ANALYSIS:
Netflix, the golden child of Wall Street and a beloved brand to tens of thousands of movie lovers, took it on the chin last week.
By jacking up prices by as much as 60 percent on its unlimited streaming and “DVD by mail” businesses, Netflix found itself in an unusual postion: being truly hated by its customers.
“Netflix, you just lost my affection and loyalty and you pushed me to start looking for other options!,” one irate subscriber wrote on a Wall Street Journal discussion board devoted to the price increase.
In fact, anger was running so high that, according to a recent poll conducted by CNET, as many as 55 percent of the former faithful say they will abandon the service entirely.
On Monday, Netflix's stock dropped 2.76 percent to $279 after analysts suggested its share price was too high.
Also read: Is Netflix Streaming Its Way Towards Disaster?
What ticked-off customers may not know is that the subscription giant had no choice. Though Wall Street long ago fell in love with Netflix’s multiplying subscriber rolls and digital pioneering, the fact remains that the Los Gatos, California-based company has been giving away too much for too long while charging too little.
With rivals such as Amazon nipping at its heels and the risk that Internet service providers could soon charge higher prices to sites that offer streaming video, Netflix is feeling the heat for the first time since it began its meteoric rise to digital titan-dom some two years ago.
In the short term, Netflix could no longer afford to keep offering monthly plans at such a steep discount, analysts and studio executives tell TheWrap. Customers were simply not transitioning away from physical discs and toward streaming fast enough to support the low price points.
In its message to customers announcing the price increase, Netflix acknowledged that it had miscalculated that DVD-to-streaming transition.
“Given the long life we think DVDs by mail will have, treating DVDs as a $2 add-on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs,” the company wrote.
Netflix is spending hundreds of millions of dollars to acquire digital content through deals with Epix, Relativity, NBCU and more. And the savings on postage fees from dialing down its by-mail DVD operation have not only failed to meet projections, they are not matching the escalating costs of the digital acquisitions.
Since payments to studios are only likely to escalate, something had to give.
“The company has actually been losing money on a cash basis and has hidden it with accounting treatments,” Tony Wible, an analyst at Janney Montgomery Scott, told TheWrap.
“It certainly marks an inflection point in the company’s growth strategy,” Wible added. “It was a business about low price points, brand recognition, market share, and now it’s moving towards fragmentation and profitability.”
