Netflix Tries To Blame Press Coverage Of Its Price Hikes For Lower Than Expected Subscriber Additions

from the shoot-the-messenger dept

Tue, Jul 19th 2016 10:47am — Karl Bode

Late last year, Netflix raised rates on the company's new streaming subscribers from $9 a month to $10 a month. Existing subscribers were grandfathered in at the previous rate until last May, when they too saw the price hike. Reporting the company's earnings this week, Netflix noted that it "only" added 1.7 million new subscribers worldwide. And while that's still pretty impressive at a time when most major cable companies are slowly bleeding subscribers, that's still well below the 2.5 million Netflix expected to add. The most likely reason for the dip? Price hikes (though foolishly blocking VPN users may have also played a role).

But in a Netflix letter to investors this week (pdf), the company tried its very best to try and blame the press coverage of its rate hikes -- not the rate hikes themselves -- for the company's slower than expected growth:

"Gross additions were on target, but churn ticked up slightly and unexpectedly, coincident with the press coverage in early April of our plan to ungrandfather longer tenured members and remained elevated through the quarter. We think some members perceived the news as an impending new price increase rather than the completion of two years of grandfathering."

It was the press coverage of your staggered rate hikes that annoyed users? It was member "perception" of that news that was to blame for people leaving? That's some very Comcast-esque spin from Netflix, who throughout the letter consistently replaces the phrase "price hike" with "grandfathering" as if the investors they're talking to aren't bright enough to tell the difference (and perhaps that's true):

"While ungrandfathering and associated media coverage may moderate near term membership growth, we believe that ungrandfathering will provide us with more revenue to invest in our content to satisfy members, thus driving longterm growth. Over the second half of this year, we’ll complete ungrandfathering. Our three tier pricing (in the US: $7.99 SD, $9.99 HD, and $11.99 UHD) is working well for us and for new members, and our gross additions remain healthy."

Of course to be fair, one small U.S. price hike isn't really much of a big deal for a company that just expanded into 130 more countries only back in January. Also, if you recall, the internet media went into histrionics a few years ago after Netflix bungled its DVD arm spin off (Qwikster, RIP) and imposed a different rate hike, one many analysts insisted spelled doom for the company. The reality is most people still find Netflix to be an incredible value in the age of soaring legacy cable TV prices, and the company still has some leg room on both international growth and pricing.

But just like its traditional cable counterparts, Netflix is going to start having to feed insatiable investors with either additional international growth (likely China), or price hikes on existing customers. And just like any innovator pressured by Wall Street's incessant hunger for more, the company's strategy will slowly but surely shift from disruption to turf protection as streaming competitors arise and cable figures out it needs to compete on price. And while these recent hikes may not be dramatic, they're arriving as Netflix's overall catalog has shrunk in the last few years by as much as 40% by some estimates.

So while the Netflix of today remains a better value and more consumer friendly on issues like net neutrality (usually), the decision to start charging more for less -- then blaming the press when consumers balk -- is a relatively Comcast-esque move that may not bode well for the Netflix of tomorrow.

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Filed Under: blame, journalism, prices, streaming
Companies: netflix

26 Comments

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Joe K, 19 Jul 2016 @ 10:57am

"These reviewers and bloggers decided to make up lies and say that the food was disgusting."

But in a Netflix letter to investors this week (pdf), the company tried its very best to try and blame the press coverage of its rate hikes -- not the rate hikes themselves […]

This tactic worked out great for Amy's Baking Company. Why shouldn't it work for Netflix?
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Anonymous Coward, 19 Jul 2016 @ 11:17am

"and cable figures out it needs to compete on price"
Cable companies competing on price is a nice fiction. Their conduct to date makes me think they'd rather go bankrupt than admit that prices can go in any direction other than up.
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Anonymous Coward, 19 Jul 2016 @ 11:34am

Why take responsibility when it's easier to blame a goat.
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PoorNetFlix, 19 Jul 2016 @ 11:38am

Why stay with Netflix?
Here's my advice to Netflix:

Explain to subscribers in painful detail why they block VPNs, the cost of licensing programming, why they drop content and the cost of creating new shows. Treat subscribers as educated and capable of understanding how the business works.

Then again, perhaps consumers have hit that wall where subscribers may not feel the price of two lattes of month is worth a Netflix account when they also have to pay their ever increasing broadband bill cost and hit their monthly "data caps".

Or perhaps people have already watched most of the content Netflix offers (or removed) and feel there's just not enough to continue with their subscription. Netflix is known for binge watchers, when they've seen it all, why continue?

In any case, it will be interesting to watch Netflix struggle with retention.
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hegemon13, 19 Jul 2016 @ 11:39am

Quality
While the quality of original programs has been fantastic, the quality of the remaining catalog continues to disappoint. They seem to be making moves lately, with the Disney and Star Trek deals, to improve that situation. However, I still find the library to be populated primarily with older TV series, documentaries, and B movies. When it comes to watching a movie, I'm more likely to find something I want on Prime than Netflix, which is a huge change from even a couple years ago.

