Netflix has been getting hammered in the press for its missteps from raising prices, starting Qwikster and then killing Qwikster. Now its stocks tank on its most recent earnings report. But lets look a little closer at the effects of the price change. Its $9.99 monthly plan went to $15.98 and the earnings report indicates that they lost 800,000 subscribers during the quarter (from 24.6 million to 23.8 million). This would imply an elasticity of less that 0.1, pretty inelastic.
They will surely lose more over the coming month due to the price change and they would have gained subscribers simply through "natural growth." But how much could this account for? For example, suppose natural growth would have put subscribers at 30 million. Then the price change would have had to cause 5 million subscribers to stop service over the long-run just to get an elasticity greater than 1.0, in the elastic range where profits are maximized. This is six times the 800,000 lost subscribers so far.
As a result, Netflix earned $62.5 million in the quarter compared to $38 million the same quarter last year. On this news, the stock price plummeted 37%, wiping out $2.3 billion in market capitalization. Stock market analysts claim that the stock price is warranted despite the good earnings news because they expect much lower future earnings.
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Interesting evaluation Michael.
ReplyDeleteAs a Netflix subscriber myself my reaction to the price increase was to reduce my subscription from a higher priced plan to a lower one. Also, I have developed a strategy to use less of their service in the long run. These decisions make me more profitable for Netflix in the short term, but less profitable in the long run. This fear may be what is driving investors to revalue the stock.
Also, Netflix's current strength is its CD distribution infrastructure. Upper management appears to be over-looking that. A streaming only business model has a much lower cost of entry and an uncertain, developing future cost structure as the hollywood studios are still working out ways to maximize this new revenue stream.
Very helpful information for an econ major in dire need of extra credit papper. Thanks for showing me the way to my thesis buddy. :)
ReplyDeletei calculated for thoes who want to know Elasticity=0.072
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