Still Seething at Netflix? Experts Say Not For Long


From the outcry slamming Netflix (NASDAQ:NFLX) earlier this month one would have thought the online DVD service had just applied for a bailout or dumped oil into the ocean instead of simply raising prices.

In the week after Netflix announced the separation of its DVD and streaming services that triggered the price hike, its stock slid 9%, analysts slashed their ratings and rivals like Blockbuster tried to swoop in with deals to steal unhappy subscribers.

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Upon virtually doubling the price for its traditional hybrid plan to $15.98, customers started to vehemently oppose Netflix. Many in more than 12,000 blog posts and 75,000 Facebook comments even threatened to cancel their subscriptions.

With animosity mounting, and Netflix offering little valuable reasoning except defensiveness in backing its decision, one could see how customers may have overreacted.

Since then, however, Netflix has justified its actions and claimed it will use the revenue to sign multi-million licensing deals that will ultimately improve quality and selection for customers.

While many subscribers are still seething, observers say they will eventually realize the necessity.

What went wrong?

Industry experts mostly agree the outrage was driven by the abrupt way Netflix delivered the sour news and its defensive stance in the aftermath.

It seems like they said Lets hand grenade the room, have it explode and deal with the aftermath, said Netflix fanatic Mike Kaltschnee, who runs the blog HackingNetflix.

At one point, Netflix even claimed the new prices hardly cost what some Americans dish out for a few pricey lattes, fueling the infuriation among not only its frugal customers.

Consumers are more budget-conscious, smart and savvy with how they spend, so when prices go up they are quick to analyze and figure out how to cut those costs, consumer savings expert Andrea Woroch said.

Much of the outcry seemed to derive from Netflixs lack of explanation of what it would do with the additional revenue. It wasnt until its second-quarter earnings release on Monday two weeks after its initial announcement that it finally attempted to clear the air.

In a letter to shareholders, the company highlighted multi-million dollar licensing deals with Miramax, Revolution Studios, Viacom and NBC Universal. It also said customers could soon expect exclusive Mad Men episodes.

Had Netflix better explained itself from the beginning, perhaps by highlighting the lofty $1 million price tag on each new Mad Men episode, customers might have been more willing to look past the rising rates.

They should have put a spin on it and said Heres whats coming in the next two months, but they didnt, Kaltschnee said. People will recognize the cost is necessary to keep the business running if Netflix keeps the quality high.

After all, the $7.99-a-month deal was a steal, Kaltschnee said. The low prices were set by Netflix back when the company launched in the late 1990s, and since that time it has added tons of new titles for both DVD and online viewing.

Other customers will inevitably argue the prices arent justified because the service has yet to reach its prime. Netflixs streaming still lacks many titles and has a delay on new releases.

Some think the service is just not there yet, Woroch said.

Why Netflix will emerge stronger

Whatever the feeling, todays passions will likely fizzle by September when the price changes actually go into effect for current subscribers.

Once they see what alternatives exist in the marketplace, Netflix won't look so bad, said TDG founding partner Michael Greeson.

The delayed response may have been too late to salvage the estimated 2.5 million, or 15% of customers, that TDG Research estimates will cancel their subscriptions, but Netflix, which is the clear-cut industry leader, has justified the loss by claiming its streaming service will be bettered with the additional revenue.

Some subscribers will cancel Netflix or downgrade their Netflix plans. We expect most to stay with us, Netflix said. We hate making our subscribers upset with us, but we feel like we provide a fantastic service and were working hard to further improve the quality and range of our streaming content.

Its not clear whether the move will pay off for Netflix, which has seen its value increase 850% since early 2009, but the movie renter predicts it will still have a whopping 22 million streaming subscribers, 15 million DVD customers and about 12 million hybrids by the end of the third quarter.

Netflix has a winning brand, and if they can maintain a quality service they will probably emerge from this intact, said Gene Grabowski, senior vice president and chair of crisis and litigation at Levick Strategic Communications.

The problem is how much better could they be had they told the story differently, he said.