Netflix’s price hike and the power of the bundle: Gigaom

Ryan’s posts here and here are great overviews of the impact of Netflix’s recent guidance changes on their stock.

All-in-all, Netflix did a really good job with their migration estimates; models only can go so far and are based on assumptions, some of which can be more gut than anything else. 200-800M out of 25mm is a drop in the bucket in comparision. And it’s understandable they may overestimate the DVD-only side since that’s their business’ legacy. But as we all know, the net revenue from a streaming-only HH is much higher than a DVD-only customer so they are still in a good position.

On the other hand, given the feeble way they executed the rate increase, Netflix did some damage to their good will value. Frankly, since cable’s been doing rate increases for a while, they do a better job of informing their customers. Lesson learned. But repairing good will takes a lot more effort than simply dropping another new customer acquisition campaign into the market.

As someone who’s been in the subscription biz a while, I am always dismayed when Wall Street continues to harp on pure sub numbers when in fact that in today’s world with a multitude of consumer pricing options, volatile licensing agreements, and escalating costs of DVD shipping, it’s the margin that counts, not Just subs.  20 million subs at $2 is better than 25 million subs at $1 (not real numbers but  you get the picture).  Comparing sub numbers from Netflix to video subs from TWC or Comcast or DirecTV is meaningless because the revenues from each are vastly different.

This is the same flawed reasoning that’s driving the TV/video business out-of-wack from the networks perspective because the revenue from high-volume/low-margin sources like online will not make up for the lost revenue from more traditional sources for the near-term (5-7 years).  And the networks need that revenue to continue producing the great shows that people want to stream for cheap.  Overtime, the quality of content will degrade and the only choices we’ll have will be which cheap-to-produce reality show to watch.

The ecosystem of networks-producers-distributors-consumers is so entrenched, that it will take an industry-wide and illegal (anti-trust) type of cooperation to steer this industry away from the same whirlpool drain that the news business has already gone down.  But that’s for another post!

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