Remember when Netflix
(NASDAQ:NFLX) tried to raise its prices back in 2011 and nearly killed the business? Customers went ballistic. The stock price tanked. Analysts said the company had tarnished its image irreparably. Saturday Night Live
was making fun of Netflix.
Three years after that fiasco, Netflix is raising its price again. But it's going to be different this time. Really.
In part, it will be different because Netflix learned its lesson the hard way.
The company announced Monday that it plans to raise prices sometime in the next several months by $1 or $2 per month, depending on the market. There will be no change for "a generous time period" for current subscribers, possibly as long as a year or two.
The price is now $7.99 per month for unlimited streaming video on demand. Possibly as a test case, the company raised its price in Ireland by 1 euro recently, and reports that it saw "limited impact."
What a difference from that awful day in July 2011, when Netflix last announced a price change.
That one had some strange mixed motives. CEO Reed Hastings wanted to get out ahead of the curve, as they say, giving a push to his business' inevitable transition into streaming video and away from its use of mail-order DVDs. He fine-tuned prices to encourage streaming video downloading and discourage customers who relied on postal delivery.
Hastings got out ahead of that curve all right, and he got flattened like a Toon in Toontown.
It's a startling illustration of the speed of consumer technology change, and the delicate touch a business needs to manage it successfully.
Just three years ago, many Netflix subscribers preferred to get their movies in the mail on DVDs and pop them back in the mail when they were done. Some people just liked getting those shiny red envelopes in the mail. Real movie fans preferred it because of the richer selection of available titles. Portability wasn't much of an issue: Fewer than half of us owned smartphones then, and tablets were not as ubiquitous.
Meanwhile, Netflix was under pressure to move people to streaming delivery. It cost the company maybe $0.75 to mail out a DVD. It cost $0.05 to $0.10 to deliver it over the Internet. It was an additional burden on a company already weighed down by big increases in content acquisition costs.
So, Netflix introduced an elaborate price scheme that was actually a price decrease for streaming video-only service but a price increase for mail order customers.
It got worse from there. The company tried to split its services into two separate divisions, one for DVDs, weirdly called Qwikster, and the other for the streaming video-only service. You could have both but the price would be 60% more than the old rate.
And that last point was the message that was universally received by customers: Your Netflix bill is being raised by 60%.
In four months, the company lost 800,000 subscribers and its stock price dropped 77%.
During the debacle, CEO Hastings inserted foot in mouth long enough to say, "We are now primarily a streaming video company delivering a wide selection of TV shows and films over the Internet."
No, "we" weren't, but now "we" are, Mr. Hastings.
After the close Monday, Netflix reported quarterly earnings results that beat analyst expectations for the first three months of the year. Earnings were $0.86 per share, compared with a forecast of $0.83 per share. Revenue was in line with analysts' forecasts at $1.27 billion.
There were plenty of other numbers to chew over: The company gained more than 2.2 million new streaming video subscribers in the US, bringing its total to 35.7 million. Internationally, it added 1.75 million subscribers to a base of about 12 million.
Wall Street applauded the numbers, sending the company's stock up nearly 7% in after-hours trading to $372.20.
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No positions in stocks mentioned.
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