Some Thoughts on the Netflix Price Hike

I started subscribing to Netflix in 2003.  There was a hiatus for a couple of years when The Wife and I lived very close to a Blockbuster, and we even tried their streaming/mailing service when it launched, but the long waits for everything and the ultimate closure of our Blockbuster put the final nail in that coffin.  Living where we do today, there isn’t a video rental store within several miles, and we burn up our subscription – we have the 5 DVD plan with Bluray and it’s only by the iron fisted management of the Chief Queue Mistress that we’re kept in the appropriate quantity of DVDs.  We are also Amazon Prime members gaining access to their streaming service and while I do own Amazon stock, I don’t own any Netflix stock.Waking up to the firestorm over Netflix’s change in their pricing was amusing to me.  Everyone everywhere was melting down, but I thought it was a smart decision that probably needed to be made, even though it was going to be painful.  Price hikes are never fun, particularly when you begin charging for something that you’ve always done for free.  No matter what people are going to hate it, but my take on this boils down to the following points:

  • Netflix has a very short window to expand its offering globally before competitors start making that road a lot harder.  Last year was Canada, this year it’s Latin and South America, next year they’ve announced they’re hitting the UK and Spain.  A linchpin of any global expansion strategy will be their streaming service – it’s cheaper to scale initially and can be maintained and improved by engineers working on the core platform.
  • Netflix’s content prices are undoubtably going to skyrocket over the next five years.  Streaming was an afterthought, almost experimental foray when it started, and there was no competition, but content owners are going to want to extract their toll now that they’ve seen how well it’s worked.
  • Those customers (in my own unscientific scanning of the comments and arguments) who complained the loudest chose to denigrate the streaming service as a “weak library”.  If that’s the case, choose the DVD option.  Problem solved.
  • Very roughly, lets say all 85k people who whined on Facebook cancel, and lets say all other complainers are added in for a total of 150k cancellations due to the change.  Netflix loses something like $1.5 million dollars per month.  Assuming everyone is only on the cheapest plan which we know is not true, they’ll gain an additional six bucks a month from their 25 million subscribers, netting them an additional $150 million a month.  They’ve lost less than 1 percent of their subscriber base and made out like bandits.  A price hike that only loses you 1 percent of your subscriber base?  That’s an amazing success story.
  • That extra revenue will be immediately deployed to taking their service global AND buying better content to bolster their streaming service.  The angry cancelers will find they don’t have any serious alternatives, and will be re-subscribed within six months or less.  Blockbuster?  Redbox?  These are the alternatives that are out there, and they all suck.  Hulu might pick up some, but there simply is no replacement for the massive library of DVDs by mail.

Could their communication have been better?  Maybe, but nobody wants to hear that things you’re getting for free are now costing more.  That’s how revolutions are started.  Better to just announce it and take it on the chin like they did.  One thing that all the complainers forget is that Netflix is probably one of the most data driven companies in existence.  They’ve already ran the model, and will be within a few points on how many subscribers will leave.  They know the alternatives, and they know their plans for expansion.  Who wants to bet that this price hike perfectly correlates to how much additional revenue they project they’ll need for expansion and content acquisition?  From where I sit, it looks like a really really smart move that should pay off huge within the next two years.  I doubt there’s going to be an apology forthcoming like some so-called market experts have advised in the press. Maybe it’s time to rethink the fact that I don’t own their stock…

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