Netflix Collapse: The Real Story

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]

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