Why the broad concern? This unfolding episode offers a lesson on the new rules and norms of emerging sectors. Being the new, new thing is part of the value proposition. Offering more for less to strapped consumers is vital. Sudden and sharp increases in price, even when minor and absorbable, are a high risk undertaking. The crowd is king. The crowd is fickle. The crowd follows cost savings and new capabilities. As machinations around Hulu, Apple and Netflix develop, we expect more disruption and fierce competition for delivery of streaming video content.
The recent activity in and around Netflix (NFLX) reminds us of the depth of price and competition sensitivity in the tech space. The recent 60% increases in the cost of the DVD service offered by this high flying challenger have been met with anger by some users. Rumors and conjectures swirl that Apple (AAPL) is planning a renewed push into Netflix's core market. Why does this matter to the tech space and new media? It is a powerful reminder of the extreme price sensitivity of consumers, particularly younger consumers? This episode is also a potent lesson in the fragility as well as vitality of the "new, new thing" industry.
Netflix has been a darling of investors. It has been a fast growing earnings generator displacing long standing rivals with smart, user friendly alternatives to getting and watching films and TV shows. DVDs through the mail and now streaming video, offer deep value and ease for price sensitive and time constrained fans. The low cost of subsidized mail and unlimited Internet access allow Netflix to offer a lot for a low price. Rising cost and overhead for DVDs, versus the streaming product, promoted a recent and significant price increase. The two delivery platforms were split last month and the combined service price jumped from $10 to $16 per month. This came without warning and amid a deceleration in subscriber growth.
Also, Q3 earnings were disappointing as new user growth tumbled across the quarter. Shares came in for a 10% haircut on the news. Slowing growth and rumors that mighty Apple was considering aggressive moves into video distribution are not helping. Apple is believed likely to respond to pressure from Spotify’s arrival in the U.S. by defending its empire through extending streaming video offerings. Consumers want new, better cheaper. Incomes are constrained and leading edge users expect ever cheaper - if not free access.