Netflix’s price hike and the power of the bundle

Reed Hastings

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, as well as the specter of a Blockbuster-branded streaming subscription service from Dish Network, 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, 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.

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