Netflix Deflects Rage Over Price Increase, Street Rejoices

  on July 13 2011 9:44 PM
Netflix
Netflix has updated its Android app to now support all smartphones with Android 2.2 Froyo and 2.3 Gingerbread installed. Reuters

Netflix provoked an unprecedented outpouring of backlash across the Internet as the company unveiled plans to raise prices on its movie-rental services, but many across Wall-Street believe the move will bode well for the company in the long-term.

The company said it would raise the Internet-plus-DVDs-in-the-mail plan from $9.99 per month to $15.98 per month late Tuesday, sparking protests and outrage across its subscriber base.

Investors rejoiced, however, sending shares up over 3 percent, and earned the plaudits of some Wall Street's financial analysts.

Goldman Sachs analyst Ingrid Chung told investors she believes Netflix's high-priced subs will stay put and pay a 20 percent to 30 percent increase in price. The number of streaming only subscribers in total will rise from 50 percent  to 55 percent.

While it's true some users could leave the service, she believes the resultant boost to revenue, rising to an average of $11.96 per user per month, could withstand an 18 percent churn rate, she thinks, before churn would eliminate the benefits of higher revenue. Well within what she believes is acceptable bounds.

Better yet, the new higher prices will shift users over to the streaming services even more quickly, Piper Jaffray's Michael Olson explained. Churn -- or the rate at which people leave the service -- would rise to 4.3 percent from 4, but that marginal uptick could send average revenue per user to $12 for Netflix, versus $11.27 now.

He raised his price target to $330 from $305.

While this may bode well for the company, analysts may be underestimating the churn-rate if the outrage online is any indication.

Thousands of subscribers complained on Netflix's official blog with many threatening to cancel subscriptions, while over 40k negative comments have been posted to the company's Facebook page.

Who's genius idea is this crap? said one comment on the Netflix blog, which promised to cancel service. Your streaming selection sucks and the Red Box is looking better and better these days, referring to the in-grocery store DVD rental service.

Users also created other Facebook pages, expressing their discontent, and some even took to Twitter.

One posted #Dear Netflix, I want to still love you, but price hike + M.I.A. Dexter is making me rethink this relationship. Why would you do this to us?

Some smaller Wall Street firms even joined the backers, questioning the reasoning behind the increase.

Why annoy your customers now asked Barton Crockett of Lazard Capital, given that the economics looked fine before, hence, there was no need to fix them, he explained.

Why couldn't Netflix have done what other subscription services do and walked up pricing over a few years, easing the shock? While Netflix can test new offers to new subs, it has limited ability to test price changes for existing subs, raising execution risk for a jarring change.

Netflix brushed off the criticism however.

We knew there would be some people who would be upset, company spokesman Steve Swasey said. To most people, it's a latte or two, he added.

See Also: Blockbuster Courts Netflix Defectors

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