Higher, Higher and Higher

Applause for a Pricing Increase?

When was the last time someone was excited about paying more? Stay with me for a second - did you ever leave the grocery store or movie theater thinking "yes, I paid more for the same thing!"

I doubt few consumers would agree that paying more for the same thing is something they enjoy or would voluntarily do. But the world has turned upside down or at least that's the sense I got this week when the streaming giant Netflix announced they would raise their prices on all their packages.

Typically, when a company announces they are raising prices there is public displays of dissatisfaction - which is to be expected. This thing that I've been paying for has suddenly been valued much higher and instead of finding savings elsewhere I go to my customer base.

But there was very little of that this week. Remarkably, a study from Fierce Wireless revealed that only 8% of Netflix's subscribers said they would be willing to cancel their Netflix plan in a price hike and another 8% would downgrade plans. That means the remaining 85% indicated they would accept the price increase.

Why? To me the answer is incredibly simple - it comes down to Netflix's likability. Over the past decade, they have built a brand and reputation as the young guns, the little fish in the big media ocean taking on Goliaths like Blockbuster, HBO and all the major studios.

In fact, I'll say it - people love Netflix and Netflix knows it.

Still do not believe me? Ponder these points. I would argue that Netflix has soaked itself into the core of American culture and society. They have invaded every nook and cranny of our lives…

Our Slang - think the next time you say you want to "Netflix and chill" on a casual Friday night.

Social media - Open the YouTube app or a News app this week and you probably saw videos or articles on the now banned Birdbox challenge or a trailer for a new show.

Advertising - If you live in Los Angeles - look no further than the countless billboards in which they bombard consumers with advertising.

The Water Cooler - Recall the last time you spoke with a coworker and they gave you a recommendation of a new show to watch - odds are it was a show on Netflix.

Now think about how many times you run into that mystical unicorn out there that does not have a Netflix account or password share? I can only think of one relation of my friends and family that falls into this designation.

That's the problem in this situation. Unbeknownst to consumers, they have ceded control. Netflix is no longer a casual purchase - it's a utility, a necessity to function in society. One simply cannot go without Netflix. I'd venture to say more people would skip a meal than give up their now $13 Netflix package.

What's particularly incredible is how quickly Netflix has learned from their mistakes. In case your memory fails you, let me take you back to 2011 when CEO Reed Hastings (yes, same CEO) announced that the company would:

First, do away with their extraordinarily popular $10/month subscription which gave customers unlimited on-demand viewing and DVD rentals.

Second, it would spin off its DVD operations into a separate company called Qwikster.

Oh, and third, a price hike as high as 60% for some consumers.

Full details on the sordid but fascinating affair found here.

What follows is what we as consumers are used to and what I argued above would happen - a stock drop, consumer backlash, heavy news cycle coverage and finally, the apology and retraction. You could barely say or appropriately spell "Qwikster" before poof it was gone.

None of that happened this time around. In fact, investors cheered the price increase. Cases in point - look at these headlines -

Investors are chill about Netflix Price Increases - The Wall Street Journal

Netflix Investors Cheer Doubledigit Price Increases; Shares Surge - Forbes

Here's what major Wall Street analysts think of Netflix price increase - CNBC

Note - most of the reviews are positive and give Netflix a "buy" rating

Second note - this blog acknowledges that Netflix's stock prices declined on Friday, January 18 but does not believe that to be an indicator of stewing trouble

Again, this showcases Netflix immense power amongst consumers and investors. Few companies have the ability to raise prices and remain insulated. But another one comes to mind that shares the "entertainment" space - Walt Disney World.

When Disney opened the Magic Kingdom in 1971 the price of one day admission pass was $3.50 for 1 adult and $1.00 for 1 child. Disclaimer - the price of admission did not include the fees for rides.

As of January 2019, the price of admission to Walt Disney World was $109.00 for 10+ years old. This did not include admission to other theme parks around Walt Disney World. In the span of 48 years, the company has raised the price of admissions nearly every year and still performs well in its hub cities.

But the big question is - what comes next for Netflix.

Some of you have heard my take - I do not see Netflix's prospects changing despite their claims of owning 10% of TV screen time in the US.

They face the same obstacles today and tomorrow as they did yesterday, which is content. Yes, you read that correctly, content.

Netflix's onslaught of original tv series and movies are deliberate moves made out of necessity. Since its inception, Netflix has relied upon the content of others - Starz, Disney, Warner Media Group (formerly Time Warner), Comcast, etc. for access to their back catalogues. It was a major selling point for them - where else could a user find the entire back catalogue of Friends?

But 2019 will be a year of transition - I argue - for Netflix as many of their lucrative catalogue deals are ending. Disney has already pledged to end its distribution agreement and ergo remove its content from Netflix - power house titles such as Marvel movies, Star Wars and Pixar Originals. It's why in (mostly) retaliation Netflix cancelled all their Marvel collaboration projects.

Netflix will face the same content leakage with Warner Media Group (WMG) content. The reasons are nearly identical as above. Both Disney and WMG will be launching their own subscription video on demand (SVOD) services in 2019 to directly compete with Netflix. So, Netflix needs to restock their fridge and fast which is why they are continuing to burn through more cash and why they need more money from consumers.

However, how much longer can Netflix continue to raise prices and not see subscriber churn? I'd argue they are reaching a tipping point as the price of the subscription is beginning to exceed the comfort range of many consumers.

Think about this - the price of a Netflix subscription now surpasses the price of the following like services:

• Amazon Prime

• MoviePass

• Hulu (VOD only)

• STARZ

• SHOWTIME

• CINEMAX

In fact, if you only used Netflix once this past month, you would have been better off renting a movie from Redbox who charges $0.99 a rental for every day or a $4.99 3 day rental at Blockbuster!

I doubt many customers have come to this realization…yet. But winter is coming. And Netflix better remember that, otherwise, the next time they announce a price increase, it could resemble 2011.