Netflix (NFLX) CEO Reed Hastings learned the hard way that announcing a big price increase can blow up into a huge controversy. So for his latest effort to charge more, he’s moving slowly – very slowly.
Along with Monday’s quarterly earnings release for Wall Street, Hastings said the cost of Netflix would go up $1 to $2 a month for new customers, depending on the country. Current customers will be “generously grandfathered” for at least a year, maybe two. Hastings had foreshadowed the increase on January’s earnings call as well, confirming that Netflix was testing different price points.
But at the current popular price of $7.99 a month, Netflix is growing like mad and expanding worldwide. It gained almost 12 million paying members over the past year and revenue was up 24%. So why the need for a price increase?
Further, there's obviously some risk for Hastings with this tactic. Back in 2011, his plan to spin off DVD operations into a new unit called Qwikster and raise prices 60% had immediate consequences, as Netflix lost one million subscribers and its stock plunged almost 80% in a few months.
No bold surprises
This time, Hastings is eschewing a bold surprise and going for the slow boiling frog approach.
“You're talking about $1 or $2 difference per month. I don't think it's a huge difference,” Hastings said on Monday’s call with analysts, in a restrained and tentative tone that sounded almost rehearsed. “And then, yes, the two years is very generous. We'll do it between a year and two years... . We'll be able to announce more details later.”
And, so far, the approach is working. There’s been no explosion of angry tweets, no change.org petition calling for Hastings to resign and no sign of mass cancellations. But why take the risk at all?
The first culprit is Hollywood. We’re in a so-called golden age of television, thanks in large part to the arrival of talented actors, writers and directors who once only made movies and shunned the “idiot box.” But top talent still wants top pay and their demands are only increasing as Internet companies such as Netflix, Amazon (AMZN) and Hulu compete for original shows against traditional networks and premium cable channels including HBO (TWX), CBS (CBS) and Fox (NWSA).
Netflix is spending more than $2 billion a year on content, with over $100 million just for "House of Cards." And its long-term commitments to Hollywood have ballooned to $7.1 billion, up from $5.7 billion a year ago. Even with the growing spending, Netflix lost out in the bidding for HBO’s massive hit crime drama, "True Detective."
Also to blame? Wall Street. Shares of Netflix peaked at $458 on March 6 but then plummeted as low as $312.10 on April 15, a 32% skid over five weeks. While investors decided to flee from many of 2013’s top-performing stocks, analysts were also concerned about the growing content costs. Both groups would like to see more of dollars flowing to the bottom line, which the price increase will accomplish, albeit slowly.
Some on Wall Street also feared a tiff with Comcast (CMCSA), that ended up with Netflix agreeing to pay for reaching its own customers, could be followed by more demands from other broadband providers. The price increase adds revenue to cover that scenario. The stock had already recovered some of the loss last week, but Monday’s results and the potential for more revenue were even more reassuring, pushing the price back up as much as 7%, to $380, on Tuesday.
The Comcast payments, which Hastings complained about further on Monday’s call, could be another rationale for the price hike. So far, the cost of the deal appears to be moderate, but Hastings said he is worried about the future. Broadcast networks already extract billions of dollars from cable companies for retransmission rights of their local stations. If the same model grows online, consumers could end up having to pay a lot more, and not just for Netflix.
Finally, dear reader, take a look in the mirror. Hastings tested higher monthly fees in Ireland, and likely other markets more on the sly. And customers proved so loyal and devoted that they signed up for Netflix at about the same rate, even at higher prices. With more than 48 million members worldwide and award-winning original shows, the company’s message is no longer just "come to Netflix to save on your cable bill."
“We've realized through testing that we don't need to be running around saying ‘Netflix free trial’ nearly as much. That's very commercial and reductionist,” Hastings explained. “By focusing on the core elements of member satisfaction and the content that you get if you join Netflix, we can get to a much bigger market share and a better connection with members.”
In other words, dear Netflix fans, the fault lies not in our stars but in ourselves.
- Reed Hastings