Netflix (NFLX) faces customer backlash, weak economy
Netflix has angered many of its customers with its new plan to split its service into two while raising prices. Netflix stock (NFLX) has lost a quarter of its value in the past week.
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But the price and convenience factors are intertwined. By changing its business model, Netflix is giving many customers a reason to rethink that monthly bill – at a time when many families are trying to think creatively about how to save money.Skip to next paragraph
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Some 40 percent of Americans have reduced their spending in the past 60 days, finds one new poll conducted for the financial firm Bankrate.com. That estimate is based on 1,000 interviews with Americans in a representative sample of the overall population. The downshift has been driven by negative economic news and a shaky stock market.
Although many people aren't cutting back on entertainment spending, a goodly number are.
For example, a tally by the Associated Press found that eight large subscription-TV providers lost 195,700 subscribers in the April-to-June quarter.
Netflix on one level stands to benefit from any erosion in traditional cable service.
Just because there's a customer outcry doesn't necessarily prove that Hastings has made a strategic blunder. Plenty of companies have imposed price hikes and repositioned their products, suffered some initial setbacks, and gone on to prosper.
It's possible that Netflix is making a well-calculated trade-off.
Bill Gurley, a partner at the venture capital firm Benchmark Capital, writes that "the price move was not a 'decision,' so much as a 'reality' presented to Netflix from the content owners in Hollywood."
His hunch is that, with Hollywood production companies asking for more money for rights to stream their content, Netflix is splitting in two in order to bargain for lower costs. Netflix can say that fewer people (just those customers that choose to pay for its streaming business) have access to the content.
Whatever the details, here's the way Hastings put it in his apology:
"We realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently."