In an April 2016 letter to shareholders with its Q1 earnings release, Netflix said it would spend the remainder of 2016 ‘un-grandfathering’ U.S. members, meaning that long-time members who signed up at $7.99 or later $8.99, and who were initially exempt from subsequent pay rises, will have to move onto the same pricing plans as new users. This means paying $7.99 for an SD-only, one-screen only plan, or $9.99 for an HD two-screen plan or $11.99 for a plan that gives access to UHD content and access on up to four screens. The company said it expected only a modest increase in churn from un-grandfathering because the members concerned have been with Netflix for a reasonable period already, and because content in the service continues to improve. “The increase in ARPU will allow us to invest more in content next year,” the company added.
In the U.S., more than half of Netflix members were paying $7.99 or $8.99 for the $9.99 HD twoscreen plan as a result of grandfathering. The price rise for these customers has provoked discussion about how price sensitive Netflix customers are in the U.S. and the potential for long-term ARPU now the company has posted Q2 results that show reduced rates of subscriber growth. Joel Espelien, a Senior Advisor for research and advisory firm TDG (The Diffusion Group) blames increased churn on the price increases, with increased churn being blamed for the lower subscriber growth.
He says the increased churn resulting from a $1-2 per month price rise (for grandfathered customers) “suggests that the fundamental value proposition for OTT SVOD video remains fragile.” Espelien adds: “Despite all the Emmy nominations and the billions of dollars spent on original content, U.S. consumers continue to perceive Netflix as a low cost, meaning cheap, service.”
Observing that what he calls low-end positioning is difficult to change, he worries that Netflix could remain permanently stuck at a $10 price point, saying this severely challenges the company’s ability to generate meaningful earnings in the U.S. He notes that the same $10 price in Asia is a premium price point, with some commentators saying it is way too high in these markets. His advice is that Netflix should keep pricing at those relatively high levels in Asia, build a premium brand and forego raw subscriber growth internationally in the short-term while waiting for middle-class consumers to grow into the service over time.
Espelien believes the die is now cast on OTT SVOD pricing in the U.S. and that no other OTT players will improve upon $10 a month. “The implications for the industry are not great,” he concludes.
Other analysts have painted a mixed picture for the outlook at Netflix, with Jonathan Broughton, Senior Analyst at IHS Technology (the research, analysis and strategy company), observing that after the price increases Netflix is in a similar price category to competitors. “Netflix’s Q1-2 subscriber growth was always going to be bad as many ‘grandfather’ customers are faced with price hikes after enjoying many years of cheap streaming,” he reckons.
But as Netflix observed in its original note to shareholders, this is not necessarily bad news. “Since the grandfather deals have ended, Netflix will have experienced an increase in ARPUs and a revenue growth, which outstrips subscriber growth,” Broughton predicts. And he emphasizes that although subscriber growth slowed substantially, the service is still growing. “As the majority of churned customers are resultant of grandfather deals, and gross additions were on target, IHS expects Netflix to return to strong growth in the near future.”
Netflix is convinced the fundamentals are good. During the Q2 earnings call, CEO Reed Hastings dismissed increased competition or market saturation as possible reasons for the slower growth. He acknowledged that people just do not like price rises. “It is a necessary phase for us to get through. And then with the increased revenue, we are continuing to invest in better and better content. So that is what makes us feel very strong and positive about the long-term, and why we believe this is a short-term phenomenon,” he told analysts.
Mike Goodman, Director of Digital Media Strategies at the research and analysis firm Strategy Analytics, does believe wider market pressures have a bearing on these latest results, however. “In Q1, Netflix’s share of the streaming VOD market in the U.S. had declined from 76% in 2015 to 72% of households who subscribe to a streaming VOD service,” he states. “Their share has declined, and will continue to do so, as the SVOD market becomes saturated with competition, both domestically and internationally. There are over 20 SVOD services operating in North America and Western Europe.”