Netflix has taken a bit of a hit for the first time since it embraced the Internet as a means of distribution. But there is enough to suggest this is a minor blip, and that the company’s longterm future is not only assured but rosy.
Netflix has had an amazing last few years, transitioning from a DVD-by-mail company into a streaming video company, and gaining millions of new customers as a result of this strategy.
However, nothing ever lasts for ever, and the incredible run of growth upon growth now seems to be slipping out of Netflix’ grasp. It has lowered its guidance on domestic subscriber numbers from 25 million customers to 24 million. This may not seem like much but it is for a company that has been exceeding expectations for a long period.
As a result of the new guidance, Netflix stock tanked on Thursday (Sept. 15) morning, dropping around 15 percent to $177-per-share. At the time of writing it has slipped further to $159-per-share.
The figures actually make for interesting reading. The biggest drop is in those subscribing to receive DVDs in the mail. Streaming is only taking a slight hit. And the number of people choosing the dual option remains the same, despite this being the group hit hardest by the recent price increases.
This means people aren’t ditching Netflix in droves as a result of the price increase. Which, lest we forget, saw people who want both DVDs and streaming options now paying two lots of $7.99 rather than a combined $9.99. Netflix should see this as a positive, and judging by a brief note attached to the new guidance, does. It states the reasons for the price increases as follows:-
(1) to create a dedicated DVD rental division that takes pride in great execution and maximizes the opportunity for disc rental over the coming decade;
(2) to enable us to improve our global streaming service even more rapidly, because it is not meshed with a domestic DVD business;
(3) to enable us, with the growth in revenue, to license more streaming content and thereby improve our streaming service even more;
(4) to remain very price aggressive, with $7.99 per month for unlimited streaming of a huge library of TV shows and movies, and $7.99 per month for unlimited DVD rentals, 1 out at-a-time.
Netflix is clear on its strategy going forward, and I have to say it makes sense. I can understand the frustration felt by people suddenly faced with paying 60 percent more every month, but there is the option to choose either DVDs or streaming and actually end up paying less.
If Netflix’ stock stabilizes quickly then I can’t see this being a major problem. If it doesn’t? Then your guess is as good as mine.
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