Netflix betting on subscriber fallout in Q3, everyone over it in Q4

Netflix betting on subscriber fallout in Q3, everyone over it in Q4

Summary: Netflix posted solid Q2 earnings on Monday, but naturally, all of the attention was focused on the recent price hikes. Nevertheless, Netflix execs feel confident that all the complaining is just hype.

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TOPICS: Banking
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Netflix posted solid Q2 earnings on Monday, but naturally, all of the attention was focused on the recent price hikes. Nevertheless, Netflix execs feel confident that all the complaining is just hype.

See also: Netflix makes case for its price moves, but cuts Q3 outlook

Speaking during the company's quarterly conference call for investors on Monday, CEO Reed Hastings reiterated that Netflix regrets that customers are upset, but recognizes that most of these angry emotions will likely taper off within a few months:

Because of the timing, we announced it at the very beginning of a quarter, we'll see the negative effects of it in Q3. That is, the elevated churn and lower revenue growth than we would otherwise have. Then the price increase takes effect essentially mid-September, on average. So we get a little bit of benefit at the end of the quarter and then the real benefit comes in the following quarters, Q4 and beyond. But in terms of tracking where we are and our expectations, we're feeling very good.

Although the most obvious reasons as to why Netflix is raising its rates (i.e. having to pay more to Hollywood studios for licensing fees), execs spoke a little more about the jump in subscription rates. And even if subscriber numbers drop off, Hastings still boasts that Netflix is the number one spot for DVD rentals:

We feel great when you think about it with our DVD service at $7.99. It's an incredible value. It's the lowest priced offer in the marketplace. It's the best service levels in the marketplace. So if a customer wants DVD rental by mail, we're definitely the place to go. And then in terms of streaming, we've gained increasing confidence over the last two years about the viability and strength of a pure streaming plan. We gained some confidence when we launched in Canada and that blew away our expectations with the response. We gained some confidence when we led on our nonmember home page with streaming only and as we put in our shareholder letter, in Q2, about 75% of subscribers chose streaming only. In other words, even though DVD was only $2 more, 75% [were] stuck with streaming only.

Although there is Redbox and Blockbuster, Netflix still does lead the way in DVD sales. The real competition really is in streaming, with Hulu Plus and sites from cable providers like Xfinity from Comcast. Thus, Netflix actually does have a need to step up pricing in order to build that digital streaming library to stave off its competitors and have a chance to retain the majority of its customers base, which it likely will.

In a recent study conducted by Morgan Stanley's AlphaWise on July 15 --- just days after Netflix rates skyrocketed --- found that subscriber churn and initial responses were fueled by "too much emotion," which is likely to die down by the time the new prices go into effect for new subscribers this September:

Since Netflix’s July 12 price increase announcement, we have seen the ad-hoc polls’ churn results gradually come down; we anticipate the true churn rate will prove to be much lower and the that fulcrum point for sub churn will be at the legacy, 1-disc out, streaming plan.

Another survey reported by equity research firm Wedbush backs up those assertions with a report published on July 24. After finding that 31.4 percent of subscribers with the $9.99 plan (roughly 4.2 million subscribers) would drop their Netflix subscriptions entirely, Wedbush still believes that such estimates are actually just overdramatic:

In our view, respondents are more emotional and, in general, angrier following a price increase that is not accompanied by a meaningful addition to the value provided by the current services. Many appear to have viewed the price changes as a “takeaway”, and we believe that the large percentage who stated an intention to discontinue the service will reconsider their decision as they evaluate their alternatives to obtain streaming content elsewhere at a reasonable price. As such, we expect defections at perhaps half the rate indicated by the survey, and expect no more than half of the 5.5 million current subscribers who said they would discontinue Netflix service to actually do so.

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Topic: Banking

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42 comments
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  • RE: Netflix betting on subscriber fallout in Q3, everyone over it in Q4

    Don't bet on that people will forget about how Netflix raised their prices over 60% in one day. People that feel burned will not recommend Netflix to anyone after that. Netflix built their business on positive word of mouth and they now have lost the good will they spent years building up. I am betting Red Box will see a nice up tick in their revenue over the next year or two.
    CowboyJake
    • RE: Netflix betting on subscriber fallout in Q3, everyone over it in Q4

      @CowboyJake Oh yes, I won't forget.
      Droid.Incredible
    • RE: Netflix betting on subscriber fallout in Q3, everyone over it in Q4

      @CowboyJake
      until people use it. I tried Redbox twice. The DVD's are in horrible condition.
      tiderulz
      • Haven't had any problems

        @tiderulz

        I use Redbox often including this past weekend and haven't had any quality problem with their DVD's.
        dragosani
      • No Problems

        @tiderulz I haven't had any problems either. The only problem I've ever had is that the closest Redbox fills up and so I've either kept the movie another night and took back sooner in the evening or I've driven a couple extra miles and returned it to another one.
        safesax2002
      • RE: Netflix betting on subscriber fallout in Q3, everyone over it in Q4

        @tiderulz

        I use Redbox every week for my movies and my kids movies. I have 'NEVER' had a single problem with any of the movies. You may want to consider upgrading you're dvd player to something better.
        Ben030975
      • RE: Netflix betting on subscriber fallout in Q3, everyone over it in Q4

