Wednesday, July 13, 2011

Netflix Tests Subscribers Price Elasticity and Loyalty

            Before the proliferation of video content, consumers tolerated “least objectionable programming” as the major broadcast networks worked to amass the largest possible audience..  Cable television and the now the Internet show how narrowcasting can accrue ample profits.  So far Netflix has had the opportunity to provide subscribers with mass market (and mega-budget) blockbusters as well as content toward the end of a very long tail.
            Whether motivated by a significant increase in content costs, or a foolish strategy to press its perceived “must have” content role, Netflix will increase rates as much as 60%.  The company wants to migrate subscribers to its online service, despite the fact that this service is comparatively inferior both in terms of access to blockbusters and long tail content.  I think Netflix has overplayed its hand, but its tactics will provide another opportunity to see just how price sensitive consumers are in the video content marketplace.
            When television viewers had few choices they tolerated mediocre, mass market content.  Given choices consumers have fragmented the market in exchange for the obligation to pay more.  Virtually overnight, Netflix forces subscribers to reconsider both the value proposition of a general subscription to diverse video content as well as the incrementally greater value of access to an even larger inventory of postal delivered content. 
            I’m abandoning my subscription in its entirety and returning to Redbox and that somewhat dismissed strategy of “surfing the web.” I found myself tolerating less than ideal movies ostensibly to justify the current rental rates, particularly for streaming content.  Netflix has encouraged me to pay Redbox on its pay per view basis, and to renew my search for Web serendipity.  In other words this subscriber is quite price sensitive and has no tolerance for a 60% rate hike.  My verdict: a way too clever company forgot the old adage that bulls and bears can make money in markets, but pigs get slaughtered.

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