Netflix trips in its bid to raise people's bills & still sign up customers

The optimistic scenario about Netflix Inc goes like this: The company is wise to spend like mad to create a new generation of entertainment service that capitalises on the inexorable shift of people away from old ways of wasting time like television toward new modes of wasting time like staring at smartphones.

Eventually, the theory goes, Netflix will stop bleeding cash and borrowing money because it will be able to raise prices once it becomes essential to hundreds of millions of loyal customers. The profits will pour down like rain. 

That optimistic scenario just took a hit.

Netflix lost paying customers in the US during the second quarter for the first time in years after it increased prices on its most popular plan to $13 a month from $11. The results show that there are limits to how much Netflix can raise people’s bills and keep newcomers flowing in the door. Pricing power is not absolute. It turns out some people don’t want Netflix if it costs more.

Netflix said on Wednesday that the number of its paid streaming subscribers in the US fell slightly, from about 60.2 million at the end of the first quarter to 60.1 million at the end of June. It’s the first time that I can see since Netflix streaming became a standalone service that the number of customers decreased from one quarter to the next.

That slight decline came as Netflix pushed through its higher subscription prices in the US and in some other countries. Netflix’s share price fell 12 per cent in after-hours trading — about back to where it was trading in January. 

Netflix added a net 2.8 million new paid streaming customers outside the US, which was significantly lower than Netflix had expected. That shortfall came particularly in regions where Netflix increased prices.The company also said its fresh programming in the second quarter attracted fewer new paying subscribers than it expected. (Mind you, this was after Netflix boasted — including in its earnings results on Wednesday — about the high viewership numbers of some of its exclusive TV series and movies.) And the company said it expects the growth in paid customers in the U.S. to “return to more typical” levels in the third quarter.

There’s something unsettling about Netflix blaming a lackluster array of new programming for a shortfall in new customers. The appeal of Netflix — like that of Amazon in retailing — is as a one-stop shop for video entertainment. OK, Netflix doesn’t have literally every TV show and movie ever made, but it had so many of them that people were content to sign up and forget about it.

Only less comprehensive entertainment services like HBO or Hulu should have to think about people coming to sign up for a subscription only when a favorite show returns to the air. But if Netflix is becoming as dependent on select hit series or movies, it’s far more like conventional entertainment companies than a supermarket where no single piece of programming matters. 

Netflix is fond of saying that it’s still responsible for a small fraction of the time people spend on entertainment and that it wants to be a bigger part of their leisure time. But when people look at the cost of Netflix and say, “No, thanks,” that isn’t a great sign for the company’s pricing power or its ability to win more of their entertainment time and budget now that there are an increasing number of alternatives.

One quarter of slight shrinkage in the important U.S. market doesn’t spoil the incredible tale of Netflix. But it makes the story a little less believable.