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Roundtable: Netflix's Pricing Pandemonium

Aaron Steinfeld

NetflixWelcome back to the epic that is the Unboxed Thoughts Roundtable. Moving away from the political themes of the previous few roundtables, today's session's topic is... drum roll please... Netflix! Oh, you already knew that? Well, way to ruin the surprise for everyone else, captain fun hater. This round's question:

In recent news, Netflix announced changes to their consumer pricing structure. While investors seemed to initially love this plan, consumers have the debatable right to be less than thrilled. Will the new prices help or hurt Netflix in the long run?

As with most things, I see myself as the centric and catalytic force behind this situation. Why, you ask? Because I have the innate ability to make things worse for everyone. All self-esteem issues aside, I recently set my parents up with their own Netflix account (complete with a Roku box), and told them, albeit naively, I'd upgrade them beyond their current streaming account to be both a streaming and DVD account. Couple this with the fact that I, myself, also planned on diving into the world of Netflix (DVD collecting is expensive), and now you see why I was responsible for the Netflix price hike. They saw me coming, and they wanted my money. Oh, hold on—someone just told me that I really had no control over this situation, and the prices would have been jacked up by 60% with or without my investments. Okay, all of a sudden, I feel a lot less important. But hey, don't worry—the below responses from some of your favorite people will surely salvage my self-destructive rant...

So, what will happen to Netflix?

"It will only help for several reasons:
  1. The costs associated with physically mailing DVDs will only go up and further cut into Netflix’s margins, which will constrain capital available to otherwise sign new/extend agreements with networks. Netflix will be more than happy to shed some of their DVD only customers for the higher margin streaming customers.
  2. By segmenting the product lines, in the near-term Netflix is able to focus much more time and attention on streaming, a market segment that is only going to become more competitive (see today’s Amazon/CBS agreement) and require additional resources. Longer term, they will be better positioned to spin-off the DVD segment entirely. Netflix’s DVD business will one day come to mirror AOL’s dial-up Internet service, weighing down resources for an aspect of the business that contributes little to total company revenue.
  3. Consumers who only want a streaming product will now be paying a reduced monthly fee; albeit, a minor cost savings. The same applies for those who only want DVDs and do not want or have the capability to stream. By segmenting the two product lines, Netflix is giving consumers more control of how they consume content in their preferred format.
As an FYI, I am currently a Netflix streaming customer and will be dropping the DVD subscription once the new pricing kicks in. For movies unavailable on Netflix, I will rely more heavily on Apple TV, Amazon, Hulu Plus and other free and paid streaming services." ~Brian (@bhschaffer)
"The Netflix price hike teaches those in the Business to Consumer PR world a valuable lesson. By not engaging with consumers via social media, companies become all the more alienated from their target audience and much less able to capture a consumer market hungry for companies who are willing to dialogue.

The press release is the ultimate corporate monologue. It is a way for companies to say THIS IS OUR MESSAGE in a singular, un-relatable, suit-wearing voice. Netflix has expanded its impressive client base to 25 million in the past year and has the potential to become a global household staple. But blasting a press release into the cyber sphere and then stepping back and taking cover while an irate group of fervent Quit-Netflix bloggers deface the Netflix Facebook page is the epitome of a company not getting it.

Public Relations, and especially B-to-C Public Relations, is no longer a one-way vector going from the marketing department desk to the consumer. With the prominence of social media, consumers now have the very public ability to berate companies who don’t engage and relate to companies that do.

The truth is that consumers have power. They can sway the opinions of their friends and colleagues and even total strangers with product reviews, posts, and tweets. More importantly, consumers can sway the confidence of investors.

I think there is no question that Netflix’s decision to hike prices will slow their acquisition of new customers in the short term. And, from a PR perspective, they failed to appropriately respond to the customer complaints wallpapering the web. The tone and messaging surrounding the price hike announcement was off-putting. Furthermore, the noise of customer dissatisfaction created by Netflix’s announcement has created the perfect opportunity and potential catalyst for new competitors to capitalize on customer disenchantment; Hulu has attracted a slew of potential buyers looking to reposition and grow the Netflix-competitor.

But will the changes to the Netflix pricing structure help or hurt in the long run?

