Tag Archives: Netflix

Rising Prices that Hit Home

Learning about inflation in Econ 411 and other classes, we economics students are familiar with the slow creep up in prices over time. At the current target rate of 2%, however, it is hard to notice inflation on a day-to-day basis. One must look at a long time period to see the true impact. Prices, however, can be sticky as firms raise their prices in larger increments over longer periods of time. As a piece in today’s Business Insider points out, two notable American consumer oriented businesses are planning notable price hikes within the next quarter – Chipotle and Netflix. Business Insider laments the negative effect this could have on American consumers who have faced higher than natural unemployment and stagnant wages but I believe that the two companies are right in increasing their prices.

Let’s start with Chipotle. Founded in 1993, the company has grown to over 1,500 locations and revenues of over $3 billion annually. From my experience, Chipotle is an incredibly popular fast dining option for most people I know from college students to families. It is also one of the most affordable. A full feature burrito or burrito bowl without guacamole or other extras currently costs less than $7. I have always viewed Chipotle as a high quality, value option when selecting a lunch or dinner spot. The news, therefore, that they are raising prices, did not really surprise me as I always believed this would be a possibility. The food items that go into burritos are commodities and Chipotle does not have much control over the cost of its food inputs. According to the company’s first quarter earnings release:

Food costs were 34.5% of revenue, an increase of 150 basis points driven by higher commodity costs. Higher commodity costs were primarily driven by inflationary pressures in beef, avocados, and cheese prices.

According to BusinessWeek steak prices have increased by 25% already this year while cheese and pork could rise by as much as 10% as well. It is fair for any company to pass on price increases to consumers, especially one that has maintained a steady price level for years like Chipotle. As with any item, the concept of price elasticity tells us that a price increase will likely lead some consumers to not buy the good, but considering that Chipotle is only planning an approximate 5% price hike, the increase should not deter too many hungry customers from buying burritos.

Netflix’s price hike brings up a similar point. Since they introduced their online streaming service in 2008, Netflix’s streaming subscriber count has passed 33 million in the US alone. And since they split their DVD mail order business from the streaming business in 2011, the price of a streaming subscription has remained $7.99 a month. As the company has accumulated more and more digital content – from AMC hits Breaking Bad and Mad Men to original content blockbusters like House of Cards and Orange is the New Black – the price of acquiring premium content has gone up. In order to continue to accumulate a world class content catalog, it makes sense for Netflix to increase the monthly subscription price by a dollar or two.

While Business Insider brings up a great point about the negative impact this could have on the American consumer, the danger is overblown. These are very small increases in services that were priced very reasonably to begin with. It will be interesting to see what impact this has on the number of customers at these two companies, but I can say that I will remain a loyal customer at both.

(Revised) Netflix to Pay Comcast; May Cause Future Problems

A couple of months ago, Netflix announced that they would be paying Comcast for faster streaming to Comcast’s customers. Comcast, who recently acquired Time Warner, is the largest internet service provider (ISP) in the country with around thirty-two million households as customers. This move may have unintentionally harmed Netflix, other internet based companies, and setback everyone in the United States who requires access to speedier internet. This post will analyze the effects on all three of these groups of actors in the internet market.

1) Netflix

While Comcast is the dominant internet provider, there are numerous other internet providers who have just gained a substantial bargaining edge with Netflix. Since the move has increased streaming speeds for Comcast’s Netflix users, CNN reported that Netflix is in talks with Verizon and other ISPs to work out a similar deal. While the financial terms of the Comcast deal haven’t been announced, I think it is a fairly safe bet that this was costly for Netflix. They may have the cash on hand to pay Comcast and Verizon for this kind of arrangement, but It would surely be too expensive to pay every ISP in the country. Additionally, if an ISP wants such an agreement, what is to stop them from slowing Netflix’s streaming speed if they don’t pay up? Despite entering these agreements to pay ISPs, Netflix is publicly condemning the fact they have to in order for their customers to stream their movies and TV shows at a reasonable pace.

2) Other Web Based Companies

Not only has this move opened Netflix up to the problems mentioned about, they have set a dangerous precedent that may force other websites into such arrangements in order to get the same speed for their users. This will particularly effect websites who have massive traffic but don’t have the massive revenues to pay ISPs.

Since the previously slow streaming speed on Netflix was the result of their massive number of users, we can assume that internet speed is a zero sum game. If one website loads faster, others must load slower. This will also pressure websites who don’t want to frustrate users with slow load speeds to enter into agreements with ISPs and pay them so that their users can enjoy the same speeds.

3) Internet Users Everywhere

Finally, internet users in general are harmed by the direction that net neutrality is headed. Websites who previously had very minimal advertising may be forced to cover their websites with banner ads to make up the revenue that will be spent paying internet service providers. While the websites that we use that do agree to pay for faster streaming will speed up, other websites who don’t have the cash to pay ISPs will relatively slow down. 

A Proposed Solution

As the FCC’s net neutrality rules no longer hold ISPs from throttling websites’ speeds, ISPs are in a position to take advantage of websites, as they are doing with Netflix. To stop this, websites like Netflix can stop entering such agreements and instead use the money to help fund or lobby for increased expansion of services like google fiber, the 1 gigabit internet that is reasonably priced relative to companies like Comcast. (Currently it is only offered in a handful of cities). If Netflix would simply refuse to pay Comcast, Verizon, and other ISPs and instead try to help google fiber reach the entire country, there would soon be no need to pay for increased speeds, and websites would have no problems loading faster than ever.

Netflix to Pay Comcast may Cause Future Problems

Netflix just announced that they would be paying Comcast for faster streaming to Comcast’s customers. Comcast, who just acquired Time Warner, is the largest internet provider in the country with around 32 million households. This move may have unintentionally harmed Netflix, other internet based companies, and everyone in the United States who requires speedier internet.

While Comcast is the dominant provider of internet for households, there are numerous other internet providers who have just gained a substantial bargaining edge with Netflix. If Netflix is willing to pay Comcast, they should also be willing to pay these other internet providers around the country. However, this could prove costly depending on the details of the payment (which weren’t announced). If Netflix customers who stream from a provider other than Comcast are angered by this and membership for this subset of their users begins to drop, Netflix will have to act quickly to pay other internet providers to increase streaming speeds.

Not only has this opened up Netflix to potential problems, they have set a dangerous precedent for other websites that get massive traffic but don’t have the revenues of Netflix and can’t pay for better streaming. Since the slower streaming on Netflix was reportedly caused by the massive number of users, apparently internet speed is a zero sum game. If one website loads faster, others must load slower. This will harm websites like reddit or wordpress who generate a high volume of traffic but don’t have the massive revenues of companies like netflix. While deals like this one between Netflix and Comcast aren’t governed by the rules of net neutrality, this certainly affects it. (net neutrality is defined by google as “the principle that Internet service providers should enable access to all content and applications regardless of the source, and without favoring or blocking particular products or websites.”)

Finally, the users of the internet are harmed by this. Not only will sites necessarily revisit their stance on ads (probably in favor of selling more) to make up for the increased cost of paying internet providers for reasonable streaming speeds and loading times, but this will keep the expansion of services like Google Fiber (which offers 1 gigabit internet) from speeding up. If Netflix would simply refuse to pay Comcast for their speedier streaming and instead used that money to promote the expansion of faster internet services, then the need for paying Comcast and other internet providers would eventually become nonexistent. But for now, I guess we can just envy the handful of lucky cities and their google fiber, go home to our Comcast XFinity connected homes and be content with streaming House of Cards marginally faster.