Blog Post

Netflix’s price hike and the power of the bundle

About halfway through the first month in which customers are faced with a new pricing scheme, Netflix has lowered its subscriber forecast for the quarter. The headline number showed 1 million fewer customers expected for the third quarter, which means Netflix will lose subscribers for the first time in four years. But take a closer look at where subscribers are missing — and where they’re not — and there are a few interesting takeaways from the revised forecast. Most notably, combined streaming-and-DVD subscriptions remain strong, while DVD-only numbers were weaker than expected.

The bundle still matters

While Netflix revised its subscriber guidance Thursday, reducing the number of streaming-only and DVD-only customers it expects to have by the end of the third quarter, but one number remained unchanged — the forecast for subscribers that would subscribe to both services. Interestingly, the 12 million number is in-line with previous guidance.

That suggests a few things:

  1. The “price hike” didn’t have the effect everyone anticipated. The breakdown in guidance wasn’t from users choosing not to pay 60 percent more for the combined service, but from users choosing to quit rather than downgrading to one service or another. (More on that later.)
  2. There’s still power in the bundle. By the end of the quarter, half of all Netflix subscribers in the U.S. will continue to subscribe to both streaming and DVD-by-mail services. That gives them the best of both worlds: Instant access to streaming content, with a much wider library of DVDs available if they’re willing to wait.

Subscribers shunning DVD, not streaming

Netflix was nominally off in its forecast for the number of subscribers who would choose a streaming-only plan, with guidance revised down by 200,000 subscribers to 21.8 million. But on the DVD-only side, Netflix’s forecast was revised down by 800,000 subscribers, suggesting it over-estimated the popularity of the DVD-by-mail option.

That’s bad news for Netflix, which initiated the pricing change and separated the DVD business from its streaming operations. In order to prolong the life of the legacy DVD business as long as possible, those operations are now being run as a separate unit within Netflix. But demand for DVD-by-mail may be less robust than Netflix thought, and the extent to which its subscribers abandon physical media might happen more aggressively than originally forecast.

That’s also bad news for Hollywood. Despite having just a fraction of the content available in its streaming library than is available on DVD, subscribers have shown a clear preference for instant gratification over greater content selection. Convenience, in this case, is clearly winning out over choice. And digital media, which still is a very small market compared to DVD sales, is winning out over physical media.

For some folks, it’s all or nothing

Some users clearly didn’t see the value in subscribing to one service or another, eschewing both rather than downgrading and saving a few bucks. Those subscribers might have used Netflix primarily for streaming and saw DVD not as a “must-have” service but a “nice-to-have” service. Priced at $9.99, that’s reasonable. At $15.98, it’s a little too much. Or it could be the other way around: Netflix has plenty of legacy DVD subscribers who were forced to pay a few extra bucks when the combined DVD and streaming plans were introduced. But after using the combined service, downgrading to DVD-only might not have seemed like a great value.

Either way, there’s a contingent of Netflix subscribers who have decided that, rather than downgrade for $2 less, they’d rather take their chances elsewhere. Given increased competition from Hulu Plus and Amazon Prime Instant Videos, (s AMZN) as well as the specter of a Blockbuster-branded streaming subscription service from Dish Network, (s DISH) there are more choices than ever for viewers who want to watch over-the-top content. And on the DVD side, there’s always Redbox, (s CSTR) which continues to grow, and Blockbuster is a much more viable business since being acquired by Dish in a bankruptcy auction.

Photos courtesy of Flickr users Ryan Shea and nrkbeta.

26 Responses to “Netflix’s price hike and the power of the bundle”

  1. Of the “half of Netflix subscribers still think that’s a good value” I’m guessing that a decent sized chunk of them don’t think that way (like me) and are willing to pay the extra for a month or 2 while we decide where else to go completely and/or which to cut back to (just DVD or just stream) but aren’t willing to pay it for very long. And another chunk of them are people who will just get sick of seeing the much higher charge and will make their cancel or cutback over the next 2 quarters.

    • Andy, I think you hit the nail on the head. Not everyone received the price increase notice at the same time and many like you and I will be waiting a month or two before deciding what to do. These factors will inevitably result in the membership numbers continuing to fall for a while yet.

  2. You say, “That’s also bad news for Hollywood.”

    No, this is the best news possible for Hollywood. The Internet is about disintermediation and that’s why Netflix is in trouble as we move towards streaming as the predominant distribution channel.

    The studios will have no trouble distributing their content directly to the consumer and cutting out Netflix or at least getting better terms as they use multiple online channels to deliver the films. Crackle is one example and I predict it’s popularity will grow and Sony will offer it’s own low cost premium service for new releases.

  3. Hi Ryan – really good post and great conversation. All-in-all, Netflix did a really good job with their migration estimates which can be more gut than anything else. 200-800M out of 25mm is a drop in the bucket in comparision. And it’s understandable they may overestimate the DVD-only side since that’s their business’ legacy. But as we all know, the net revenue from a streaming-only HH is much higher than a DVD-only customer so they are still in a good position.

    As someone who’s been in the subscription biz a while, I am always dismayed when Wall Street continues to harp on pure sub numbers when in fact that in today’s world with a multitude of consumer pricing options, volatile licensing agreemets, and cost of DVD shipping, it’s the margin that counts, not subs.

    On the other hand, given the feeble way they executed the rate increase, they did some damage to their good will value. Frankly, since cable’s been doing rate increases for a while, they do a better job of informing their customers. Lesson learned. But repairing good will takes a lot more effort than simply dropping another new customer acquisition campaign into the market!