In the wake of Netflix’s release of their Q2 earnings, J.P. Morgan, Morgan Stanley, and Goldman Sachs all seem optimistic about the pricing restructure’s ultimate effects on long-term growth. Essentially, even if the customer growth rate slows, Netflix will still see an improvement in revenue due to the increased average revenue per user.

Perhaps Netflix’s division of its DVD service and streaming service is an indication of long-term objectives to eliminate the more costly DVD operation all-together. However, it seems to me that the restructuring of their product options will not successfully precipitate their objective of slowing DVD usage. Until Netflix is able to secure a more impressive movie selection from the Hollywood studios in order to enhance the allure of their Watch Instantly product, many customers will prefer the unlimited-DVD option, which simply provides access to better movies." ~Julia (@juliabmellon)
"I think the higher prices are going to force the split of Netflix camps -i.e. the people that love the unending flow of DVDs and then of course those that prefer streaming video.
For those consumers that prefer a little bit of everything, the higher prices will probably 1) make them cranky 2) push them to do whatever is cheapest (aka choosing the $8 DVDs or Streaming vs. the old DVD/Streaming package for $10).
So at the end of the day, I think Netflix may actually lose money. We'll see. " ~Bea (@beabroderick)
"The ambiguous, non-committal side of me says only time will tell.

For me personally, I was beyond annoyed when I received the very generic email, informing me that my monthly bill would be increasing by 60% as of September 1. Despite being a relatively new member Netflix subscriber (just over a year), I believe there should have been some concession made to current subscribers; a way to say, “We know this is unexpected and not ideal, but we appreciate your business and thank you for helping to make the company what it is today.” For example, the Netflix could have offered those customers who currently subscribe to both its streaming and DVD rental services an opportunity to maintain that package at a price that is discounted from the new schema (say $12.99 for both services?). In other words, grandfather them in to the new pricing. Had they done this, I likely would have been frustrated, but would be far more likely to pay this figure than the nearly $16 they propose. So instead, I’ll be removing the streaming service from my package all together.

Now don’t get me wrong. I understand the business side of this. And candidly, yes it’s probably a smart move. I know that even when people, like me, refuse to upgrade to the higher price, there will be plenty of customers who simply won’t care – or worse – don’t look at their monthly credit card statements to see that the pricing has changed. In the end, Netflix will at worst stay on par with current revenues and likely increase them.

So to answer the question—I think this move will help the company. HOWEVER, and this is a big however… I do think Netflix has just re-opened the door to competition—namely Blockbuster. We all know that traditional brick and mortar rental stores are quickly becoming extinct. Blockbuster being the prime example of a national powerhouse forced into bankruptcy by Netflix. When Blockbuster attempted to compete with Netflix’s mail order DVDs they were unable to capture significant market share. But with that being said, now that Blockbuster is under new ownership (Dish Networks) there is a clear opportunity to swoop in and pick-up disgruntled Netflix subscribers with a lower cost solution. Will Dish Network/Blockbuster take advantage? We will have to wait and see. But if the company could mobilize quickly, it certainly could take a first step toward climbing back from the movie rental abyss, and provide some much needed competition along the way. " ~Stephen (@srkennedy)
"As a new customer to Netflix, I can’t say I was very excited to hear about this price hike. (Honestly, I only signed up because of the $9.99 monthly price.)
That said, I understand that from a pure cost perspective, Netflix will need to increase prices. Increasing prices will allow them to offer the newest content available streaming online. Unsurprisingly, streaming video content is a fast growing portion of their business. From personally exploring the streaming content available, I have seen that current offerings aren’t the newest movies or shows (most selections are a year old or more). To continue to build their customer base and stay competitive with other streaming vendors like Amazon, Hulu and others, Netflix will need newer movies/shows. There in lies the necessity of funding to buy the rights to do so.
On the other hand, long term customers that have been accustomed to Netflix’s low cost will likely find this increase to be ‘the straw that broke the camel’s back’ and switch to another provider. The question remains whether Netflix can keep the content fresh enough to secure new customers without driving away long term ones. " ~Gabrielle (gabrielle-simon)

So, what do you think? Will Netflix see higher profits as the future slowly unfolds, or will companies like Blockbuster, Amazon or Vudu take advantage and take away market share from overwhelming grasp of everyone's favorite movie service? We discuss, you decide. CJP

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