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6 Thoughts on Netflix's New Streaming-Only Plan and DVD Plan Price Hikes
In rolling out a streaming-only service tier this morning, priced at $7.99/mo, Netflix made good on what it has said it would do for months. It's also a logical step given the streaming-only service it introduced 2 months ago in Canada. What was more surprising in today's announcement was the price hikes Netflix is implementing on all of its DVD rental plans, which of course include unlimited streaming. Here are 6 thoughts on today's news:
1. Streaming is the future - Last quarter Netflix said that more hours of content are now watched via its content streaming than via its DVDs. With the standalone streaming service's introduction, Netflix is putting its money where its mouth is, incenting heavy streamers to drop out of the company's DVD-by-mail services entirely, while appealing to new subscribers who don't care about DVDs at all. But since many titles are still only available on DVD, and not streaming, the odds of a massive downgrade to streaming-only are probably low, for now at least. Regardless, given streaming improves Netflix's margins vs. DVD delivery, even lower revenues per subscriber make Netflix a more profitable company.
2. Is the cost of unlimited streaming the real driver behind DVD-by-mail price hikes? - Netflix also rolled out price increases on all its DVD-by-mail services, starting with $1 more per/mo for its 1-out (now $9.99/mo) and 2-out (now $14.99/mo) plans and increasing to $3 more/mo for its 3-out (now $19.99/mo) plan and even more for higher tiers. The 18% price bump on the 3-out plan would even make the most aggressive cable operators blush, and will surely get these subscribers' attention. But what's behind these increases? In a blog post today, Netflix's VP, Marketing Jessie Becker wrote, "The price increase will allow us to continue to offer the popular plan choice of unlimited TV episodes and movies streaming instantly along with unlimited DVDs." Hmm. Is that vague explanation another way of saying we want/need to offset the cost of unlimited streaming that these plans allow? It's long been a question whether Netflix can sustain unlimited streaming without raising rates at some point. The new rate increases begin to answer this question.
3. Attention all low-price/value-oriented consumers - With the new $7.99/mo tier, Netflix has reduced the entry price for signing up by a $1 (from the previous $8.99 entry tier). As a result it will become even more attractive to low-price/value-oriented consumers. Netflix has recognized better than any other entertainment provider that pay-TV operators' focus on rate increases and $100+ per month bundles has opened up a massive opportunity for lower-priced alternatives, particularly as the down economy forces household discretionary spending cuts. This is part of the reason Netflix has far out-stripped pay-TV operators in subscribers additions in 2010. Conversely, for those pay-TV subscribers who keep their subscriptions, an additional $7.99 to pick up Netflix is now a slightly lower percentage increase to their overall monthly spending and therefore may be an easier decision to make.
4. Netflix will be 2010's top stocking stuffer - Once again, Netflix has shown its consumer marketing savvy, rolling out a perfect stocking stuffer gift just ahead of Black Friday. All those millions of buyers of connected devices this holiday season will now be even more tempted to give Netflix streaming a try. If they like the streaming only service, but want more content, some of them will inevitably upgrade to a DVD-by-mail plan too.
5. Free trial accounts in Q4 '10 and Q1 '11 will soar, increasing pressure on conversion - In my follow-up Q3 '10 analysis, I highlighted the soaring level of Netflix's free trial subscribers, up to a record 26%, or approximately 1.1 million of its Q3 gross subscribers added. Netflix has explained this increase as being due to faster subscriber growth and the Canada launch. Now, with the $7.99/mo streaming-only plan we should expect free trial subscribers and their ratio to gross subscribers added and paying subscribers to move even higher. In and of itself this isn't a risk if conversion levels stay at their traditional 90+%. However, if higher percentages of trial users opt not to stay on board, churn will increase and Netflix's well-oiled approach for revenue growth and paying subscriber additions could be upended.
6. Netflix will hit 20 million subscribers shortly - In the Q3 earnings announcement Netflix once again upped its guidance for ending 2010 subscribers to 19-19.7 million subscribers (note, its Q1 guidance was for year-end 2010 subscribers of 16.5-17 million, which itself was an increase from an earlier forecast of 15.5-16.3 million). Now, with the $7.99/mo streaming plan, Netflix will certainly hit the 20 million subscriber mark shortly, with the only question being whether in Q4 it can notch its first 3 million subscriber quarter so it will happen by year-end, or if enough holiday season connected device buyers wait until post New Year's to sign up for a trial. When Netflix does hit 20 million subscribers it will be the equivalent of the 2nd largest pay-TV operator, only trailing Comcast (whose 23 million video subscribers Netflix will likely surpass by middle of '11). What a roll this company has been on.
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Topics: Netflix
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