Netflix’s Q2 net income rose 55% to $68 million, or $1.26 a share, from $43.5 million, or 80 cents, a year earlier, while sales gained 52 percent to $789 million in the period, compared with analysts’ projections of $790.5 million. The company signed up 1.96 million new users globally, boosting the total to 25.6 million worldwide.
But with Netflix’s recent price increase, customers are outraged, threatening to leave Netflix for one of their competitors. Netflix offers both streaming and DVD rental for $16/month now, and subscribers are not happy about it. Some customers are opting for the streaming only option for $10/month and will be looking into Blockbuster for the DVD-rental option. Some are thinking that Hollywood may come to their rescue by releasing movies in DVD earlier at a lower cost, but with Hollywood, it’s hard to tell if they would really aid in the alleviation of consumer angst.
The effect of this price increase will be visible in their third quarter net income, and Netflix is expecting the worst. Netflix shares dropped yesterday as a result.
“Because of the timing, we announced it at the very beginning of a quarter, we’ll see the negative effects of it in Q3. That is, the elevated churn and lower revenue growth than we would otherwise have. Then the price increase takes effect essentially mid-September, on average. So we get a little bit of benefit at the end of the quarter and then the real benefit comes in the following quarters, Q4 and beyond. But in terms of tracking where we are and our expectations, we’re feeling very good.” said CEO Reed Hastings conference call for investors on Monday.
“Netflix miscalculated on this one, and are basically saying all our growth is going to be absorbed by people who quit,” said Michael Pachter, an analyst at Wedbush Securities in Los Angeles who has an “underperform” rating on the stock. “It’s not clear how successful they’re going to be at attracting and retaining people with these new pricing plans.”
If DVD-rentals plummet, Netflix is ready to survive with their streaming service alone. They are said to be in talks with DreamWorks Animation SKG for streaming rights, but nothing is official yet. And their integration with Facebook in the US will be a no-go, due to the Video Privacy Protection Act, a 1988 law that forbids the disclosure of people’s video rental information. Companies that violate this law are liable up to $2,500 for each infraction.
But Netflix expects the slowed customer gains to be a temporary development in its long-term strategy, even as competition heats up in every sector. The popular use of smartphones and tablets has led to an increase in video streaming app downloads, but with the advent of “smart TVs” consumers are now rapidly adopting online TV applications that are integrated into their home television sets. Research survey estimates that over 60% of these connected households will use a TV app at least once per week.
As for Netflix competitors, Comcast’s partnership with Elemental technology marks their presence in the mobile industry, while Wal-Mart is trying for the third time to enter the video-streaming era with Vudu, the cloud-based video movie service they acquired last year. Wal-Mart customers on the website can rent or buy a digital movie in Vudu’s extensive library, pay for it and stream directly from Walmart.com, Vudu.com or from a Vudu-enabled device. Movie rentals will range from $1-$5.99 and $3.99-$6.99 for 3D movies while movie purchase will range from $4.99-$19.99 and $11.99-$21.99 for 3D. They will also have a ‘movie-of-the-day’ which you can rent for only $0.99. The third time may be a charm for Wal-Mart, as it steadily seeks to remain relevant in digital media distribution. Hulu, on the other hand, is still marketing itself for prospective buyers.