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Our unofficial partner that we love more than some family members, Netflix (NFLX), had a rough couple of days. The streaming media company met its projected third-quarter $0.07 earnings per share but missed on its projected revenue figures, generating $1.738 billion instead of the estimated $1.743 billion. After-hours trading was impacted negatively by the news, trading down 10% at one point, while investors had a mixed array of thoughts.
Netflix subscriber figures were not promising as well. Domestically, the company added only 880,000 new members, compared to the more promising international addition of 2.74 million. This comes to a total of 3.62 million new Netflix members, which is a marginal increase from the year-to-year figure of 3.02 million combined.
New US subscribers, however, have been on the decline since the company’s 2015 first-quarter and may very well plateau sooner than later, despite their projected 1.65 new members for the 2015 fourth-quarter.
Netflix rationalizes this decline in domestic membership with a “I didn’t reply to your text message 5 hours ago because I just received it now” level excuse of the shift towards micro-chip based credit cards and expiring credit cards. As Michael Pachter of Wedbush Securities told Reuters regarding the issue, “It’s just the dumbest thing I’ve heard.”
Furthermore, Netflix will be raising its most popular membership option from $8.99 to $9.99 for new customers in the U.S., Canada and parts of Latin America. Existing customers will have varying grace periods before the new pricing goes into effect.
The company is counting on customer gains and higher prices to improve its revenue growth, maintain rights for the majority of its programming, and continue to finance its original programming. Per a recent Bloomberg report, Netflix has “$4.3 billion in programming costs over the next year, and almost $5 billion more for the following three years.”
As a Netflix subscriber, the price increase of $1 does not bother me, despite it being the second time my, and millions of other subscribers, per month price has increased (Yes, Netflix streaming was at one point just $7.99). They still have an immense and fantastic selection of television series, their original content of series and stand-up specials are equally as awesome, and their movie selection is high quality as well.
I just have to pay $10 per month to watch movies and series without commercials? This is still a great deal, and one of the reasons why I no longer have cable television. Once Netflix officially releases The Switch, I will be Netflix and chilling as many nights as possible.
Despite my personal enthusiasm about Netflix, with monthly rates slowly increasing, billions of dollars in production and programming costs, and domestic membership stagnating, the question becomes what will be the tipping point for Netflix that deters new membership and commences current members to leave?
The initial thought that comes to mind instantaneously is if they began to run commercials in its programming. This obvious hypothetical scenario, however, is more of a “point of no return,” in that advertisement spots would be the most desperate move Netflix would make to generate revenue. Subscribers would fee from their membership in a mass migration if this is done. The streaming service prides itself on the fact they do not need advertisement monies. It is what makes the viewing experience on Netflix so much more pleasant then on cable television, Hulu, Crackle, and the lot.
The Netflix tipping point for its initial decent into a membership exodus is twofold – content and price point. Sure, we Netflix junkies do not mind the monthly rates going up a few dollars over a 4 year span or having awesome movies and shows being removed (I still cannot forgive Netflix for removing the final season of Fullmetal Alchemist: Brotherhood. Not the series – just the final season). This process helps keep content fresh, even if you are upset you did not get a chance to watch a specific series or movie before its removal.
At what point does Netflix no longer become a value? It is already more expensive than Hulu and Amazon Prime (AMZN), which has Prime Video as one of many services, on a per monthly basis and less expensive than HBO Now (read our “cord cutting” article for all the prices). HBO, unlike Netflix, has a storied and rich history of original programming. Paying $15 per month to watch the majority of its collection of series and documentaries since 1997 (when Oz debuted), as well as a large collection of films is worth the price. This is, of course, if you enjoy the type of programs HBO presents. Their programming is not for everyone.
Netflix wants to be what HBO is, yet they have years of producing critically acclaimed series on a consistent basis. House of Cards is great, but it is not The Sopranos or The Wire. As currently constructed, if Netflix were to increase its monthly rates to $15 per month, I personally would consider cancelling my subscription, but most likely would stay onboard. If they begin dropping series and adopting the HBO model with the current and upcoming original content over a period of time, while charging $15 per month, however, I would cancel my subscription.
This is where the Netflix tipping point lies – an ambivalent place where it has a distorted, self-aggrandizing view of its place in the media realm. Can, or will the media service become HBO 2.0 is an entirely different discussion. Netflix needs to ensure that its monthly rates do not increase at a more rapid pace, while maintaining quality programming. This is, of course, a very delicate balance because obtaining and maintaining rights to popular and quality films and television series that are not self-produced is very costly.
If any company can perform this balancing act, it would be Netflix. Let’s just hope that they do.
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