Netflix's Blu-ray pricing: A boon for Blockbuster?

When Netflix announced on Monday that it has decided to raise the subscription prices for those receiving Blu-ray Disc titles--10 percent of its subscribers, according to the company--the predictable occurred: people lashed out, saying Netflix is gouging customers.

In case you missed it, the new fee structure tacks on $1 per tier of the plan you're on. So if you have a one-film-at-a-time plan (two-movie allowance per month), your monthly cost has risen from $4.99 to $5.99. If you want three films at a time (unlimited movie allowance per month), your cost has risen $4, from $16.99 to $20.99. Fees are up substantially on other plans too.

Predictably, many looked at the announcement as Netflix capitalizing on consumers. Those who are upset with the release say the increase is too high. And since Netflix doesn't need to pay for packaging, and it probably gets a discount on media, given the number of copies it needs, they believe that the company is gouging customers.

I contacted Netflix for comment regarding this contention. A representative responded to me within a few minutes. He said the cost of Blu-ray discs is 30 percent higher than that of DVDs, and more of the company's customers are switching to Blu-ray, generating higher operating expenses. A $1 additional charge for Blu-ray access on all plans wasn't cutting it any longer, he said.

The representative then directed me to the company's official blog post on the matter for more information. So after all that, we still don't know how much Netflix pays.

But regardless of the motives behind this deal or the fact that some people are upset, we can't look at Netflix pricing in a vacuum. Quite the contrary, we need to compare its pricing to the competition to determine if it's still the most affordable option on the market.

Much to my surprise, Netflix might have committed an incredible blunder that it needs to address immediately: Blockbuster brick-and-mortar stores now have the more affordable option for standard Blu-ray rentals.

If we look at Netflix pricing and compare it to pricing at local Blockbusters (I called three stores to confirm Blu-ray prices), it quickly becomes clear that, assuming that you're renting high-definition films, Blockbuster is more affordable.

Let's say that you own a PlayStation 3 and want to rent Blu-ray films. But instead of renting 10 films per month, you want only the occasional movie, so you rent about one film per month. If you want that movie in Blu-ray format, it will cost you $4.99 at Blockbuster. But if you rent a Blu-ray movie on Netflix, you'll pay a flat monthly fee of $5.99.

But let's say you're a movie buff, and you want to rent three films during a month. Those three films at Blockbuster will cost you $15 before tax. On Netflix, you'll pay a fee of $20.99 before tax for a three-film plan. You'd have to replace two of the three films over the course of the month to beat the Blockbuster deal.

But it gets better. If you want the top-tier Netflix deal, eight films at a time with Blu-ray access, you'll be forced to pay $56.99 now. Assuming that you rent (just) eight films during a month on Blu-ray from Blockbuster, and return them on time, you'll be paying $40. And that doesn't take into account the fact that some of the films you might receive from Netflix will be regular DVDs, which are even cheaper at Blockbuster brick-and-mortar stores.

It's true that after subscribers start sending films back, they will save money with Netflix. The Blockbuster prices also don't account for late fees and the cost of gasoline used, as well as general inconveniences oriented with heading to a video rental store (i.e. not always finding what you're looking for). Netflix eliminates annoying shoppers and empty shelves, offering predictability and convenience. But if you're someone who wants to grab films at the local store without waiting for the mail, and you'll watch about one movie per weekend, Blockbuster may turn out to be a much better deal.

Blockbuster's by-mail service, TotalAccess, is now cheaper too. If you want three films (potentially in Blu-ray format) at the same time and no limit on the number of films you can rent during the month, Blockbuster's plan is $19.99. Netflix's comparable plan is $20.99, with Blu-ray availability.

TotalAccess is just as convenient as Netflix's service. You get your films delivered to your home, you don't have late fees, you won't need to pay for the cost of gas, and the films will always be available. In other words, TotalAccess provides all the same benefits as Netflix's offering for a lower price.

OK, so maybe you can make the case that Netflix plans include streaming. But Blockbuster plans include in-store exchanges, and the company's streaming plan calls for $4 per rental. Once again, if you rent just a few movies per month, it's cheaper to use Blockbuster's streaming service than Netflix's.

Am I the only one who is vexed by Netflix's new Blu-ray pricing scheme? The $1 surcharge for Blu-ray was understandable. But once Netflix started charging this much more for its plans, it turned into a mistake, in my estimation. The company just handed over price leadership (among its more run-of-the-mill users, at least) to its main competitor for no good reason. What gives?

Netflix is now the most affordable option if a) you return films to Netflix throughout a month or b) if you return films to Blockbuster late. Are those situations normal? Sure. But given the current economic conditions and the fact that we're all trying to save some cash where possible, how long will it take before subscribers realize that they can potentially save money by going to Blockbuster to pick up that movie or by subscribing to TotalAccess?

I never thought I'd say this again, but the brick-and-mortar option (from Blockbuster, no less) just trumped the by-mail rental business for me.

Am I the only one who thinks that's ironic?

Check out Don's Digital Home podcast, Twitter stream, and FriendFeed.