Netflix Downplays Subscriber Outcry to New Pricing Plans

Netflix CEO Reed Hastings sought to downplay negative press the company received after it announced a hefty price increase for its video subscription service last week. The “noise level” from disgruntled subscribers was “less than expected,” given the 60 percent price increase implemented for subscribers who opted into the combination streaming/DVD plan, Hastings said Monday in an earnings call. “We knew what we were getting into."

Regarding the collateral damage of customer outrage, evidenced by negative social media response and highly publicized call volume to the company customer support line following the announcement -- with some customers being disconnected instantly upon calling -- Hastings said Netflix, “like any customer-driven organization,” felt “bad about customers upset with us.” It “was a very short amount of time that calls exceeded capacity,” and service has returned to normal levels, he said. The company feels “great” about “amazing new content” that it will offer in Q4 and early 2012 as a result of the new pricing model, Hastings said. The decision to raise prices, “as tough as it is,” will allow Netflix to have “fantastic streaming content going forward,” he said.

Negative effects of the plan change will be felt primarily in Q3 in terms of “elevated churn” and limited subscriber growth, since subscription plan changes will take effect in September, Hastings said. A “little benefit” will occur in the bottom line toward the end of Q3, and the “real benefit” will come in the following quarters, he said.

Hastings sidestepped questions about the number of cancellations Netflix has had since disclosing the plan change last week and whether customers were showing a preference for the DVD, streaming or hybrid plans. The company “feels great” about its DVD service that’s an “incredible value at $7.99” and the best deal available for disc-based video content, he said. Chief Financial Officer David Wells said “there’s no indication” the company has reached a peak in subscriber growth. Q3 will be a quarter where subscribers are “choosing where they want to land,” and in Q4 the company will “return to growth.”

The company has gained increasing confidence over the past two years about the viability of a streaming-only plan, Wells said. The launch in Canada of a streaming-only service “blew away our expectations,” Hastings said. He cited company data from Q2 showing that 75 percent of U.S. subscribers chose Netflix’ streaming-only service as their plan, even though DVD service added just $2 to the cost of the package, he said. “With this pricing change, we'll be able to strengthen that streaming plan with more content, so that’s why we feel good about it,” he said. Wells said the company believes “most people are taking the hybrid solution."

"The DVD can last a long time as a successful service and generate lots of satisfaction and profits if we give it a platform to succeed on,” Hastings said. He conceded that Netflix hasn’t focused much marketing on the DVD side of its business recently, but said having it as a separate division with measurable profit and loss will enable the DVD business to “shrink slowly as opposed to rapidly with a little bit of investment.” Netflix will “figure that out over the next couple of quarters,” he said.

Asked whether DVD will become more or less of a priority now that it has become “decoupled” from streaming, Hastings said, “it'll become less important to those people at Netflix working on streaming and more important to those in the dedicated DVD division.” For the long term, he compared the DVD to the music industry which saw CDs begin to decline in 2000 at 10 percent yearly. “We're going to maximize whatever opportunities are there,” he said, saying the company will continually assess the profitability DVD along the way. “The DVD has a longer and bigger life than many people think, and we're do some investments to see that business through,” he said. In response to a question about whether the separation of plans sets the stage for acquisition of content on a per-subscriber basis, Hastings said there’s “no connection between those issues.” Content acquisition processes aren’t expected to change as a result of the new plan options either, Hastings said, since movie and TV studios have different divisions for DVD and streaming.

One question dealt with the longevity of demand for streaming content. Hastings said demand for a video is “very title specific,” and the company is excited about being the “exclusive subscription provider for Mad Men.” The pattern he expects to emerge for Mad Men is a “burst of activity,” when the series is first available, then a slowdown, and then another burst when season five begins on live TV as customers attempt to catch up with earlier shows. With streaming in general, the company has been “very pleased” with continuous viewing of licensed content “that it doesn’t die right away, and in fact, has a great life,” he said.

Hastings wouldn’t comment on published reports that Netflix is in discussions with DreamWorks on a potential streaming deal. “We're always in talks with all the different providers but we're not going to comment on them in advance,” he said. Netflix has no plan to introduce a family subscription package, Hastings said. He said Netflix has an interest in making the service “feel more personal to the individual,” and that includes Facebook integration.