Seventeen years after Netflix originally launched, the streaming content industry it now leads is moreunsettled than ever. Considerthis series of announcements over eight daysin April:
April 21: Netflix announces plans to raise its new subscriber fees globallyby $1 to $2 a month.
- April 23: Amazon announces a licensing agreement that will give Amazon Prime members exclusive access to HBO’s library of original content.
- April 24: Netflix announces that it has contracted with three small cable companies to provide subscribers access to its content via TiVo DVRs.
- April 28: Netflix announcesa deal with Verizon to provide Netflix subscribers high-speed online access to streaming content, the second such deal Netflix has made with an Internet service provider (ISP) over its own strident objections.
Clearly, streaming content is an evolving battlefield teeming with opportunities — and risks — for companies large and small across a wide spectrum of industries, from online media and shopping giants to ISPs, cable firms, content creators, and others. The Netflix fee hike provides a prism through which to view the various challenges in the current market.
To start, it should be noted that this isn’t Netflix’s first foray into subscriber fee increases. In 2011, the company decided to split its DVDs-by-mail and online streaming services into two separate lines of business, which resulted in a 60% fee hike for many customers and cost Netflix about 800,000 existing subscribers and 80% of its stock price.
To avoid losing customers this time around, Netflix is taking a much more deliberate approach. It tested the new price in Ireland, where results, while limited, were promising (that may change, since this latest price increase will also likely apply to Irish subscribers). Per the shareholders letter announcing Netflix’s global fee hike, “Existing members would stay at current pricing … for a generous time period,” which CEO Reed Hastings later suggested might be one to two years.
This price increase comes after several years of impressive growth following those 2011 losses. In the first quarter of 2014, Netflix added 2.25 million streaming subscribers in the U.S. and a total of 4 million worldwide. It now has 35.7 million U.S. subscribers and more than 48 million globally, in line with its long-term goal of 60 to 90 million domestic subscribers.
To reach that goal, though, Netflix needs to keep expanding its content inventory, which means it will also “have to eventually increase prices a little bit,” as Hastings admitted. Netflix already has $7.1 billion in existing obligations for original and licensed content, andit recently contracted for an original Spanish-language series; a new series from Mitch Hurwitz (the creator of Arrested Development); a third season of House of Cards; and a final season of AMC’s The Killing.
These are all positive content moves for current and potential subscribers. Still, these shows start out in Netflix’s debit column, and there are no guarantees that they’ll attract enough customers to cover Netflix’s costs, let alone turn a profit. (That’s show business, quite literally.)
That leads to a second challenge: The highly competitive nature of the streaming content market. An ever-increasing number of companies, from Apple and AT&T to Yahoo! and even small cable providers, want to get (or stay) in the game, and Netflix will need all of the financial wherewithal it can muster to maintain its leadership position in the market. Contracting with regional cable companies opens a new revenue stream for Netflix and might offer greater leverage with large cable giants, but increased competition requires increased investment, which might also help justify the new membership fees.
Beyond that, Netflix is now (reluctantly)paying ISPsto ensure that subscribers can quickly access its streaming content. Without wandering too deep into these specific weeds, the question of who should bear the costs of broadband access has turned into a battle between ISPs and streaming content companies. Netflix’s deal with Verizon, on the heels of its Comcast agreement, may signal its admission of surrender on this front, though. Down the road, consumers will no doubt have to pay more for faster broadbandaccess, but for now, Netflix may be instituting higher subscriber fees to help protect its bottom line, at least in part, against these costs.
These are, as an apocryphal proverb might suggest, interesting times for streaming content companies. Consumer demand continues to climb, as do their objections to any obstacles that impede their access to fast, affordable broadband services. If it had occurred in a vacuum, Netflix’s decision to raise fees for new subscribers might have been seen as a significant move, but given the volatility of today’s market, there’s a decent chance that it will be all but forgotten — at least until the new fees start to affect its existing subscriber base.
by Tom Caporaso, CEO of Clarus Marketing Group. Tom has nearly two decades of direct marketing experience, specializing in continuity, subscription, and custom loyalty programs. His background includes senior management roles in, E-Commerce, Subscription Programs, Site Optimization, SEM and SEO, Product, Marketing, Sales and Client Services.