Now, with four kids, a $2/mo. price increase is insubstantial compared to the amount they use it, and a huge savings over cable. And to be fair to Netflix, they were very clear in their email communication 2 years ago that the grandfathered price would be for a limited 2-year span, so no one should have been surprised.
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streetlight (profile), 19 Jul 2016 @ 11:41am

Has Netflix reached a saturation point?
If everyone who wants Netflix has it than there will be little or no growth. Though the price increase from $9 to $10 is 11%, in absolute terms it is small. In the US those that can afford High Speed Internet to deliver Netflix can surely afford $1 per month extra. My problem with streaming Netflix is the quality and small available content along with the churn in that content. When 90% of everything produced since the advent of talkies is available to stream, Streaming Netflix will get a customer.
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I.T. Guy, 19 Jul 2016 @ 11:43am

This is awesome!!!
"We think some members perceived the news as an impending new price increase rather than the completion of two years of grandfathering."

That's some brilliance right there.

No no silly consumer its not a price hike it's the completion of two years of grandfathering. LOL.
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Anonymous Coward, 19 Jul 2016 @ 12:26pm

Netflix is evolving exactly as HBO did: starting out with movies to get subscribers, then shifting to original content in order to actually keep them.

Original content is king.
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streetlight (profile), 19 Jul 2016 @ 12:39pm

Re: Original content is king
Um..., well HBO now has boxing which seems to have replaced the Wimbledon tennis tournament as its preferred sporting event. Boxing??? It's original content to me is zero stars quality when there is no such thing as a zero star movie.
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Ninja (profile), 19 Jul 2016 @ 12:40pm

They have to say something to the investors. I'm all for saying what they want to hear while doing what is better for the company in the long run. (I'm actually against selling your soul.. Ahem, going to the stock market at all but that's another issue.)

Still, I believe they could be pounding the copyright monopoly harder and louder. You know, don't blame the price hikes on anybody, just show hard data with the absurd the MAFIAA wants to charge for their content just because they can. Use your position as means to rise awareness and make people hate copyright with passion.

But then again, Netflix is ripe for becoming the established player instead of the disruptive one...
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Ninja (profile), 19 Jul 2016 @ 12:42pm

Re:
Hmmm.. That didn't keep me from trimming my cord before cutting it. HBO was the first to go.
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Ninja (profile), 19 Jul 2016 @ 12:47pm

Re: "These reviewers and bloggers decided to make up lies and say that the food was disgusting."
For me it smells like Netflix is throwing some meat to satisfy the investors and keep them quiet rather than the company real stance. Much like their loose crackdown on VPNs and the MAFIAA.
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Anonymous Coward, 19 Jul 2016 @ 1:09pm

Re:
Not to mention having to pay Comcast twice for the last mile.
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streetlight (profile), 19 Jul 2016 @ 1:23pm

Re: They have to say something to investors
I just looked up Netflix's stock price today (7/19/2013) and it closed at $85.76, down 13.22% per share. The stock pays no dividend so it's an equity play - buy the stock and increase one's wealth from the increase in the stock price. From the investor point of view, maintaining a constant or declining stock price does nothing without a dividend because you can make more money in a bank savings account. When Netflix becomes a mature company (and it may be there now) maintaining a fixed or very slowly increasing, and not a volatile, share price, it must pay a dividend like other mature companies. For example, Microsoft pays a dividend of $1.44 per annum on a stock costing about $53 or 2.7%. Netflix must improve its product to maintain its user numbers else it won't be able to pay a dividend and be a good investment.
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Anonymous Anonymous Coward (profile), 19 Jul 2016 @ 1:50pm

Re: Why stay with Netflix?
There is a problem with their contracts with the content owners. Those contracts are classified as Top Top Top Secret, eyes only, not for release, only the lawyers know for sure, and revealing any information from them would probably void the contract. You are only allowed to know what we are offering this week. This is probably not Netflix's doing.
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Anonymous Coward, 19 Jul 2016 @ 2:20pm

Now that Netflix has rescued consumers from DVD rental stores and cable TV, it can move on to increasing shareholder value at all costs.

Either die a hero, or live long enough to become the villain?
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Anonymous Coward, 19 Jul 2016 @ 10:59pm

Re: Re: Original content is king
HBO started with boxing as well, as an alternative to what was called "closed circuit" television.

HBO original content includes The Sopranos and The Wire, two of the best series in the history of television, as well as the hilarious Silicon Valley and others.
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PaulT (profile), 20 Jul 2016 @ 12:13am

They do have a real point, IMHO. I spoke to several people who were complaining about the "price hike". Some I managed to explain the truth to, but some remained convinced that the price had been unacceptably raised even after I pointed out that they'd been paying less than new subscribers for 2 years. The reporting around this was very confusing for people who aren't paying much attention to what's happening around them (which, sadly, is a lot of people).

