Netflix subscribers threaten to quit, but will they really?

Written on:July 13, 2011
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Internet message boards, blog comments and various social networks have been swamped with the gnashing of teeth and displeasure of Netflix subscribers outraged by the company’s recent update to its subscription pricing plans. The feeling one gets is that the company is on the verge of a mass exodus of subscribers due to the overwhelmingly negative response of commentary around the web.

This isn’t the first run-in that Netflix has had with consumer dissatisfaction lately. Actually, the latest outrage follows what has been a slow burn of negative commentary from a vocal minority of users for quite a long time. The first indications of unhappiness with Netflix surfaced when it raised rates for its combined DVD and streaming service to $ 9.99, while offering a cheaper streaming-only plan. Then the company removed its DVD queue from connected devices, a move which brought thousands of comments to its blog. Later, commenters complained when the company redesigned its website to make it easier for streaming.

But now more than ever, critics are showing up en masse to voice their displeasure over changes to its pricing plans. And this time things seem different: that slow burn has finally exploded a powder keg of subscriber discontent. To channel Network‘s Howard Beale, Netflix subscribers are “mad as hell, and they’re not going to take this anymore!” Or will they?

There have been numerous informal and unscientific polls around the Internet suggesting that anywhere from 30 to 40 percent of subscribers could reduce their DVD and streaming plans to one or the other, or that they could quit the Netflix service altogether. Meanwhile, BTIG analyst Richard Greenfield reports that after Netflix emailed subscribers of the pricing change, customer service lines have been ringing off the hook, to the point where some users can’t actually get through to voice their concerns or learn more about their pricing options.

But how many of those subscribers will actually quit? Despite months of creeping complaints from legacy DVD users that the company’s focus on a weak library of streaming content meant they were being ignored by comparison, Netflix’s subscriber growth has been at an all-time high and churn has been at an all-time low.

In the first quarter, churn was at 2.8 percent, much lower than its typical 3.5 percent to 4 percent that Netflix has reported over the last several years. When Netflix reports second-quarter earnings on July 25, analysts will be looking closely at its churn in comparison not only to the 2.8 percent from the first quarter but the 4 percent that it reported in the second quarter 2010. But since Netflix’s price change wasn’t announced until July and doesn’t fully go into effect until September, we won’t know the full impact it’s had on the company’s financials until it states third-quarter numbers in October.

The more likely scenario is not that Netflix users quit, but that they downgrade to one plan or another. (Before they quit, they should check out this test from FeedFliks to see how much usage they get out of each service.) But let’s say that a bunch of fed-up Netflix subscribers do leave. Chances are, they signed up for Netflix as DVD users but don’t want to stick around because the streaming service doesn’t have enough content for them.

While there are plenty of Netflix DVD users still around, the subscribers that it’s attracting are signing up primarily for its streaming service. That’s one reason that average revenue per user continues to decline, as it on-boards subscribers with its $ 7.99 subscription streaming-only plan. And, frankly, those are the subscribers that it wants anyway, rather than the expensive DVD-by-mail users that have been loudly complaining. All of which is to say, even if a bunch of DVD-by-mail subscribers do leave, Netflix will be happy to replace them with the more profitable streaming subscribers.

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