Netflix took a beating on Wall Street last week. After revising subscriber estimates downward by 1 million subscribers, its stock went into free fall, closing the week at $155, down from a $300 peak in July. Netflix, the darling of Wall Street for the past three years, has lost half its value in a few short months.
It must be a gulp moment right now for CEO Reed Hastings, who has always set Netflix on its own path and let investors figure things out for themselves. More than any other company, Netflix represents the transition of high-end video entertainment (movies and TV shows) to the Internet. A bet on Netflix, is a bet on streaming video. That transition is inevitable. It is going to happen for many reasons. Reed knows this. He saw it earlier than most. Sending people DVDs by mail was always just an interim business model until broadband, the studios, and customers caught up.
We are still not quite there yet. The pace at which people are dropping DVDs is faster than the rate at which they are adopting streaming. The pressure on Netflix to do something to restore confidence must be severe. But Reed, don’t listen to Wall Street. Just keep pushing the studios to open up more of their movies and TV shows to streaming, and customers will follow.
However, do listen to customers. Raising prices for those of us who opt for both streaming and DVDs would have been fine if Netflix had a deeper streaming catalog. But the gap is still too big, and the price hike seemed premature. Your customers are extremely loyal. Don’t piss them off.
If you remember, it was back in July when Netflix announced new pricing that would raise prices for subscribers who get both DVDs in the mail and stream movies over the Internet. This caused a backlash among some customers, although it did have the effect of making Netflix’s streaming-only plan more attractive, with 75 percent of new customers now signing up for it.
Still, it’s not enough to offset the drop-off in DVD subscribers. Of the 1 million fewer subscribers Netflix now expects, 800,000 will be from DVD-only subscribers. The remaining 200,000 decline will come from streaming-only subs, with the number who pay for both remaining steady. Out of Netflix’s expected 24 million subscribers this year, 21.8 million will have access to streaming in some form, and only 2.2 million will stick to DVD-only subscriptions.
The shift is already clear. It is just that the exact rate at which that shift is occurring is hard to predict, hence the wild swings in the stock price. Losing the renewal of its streaming distribution deal with Starz didn’t help matters either.
Getting the studios and entertainment companies on board will continue to be the biggest challenge for Netflix. The economics of streaming don’t match the economics of other forms of distribution (like cable) for the media companies. But consumer behavior is already going in the direction of streaming. It is only a matter of how many screens you have connected to the Internet and how big they are. If it is only your computer screen, streaming is more of a last resort. But once you can get Netflix on your iPad or flat-screen TV, then it becomes one of many viewing options—and often the best one.
Personally, I stream Netflix whenever I can, even if I know the same movie is already in my DVD mail-in queue. If I could watch everything via streaming, I would. But I can’t yet, so I am reluctantly paying more for my DVD-streaming combo subscription in the hopes that I will feel comfortable dropping the DVDs in a year. If Netflix can deliver on that promise over time, then I will continue to be a lifelong customer and so will millions of others. In the end, making its product better is the only part that Netflix can control. Keep doing that, Reed, and your customers will keep backing you no matter what Wall Street thinks.
Netflix is the world’s leading Internet television network with more than 33 million members in 40 countries enjoying more than one billion hours of TV shows and movies per month, including Netflix original series. For one low monthly price, Netflix members can watch as much as they want, anytime, anywhere, on nearly any Internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments. Learn more about how Netflix (NASDAQ:NFLX) is pioneering Internet television at...
Reed Hastings co-founded Netflix as a DVD rental-by-mail company in 1997 and since led its transformation to become the world’s leading streaming subscription service for watching movies and television programs. With more than 33 million streaming members in the United States, Canada, Latin America, the United Kingdom, Ireland and the Nordics, Netflix has revolutionized the way people enjoy entertainment. Previously, Reed founded Pure Software, which made tools for Unix software developers. He guided Pure into becoming one of the world’s...