        @tiderulz Strange, I could say the same for about half the netflix DVD's I get. Sometimes I have to send the disc back to them 2 or 3 times before I get one that doesnt look like someone took sandpaper to the DVD... and have to endure the wait for the mail.
        Relorian@...
      • RE: Netflix betting on subscriber fallout in Q3, everyone over it in Q4

        @tiderulz I always have problems with Netflix DVDs and find I have to clean them before use.
        Masari.Jones
    • RE: Netflix betting on subscriber fallout in Q3, everyone over it in Q4

      @CowboyJake I've already cancelled my streaming service with Netflix, I'm not going to pay for subpar streaming options. I hope the 5.5 million people that said they were going to cancel actually do so, otherwise Netflix won't care (as they indicated).

      I guess losing 2-2.5million customers is no big deal to them...
      Masari.Jones
    • RE: Netflix betting on subscriber fallout in Q3, everyone over it in Q4

      @CowboyJake I won't forget, that's for sure. <a href="http://www.getadj.net">Get a DJ</a> <a href="http://www.global-djs.net">DJ Agency</a>
      mrswilliamson
  • Canceled

    Yup pulled the plug on them. IT sad to see a CEO say that it will die down. that people are too stupied to look past at what they are doing. It was not hard to cancel either when you think of how crappy the streaming is. What titles do you have? I know use Dishnetwork for streaming movies when on the road from my DVR. As for DVD's i wait for them to be on demand. Not a big deal. They will slowly dig their own grave.
    ser182
  • On my way out

    I was waiting until Aug 31 to cancel, thinking Netflix would wake up and change their mind on this outrageous price hike. Based on your article, their arrogance seems to be blinding them into believing they are invincible. They must be following RIM's mentality. Trust me, I for one will not forget.
    mbrauch@...
  • RE: Netflix betting on subscriber fallout in Q3, everyone over it in Q4

    They lost me, I didnt mind the 10 bucks they were taking from my bank account. But when they came up with their new pricing i discovered i wasnt using it that much and i would be better w/out them altogether. Netfilx, i wont be back i have discovered i dont need you.
    cptfreespirit@...
  • Just tried my first Redbox

    I canceled the same day of the announcement since my Netflix plan date was a couple of days later (if you cancel it is immediate and any remaining days on your plan are not refunded). I was 1 DVD + streaming. Due to poor selection barely used the streaming eventhough it was convenient via the XBox.<br><br>Yesterday I rented my first DVD at Redbox at a store close to my work. Of course it wouldn't be available yet on Netflix since it came out last week. Worked fine for me and I was happy with the service.

    The other thing is that they crossed the price point of $10 for the service. That is below HBO or Showtime services from the satellite and cable companies. The new pricing is above that and first run movies are available around the same time and the most services have on demand for the subscribed services.
    Redhooker
  • RE: Netflix betting on subscriber fallout in Q3, everyone over it in Q4

    What arrogance, they did have to add insult to injury!
    sullyjls@...
  • RE: Netflix betting on subscriber fallout in Q3, everyone over it in Q4

    I too was waiting to see if they were going to change their minds before September 1. Like they said, I have cooled off a bit, but I will still cancel my Netflix service before my August payment. We almost never use the streaming because there is never anything in their selections. Let's see them pay for their new Hollywood selections with a 60% decrease in subscriptions!
    forwhomthebellstoll
  • RE: Netflix betting on subscriber fallout in Q3, everyone over it in Q4

    I am still confused on why Netflix still hasn't explained the reason behind the price hikes. A good worded letter from their CEO could easily have made Hollywood the bad guy and Netflix the poor company being bullied.

    As for as streaming: I don't mind their streaming lineup as I like obscure and rare movies and TV shows. But Average Joe America is probably not interested. If 75% of their users switch to streaming, then my guess is about 1/3 will quit due to lack of choice and probably another 1/3 will switch back to DVD only.
    lambtron__40
  • RE: Netflix betting on subscriber fallout in Q3, everyone over it in Q4

    They are entitled to charge what they like but if they want to stay in business they need a better library of online streaming content. As much as I hate to admit it, Itunes always has better movies availible for streaming, esepcially in new releases, no matter if you prefer blockbuster titles or quirky indepnedent flicks.
    putty.master
  • RE: Netflix betting on subscriber fallout in Q3, everyone over it in Q4

    While I understand everyone's frustration, the new price scheme isn't a far cry from other venues. I play video game mmo's which cost 15 bucks a month, and my wife has Netflix (using the Wii) which is now 16 a month. While I could complain about the price increase, the price per hour that we use both of these services is about the same, they being each of our entertainment of choice, and the availability of them is also a factor. While we could go and use redbox, etc., but we decided that after driving every time we want to return and get a new disc, it was just better to suck it up and pay the subscription fee. A dollar a day via redbox x30 days = 30 bucks for a month instead of the 16, gas not included.
    danielw45502@...
  • RE: Netflix betting on subscriber fallout in Q3, everyone over it in Q4

    Most people I know who use Netflix only use the streaming service.
    dfl274