Media & Entertainment

Netflix is still too cheap


Netflix app icon iOS
Image Credits: TechCrunch

Ed Byrne


Ed Byrne is an entrepreneur, investor and co-founder of Scaleworks.

More posts from Ed Byrne

How do you know your product is priced too low? One way is when you raise the price between 13 and 18%, you have almost no churn, not many complaints, and your stock price actually goes up!

When Netflix increased its prices a few weeks ago, investors were so confident in the revenue increase that would be delivered that they didn’t even wait to see what customer’s reaction would be.

Netflix spends an astounding amount of money on content rights and content development — supposedly budgeting $15 billion for 2019 — and resulting in $3 billion in negative cash flow, which is heavily funded with debt — at $10.4 billion by the end 2018.

Even at its already large size, the company continues to grow rapidly, so I am not suggesting their cash flow or spending is any cause for concern.

What I am suggesting is that Netflix is too cheap, and could likely be cashflow profitable without reducing investment in content, by implementing some pricing model changes. The fact that customers and investors did not seem to bat an eyelid at the recent price increase gives me some confidence that they are not maximizing profit per customer!

In some scenarios, especially early on, companies decide to focus on customer acquisition at the expense of revenue maximization. Other than the unfathomable madness of some companies that do this while running a negative GROSS margin (a big ‘thank you’ to their investors for subsidizing consumers!), market share ‘land grabs’ in B2C can make sense. It looks like Netflix has been focussed on market share for a long time and continues to focus on maximizing subscriber numbers over profit.

But is it really a linear equation — where an increase in price will result in a decrease in new subscribers or total subscribers? Clearly not in this case. Wouldn’t it be worth at least testing variations on the pricing model in somemarket segments to discover the optimum value price?

Quick definition — the Optimum Value Price is where you can capture the highest number of customers, at the right price for each type of customer.  

Right now — Netflix differentiates price in 2 ways only — number of screens, and HD or Ultra HD. I think Ultra HD is a bit of a red herring as most devices and connections are not capable of getting it, and there’s not much content either. So really — the primary driver of price is number of screens — 1 for $9, 2 for $13 and 4 for $16.

This assumes the only difference between customers is the number of devices they want to watch content on at the same time. This is a misnomer. No one is watching 2 devices simultaneously— one with each eye?! So it’s really the number of users on an account —  1 user for $9, 2 users for $13 (nearly a 30% discount off list) or 4 users for $16 (a 45% discount from a single user account).

Consider some of the likely differences between consumers, and the variables by which they derive value: 

  • Number of Hours Watched
  • Variety of Content Consumed (number of different shows and movies)
  • ‘Binge Watchers’
  • Demographics (geographic and individual)
  • Devices, Connections and Locations Watched From
  • Frequency and Length of Simultaneous Connections

If you wanted to be aggressive, you could think about time of day, early access to new series and movies, premium content, subscriptions to different genres. But lets keep it simple for now — here’s a slightly more value-based pricing plan idea:

The base plan price hasn’t been changed— but that may be doable — so these increases are from what might already be a not optimized starting point.

On the Unlimited Plan — think about how many people have more than 1 user, watch Netflix multiple times a week, don’t ever want to think about usage limits and are not price sensitive to $30 a month for something they use regularly (and that has exclusive content they really want to see —  Netflix has so many ‘must watch’ shows!)? Is it 10% of US subscribers? If so, a back-of-the-envelope calculation shows that’s likely over $1bn in 100% margin contributing revenue.

The real question is this — if Netflix changed its pricing model to be a little more complex and value-based — what is the level of change that can be sustained without materially reducing subscriber retention and addition? My guess is there’s at least enough leeway to reduce the need for debt to fund content.

More TechCrunch

Welcome back to TechCrunch’s Week in Review. This week had two major events from OpenAI and Google. OpenAI’s spring update event saw the reveal of its new model, GPT-4o, which…

OpenAI and Google lay out their competing AI visions

Expedia says Rathi Murthy and Sreenivas Rachamadugu, respectively its CTO and senior vice president of core services product & engineering, are no longer employed at the travel booking company. In…

Expedia says two execs dismissed after ‘violation of company policy’

When Jeffrey Wang posted to X asking if anyone wanted to go in on an order of fancy-but-affordable office nap pods, he didn’t expect the post to go viral.

