The Netflix Decision

“Jumpman, Jumpman, Jumpman, them boys up to something.”

Something is telling me that those folks up in Los Gatos are up to something. Netflix knew it was coming, the current pricing model won’t last.

Lets first give credit to Netflix’s awesome story.  They currently have 69.17M subscribers who either pay $9.99, $8.99 or even $7.99 (my friend just corrected me) <did I miss a price bracket?>.  They produce Emmy worthy content and provide an outstanding product at an unbeatable price.  They are smart, had first-mover advantage and followed their heart in what they believed.  Like my previous posts mention, pick stocks where you invest in the CEO and I promise you the returns will follow exponentially. Reid Hastings, the Co-Founder and CEO, is truly an epic guy who believed in the following:

  1. Video viewership was going to shift to online streaming.
  2. Online streaming costs would continue to decline.
  3. Low-cost, cancel-anytime subscription models attract users.

My belief is that Reed reinvigorated the subscription model for consumers which is now dominating the technology space.  I believe Reid and team would tell you they made a “marketing guess” of charging $9.99 to gain users while figuring out how to produce a profitable long-term solution.  Netflix also experienced lower marketing costs due to strong word-of-mouth while their customer satisfaction ranked near the top of customer service surveys for retailers or media distribution companies.  Any company would love to spend less acquiring users.

I told a friend recently that I started analyzing all of my reoccurring costs i.e. Google Storage, Apple Storage Plan, Netflix, Spotify, LinkedIn Premium, Amazon Prime, etc.  You should do, it might shock you.  What sparked this post is when he told me that he paid $12.99 for Spotify. I currently pay $9.99 and still do today.  So, if Spotify is increasing their costs, who else will follow and why?

For Netflix it is all over their financial statements.  Net income has been decreasing since 2013. The cost per core user is growing and even acquiring a new user at the current price may hurt as well.  Investments have increased which have driven the cost of the service.  As more and more subscription-based products like Spotify are added to consumer budgets, Netflix cannot afford to just keep gradually increasing the price without sound logic to consumers. Additional, more creative revenue models will be needed to produce and bring on more content, which will ultimately make it a better product and grow the user base. House of Cards costs $60M to produce per season and that is only one show of many. Even Netflix’s new partnership with Disney, included in your membership, is estimated to lose $300M a year or cost $4.33 per user.

Which is why I believe they are at a crossroads.

The economics of the unbundled world is still unclear. Each new streaming player is coming up with its own valuation for the channels it offers. Sling TV, from Dish Network, costs $20 per month for a suite of channels that includes ESPN, Cartoon Network and TNT but no broadcast networks. Sony’s Vue, which is only available through PlayStation consoles in a few markets, costs around $50 and includes CBS, Fox and NBC stations but no ABC. Apple’s lineup is expected to cost between $30 and $40 per month but Apple as well as Google are unwilling to pay to get content.

Lets also analyze the a la carte option.  Say you want only the following networks: TNT, Disney Channel and USA.  It is estimated that TNT would cost $8-$10, Disney Channel would cost $8-$10, and USA would cost $5-6 per month.  Netflix is better than all three combined and offers Disney in their service; however, did you notice that TNT = Netflix?

So what will Netflix do?

PATH 1:  Netflix increases the monthly cost from $9.99 to $29.99/month

They start competing against traditional cable/satellite.  Some think Netflix would lose because they aren’t as deep into households where cable companies have higher subscriber counts. I say why the heck can’t they take the next step here, it’s a hip service and built for a >$50K HHI audience.  I thought I heard people were cutting the cords?

PATH 2:  Monetize with video advertisements

Let say they make you watch ten fifteen second video advertisements per month, randomly across your viewing.  First, would you be okay with it?  Second, would it be worth losing customers?  Using a nice $.10 cost-per-view that’s an additional $1.00 they could make per user and that doesn’t really help the balance sheet.  They would also need to invest in building an ad sales team or partner with someone like Facebook to sell it for them.

PATH 3:  Becomes the in-home movie theatre

  • Netflix continues to produce new movies and launches over streaming; included in current pricing to attract more users.
  • Studios partner with Netflix and share 20% of the revenue to launch movies.

PATH 4:  Netflix licenses their own content

This one is pretty obvious.  Coming now to Amazon Prime is………Netflix originals…..yeah right.

Get ready.  I really think changes to your experience are coming soon, just like my buddy who is paying more for Spotify.

The Netflix Decision

2 thoughts on “The Netflix Decision

  1. Anna Schmadeke says:

    Interesting. We currently pay $7.99 for Netflix and have for years. I love that deal, so I’m hoping for no changes! Good blog, Chris!:)


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s