Earlier this month, Netflix made an unpopular (but at the same time necessary) decision to raise prices. The price hike was $1 per month and only applied to its second tier of service, which includes HD video and allows for two simultaneous video streams. Speculation arose that the Netflix price increase was tied to issues with password sharing, which Parks Associates covered heavily in The Cost of Piracy earlier this May. Naturally, this reignited the conversation surrounding OTT password sharing and whether or not it constitutes piracy (TL;DR, it’s complicated). Therefore, password swappers beware, as you must either pay up or subscribe to the lowest tier. However, there are two factors to keep in mind when considering Netflix’s price increase.

1. The idea that consumers will flock to the lowest tier of service to avoid the price increase does not make sense. It does not follow the concern of people swapping passwords. If multiple households are paying for an account, a $1 per month increase would mean a max increase of 50 cents a month (provided two or more households are paying for a single account). That really is not that big a deal. Additionally, it is unlikely that a substantial number of customers will forego HD service just so they do not have to pay that extra $1 a month. Quality still matters.
2. More than the issue of password sharing, Netflix is figuring out that creating and distributing their own content is really expensive. While it is great that their big hits like House of Cards and Orange is the New Black are so popular and keep getting renewed, cast and crew for those shows expect budget increases, contract bonuses, and raises. Netflix cannot turn to advertisers and demand an increased premium for the show’s time slot since there is not a broadcast time slot and Netflix does not have advertising. The only ways for Netflix to pay for increases are to incur more debt or to increase subscription prices. The rate increase is simply a revenue generator, not a piracy deterrent.

Netflix ultimately decided to grandfather in current customers and only charge new customers the extra $1 per month, but current customers will not pay the same price indefinitely. Current customers will enjoy a grace period with their old $8.99 per month rate, after which a phase-in period will follow when customer rates will increase to $9.99 per month based on when the customer joined. While customers are understandably upset with the move, the fact is that Netflix still offers a lot of content for a low price. When faced with the prospect of unlimited viewing, $120 a year for HD does not sound all that bad for the consumer, password swapping or not.