Netflix Collapse: The Real Story


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Netflix has achieved the unwelcome triple triumph of pissing off former customers, current customers and shareholders. But it’s the customers who’ve stayed with the company that are the real source of the problems.

The company has been making the headlines after admitting that it had a net loss 810,000 subscribers in the past quarter, far more than it expected. The decline was bad enough that it was forced to write to shareholders with the news, noting that its explanation of the price changes meant “many perceived us as greedy… many of our long-term members felt shocked by the pricing changes, and more of them have expressed that by canceling Netflix than we expected.”

The company also admitted that the aborted plans to split DVD and streaming rentals into separate businesses had been a screw-up that caused increased cancellations, though called this a relatively minor impact.

The note to shareholders also said that both profits and revenue will be lower than expected. It also warned that a planned expansion into the UK and Ireland will likely push the company into the red next year, a hit it considers worthwhile as a long-term investment. (That does indicate the anticipated profit margin in the US must be relatively slim.) In response to the news, the company’s stock price has slumped from $118.84 at the end of Monday’s trading to around $75 at the time of writing.

What’s being missed by many, though, is that while “Customers abandon Netflix/stock price collapses” makes a simple story, that’s not really the issue. The 810,000 lost subscribers represent barely two percent of the company’s customer base. While hardly ideal, most companies could probably cope with that rate of customer loss for a fair while before panic set in.

The real problem is what the remaining customers did. As you’ll recall, the price increase from $9.99 a month to $15.99 only applied to customers who opted to keep both DVD and streaming rentals. Customers could also choose one or the other for a new rate of $7.99.

It turns out that just seven percent of customers plumped for the $15.99 package. In other words, seven percent of customers are paying 60% more, while 93% of customers are paying 20 percent less. If my calculations are correct, that means that even if you completely ignore the customers who jumped ship, the “price rise” led to an immediate drop in revenue of 14.4%.

In the long term, all of this is likely surmountable. Netflix now has millions of customers for which it no longer needs to spend cash on discs, packaging, or shipping costs. Its success in Canada and its European expansion show there’s plenty of scope for picking up new streaming-only customers. And so far Internet set-ups based around net neutrality have helped it avoid being landed with the bill for the stunning proportion of bandwidth its streaming uses.

But the irony remains that thanks to some horrendous public relations, Netflix has ended up taking a major hit through a much publicized “price hike” when it’s actually a price cut that’s caused the bulk of its current woes.

[Image credit: Yahoo Finance]





17 Responses to Netflix Collapse: The Real Story

  1. WE ARE THE 98% #OCCU… wait, wrong thread. Anyway, my wife and I kept our Netflix because of our daughter. We don't have cable TV, but we do have internet. $7.99 is a steal for all the kid's programming we can handle along with some other movies and TV shows that peak our interest without scouring the internet for the programs we like or want to watch. If that price ever goes up, we will cancel.

  2. Yup, I dumped the DVD service and kept streaming. However I’m thinking of walking away from Netflix completely because their content catalog is shrinking.

  3. I have Netflix. I'm one of the 7% that opted to keep both streaming and DVDs (mostly because I'm in the middle of a series that is unavailable as streaming. Whether I'll keep it after, I don't know) Honestly, my kids watch much more that I do, and it's a small price to pay compared to cable.

  4. I cut down to streaming too. And with all the other options becoming available NetFlix made some REALY poor choices. I'd be surprised to see the CEO/President still there by next year.

    Rumors are abound that Amazon is going to begin offering a subscription service for their streaming selection (outside of Amazon Prime) And VuDu, YouTube, and Hulu are going to become more competitive in the arena soon as well.

    Stupid Netflix. Just plain Stupid.

  5. "Netflix has ended up taking a major hit through a much publicized “price hike” when it’s actually a price cut that’s caused the bulk of its current woes."
    Price CUT? What price cut? When customers choose a cheaper option because the price for a package has gone up, that isn't a price cut.

