Netflix Struggles as Subscribers Quit and Stocks Drop

Price Hikes and Soaring Studio Licensing Fees Cause Turmoil in the Business Model

by Branford Lyles on September 16, 2011

The DVD mailing and online content streaming service Netflix has had to downwardly revise its 2011 projections. It expects to have one million fewer subscribers that it had initially stated. The main reason for the drop can be easily recognized: a large raise in subscription fees without an increase in content quality. The news has caused Netflix stocks to drop by 19 percent.

In July, Netflix sent emails to its customers concerning a rate hike taking effect in September. The most popular subscription at the time included unlimited streaming service with one DVD rental. The new plan would split those two services into separate plans. Instead of paying about $10 for both, the new plan charged $8 for each. In effect, to maintain the same plan, customers have been forced to undergo a price hike of 60 percent.

Naturally, there was an uproar among the subscribers with thousands of angry customers tweeting their protests and threatening to quit. It appears that many of them have made good on that promise. Aside from the amount of the increase, most customers have said that there are no new features or content to justify the added expense.

To keep subscribers, or lure them back, you need offer them value at a good price,” said Barclays Capital Internet and media analyst Anthony DiClemente. Netflix has faced a situation of “more money, more problems.” As its streaming service took off, studios which had allowed the company to license their content realized they could charge Netflix far more than they had been. Some experts have predicted that Netflix licensing costs will rise from $180 million in 2010 to $1.98 billion in 2012.

Of course, to a person at home, the hike is still more money for the exact same content. To make matters worse, the partnership with premium movie channel Starz, which provided a significant amount of streaming content, has been severed after negotiations broke down. This means that soon Netflix subscribers will actually be paying more money for less content than before.

All of this is great news for the new kids on the content-streaming block. Amazon, Google, and the DISH Network have all begun online streaming content services. When studios realized that they could initiate bidding wars with competitors, they stopped giving bargain prices to Netflix.

While the news may be good, it is not be catastrophic to the company. Despite a decrease in growth projections, it is still growing. Stocks may be dropping, but they are still up 460 percent from their value in 2008.

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