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Netflix Reports Sharp Slowdown in User Growth: Bad news? by: Shalini Ramachandran and Maria Armental Jul 19, 2016 TOPICS: Competition, Pricing as an Element of Marketing Mix

SUMMARY: in three years. The company explained that price increases for existing subscribers led to higher service cancellations and contributed to the weaker than expected results. One analyst says that investors are missing the bigger picture because the additional revenues the company earns from the price increases outweigh the loss of subscribers. Reported earnings growth beat analyst estimates. Subscriber growth may also be dropping as the company matures and faces increased competition. Streaming services are available from Amazon, Hulu and other services including those from content providers like HBO and CBS. The company is looking for growth in global markets. Netflix noted that Latin America, Canada, the Nordic, UK and Ireland are individually profitable signaling success in these markets that launched before 2014. The company is also making changes in distribution. Netflix started allowing its original shows to air on broadcast TV before the next season premiere on Netflix. The company is examining a way for users to download shows to watch later. This could be important in countries where cellular networks aren't as reliable as in the US.

CLASSROOM APPLICATION: When companies make pricing decisions several factors are part of the equation. One part is costs. For a company like Netflix those costs involve acquisition expenses for content. The pricing decision for any company can affect the number of units sold. What's important to remember is that a company like Netflix is not in the business of maximizing the number of subscribers, but rather maximizing shareholder wealth for those who own the public company. Netflix increased prices and it resulted in weaker subscriber expansion. Some existing subscribers cancelled. What's important to know is that revenue in the quarter increased by 28%. Focusing on the number of subscribers to the exclusion of revenue ignores an important metric that affects the long-term financial performance of the company. Subscriber growth may also have dropped because of competition. Netflix faces more competition in the market for streaming services. That can create challenges as the company makes pricing decisions. Netflix also illustrates why companies go global in order to maintain growth.

QUESTIONS:  1. Identify all the issues a company should consider when it is setting prices. 2. Should Netflix be more concerned with the number of subscribers or revenues? Explain. 3. Describe the competitive environment for streaming services and how that might affect Netflix and its pricing decisions. 4. Review the role global expansion played in Netflix's financial performance. What are the company's future plans? 5. Discuss how Netflix is changing or considering changing the way it delivers content to viewers. End