    • The bast majority of people "THE 99%!!!" (lol), used the 9.99 package.
      When netflix decided that they will split DVDs and Streaming they gave people the choice, use 1 service DVD or streaming for 7.99(2 bugs cheaper), or keep both fir 15.99.
      Most people choose to use the single service, and just pay 7.99, and that 2 dollar reduction is what is hitting netflix ATM.
      Sadly seems like netflix is going to day, just when it had arrived to Mexico >.>

  6. If they really wanted to do something to bring in more money, they would finally support Linux. I almost guarantee that they would make back their lost customers and more if they were to have a wider support base.

  7. Honestly – I've always found Netflix's streaming content to be a joke. Some friends and I wanted to watch Jaws – didn't have it, we had to settle for Jaws 3, and it's always like that. You can find the C movies, occasionally a B movie, but because studios won't let Netflix offer the A movies on streaming (probably because of deals they've already worked out with cable companies and their various OnDemand services), the streaming has always seemed a bit of a joke.
    I don't see Netflix lasting 5 more years, not unless they manage to land a few A-quality television series, or decided to run with producing more of the canceled cult-series.
    I get the feeling that Xbox's soon-to-be TV offering is about to be the next cord cutting option when it comes to cable.

    • Uh, their selection is recent months has grown substantially. No a-list TV series? Star Trek. Walking Dead. Vampire Diaries. Hot in Cleveland. A-list movies? Toy Story 3, Tron Legacy. The list goes on and on…

  8. $7.99 is a steal. I'd be willing to pay $9.99 as long as they could upgrade their online library a bit.

  9. I would be willing to spend up to $10 a month on just the streaming service. Maybe even $15. It's still an incredible deal and I can have my entire house wired to use it. Even at $15 it still beats the bricks off of basic cable.

  10. *shrugs* This has nothing to do with netflix and everything to do with

    1. ISP's who are screaming at them for using their bandwidth.

    2. Studios trying to bend Netflix over with streaming….looking directly at you STARS….

    You are pissed? Then guess what? Point that attention at the studios not netflix. If netflix is guilty of anything its not building a PR campaign to focus that attention on studios. But I'm pretty sure they they don't want to piss off the studios they currently have…so they take this bad PR on the chin.

  11. "In the long term, all of this is likely surmountable. Netflix now has millions of customers for which it no longer needs to spend cash on discs, packaging, or shipping costs."

    No but it has to pay licensing fees which are going to add up fast. Everything I've read points to Netflix creating contracts on a per device basis. Also there is this….
    http://news.cnet.com/8301-31001_3-20080205-261/wh

    The studios are raping Netflix pure and simple.

  12. Netflix made a huge mistake by giving customers the option to withdraw from the DVD service and get streaming alone. DVD alone makes sense, because some people don't have the bandwidth for streaming. But allowing customers a streaming-only option gave many of us the out we were looking for.

    Streaming, on-demand content is the future. The sooner someone figures out the right business model and pricing, the sooner people like me will say goodbye to network television.

  13. You're missing some important math here. Their margins are much higher with their streaming service, so they likely made up far far more from that 90+% from higher margins than they did by losing a few percentage points of their overall base. This was always the direction the company was going.

  14. Where does the 7% vs 93% figure come from? Didn't you specifically have to opt-out of the price hike and downgrade to the lower cost service? While I find it easy to believe that 93% of people intended to drop either dvds or streaming, I find it hard to believe that 93% actually logged on to their netflix accounts and did so.

  15. This is a great real-world example of what economists call "price-elasticity" – the % change in quantity of services demanded, divided by the % change in price. When you're offering a service which is price-elastic, it means that lowering the price will bring in more revenue from new customers than you lose by lowering the price. When you raise the price on a price-elastic good or service, you'll lose more money than you gain. Always.

    Unfortunately, it's hard to figure out how elastic/inelastic your consumers' demand for your good is until you change the price, and then it seems like a 50-50 shot of shooting yourself in the foot.