With AI startups booming, nap pods and Silicon Valley hustle culture are back

OpenAI’s Superalignment team, responsible for developing ways to govern and steer “superintelligent” AI systems, was promised 20% of the company’s compute resources, according to a person from that team. But…

OpenAI created a team to control ‘superintelligent’ AI — then let it wither, source says

A new crop of early-stage startups — along with some recent VC investments — illustrates a niche emerging in the autonomous vehicle technology sector. Unlike the companies bringing robotaxis to…

VCs and the military are fueling self-driving startups that don’t need roads

When the founders of Sagetap, Sahil Khanna and Kevin Hughes, started working at early-stage enterprise software startups, they were surprised to find that the companies they worked at were trying…

Deal Dive: Sagetap looks to bring enterprise software sales into the 21st century

Keeping up with an industry as fast-moving as AI is a tall order. So until an AI can do it for you, here’s a handy roundup of recent stories in the world…

This Week in AI: OpenAI moves away from safety

After Apple loosened its App Store guidelines to permit game emulators, the retro game emulator Delta — an app 10 years in the making — hit the top of the…

Adobe comes after indie game emulator Delta for copying its logo

Meta is once again taking on its competitors by developing a feature that borrows concepts from others — in this case, BeReal and Snapchat. The company is developing a feature…

Meta’s latest experiment borrows from BeReal’s and Snapchat’s core ideas

Welcome to Startups Weekly! We’ve been drowning in AI news this week, with Google’s I/O setting the pace. And Elon Musk rages against the machine.

Startups Weekly: It’s the dawning of the age of AI — plus,  Musk is raging against the machine

IndieBio’s Bay Area incubator is about to debut its 15th cohort of biotech startups. We took special note of a few, which were making some major, bordering on ludicrous, claims…

IndieBio’s SF incubator lineup is making some wild biotech promises

YouTube TV has announced that its multiview feature for watching four streams at once is now available on Android phones and tablets. The Android launch comes two months after YouTube…

YouTube TV’s ‘multiview’ feature is now available on Android phones and tablets

Featured Article

Two Santa Cruz students uncover security bug that could let millions do their laundry for free

CSC ServiceWorks provides laundry machines to thousands of residential homes and universities, but the company ignored requests to fix a security bug.

1 day ago
Two Santa Cruz students uncover security bug that could let millions do their laundry for free

TechCrunch Disrupt 2024 is just around the corner, and the buzz is palpable. But what if we told you there’s a chance for you to not just attend, but also…

Harness the TechCrunch Effect: Host a Side Event at Disrupt 2024

Decks are all about telling a compelling story and Goodcarbon does a good job on that front. But there’s important information missing too.

Pitch Deck Teardown: Goodcarbon’s $5.5M seed deck

Slack is making it difficult for its customers if they want the company to stop using its data for model training.

Slack under attack over sneaky AI training policy

A Texas-based company that provides health insurance and benefit plans disclosed a data breach affecting almost 2.5 million people, some of whom had their Social Security number stolen. WebTPA said…

Healthcare company WebTPA discloses breach affecting 2.5 million people

Featured Article

Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Microsoft won’t be facing antitrust scrutiny in the U.K. over its recent investment into French AI startup Mistral AI.

2 days ago
Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Ember has partnered with HSBC in the U.K. so that the bank’s business customers can access Ember’s services from their online accounts.

Embedded finance is still trendy as accounting automation startup Ember partners with HSBC UK

Kudos uses AI to figure out consumer spending habits so it can then provide more personalized financial advice, like maximizing rewards and utilizing credit effectively.

Kudos lands $10M for an AI smart wallet that picks the best credit card for purchases

The EU’s warning comes after Microsoft failed to respond to a legally binding request for information that focused on its generative AI tools.

EU warns Microsoft it could be fined billions over missing GenAI risk info

The prospects for troubled banking-as-a-service startup Synapse have gone from bad to worse this week after a United States Trustee filed an emergency motion on Wednesday.  The trustee is asking…

A US Trustee wants troubled fintech Synapse to be liquidated via Chapter 7 bankruptcy, cites ‘gross mismanagement’

U.K.-based Seraphim Space is spinning up its 13th accelerator program, with nine participating companies working on a range of tech from propulsion to in-space manufacturing and space situational awareness. The…

Seraphim’s latest space accelerator welcomes nine companies

OpenAI has reached a deal with Reddit to use the social news site’s data for training AI models. In a blog post on OpenAI’s press relations site, the company said…

OpenAI inks deal to train AI on Reddit data

X users will now be able to discover posts from new Communities that are trending directly from an Explore tab within the section.

X pushes more users to Communities

For Mark Zuckerberg’s 40th birthday, his wife got him a photoshoot. Zuckerberg gives the camera a sly smile as he sits amid a carefully crafted re-creation of his childhood bedroom.…

Mark Zuckerberg’s makeover: Midlife crisis or carefully crafted rebrand?

Strava announced a slew of features, including AI to weed out leaderboard cheats, a new ‘family’ subscription plan, dark mode and more.

Strava taps AI to weed out leaderboard cheats, unveils ‘family’ plan, dark mode and more

We all fall down sometimes. Astronauts are no exception. You need to be in peak physical condition for space travel, but bulky space suits and lower gravity levels can be…

Astronauts fall over. Robotic limbs can help them back up.

Microsoft will launch its custom Cobalt 100 chips to customers as a public preview at its Build conference next week, TechCrunch has learned. In an analyst briefing ahead of Build,…

Microsoft’s custom Cobalt chips will come to Azure next week

What a wild week for transportation news! It was a smorgasbord of news that seemed to touch every sector and theme in transportation.

Tesla keeps cutting jobs and the feds probe Waymo