    • I think one point you missed is not only the economic factor, but also the loss of customer good will. Many people felt Netflix’s attitude toward their existing customers was arrogant and callous. If you read any of the online discussion when the price hike was announced, it’s obvious that members felt betrayed by Netflix’s attitude, and they in turn decided they could take their business elsewhere.

  4. I’m still amused by the idea that Netflix’ streaming content selection is “limited.”

    If you compare it to the DVD selection, yes it is, no question.

    But if you compare streaming availability to the time available to watch stuff AND to the availability of things you might not ever take the time to rent as DVDs, streaming availability (supplemented with Blu-ray for the new stuff) is fantastic, especially if you’re interested in foreign, independent, or old films, as well as documentaries.

  5. One question I have is if Netflix realizes what they’ve done to their long-term marketing and revenue streams. I have been a subscriber since July 2000; before this latest shift I couldn’t recommend them enough to family, friends, or complete strangers if the topic came up. In November of last year they raised my “grandfathered” 4 disk/month + unlimited streaming price from 16.99 to 19.99; now with the new pricing schedule they want to charge me 21.99 for 4 disks and another 7 bucks for streaming. My move was to downgrade to 3 disks, no streaming, 15.99. I wonder how many other people took the opportunity to reduce their subscription rate? Keep a close eye on their revenue numbers next time around, my guess is that it will be hit by more than just the subscriber loss.

    So now when someone asks me I just say, Yup, you can get disks from them, but they are not really interested in building a client relationship, and don’t be surprised when they raise their rates.

  6. Keith Hawn

    “Some users clearly didn’t see the value in subscribing to one service or another, eschewing both rather than downgrading and saving a few bucks.” Where in the data released by Netflix are you getting that from? I don’t see it.

    “Either way, there’s a contingent of Netflix subscribers who have decided that, rather than downgrade for $2 less, they’d rather take their chances elsewhere.” You know that makes absolutely no sense, at all, don’t you?

    • Ryan Lawler

      I don’t claim it makes sense. Alternate headline for this piece would be “The counterintuitive results of Netflix’s price hike.” Half of Netflix subs decide to pay 60% more. I just find it interesting that’s the number it got right, while it overestimated those who would switch to one plan or the other.

      What’s lost in the whole debate is that Netflix lost a lot of goodwill from users with the price change. There were a number who canceled simply because they were angry at the way it was communicated.

  7. Mario Juestel

    I prefer watching my movies on Blu-ray for the full HD experience. I left Netflix and went with Blockbuster.

    Netflix’s streaming offering is too limited in my opinion. It was nice to have, not a must have feature.

  8. I think the point is being missed that this is guidance to ‘soften the blow’ when the real numbers come out. Most of what I’ve seen of people that had bundles are either choosing cancel; stream only; or DVD only. I think that 12 Mil bundle number staying the same is way off. Even when new subscribers, I see this number dropping the most when real numbers are issued.

    • Ryan Lawler

      Steven, I have to disagree with you here. Halfway through the month, I think Netflix feels confident it can model where it will end up at the end of September. It wouldn’t offer new guidance it thought would be wrong.

      Anyway, this is why it’s interesting — you’d think that most would choose one or another rather than swallow the 60% increase, but half of Netflix subscribers still think that’s a good value.

  9. I think that framing this as DVDs versus streaming focuses too much on the technology and not the users. As a user, I don’t care if my movie comes on DVD or the Internet. I just want to watch what I want to watch. So you’re right that the bundle is more important since that doesn’t limit my choice.

    As soon as Netflix makes me choose between DVD and streaming, Netflix loses. Why should I pay $9.99 for DVDs when Redbox or Blockbuster Express are only $1.00? I would have to watch over 10 movies a month to make Netflix worthwhile. I can see how heavy viewers would go for Netflix but I don’t have the time to watch that many movies.

    On the streaming side, why should I pay $7.99 for a VERY limited selection of movies. I could barely find anything to watch, even after substantially lowering my standards. Starz pulling its library from Netflix makes the selection even worse.

    You’re right that at $15.98, the price is too high, at least for my level of viewing. I chose to quit Netflix. Now I just get DVDs from Redbox or Blockbuster Express. The added benefit there is that I can now watch movies earlier Netflix is always the last to get the new releases. The fact that I don’t miss Netflix at all is a bad sign for their business.

  10. You must be smoking something really strong. Netflix had an opportunity to obliterate this market. We can only hope that Amazon buys Hulu and expands their current Prime membership video selection to something other than British tv shows.

    • Ryan Lawler

      I think it’s way too early to declare another winner or to count Netflix out. It’s still way above and beyond anyone else in terms of paid streaming video usage. Remember when everyone thought Netflix was dead in the water because Blockbuster was getting into the DVD-by-mail game?

  11. I actually went to DVD only. I didnt want the streaming with not much content. I actually get Blu Ray which is more and I thought the price hike was too high since Blu ray customers pay more.

  12. Chuck Lovelace

    You mention this is bad for DVD but fail to mention this…The trouble is that Netflix didn’t match its streaming-only subscriber uptake number either. Bad news for Netflix.

    • Ryan Lawler

      The degree to which they didn’t match the streaming number was smaller, and on a larger base of subscribers. Thing is, this is all uncharted territory — breaking out into different segments, etc. So it’s not surprising that they ‘missed.’ But the degree to which they missed was smaller.