After a decade of explosive expansion, Netflix is experiencing some growing pains. Though Americans are watching more online video than ever, Netflix is facing steeper competition (from rivals like Google, Amazon, Apple, and HBO) in addition to an uncertain future in international markets.
These uncertainties — combined with slowing subscription growth — sent Netflix stock plummeting 15 per cent in after-hours trading ahead of its second quarter earnings report. The company reported only 1.7 million new subscribers, falling significantly short of its 2.5 million user target.
“Gross additions were on target, but churn ticked up slightly and unexpectedly, coincident with the press coverage in early April of our plan to un-grandfather longer tenured members and remained elevated through the quarter,” said Netflix CEO Reed Hastings in a letter to investors. “We think some members perceived the news as an impending new price increase rather than the completion of two years of grandfathering.” (Un-grandfathering is the business-y term for making long-time users pay newer subscription rates.)
Netflix CEO Reed Hastings included this Google Trends graph in the company’s earning report to show an uptick in the search term “Netflix price increase” earlier this year.
Hastings continued to harp on how foolish consumers just didn’t understand the price hike. “We got this slight uptick in churn in multiple countries in the same week, and of course, that’s not a competitive signature,” Hastings said during the earnings call. “We’ve looked at everything, and the fact that it’s coincident with that Google Trend data we included really indicates that people don’t like price increases. We know that.”
“This is really around change resistance,” he added. “Whatever the price is for something, people don’t like for it to go up. But in terms of new members, which is what drives growth, the new pricing is working great.”
Sadly, for Netflix investors, the new pricing actually isn’t doing that great. The company barely reached half of its new subscriber target in the second quarter, and many investors remain cautious.
This ugly earnings report is rather unusual for Netflix. Until today, coverage of Netflix has been mostly rosy. The last time Netflix had such a sombre earnings call was when the company tried to break itself in half in 2011, when it launched a DVD-only subscription service called Qwikster. The service was short-lived and is still considered one of the worst product launches of the last decade.
Despite the poor earnings report, Hastings and company said that with the increased revenue, Netflix plans to invest in better content. Earlier this year, the company expanded to 130 new countries (but not China) and it could soon be available built in to set-top boxes. But the real question that remains is whether Netflix subscribers will continue to shell out monthly fees when there are so many other places to find online video.