The article down below attempts to figure out why Netflix is increasing prices by 60%. Let's not beat around the bush, the price increase is intended to please the shareholders. According to the article below, Netflix acknowledges the fact that its internal cost of business has not increased. So, a price increase is simply a direct relationship to pleasing shareholders.
Higher prices with no increase in costs = Higher Gross Margins = Higher Profits = More $$$ for HAPPY SHAREHOLDERS!!!
Think of it this way. Netflix has 23 million customers with revenues of $2.3 billion. With this 60% price hike, Netflix can stand to lose over 8 million subscribers (that's over 34% of its customer base) yet they will still have roughly the same revenues.
Here is the simple math*:
- Currently 23mil customers X the average total revenue per customer ($100/yr) = $2.3bil
- Losing 34% of its customers would bring 23mil down to approximately 15mil customers
- 60% price increase brings the average total revenue per customer from $100 to $160/yr
- $160 of revenue per customer/yr X 15mil customers = $2.4bil in new total revenues
Think about that for one second. If you owned a business, and you no longer had to service 34% of your customers, yet you still had the same total revenue coming in. The immediate result would be higher margins.
- Fewer customers to service = lower operating costs.
- Maintaining revenues while decreasing costs = higher margins.
Why lower operating costs? When Netflix loses a few million customers (because you know they will with this price increase) you can bet your A$$ they will lower its internal operating costs.
For example:
- This includes the inevitable RIF (Reduction In Workforce). They have not announced this yet, but I guarantee they will be making announcements by the 4th quarter. It will not be large reductions, but enough to justify fewer customer service reps for the loss of customers (since losing a few mil customers will leave a few call centers at Netflix twiddling their thumbs after the price changes are in full swing).
- Additionally, look for other savings in its DVD side of the business. Fewer requests in DVD rentals will result in less postage, less space needed to stock the DVDs, fewer DVDs for fewer customers, less envelopes due to fewer mailings etc.
In the end, the customer loses and Netflix Shareholders win. That's business 101.
I know that I will definitely drop part of my subscription since I rarely rent DVDs to start with. I think it's only a matter of time before other services like Hulu or Apple figure out a more cost effective way to integrate more streaming content options at a competitive fixed rate.
See original article below:
Why Netflix Raised Its Prices
Related Quotes
| Symbol | Price | Change |
|---|---|---|
| NFLX | 286.93 | +0.31 |
 | ||
, On Thursday July 14, 2011, 11:39 am EDT
Sad, sad, sad. The world's best deal in TV and movies has just gone away.I refer, of course, to Netflix's $10-a-month deal: unlimited DVDs by mail and unlimited streaming TV shows and movies.
This week, Netflix abruptly jacked up its price for that deal by 60 percent. Now, if you want to check out one DVD-by-mail at a time, and enjoy unlimited streaming of Netflix's 20,000 TV shows and (mostly older) movies to your computer, phone or Blu-ray player, you have to pay $16 a month instead of $10. (The price hike hits new customers immediately, and existing customers on Sept. 1.)
This, as you can imagine, is not a popular decision. This isn't a cost-of-living increase. This isn't inflation. It's a 60 percent overnight price increase - that gives you nothing new in return.
No wonder people are irate. "I was a loyal Netflix subscriber since 2005," goes one of the 44,000 seething messages on Netflix's Facebook page. "Since they have grown into this BIG GREEDY CORPORATION in the past few years, they've decided to hit its loyal customers with a 60% increase in fees and expect us to pay it! WELL NETFLIX AS OF 31 AUGUST 2011, CANCEL MY ACCOUNT!!!!!!!!!!!!"
All over the Web, you can read analysts explaining the backstory this way: "Why, when Netflix first unveiled its streaming feature in 2007, nobody else was streaming this stuff. To the TV and movie companies, it was free money. But now, all those contracts with Netflix are up for renewal, and the movie and TV studios are all charging Netflix a lot more!"
There's only one problem with that analysis: According to Netflix, it's wrong. The new studio contracts have nothing to do with the price change.
In fact, Netflix swears up and down that higher costs of doing business have nothing to do with the price hike.
