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Economies of Scale Effect Should Decrease Membership Costs
Do you shop at Costco? If so, do you notice how inexpensive everything is? You can get the same product sold in a supermarket for less than half the price at Costco. Of course, you have to buy twice as much and purchase an annual membership. If the consumer commits to buying a larger quantity, the fixed costs in producing the item are mitigated. In layman’s terms, this is a volume discount. Economists call this the economies of scale effect.
Netflix continually boasts about adding new members at every quarterly conference call. This should benefit existing members. As more members contribute their subscription fee, Netflix has more cash to operate. Greater revenues and increased content purchases also enable better negotiation with studios and networks. They can purchase content for less. The increased data center demand also offers economies of scale benefits. Amazon charges less per GB of data served as the overall data requirements of their clients grow larger. Netflix is benefitting from economies of scale, but soon their subscribers might not.
Netflix Gets Better at Raising Subscriber Rates
Remember the last time Netflix raised their rates? They severed the free streaming service from DVD rentals and charged extra for it. It was a catastrophe. Their stock price plummeted. It took years for their stock to recover. They promised better content, however, the notion that they needed to increase rates spooked investors. It increases suspicion that Netflix sees their growth slowing. A growing business can keep prices constant while increasing profitability.
Netflix isn’t going to let this happen again. They have a new way of raising rates. Current customers are still paying the same subscription price. This is a smart move, because it prevents existing customers from terminating subscriptions. If they do, they must pay a higher rate as a new subscriber. Currently, Netflix charges new customers more. It is truly bizarre and almost unprecedented in this industry. It is a strategy forged from catastrophe.
Increases to existing customers’ subscriptions will be staggered. That’s why everyone has a different guaranteed price date on their account summary. You can check this date by logging in to your Netflix account. It is displayed on the main account page.
I have been with Netflix for over a decade. My price is guaranteed until May 9, 2016. It is very specific, down to the day. This ensures that there will be no commotion about Netflix raising rates. They are doing it piece-meal, to avoid a backlash that can negatively affect the stock value.
Netflix is Facing Greater Competition
In April 2015, HBO launched their HBO NOW service, targeted at cord-cutters. HBO subscribers can now enjoy the service without subscribing to cable. HBO has offered streaming for several years, however, it was a perk of membership. Now anyone can subscribe to the HBO NOW streaming service.
Since subscribing to HBO NOW, I haven’t watched Netflix at all. I used to watch Netflix every day. They seem to be nervous, bombarding me with emails to titillate me into watching. Given that I would lose my current price if I temporarily cancelled Netflix, I am keeping the service. When this changes, I may be more inclined to cancel Netflix and re-subscribe for a few months. Keep in mind, many new Netflix subscribers face no penalty from cancellation. (continue…)