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Netflix's Pricing Dilemma

25 Jul, 2016 By: Thomas K. Arnold

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Netflix’s latest financial report can be taken in one of two ways. Cynics may read the report, in which the streaming service reported missing its growth projection by 32%, as a precursor of impending doom. They might take issue with CEO Reed Hastings’ assertion, in a shareholder letter, that market saturation in the United States isn’t a factor, and that the slower-than-expected growth was largely a reflection of a price increase in monthly subscriptions — a price increase Netflix badly needed to remain competitive in acquiring, and producing, content. In fact, one might argue that if the U.S. market isn’t saturated, then why bother to raise the price? As for international expansion, growth projections there weren’t met, either.

Cynics see this as a clear indicator that Netflix has some serious headwinds to contend with, headwinds that will only grow stronger as time marches on. The most pessimistic among them believe Netflix is living on borrowed time, and — just like so many trendy products and services, may ultimately shrink (like MySpace) or vanish completely (like Blockbuster, which ironically was deep-sixed by Netflix effectively building a better mousetrap).

Personally, I don’t see much cause for alarm in Netflix’s latest numbers — at least, not yet. Subscription growth may be leveling out, but I don’t see churn increasing significantly anytime soon, as long as Netflix keeps future price hikes in check. It’s sort of like gym memberships — the gyms that charge 10 bucks a month are flourishing because the amount is too small for most people to notice each month when it’s automatically charged to their credit cards or taken out of their bank accounts.

Saturation is a bigger concern, both in the United States and globally. While a flattening out of Netflix revenue would still see the company in serious money, investors aren’t generally drawn to slow and steady. They want growth to continue, as evidenced by the 15% plunge in Netflix’s stock price in the wake of the earnings report’s release.

Another challenge Netflix is facing is competition. Dozens of OTT rivals have sprung up, and Netflix is finding that while its logo is popping up on more and more TV screens, so are those of other services, from Amazon Prime to Hulu. And despite Netflix’s push toward original programming, Netflix fatigue will become a bigger factor over time — which means the company will have to spend even more money on content, money that at some point in time will be harder to cough up.

It’s a classic case of damned if you do, damned if you don’t. Netflix will need to keep raising prices to remain in the game, but it can’t raise prices too much or else subscribers will jump ship and go elsewhere — particularly as the pool of alternatives continues to expand.
 

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