Friday, September 16, 2011

"We Out" Surprise!: Netflix Losing Customers


"The right long-term strategy choice."

I thought about titling this post that direct quote from Netflix. When it came down to it, I thought my title "We Out" was a better fit. But, I digress...

A few months back, Netflix made the brash decision to raise prices by as much as 60% and swore on their jobs that they felt they would be able to retain just as many customers as usual, as a matter of fact, they ensured shareholders, they would attract more customers due to the variety of plan options.

Team Netflix was wrong.



The changes took effect this month, and as a result the company will end September 2011 with 600,000 fewer U.S. customers than it had in June 2011. If that's not a loss, I need a definition ASAP!

Since then, Netflix has turned into Wall Street's equivalent of a box-office flop. Its shares plunged $39.46, or about 19 percent, to close at $169.25 on Thursday, leaving Netflix's stock price more than 40 percent below where it stood before the company unveiled the higher prices. The cost to shareholders so far: more than $6 billion in paper losses.


Wait, it only gets worse...earlier this month Netflix suffered another setback when Starz Entertainment chalked an agreement to renew the licensing rights to a key part of Netflix's video library for Internet streaming. That change comes in March, and will indeed significantly damage the variety of Netflix's video selection.

"Netflix isn't looking like it's as good a deal because their prices are getting higher and their content isn't getting any better," said Wedbush Securities analyst Michael Pachter, who firmly believes the company's shares could possibly fall as low as $110. "It's like they have taken the beef away from the buffet."

Where did the price increase come from? You may be wondering...

Well, the new pricing strategy was driven by Netflix's desire to build up its service that streams video over high-speed Internet connections. And although their foundation is the DVD-by-mail route, the company sees a major move in the "via Internet" lane. Netflix management believes the convenience of Internet video is the main reason that it has added 17 million U.S. subscribers during the past three years, and in turn established the company as a major player in the entertainment industry.

Before you jump ship the Netflix ship though, here's what happened:


As the streaming service took off, Hollywood studios and other video distributors such as Starz have been demanding higher fees for the licensing rights to their content -- a trend that caused Netflix to dig deeper into its subscribers' wallets.

Even with fewer subscribers, Netflix expects to bring in $10 million to $25 million more from its customers than during the July-September period than it did April-June.

Netflix revenue won't keep rising, though, if more subscribers flee. Pachter thinks that could still happen because some customers won't be billed at the higher rates until the end of the month.

Besides being more expensive, Netflix's new pricing structure is also more complicated for subscribers who want to stream and rent DVDs from the service.

Until Sept. 1, Netflix offered plans that bundled DVD rentals and unlimited video streaming for as little as $10 per month. Those options are now sold separately, resulting in a cost of at least $16 per month for people who want streaming and DVDs. Having both choices is appealing because Netflix's streaming library primarily consists of old TV shows and movies, leaving DVDs as the main way to see recently released films.



To hold down costs in a tough economy, millions of Netflix customers are either limiting their subscriptions to a streaming-only or DVD-only plan. Other customers are canceling their accounts to protest the new pricing scheme. Those canceling are following through on threats that were made on Facebook and Netflix's own blog after the higher prices were announced.

Despite the vitriolic reaction, Netflix CEO Reed Hastings still thought the company would be able to add subscribers. In late July, he issued a forecast that indicated Netflix would end September with 25 million U.S. subscribers, up from 24.6 million in June. That prediction was lowered Thursday to 24 million. The revision mostly reflects Netflix's expectation that it will have 800,000 fewer DVD-only subscribers than it previously thought.

Many of the people no longer renting DVDs from Netflix will get their discs elsewhere. That could be a boon for Redbox, which rents DVDs for $1 per night through 33,330 kiosks in supermarkets and other retailers, and Blockbuster, which still has 1,500 U.S. stores after emerging from bankruptcy protection under the ownership of Dish Network Corp. Investors are betting Redbox will be the main beneficiary; the shares of Redbox owner Coinstar surged $3.33, or more than 7 percent, to close at $48.55 on Thursday. Dish Network's shares edged up 11 cents to $25.82.

This could be an opportune time for would-be rivals to attack Netflix's streaming service too, BTIG Research analyst Richard Greenfield wrote in a Thursday blog post. Internet retailer Amazon.com Inc. launched a free streaming service for subscribers to its two-day shipping service earlier this year. Greenfield and other analysts believe Google Inc., already the owner of YouTube, is eager to expand its Internet video offerings to include more movies. One way Google could achieve that would be to buy Hulu.com, which has been put up by for sale by the television network owners that supply its video content.

RADIOS ALL THE WAY UP! This could mean BIG BIG things.

This has happened once before, smaller proportions though. The last major customer flee stint occurred during 2007 when Netflix lost a small, by comparison, 55,000 viewers from March through June.

Was Netflix raising their prices a Good Move OR Bad Move?

SCREAM @ ME!!!

SOURCE: Y!

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