Sunday, September 18, 2011

Netflix Lowers Subscriber Estimates

In the consumer markets, price increases virtually always have the effect of reducing demand, as economists predict will happen. When Netflix decided to "entice" customers to shift from DVD rental to streaming, a significant price increase for some consumers, particularly those that wanted both unlimited DVD rentals and unlimited streaming, was part of the strategy. Consumers who only wanted unlimited streaming or DVD rentals, but not both, actually saw bills drop. Plan changes to cost one million customers

Netflix now says it expects to lose about one million customers because of the pricing plan changes. The company, which split its streaming and DVD-by-mail services two months ago, now expects a total of 24 million subscribers in the third quarter, down from the 25 million it forecast in July 2011.

Netflix expects 21.8 million people to subscribe to its streaming service, either with or without also getting DVDs in the mail. That's down from an expected 22 million it forecast earlier. And Netflix expects 14.2 million people to subscribe to mail-order DVD rental service, with or without streaming. That's down from its July forecast of 15 million.

Some will fault Netflix for making a risky move. Others might say the move is a bold signal that Netflix is about to get into a new business, not simply based on streaming instead of DVDs, but a change of business from "movie rentals" to "television."

That is the big change, not the pricing shift. Netflix is betting it can primarily become a provider of streamed TV content, instead of a provider of movie content. Some might say the difference is that where Netflix used to compete with Blockbuster Video, in the future it will compete with Hulu. At a secondary level, where Netflix used to compete with premium cable TV networks such as HBO, in the future it might start to compete with cable TV.

Netflix chief content officer Ted Sarandos says the company ran into trouble with its forecasts for streaming video and DVD rental subscriptions because it’s still adjusting to the decision in July to turn them into separate products. “Being able to precisely forecast and predict the behavior of that many people on a fairly radical change is something we’ll get better at all the time.” Forecast miss

The key point is that Netflix is about to embark on a business model change much more substantial than simply "how" movie content gets delivered to its customers. Netflix now will try to become a substantial provider of TV content. Some would argue that is the real challenge.

Although “the DVD business has a long life in middle America,” Sarandos says “it’s just not part of our future.” That's a clear signal.

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