Netflix (NFLX) chief financial officer David Wells spoke at Credit Suisse’s technology conference this afternoon, and reflected upon “painful lessons” that he said the company has been through over the last several months as its stock collapsed.
Wells explained the price increase this summer, which took effect in September, and which led to substantial subscriber defections, were meant to push the company toward a future based on streaming video, not DVD rentals, but reiterated that the company failed to appreciate how much it would anger subscribers:
The strategic intent behind the price increase, the price changes was to materially shift us towards streaming. If you looked at our subscribers’ behavioral data, so if we looked at the amount of time they spent streaming and the amount of time people spent on DVD or watching movies via DVD, it had become increasingly and overwhelmingly streaming. So I think that in terms of the decision to raise price by 60% for those hybrid subscribers, we were fine if those subscribers downward migrated to a streaming-only plan. In fact, we were somewhat better off. The marginal profitability of an $8 streaming-only subscriber was higher than the marginal profitability of a $10 hybrid subscriber, but that is business strategy. It’s not consumer strategy and we were somewhat overweighted, obviously, towards business strategy [...] I think we broke some other social norms in terms of the amount of grandfathering or not grandfathering we did to the price increase and there was poor execution in terms of how it was communicated as well [...] They left in anger.
Asked by Credit Suisse’s John Blackledge when the brand will repair itself, Wells said it “will take a little bit of time come back,” and noted that about a third of new subscribers are “rejoins,” as he put it.
Netflix shares ended the day down $2.38, or 3.4%, at $67.57.
Update: In a phone call later this afternoon, Blackledge took a few minutes to share with me his “takeaways,” if you will, from the discussion. Blackledge, who has an Outperform on the stock, is largely encouraged by what he heard. Herewith, his verbatim comments to me.
�They did say that streaming content expenses will rise 70% to 80% in 2012 over 2011�s level, and that was actually a positive clarification given that they had said [during the Q3 report] that streaming costs would nearly double.�
�I asked David Wells about why they would go into the U.K. now, and he pointed out that they have certain times when they have a better chance of getting certain content and if they didn�t act, it may not come back again for five to seven years. So they had to seize that opportunity.�
�The longer term market here has not changed. What�s changed is people�s sentiment toward the brand. That�s going to take some time to repair, it�s going to take a couple of years. The key issue with investors is what happens to subscribers. They had sort of lost their ability to forecast subscriber growth recently. I think now they�ve at least gotten back their ability to anticipate or forecast churn. They reiterated their forecast that churn is moderating this quarter. I think they believe streaming gross sub additions will be strong in December and heading into 2012. They are on pace this year to add less than 5 million subscribers, as the price change impacted the sub growth, given they were on pace to add 10 million before the price change. So if the ten-million rate was more like a normal year for them, with the brand recovering in 2012, we believe they could add over 5.5 million subscribers in 2012.
�The company is for the most part done adding new content deals for 2012. But that doesn’t mean that their new content won’t be refreshed in 2012. They have existing deals in place that continue to add content to the menu, and they have renewals of existing deals to look forward. That will still be new content as they continue to attract new subscribers and retain existing subscribers. And they�ll still be way ahead of where others are on content.�
For my part, I’ll say that both the comments from Wells and Blackledge’s assessment involve a lot of “ifs.” We’ll just have to wait and see, I suppose.
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