However, in reality it's probably the lesser of the issues. I know people who have jumped ship to either another service or back to piracy as a direct result of the VPN blocking. I believe this is the larger issue, but Netflix's investors won't be placated by "we lost customers because of prehistoric licencing regimes" and "people won't pay 2x the price for 1/5 of the library just because they happen to be in the wrong country", so they have to save face.

"Of course to be fair, one small U.S. price hike isn't really much of a big deal for a company that just expanded into 130 more countries"

My account is from the UK site, and I was grandfathered in as well. I'm not sure how many were ultimately affected, but it's more than the US.
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Anonymous Coward, 20 Jul 2016 @ 12:59am

Netflix Remark - Fixed!
We think some members *CORRECTLY* perceived the news as an impending new price increase rather than *SWALLOWING OUR BULLSHIT ABOUT* the completion of two years of grandfathering.

A delayed price-hike is still a price-hike, Netflix.
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Anonymous Coward, 20 Jul 2016 @ 1:08am

Very Possibly Noteworthy
"...foolishly blocking VPN users may have also played a role..."

In a related story, observers note that TPB and KAT still do not block VPN users.
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flyinginn (profile), 20 Jul 2016 @ 3:43am

Global growth figures may also be hiding variability in country-by-country performance. UK Netflix is a far cry from most, apparently because it's competing with Sky for exclusives. The result is a UK presence which isn't worth the cost of membership. Possibly the same is true in other national versions.
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jsf (profile), 20 Jul 2016 @ 7:44am

Re:
I ran into this situation as well. A half dozen people mentioned seeing the Netflix price increase in the news and were wondering if they should cancel. When I mentioned that it was a one dollar increase they all went quite.

So there may well be something behind what Netflix said. They may be giving it more emphasis than it really had, but I think it is a real thing.
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John85851 (profile), 20 Jul 2016 @ 10:02am

Re: Re: Why stay with Netflix?
Isn't that the whole point of releasing the information and treating subscribers like adults?

All Netflix has to say is "Sorry we're removing your favorite movie, but Universal/ Paramount/ etc think they can get more viewers by only showing it on their own site rather than to the X million of Netflix subscribers." (This makes the studios the enemy.)

And conversely: "We just spent $5 gazillion in a deal with Disney to bring you all the Marvel, Star Wars, Pixar, and Disney movies. We're a business and we have to re-coop our investment". (This increases the variety of available movies and shows, which makes a subscription a better value.)
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PaulT (profile), 20 Jul 2016 @ 11:48pm

Re: Re: Re: Why stay with Netflix?
"All Netflix has to say is "Sorry we're removing your favorite movie, but Universal/ Paramount/ etc think they can get more viewers by only showing it on their own site rather than to the X million of Netflix subscribers.""

...therefore damaging future negotiations with all parties, especially considering that many of those studios are not switching to their own streaming service, but either licencing to Netflix's competitors (Hulu, Amazon, etc.) or temporarily removing all licencing due to some other reason (soundtrack licencing has expired, for example, or rights have been bought by another distributor who will return the film to Netflix after a new deal).

This is why they can trumpet from the mountains about their successful deals with Disney, etc., but they can't promote more negative news - *especially* when it comes to the actual terms of the deals. There's a lot of things that will simply antagonise studios and damage future negotiations.
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Dingledore the Flabberghaster, 21 Jul 2016 @ 4:41am

Re:
It's still good value in the UK, but it's not my default go-to streaming service these days. Now TV has a much better range of films (and Entertainment and Sport packages are good value too). Amazon has got less but allows downloading - which is hugely beneficial on my regular long train journeys.
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PaulT (profile), 21 Jul 2016 @ 5:10am

Re: Re:
Supposedly the download feature is forthcoming in the near future on Netflix. Which I'm going to enjoy because I'm not able to use the Amazon streaming service (geoblocked away from the UK site I use for most of my purchases, but the Amazon Spain site doesn't offer video streaming). Due to this, I tend to default to the service I use that does allow downloads (MUBI) but on journeys I would generally rather a wide range of less cerebral fare or TV shows to catch up on (MUBI is a curated service geared toward foreign language & art cinema, not always good travel material).

But, it's true that part of the issue for Netflix in the UK is going to be that between Sky and Amazon and numerous smaller competitors, lots of content is being licenced ahead of them. Nobody wants to pay for all 3 major services at once, so without the ability to use a VPN for a better selection Netflix becomes a less attractive choice for many and they may jump ship based on content offerings.

However, I can see why the pricing confusion was blamed here, as the underlying library issues are both not exactly Netflix's decision (they were fine with VPN usage till the studios got mardy) and more difficult to counter.
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