Netflix (NASDAQ: NFLX ) is getting hammered today after announcing its
dual-pricing model has scared off more customers than expected. Netflix
announced a pricing plan back in July that, starting this month, it would begin
charging customers separately for the DVDs it mails out and the streaming video
service it provides. Instead of $9.99 for both, NFLX would charge $7.99 for each
service. Netflix had estimated it would wind up with about 3 million DVD-only
subscribers and 10 million streaming-only subs. But the real numbers are smaller
much smaller and that could really mess up any Netflix plans to improve its
video library. The company announced it now tallied 2.2 million DVD-only
customers in the U.S., a dramatic 26% shortfall. The streaming video numbers
also missed the mark, with only 9.8 million down from a 10 million projection.
Thats a 1 million loss to the total headcount of viewers. So what's the big
deal? Most people know that streaming video is the way of the future, right?
True. But that's the trouble. Netflix made this move to generate cash for a
better catalog of TV shows and movies for its streaming video audience. The
costs for rights to new releases and quality content in this format are
astronomical, and Netflix has been facing criticism for a while that its library
is too stale and too boring for some. The vast majority of Netflix titles are
consumed via streaming video, and by charging separately for streaming, the
company had hoped to more closely align what it charges folks and what it has to
pay studios for the titles. But apparently, customers are reluctant to embrace
this model. People who are fanatics about the streaming service could have
gotten a price reduction by eliminating DVDs via the mail and in effect lowering
their monthly bill from $9.99 to $7.99. But the fact that a
greater-than-expected group jumped ship shows a big flaw in Netflix's logic.
Adding insult to injury is that Starz and Netflix recently announced they
couldn't strike a deal on content sharing. Starz titles about 8% of domestic
viewing will disappear in February. NFLX reportedly offered a cool $300
million, which apparently wasn't enough. Starz insisted on tiered pricing
instead, which likely would have charged Netflix customers an additional sum
beyond the $7.99-per-month subscription fee No wonder the stock is tanking, and
competitors like Amazon (NASDAQ: AMZN ) and Apple (NASDAQ: AAPL ), who have been
beefing up their own streaming video services , smell blood in the water. And no
wonder Netflix investors are running for cover. So what's next for streaming
video fans who use the iconic company to consume their favorite reruns or older
movies? Probably not much. Netflix has the scale and brand recognition to
maintain a foothold as the dominant provider of movies and TV shows that are a
few years old. If you're a big fan of new releases and the latest cable TV
sitcoms, however, you could be in for more disappointment as content providers
tighten the noose on Netflix and let-down subscribers head for the hills.
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