It appears that Verizon (NYSE:VZ) and Redbox’s joint streaming service will hit the market sometime in December and will be priced cheaper than Netflix’s (NASDAQ:NFLX).  There is no doubt that competition is growing for Netflix and several big names such as Amazon (NASDAQ:AMZN), Dish Network’s (NASDAQ:DISH) Blockbuster, Comcast’s (NASDAQ:CMCSA) Xfinity Streampix and now Verizon-Redbox, are making strides in the streaming business. But that’s not the extent of the threat. It also appears that most of these competitors are trying to undercut Netflix in pricing. That’s the last thing that Netflix wants since it can not really afford to reduce its own prices due to mounting content costs.
Take a look at Amazon Prime for example. The service is priced at $79 a year, which amounts to less than $7 per month compared to $7.99 per month for Netflix’s service. Despite a lower pricing, Amazon has been able to enrich its content. Over the past year, the company has set up deals with NBC Universal, News Corp’s Fox and ABC in addition to several other players for content. It recently expanded its video collection with a performance-based pricing deal with Epix – a partnership between Hollywood studios Paramount Pictures, Metro-Goldwyn-Mayer, and Lionsgate. After the deal, the service has a video library of almost 25,000 titles.
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If we look at Comcast, its service is priced at $4.99 per month which is substantially lower than Netflix’s fee. Comcast has been rather opaque regarding its success with the streaming service but can be safely assumed as a formidable competitor. Now Verizon’s Redbox Instant service is being priced at $6 per month for starters, with $8 per month option to get credits that can be used for DVDs. 
These big competitors don’t have streaming as their main business, and therefore, can afford to squeeze streaming margins if the success helps them improve their broader mainstream business. That’s where the danger lies for Netflix which can not really afford to get more competitive on price now. Netflix will need to get better content to differentiate itself and justify higher pricing relative to competitors.
Our price estimate for Netflix stands at $81, implying a premium of little over 5% to the market price.Notes:
- Scoop: Key pricing and launch details of Redbox Instant revealed, GigaOm, Nov 29 2012 [↩] [↩]