Subscribers Take A Hatchet To Netflix' Pricing Script

by Thom Forbes, Sep 16, 2011, 7:39 AM

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We consumers collectively told them so, but they went ahead and did it anyway. Now they're paying the price, which is to say that they've got a company on their hands this morning that's worth 19% less than it was 24 hours ago, and is down about 40% since it announced what amounted to as much as a 60% price increase on July 12.

We're talking Netflix, of course.

Exactly a year ago today, Businessweek's Ronald Grover published a story that carried the hed: "Netflix: Premium Cable's Worst Nightmare." The piece concluded: "As more home entertainment gear becomes Web-ready, Netflix is poised to become the first true online rival to cable movie channels."

Today's headlines tell a different story. As the AP's Michael Liedtke puts it, the company's decision to raise prices is "turning into a horror show." And despite its protestations it knew what it was getting into, you have to believe that it didn't think that the reaction would get this bad or it may prove to one of the daffiest business decisions this side of a streaming Ralph Cramden.

The company had expected to add 400,000 subscribers in the current quarter, which ends Sept. 30, but it appears that it will lose 600,000, leaving it with 24 million users in the U.S. instead of the 25 million it previously told investors to expect, Ben Fritz points out in the Los Angeles Times.

"We know our decision to split our services has upset many of our subscribers, which we don't take lightly, but we believe this split will help us make our services better for subscribers and shareholders for years to come," Netflix says in a statement.

And Ted Sarandos, Netflix' chief content officer, admitted at a press conference yesterday that the company had underestimated its customers' reaction. "Being able to precisely forecast and predict the behavior of that many people on a fairly radical change is something we'll get better at," he said.

The company still has its defenders on Wall Street. Forbes' Eric Savitz tracks at least three: Piper Jaffray analyst Michael Olson, Nat Schindler of Bank of America/Merrill Lynch and Jamie Townsend of Town Hall Research all keep their "buy" ratings for the stock.

Although Olson remains bullish on the company, pointing out that "the drop in DVD subs was expected and somewhat intended," he does say that "the company needs to see an offsetting uptick in streaming subs and that has not yet happened."

But Savitz also tallies seven "bears," who are either neutral or say "sell." Many of them cite the increasing competition.

"We believe it will be increasingly more difficult to support its high valuation in the face of headwinds tied to Usage Based billing, a deceleration in sub growth, and an increase in competition that will likely trigger an increase in content costs and SAC [subscriber acquisition costs]," writes Jenney Capital's Tony Wible.

But, reports the Wall Street Journal's Ian Sherr, it's unclear where the subscribers who leave Netflix are going.

"While companies like Amazon, Apple and Hulu LLC have been beefing up their Internet video offerings," he writes, "they either lack the scope Netflix has, or don't offer an all-you-can-eat subscription."

Let's grant Netflix the benefit of the doubt and say that it's just getting a little bit more than it bargained for when it decided to wean us off the U.S. Postal Service. Still, there's a big difference between streaming and watching a video that comes in the mail.

Say you're about 15 minutes into "The Hangover, Part II" and decide it's about as inane a movie you have seen since the days of celluloid. If you've planned your Friday night around watching it on your Blu-Ray, you're likely to waste the rest of the night trying to get into a sophomoric mood. If you've streamed it, however, it's a matter of moments before you've found a cure: streaming episodes of Ralph Cramden and the rest of the "Honeymooners" from somewhere on the Net.

Loyalty to Netflix itself may turn out to be just as tenuous.

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0 comments on "Subscribers Take A Hatchet To Netflix' Pricing Script ".

1. Sari Signorelli from Syracuse University
   

   commented on: September 16, 2011 at 10:08 a.m.

   I was a loyal Netflix customer because of stellar customer service and a good value for the product. However, the latest pricing restructure, combined with a decrease in customer service (you can't contact them via email any longer), sent my dollars back to cable. I'm finding that premium cable stations have some top notch shows, so I can live without the limited streaming library at Netflix. And I don't watch enough blu-rays/dvds monthly to warrant the expense.

2. Dana Greyson from Write Stuff Websites
   

   commented on: September 17, 2011 at 4:38 a.m.

   There are ways to handle pricing increases as upsells and options without creating alienation. Or, at the very least, Netflix could talk about what they've invested to offer better streaming and specifically why it will cost an extra investment they're unable to carry completely themselves to maintain or improve selection and download time. Instead, Netflix will go down as a textbook case of how NOT to do execute a price increase.

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