CFO: Netflix Rebuilding the Brand ‘Brick by Brick’

29 Nov, 2011 By: Erik Gruenwedel

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Streaming pioneer eying subscriber rebound in December, including a 30% return by former subs

Netflix is working to restore subscriber faith in its trailblazing streaming and by-mail disc subscription services. It's a process that won’t be an overnight fix, CFO David Wells told an investor group.

Speaking Nov. 29 at the Credit Suisse 2011 Technology Conference in Phoenix, Wells continued damage control saying the unpopular decision in September to raise the monthly fee for the combined disc and streaming program was done after internal data showed subs were renting fewer discs. The belief was that most of the combo subs would migrate toward the lower-cost streaming-only option. Indeed, streaming usage is up three times in 2011 compared to 2010, according to Wells.

He added that management knew the marginal profitability of a $7.99 monthly streaming-only subscriber was higher than a hybrid $9.99 disc/streaming monthly subscriber.

Regardless, about 800,000 subs dropped their membership shortly after the price increase went into effect.

“No one likes a price change, especially a 60% price change in a bad economy,” Wells said, adding that the subscriber exodus was driven by price and not the aborted launch of disc-only service Qwikster. “That was business strategy, it is not consumer strategy and we were somewhat overweighed obviously by business strategy.”

Wells admitted Netflix dropped the ball regarding pricing, adding that the company “broke other social norms” dealing with communication and other aspects of the changes.

The CFO said Netflix’s strategy going forward to restore subscriber domestic subscriber growth involves a “brick by brick” approach to improving the brand via its user interface, improving content selection, merchandising that content and tweaking user algorithms, among other steps.

“There is no one big fix that is going to undo this and set the reset button,” he said. “We are under no illusion that it will go away after 90 days.”

Indeed, following subscriber declines in October, the falloff flattened in November and is projected to rebound in December, according to Wells. He said 33% of new subs are returnees.

“We’ve seen churn moderate,” the CFO said.

Wells said he believes the subscription VOD market ranges from 60 to 80 million memberships, a market potential he believes Netflix is “strongly positioned” to go after with the advent of Web-enabled TVs.

The CFO said the aforementioned sub growth is based on a market of 100 million pay-TV households in the U.S. and 300 million mobile phone subscribers.

“I am very confident the underlying opportunities for the domestic streaming addressable market haven’t changed; what has changed is people’s attitudes towards Netflix — and those are starting to moderate,” he said.

When asked if the recent decision to raise $400 million through the sale of common stock and bond offering was to secure greater content, Wells said it was solely done provide a safety buffer, or “cushion for the balance sheet.”

Netflix plans to increase content spending 70% to 80% in 2012 from about $1 billion this year to $1.9 billion in 2012, according to analysts. Wells said the goal is to concentrate on non-exclusive deals that allow greater content portfolios than exclusive deals that don’t. Indeed, the company will set aside about 15% of its acquisition budget for exclusive deals and so-called “opportunity buys.”

Wells suggested Netflix’s ongoing aggressive content license deals are also designed to thwart SVOD competitors, which observers believe includes Amazon Prime, Apple and Google. The CFO said that with the aforementioned media companies developing content distribution ecosystems, the decision emerges whether to “build, partner or buy content.”

He said that thus far Amazon, through its Kindle Fire tablet launch, and Apple, with its iPad, have chosen to view Netflix as complimentary.

“It takes a lot of money to have the same comparable content offering as Netflix,” Wells said. “You have to be prepared to spend that level. That is the market price to clear that content.”

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