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Netflix to Lose Subscribers Due to Rate Hike
Though Losses Will Likely Be a Blip on the Radar
by FFH5 10:36AM Friday Sep 16 2011
Netflix stock was down 19% yesterday with the company's admission that their new rate hikes, imposed amidst great wailing back in July, will likely result in them losing 1 million customers. Netflix's move was a response to higher licensing costs, imposed by broadcasters and studios frightened by Netflix's growing distribution power. Netflix was also trying to expedite the migration of users from DVD plans to streaming plans, though it sounds like they might have pushed that button a little too quickly.

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A letter (pdf) to shareholders insists that despite these subscriber losses, the move was the "right long-term strategic choice." Netflix reiterates that they made the pricing shift for four major reasons:
• to create a dedicated DVD rental division that takes pride in great execution and maximizes the opportunity for disc rental over the coming decade;
• to enable us to improve our global streaming service even more rapidly, because it is not meshed with a domestic DVD business;
• to enable us, with the growth in revenue, to license more streaming content and thereby improve our streaming service even more;
• to remain very price aggressive, with $7.99 per month for unlimited streaming of a huge library of TV shows and movies, and $7.99 per month for unlimited DVD rentals, 1 out at-a-time.
Back in July Netflix stated that they expected a subscriber dip due to the move, but that they believed most customers would quickly get over the hike -- and that appears to be true. While a lot is being made in the press about Netflix's subscriber prediction adjustment, this is likely a statistical blip on the Netflix radar. Consumers continue to pay for cable despite bi-annual rate hikes after all, and $8 for streaming or DVD rentals continues to present good value in the face of ever-soaring cable TV rates.

Netflix's biggest problem isn't angry subscribers. A year from now, most users will forget that this shift in pricing strategy even occurred. Netflix's biggest problem remains the fact that studios and ISPs are eager to slow or stop Netflix's disruption of legacy video services through a combination of skyrocketing programming costs and metered broadband usage.

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Madison, AL

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Someone is missing the point, and this time it's not just Netflix.

Consumers continue to pay for cable despite bi-annual rate hikes after all, and $8 for streaming or DVD rentals continues to present good value in the face of ever-soaring cable TV rates.
I'm not sure exactly how many are "content" with bi-annual rate hikes, but for the last several years I've made damn certain that I continually get put on promotional rates with my TV and/or Internet providers. If they refuse, I switch. End result, my entertainment costs have remained flat over the last several years.

What Netflix fails to realize is that by raising prices, they are quickly falling out of "complementary service" range when it comes to cable TV. Myself and many I know originally subscribed to Netflix in order to rent DVDs as a complementary service to broadcast/cable TV. When they added streaming, their selection wasn't great, but rapidly got better. In the end, it was STILL only a complementary service though, as everything they had was available on cable or elsewhere anyway. But for the price, Netflix still offered a value advantage for what it provided. But then they went and all but "doubled" the price or split up the service.

Let's face it, the streaming portion, especially with it losing a good deal of content recently, is a mediocre attraction at par price. The DVD component is still competitive with the industry, especially given Netflix's ability to provide recent content in a timely manner. But honestly, with companies like Redbox breathing down their throats and becoming ubiquitous - I mean really, how many people actually plan out what movies they want to see in advance for months at a time?

Sorry, this move was purely a shareholder move. I have a feeling it will be far more than just a "blip on the radar" in the long run.