Why Netflix did the right thing

I have never heard so many whiners complain about a price hike as I have seen with Netflix.  It shows just how many American adults still act like spoiled children.  Here are some of the comments I have seen on blogs:

  1. the cost is too high
  2. if you raise the price, add more content
  3. 60% price increase is WAY too much
  4. I don’t want to pay two separate bills
  5. I want more current titles
  6. no one raises prices in a recession

The only thing Netflix did wrong was to back down from their original announcement.  And let’s face it, the only reason they reversed that decision at ALL was for INVESTORS, not the customers.  Here is why:

  • Netflix’ current pricing is RIDICULOUSLY low already.  How many of you have cable or satellite subscriptions right now?  Do ANY of you pay less than $39 per month for those services? When you add movie channels, I know MANY people that pay near $100 per month for their traditional television content.  With Netflix, you get NO commercials, you don’t have to watch when the show is on; you can stream at the time of your choosing, and you can watch on smart phone, tablet PC, television, xBox, Wii, laptop.  All of that for less than $15 per month.  That’s the cost of buying ONE DVD at Wal-mart, and you can watch 24 hours per day on Netflix for that same price per month.  The value Netflix has provided FAR exceeds the price they charge.
  • Netflix is trying to add more content, but they are hamstrung by the content providers.  Thanks to the lobby of the media elite over the last 50 years, content is overly protected by the government.  This new technology of streaming doesn’t even fit into the current licensing models, so the content industry (Sony, Warner Brothers, and all the other big media companies) are trying to milk every dollar they can.  If you want to whine about anything, whine to them about their pricing models.  I mean, did THEY ever let you upgrade your VHS to DVD for FREE, since you already bought the license to a movie once?  How many times do we have to pay for the same thing?  You saw where STARZ is pulling content from Netflix because they wanted something like $300 million a year for their content alone.  They see that Netflix is growing, and they want their UNFAIR share of that revenue.  Netflix can’t show more content unless its costs effective, so the war is now on between the content distributors and the content owners.  I support Netflix over the embedded content owners all day long.
  • A 60% price increase is WAY too much … yeah right.  If your property taxes are $5000, and the government raises them by 60%, THAT is a lot of money.  A 60% increase on a $10/month subscription is chump change.  Percentages are relative to the items cost, so don’t whine about percentages on items that cheap to begin with.  $5/month is still so low its irrelevant.
  • Paying two bills instead of one … you forget that a ton of us Netflix fans do NOT care about the DVDs anymore.  We opted out as soon as they gave us the option.  Wait for DVDs, remember to mail them back, worry about them scratching…no way.  All we care about is the streaming content.  DVDs are a dinosaur, it makes perfect sense to break out the DVDs into a separate invoice since that business is dying.
  • More “current titles” is tied up in the war with the content providers.  Similar to Pandora’s problems with the music licensing, Netflix is getting them as fast as they can within the limitations set by the content owners.  I stayed in a hotel recently in San Francisco, and noticed that it was $13 to watch ONE current movie on their Pay Per View.  Did I buy one?  Hell no, I fired up my laptop and streamed Netflix content INCLUDED in my $10/month subscription at no additional charge.
  • No one raises prices in a recession…yeah right.  The price in any market is based on supply and demand, NOT the recession.  Now, if you are selling your house, then no, raising the price of the house is not a good decision because the housing market has more supply than demand.  You see doctors lowering their prices?  You see technology companies lowering their prices?  No, because its market driven.  The demand for content is high, and the demand for “convenient” content (streaming to phones and iPads) is even stronger.  A large majority of us want more streaming content, and are willing to pay more to get it.

Just like our national economic situation, much of this outcry comes from people with no understanding of economics.  I read recently that Netflix lost 800,000 customers.  And you “assume” that’s a bad thing right?  Wrong.  Here is the math:

Quarter Subscribers Price Revenue
3rd 24600000 $9.99 $245,754,000.00
4th 23800000 $15.98 $380,324,000.00

As you can see, while their subscribers went down, their revenue went up.  (This assumes that everyone who stayed kept both plans, which is not the case, so the actual revenue is lower.  Nevertheless, their total revenue was still WAY up for the quarter, per their 10K report).

More importantly, not only did their revenue go up, but those 800,000 that left…those are the cheapskates.  American consumers make the FALSE assumption that all money is created equal.  Business owners know that is crap.  There are basically four types of customers:

  1. A – Raving Fans – They tell everyone they know how great you are.
  2. B – Good Customers – They pay their bills, may demand top notch service, and are willing to give and take.
  3. C – Mediocre Customers – They are cheap, pay late OR demand an unreasonable amount of service.  They should be rehabilitated to a B customer, or moved to D.
  4. D – Introduce them to your competitors customers – These customers COST you more money OR pain because they whine about everything, they pay their bills late, and are never happy.  Get rid of them.

If you are a pain the ass customer, that is fine IF you are paying for the privilege.  If you want the lowest price, but are an easy customer that understands that the cheapest cost reduces your service level, that is acceptable as well.  But if you are cheap AND a pain in the ass, it ain’t worth it.  Your money is NOT as good as the others, because the retail price you pay doesn’t cover the additional labor and interest on your late payments to do business with you.  One of the evolutionary steps in a good business is to know when to walk away from customers.

Netflix got rid of 800,000 C/D customers … good for them.  Their business will be more profitable because of it, and their employees will have better morale.  They will spend some of that money on new content for the rest of us.

I canceled cable tv in 2003 when my son was born.  Now, even at a hotel, I cannot watch a show with commercials; drives us nuts.  Once you get used to NOT having commercials, you will never go back.  For several years, this meant we only rented movies, but now, thanks to Netflix, we can stream content anytime, anywhere, from just about any device.  Yesterday, I sat on the front porch giving out Halloween Candy, and when the trick or treater crowd was slow, I watched Law and Order, Criminal Intent, on my Motorola Xoom, streamed from Netflix.  I also played Pandora Halloween music from my smart phone.  Streaming content is unbelievably cool, and Netflix gets kudo’s for being the first to make it happen.

So, to all you whiners complaining about Netflix, good riddance.  The rest of us 23 million strong and growing subscribers can do fine without you.

And to the stockholders of Netflix, have you lost your minds?

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