So the question is: Why?
Netflix's blog offers this:
"Why the changes? Last November, when we launched our $7.99 unlimited streaming plan, DVDs by mail was treated as a $2 add on to our unlimited streaming plan. At the time, we didn't anticipate offering DVD only plans. Since then we have realized that there is still a very large continuing demand for DVDs both from our existing members as well as non-members. Given the long life we think DVDs by mail will have, treating DVDs as a $2 add on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs. Creating an unlimited DVDs by mail plan (no streaming) at our lowest price ever, $7.99, does make sense and will ensure a long life for our DVDs by mail offering."
I've read it five times, but I have no idea what that means. How does a 60 percent price hike "ensure a long life for our DVDs by mail"? Does it mean they'll buy more discs? Use thicker shipping envelopes?
And how can Netflix, the world leader in DVD distribution, be so dense as to "realize" only now that some people still want DVDs?!
What I just can't get past is this: Apparently, the DVD+unlimited plan was profitable at $10. Netflix had every intention of "a long life" for that plan at $10. So I ask again: What changed in eight months that requires a 60 percent price hike?
So I spent a long time on the phone with a Netflix spokesman, Steve Swasey. He made these points:
* Six years ago, the "one DVD at a time" plan (no streaming) was $10 a month. Four years ago, it was $9. Today, it's $8. So if you're interested in DVDs only, Netflix's new price is actually the lowest it's ever been.
* The price for unlimited streaming (no DVD rentals) hasn't changed. It's still $8 a month.
* The only prices that have gone up are the DVD plus streaming plans. For one DVD at a time, that's gone from $10 to $16 a month. (For two DVDs at a time plus streaming, it's now $20 a month.)
* Netflix knew that there would be a nasty backlash, and has already taken the subscriber defection into account in its financial forecasts. It still figures it will come out ahead. (I found this part a little creepy.)
I kept saying to him: "O.K., look. In November, $10 a month for one-DVD-plus-streaming seemed like a viable offering. Now, eight months later, you need to charge $16 for the same exact offering. You say your costs haven't changed that much. You say the new studio contracts aren't to blame. The only other possibility I can think of is that your initial $10 pricing was a mistake."
He wouldn't agree. He sort of came close, though, when he said that the unexpected success of the streaming service shifted the balance of power between it and the DVD business. Originally, it was "pay $10 for one DVD-streaming free!" Almost overnight, though, people began thinking of it as, "pay $8 for unlimited streaming-and get one DVD for $2 more!"
"That's not sustainable for the longer life of DVD's," Mr. Swasey said. "We need more revenue. It's a business concern we have to address. We want two separate business units, each side of the service. We were not able to fulfill the requests for DVDs at that cost."
I'm afraid that's the best answer we're going to get, short of the conspiracy theories. (One of them is that Netflix wants to hasten the demise of the DVD. This price hike will force millions of people to go for streaming only, a more profitable business for Netflix.)
The size and timing of that price leap still don't make sense to me. Especially when Netflix used to be considered such a good-hearted, consumer-focused company. The way it handled this shift feels extraordinarily blunt, ham-handed and emotionally tone-deaf.
"I've had this conversation over and over again for the last 24 hours," said Mr. Swasey. "Yes, 60 percent is a big number. But that increase is only $6 a month more. That's a latte a month. We've gone from an extreme terrific value to a terrific value."
Want to know the worst part? He's right. PCWorld.com has a nice summary of Netflix alternatives. There's Amazon Prime (no DVDs by mail, small streaming selection). Blockbuster by Mail (pricier mailed DVDs, no free streaming at all). Hulu Plus (no DVDs at all). Redbox (no streaming, pay by the day). In other words, even at $16, Netflix still gives you more than anyone else. So whether we like it or not, whether we can explain it or not, Netflix has indeed killed the best entertainment deal on the Web. Mr. Swasey has it half right: it's gone from an extreme terrific value - to an average one.
Source: http://finance.yahoo.com/news/Why-Netflix-Raised-Its-nytimes-3842223211.html?x=0
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