Netflix and recent price hike

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The recent price hike by Netflix of nearly 60% has definitely irked customers. I do not use Netflix for the simple reason that my laptop (it could be browser, but i was sure it was laptop) could not work for the Netflix interface. However, we did a case on Netflix in the class, after which I am interested in the company/business.

Netflix is an interesting company – the one which has reinvented its business model according to the market and succeeded. It started as an online DVD rental store with a proprietary recommendation system that worked really well to manage its demands. We discussed in the class, how Netflix’s core strength lies in just its recommendation algorithm – which we debated could be/could not be replicated easily. It was noted that the huge data they have is a bigger problem to be replicated by the competitors. Our Prof -for fun- said, he did not expect the company to survive as long, when it neither owns content production(that is slowly changing now), nor owns distribution. Of course, Netflix did some very right things operationally to have succeeded ( national aggregation of titles, innovative revenue sharing with studios, better work-place practices (see the video), good hiring practices, special business arrangements with USPS etc).

With the changing business landscape, Netflix re-invented to be the online streaming company, allowed unlimited streaming per month in response to competition and ultimately accounting for close to a quarter of all internet traffic in the US.

Netflix had prioritized good customer service from the beginning (no late fees, easy un-subscription, no display of titles that were not available). Its customer service has topped the poll for 6 years and is well-known online, and with the 61% market share of digital streaming and downloads, it was till recently a favorite of analysts.

But the recent pricing strategy has definitely irked the customers. Instead of $9.99 for combined DVD and online streaming, it has split the plans into two of $7.99 each – which means for the customers who wish to avail both, it is going to be 59% increase in the price. This has probably resulted in a decrease in stock price [price hike was announced around July 12th)] and definitely in social media outbursts ( #DearNetflix on twitter, company Facebook page, blogs and other facebook pages).

Why is this price hike ?

But, really, why would Netflix do such a thing ? How can they lose focus on the customer satisfaction ? The business which has re-invented itself over and over, which has survived tough times could not be doing it too wrong – will get to it a minute later. So why is this price hike ?

Pricing shapes the behavior is all too common sense. (A simple example that I love is the phone call charges over peak/non-peak period – I love this because it links me to my engineering days). With equal price points for both DVD and online streaming, it is not immediately clear which is favored by Netflix. ( Customer segments would be split into those who value great content vs those who wish more ease/quantity). However considering the costs, it is simple to see that Netflix is hoping more people move over to online streaming. Other than that the costs on streaming is cheaper for Netflix, the monetization opportunities over online streaming is more compared to the DVDs. On the other hand, DVD content is great – which could change over time, and Netflix is betting to be ready. As against, the costs of online streaming is known to increase very soon. And finally, the 61% market share of Netflix is in online streaming – I could not find the figures for DVD rentals, but my gut feel is that would be less compared to online. With all these reasons, there is no wonder Netflix is preparing for the future (or even shaping it by discouraging DVDs, BluRay) – because it was not even performing badly before this change, in fact its profit increased in recent quarter.

But what about the customers ?

The market research firm found that 34 percent of dual-service subscribers are likely – to varying degrees – to cancel their streaming service but keep DVDs by mail. Meanwhile, 44 percent of dual-service customers are to varying degrees likely to cancel DVDs but keep streaming….

And the company predicts that 12 percent to 15 percent of dual-service subscribers will cancel their service in the next six months specifically because of the new prices – a loss of between 2 million and 2.5 million subscribers.

Bottom line
Even with a loss of 2.5 million subscriber loss, Reed Hastings will likely go to the bank laughing due to the increased profitability. And then stock market would follow.

For now, enjoy this Netflix Relief Fund video and Hitler video.

Aside: India
There are several online DVD rental services in India, all running their own delivery systems and logistics. Unlike online DVD rental companies in other countries, online DVD rental services in India do not use the postal service as a means of delivery or exchange.
India’s first online DVD rental service Clixflix started in 2004, and was followed by several others like SeventyMM, EZEVID,MovieMart, Madhouse, Cinebox, CineSprite, CatchFlix,and HomeView in no particular order. Madhouse and Seventymm have merged and the combine is now known as Seventymm.
The model has been tweaked in India to suit the local market place. Cinebox serves in Ahmedabad city only with their own shipping service. Clixflix serves members through stores, phones, SMS and the internet. Madhouse uses drop boxes. SeventyMM and Catchflix operate pure online models. Cinesprite operates a multiple delivery model. Another powerful contender is Bigflix from the Reliance Anil Dhirubhai Ambani (Reliance ADA) Group one of India’s largest business houses. [source]

And as expected, Hitler is angry

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