BOSTON (TheStreet) -- When chit chat over a poker game last week turned to Netflix's (NLFX) decision to raise prices for its DVD-delivery and Internet-streaming services, Darren Chervitz, director of research for Jacob Asset Management, became very nervous.Everyone at the table planned to change part of their subscription to Netflix's service, Chervitz says. Some planned to drop delivery of DVDs and Blu-Ray discs, while others complained that the quality of the streaming content wasn't worth the increased price. As his firm is an investor in Netflix, it was not what Chervitz wanted to hear.
"I wonder why they're doing this at a time when competition is starting to get more aggressive," Chervitz says of Netflix's decision. "Is this the right time to be mucking around with your pricing plans when I'm sure Amazon ( AMZN) and Apple could get more aggressive?" Chervitz does give Netflix's management team, led by CEO Reed Hastings, the benefit of the doubt, saying the service is still a good deal compared with most other entertainment options. "People can complain about $16 per month, but I'm paying well over $150 for cable," Chervitz says. "On some levels, it is silly. You have to trust management a little since they've made decisions in the past they have been very successful." Other investors in Netflix are taking the price-hike in stride. While the price increase took him by surprise, Herb Chen, manager of the Huntington Growth Fund ( HGWIX), echoes Chervitz's view that management knows what it is doing. "Management has been intelligent enough to this point. I'm in the camp that this will work out to their benefit," Chen says. "This will be a push toward streaming video, which is where the future lies. We'll look back in two or three years and realize they had it exactly right and they knew what they were doing." Chen notes that as recently as a year ago the company was primarily known as a DVD-by-mail company. Now the company's Internet-streaming service is its calling card. "That's where the margins will be," Chen says. "In the overall run, this is the direction they want to head in. That's what is dictating the new pricing structure." Netflix, which reports quarterly results after the closing bell Monday, has seen gross margins improve from 33.3% in 2008 to above 37% last year. Subscriber growth is another reason Chen is a fan of Netflix. Net subscriber additions year over year have slowed in the last three quarters, although total subscribers are up 63% from a year ago as of the first quarter. Netflix is the eighth largest equity position in the $140 million Huntington Growth Fund, representing a 2.3% position as of June 30. Chen is also bullish on Netflix's decision to expand geographically outside of the U.S. "They haven't grown geographically to the point that they can fully, so they're still in the infancy stage of their life cycle," Chen says. -- Written by Robert Holmes in Boston. >To contact the writer of this article, click here: Robert Holmes.
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