An Amazon Prime price bump means fist pumps at Netflix

Amazon is considering a Prime rate increase, and it would push the cost higher than Netflix for the first time. That's good news for Netflix, but -- like Prime's combo of services -- it's a little complicated.

Netflix

Netflix learned the hard way what online video subscribers do in the face of a massive price hike. They scream, they yell, and then -- they flee.

Amazon is considering a price hike of its own. The e-commerce giant said Thursday it is considering raising the $79 a year membership price for its Prime service, which combines free two-day shipping with premium video streaming and e-book lending, by $20 to $40.

That's only good news for Netflix. But how good? The issue is complicated not only by the lopsided competition between the two but also by Netflix's own tinkering with its pricing structure.

Online video subscribers are a price-sensitive bunch. Although the average cost for a pay-TV subscription like cable in the US floats around $100 and gets tapped higher by a few percentage points every year, services like Netflix have a difficult time nudging their relatively low prices higher.

In 2011, Netflix said it would split its DVD-by-mail service from its streaming one, and in the process, its subscription rates would rise from $9.99 for both DVD and streaming to two separate $7.99 bills, effectively jacking up the price by 60 percent. The move enraged Netflix customers. The company subsequently aborted the spinoff idea, but Netflix lost 800,000 subscribers and its stock price dropped 77 percent in four months.

"Once you've picked a price, there's an incredible value in consumer stability," Netflix Chief Executive Reed Hastings said last year, as he told investors and analysts that the company didn't have plans to raise prices for the time being.

By comparison, Amazon's proposed price bump, at the high end, would be a 50 percent boost.

Even at the low end, it still would raise the monthly cost of Prime above the monthly rate of Netflix. Netflix costs $7.99 a month standard; a $20 increase to the Prime yearly membership would boost its monthly breakdown to $8.25.

Fundamentally, that's good for Netflix. The company would be courting a price-sensitive customer with the lower-priced option with a bigger library of content -- one that includes more, higher-budget originals that have already notched high-profile awards and nominations.

However, the calculus isn't so simple.

Amazon's Prime service has always been a strange triple play, combining free shipping, video streaming, and e-book lending. The video and e-book elements of the subscription have always been the secondary attraction of Prime compared with the delivery aspect: Analysts estimate that many Prime subscribers don't even realize Prime Instant Video is part of what they're paying for.

A worker loading orders in one of Amazon's factories. Amazon

In fact, Amazon indicated the delivery element is solely responsible for the possible price increase. Discussing the company's weaker-than-expected fourth-quarter earnings, Chief Financial Officer Thomas Szkutak noted that the $79 price of Prime hasn't risen since it was introduced nine years ago, and that customers are ordering more items across more categories with the free two-day shipping benefit. That increased usage, along with higher costs in fuel and transportation, are the factors that have Amazon eyeing a higher membership bill.

From one perspective, Prime Instant Video is being punished for its attachment to the delivery service with rising costs. Again, video watchers aren't likely to sign up for Prime to watch video when they can get a bigger catalog for less at a more popular rival.

But the delivery element of Prime also changes the consumer's price perception. Instead of looking at Prime and seeing a streaming video option that costs more than Netflix, most consumers will look at a $20 increase to Prime through the lens of retail transactions. To some, the added price may simply equate to what they would probably pay out anyway in four Amazon orders.

Further complicating matters are Netflix's own pricing tests that may raise rates for some customers. The company has been testing options that would charge different prices depending on the maximum number of devices that can watch video at the same time, with higher-priced tiers for more simultaneous streams.

Reed Hastings
Netflix CEO Reed Hastings in a live video discussion of the company's third-quarter 2013 earnings. Netflix video/Screenshot by CNET

According to Netflix's Hastings, Netflix's experiments with pricing are aimed at finding a "good, better, best plan that makes sense to consumers and feels fair." That doesn't necessarily mean that Netflix prices, on average, are rising soon. (And Hastings said Netflix would "would grandfather very generously" existing subscribers at their current rates.)

But Netflix has charted a course of expanding its content, including high-budget originals, and rolling out in new countries, particularly in Europe this year. More movies, more shows, and more countries mean higher licensing costs, which are only becoming more expensive as rivals like Amazon strive to win exclusive content too. Netflix's choices to cope are trimming costs elsewhere, increasing its membership rolls, and upping the revenue it gets from customers every month.

No matter how well Netflix accomplishes the first two, eventually, the membership price will need to go up.

The question is -- what will Amazon's Prime Instant Video service look like when that day comes, and how much will it cost if even more Amazon customers make free two-day shipping their preferred way to shop?

For now, that's a plot line Amazon is letting remain unresolved.

At least if you were watching Netflix, the next episode would automatically start in three, two, one...

 

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