Netflix Subscribers Beating Hasty Retreat (NFLX, CSTR)

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It does not appear that CEO Reid Hastings’ ‘mea culpa’ for mis-communicating the recent changes in the operations of Netflix Inc. (NASDAQ: NFLX) will quell the anger caused by the announcement that the company is splitting its DVD-rental and streaming video businesses. It’s not the unnecessary split as much as it is the 60% price hike that is sending subscribers looking elsewhere for their movie fix.

Media research firm Frank N. Magid Associates Inc. surveyed both subscribers and non-subscribers to the Netflix services just prior to Netflix’s price hike announcement. A full 9% of current responders said they would cancel their subscriptions instead of switching to the new Netflix pricing plan and another 7% said they would cancel their subscriptions for reasons unrelated to the price change. Another 14% are “seriously considering” cancellation.

That’s 30% of Netflix subscribers who have cancelled, will cancel, or are likely to cancel. The chief beneficiary of the cancellations appears to be Coinstar, Inc. (NASDAQ: CSTR), operator of the ubiquitous Redbox $1/rental machines. Magid’s research indicates that 60% of Netflix subscribers already use the Redbox machines, and 30% of these subscribers plan to use Redbox more because of the Netflix price hike.

According to the Magid research, unhappy customers are primarily unhappy with the selection available from Netflix’s streaming service. When Netflix split its subscription fees to separate streaming and DVD services, the streaming-only subscription price was set at $7.99/month and the cheapest DVD-service price was set at an additional $7.99/month. Before the price hike a combined subscription cost $9.99/month.

To rub a little salt into the wounds, Netflix announced on Sunday that it was splitting its businesses and that customers of both services would now be getting two bills instead of one. It’s difficult to conceive of anything dumber than charging more for no improvement in service or quality and then making it even more painful to pay the tab.

Clearly Netflix’s price hike has been a disaster to which everyone in the company’s management can share the blame. Moving its more of its business to a streaming model is undoubtedly the right strategy. But the arrogance and ham-handedness of this first transitional step doesn’t instill confidence that anyone at the company has a clue about who their customers are and what those customers want. Or maybe Netflix management just figured that it could afford to lose 30% of its customers if it raised its fees high enough.

Now the company can continue to blunder along, which it’s proven it can do very admirably, or it can try to repair the damage. The latter course seems the most sensible, but Netflix might have already burned its bridges. About all it can do to repair them is to declare they made a big mistake and cancel all their plans and revert back to the good old days of the $9.99 subscription fee.

Netflix can’t do that though, or its revenues and profits will suffer, even if all 30% of the departing customers come back. The company needs to come up with a way to staunch the bleeding. And that’s what Hastings and his management team get paid for — not for issuing self-serving, badly-reasoned blog posts.

Netflix shares are down by about -9% in the early afternoon today, at $131.39, after posting a new 52-week low of $129.50 earlier this morning. The stock’s 52-week high of $304.79 may be in the rear-view mirror for good now.

Paul Ausick