Tuesday, July 26, 2011 at 10:32 am.

Netflix already proves that raising DVD prices was the right move

Wall Street is punishing Netflix today for its earnings report yesterday, in which Netflix admitted that its insane growth rate would slow down a little after it changed its subscription plans and effectively raised prices on DVD rentals.

But anyone running away from Netflix today is missing the bigger, long-term picture: Netflix made exactly the right decision, and it’s already working.

The only statistic that mattered in Netflix’s quarterly report to shareholders yesterday is this: Almost 75% of new subscribers are signing up for the streaming-only plan, reflecting a “gain in popularity.”

For Netflix and the movie rental industry, streaming is the future, and mailing discs around the country in envelopes is not. This isn’t just based on a hunch — it’s based on real people signing up for new Netflix accounts.

To move Netflix and the industry forward, Netflix CEO Reed Hastings must be laser focused on his next 25 million subscribers. Already, only 1 in 4 of them wants to rent DVDs from Netflix. That percentage will continue to drop, and Netflix is smart to speed up that process however it can.

That means creating the right streaming packages for them and acquiring enough good content for them to stream. And that means separating costly DVD rentals from streaming, and trying to push both Netflix subscribers and Hollywood studios away from plastic discs.

Yes, raising DVD rental prices may be a hardship or an annoyance for some of Netflix’s existing 25 million subscribers, and that’s why Netflix warned that the next few quarters could be worse than usual. But it’s very clear that streaming is the future and discs are not. And that’s why Netflix made the right move.