly. House of Cards is, after all, a great flagship for the company, but not everybody is into American political drama.

The company is also facing cost issues elsewhere, as its earnings letter clearly spells out:

The Internet faces a long term threat from the largest ISPs driving up profits for themselves and costs for everyone else… If the Comcast and Time Warner Cable merger is approved, the combined company’s footprint will pass over 60 percent of U.S. broadband households, after the proposed divestiture, with most of those homes having Comcast as the only option for truly high-speed broadband (>10Mbps). As DSL fades in favor of cable Internet, Comcast could control high-speed broadband to the majority of American homes. Comcast is already dominant enough to be able to capture unprecedented fees from transit providers and services such as Netflix. The combined company would possess even more anti-competitive leverage to charge arbitrary interconnection tolls for access to their customers. For this reason, Netflix opposes this merger.

Internet providers everywhere are watching to see how the Comcast-Netflix rivalry shakes out with U.S. regulators, because they would doubtlessly like to engineer interconnection deals similar to the one the streaming provider was recently forced to sign with the cable company. In that sense, there could be plenty more bad news in store for Netflix, and therefore its customers.

All of this is to say that prices are inevitably going to go up and up. The real question is how high can they go before the dragon of piracy is roused from its slumber?