Early 2011, the investors bid up the Netflix shares so dramatically because Netflix had provided some great investment opportunities. From the year 2009, Netflix stocks recorded a great climb from approximately $35 in2005 to $300 in 2011(Reinkensmeyer, 2011). During this period the company was referred to as a “buy” and the rise became every investor’s dream. The company was providing a streaming service that had attracted tens of millions of subscribers, 24.6 million by July 2011 to be exact. Furthermore, during the two years 2009 to 2011 when the company introduced the streaming service, it was free to its subscribers and only required them to pay their monthly subscription to their internet service providers to watch the movies. In addition to the free streaming, the service was less cumbersome and more efficient as it did not involve the sending of DVDs through mail and shipping.
Furthermore, the company had managed to bring down the cost of marketing and acquiring of new customers which had been at $40.88 per customer in 2007 but was at $18.00 in 2011. Netflix streaming seemed to have a higher viewership of 2.1 movies a week compared to the Netflix disk which had 1.4 movies a week. With all these, Netflix profits were at their all-time high making it a great investment opportunity by the beginning of 2011. There was a tremendous change in the cost structure of Netflix as the company moved from movies on disk through the mail to streaming. To begin with, the streaming service meant that there would be no cost incurred in mailing and returning of the DVDs.
Moreover, the cost for packaging the DVDs for mailing was also eliminated. Instead, the expenses they would have to incur were for running servers and streaming the videos on the internet. The cost of streaming was estimated at $0.05, this excluded the cost of royalty that was paid to the movie studios. Another expense that Netflix was responsible for in streaming included getting the movies to the subscribers’ “front door” which thereafter the network companies would be responsible for transmission costs. However, after the increased movie viewership brought about by the change, the studios increased their fee charges for giving rights for streaming a particular content for a particular time so Netflix had to incur these costs so as to provide the contents to its viewers.
With that, the Netflix Company saw a change from increased DVD purchasing due to growing numbers to very high and fixed costs to own rights for content streaming. For this reason, Netflix switched from free unlimited streaming to paid subscriptions. When Netflix was first introducing the streaming video, they experienced some strategic uncertainties. They first offered the streaming service to their through-the-mail customers in January 2007 and they anticipated that their customers would adapt relatively slowly to the service. However, contrary to their expectations, the streaming service was well embraced by their customers.
However, despite the successful experimentation of the streaming, the Netflix Company had not considered the effects that it might have on their competitors, the studios who gave them content rights and also the internet network operators. All of these players had a specific role to play in the next move of the Netflix Company to offer paid subscriptions instead of free streaming. In their cost structure, the Netflix Company estimated to only pay for the content acquisition whereas the internet company was responsible for transmission costs. However, they did not prepare for the increased cost by studios for acquiring rights to stream content. It came as a blow, especially after the studios realized that the unlimited streaming by Netflix would lead to a decrease in the amount they earned from the cable television. It was because Netflix posed as a major competitor for the cable TVs since it required no subscription fee just internet connection in households.
After the Netflix Company announced that there will be monthly fees applied for streaming video and also movies on disk, there was a big outrage from the customers. Netflix received a big blow in their business especially after informing the subscribers that they would have to pay for the streaming service after two years of free streaming. Many subscribers threatened to leave the Netflix service entirely for the 60% increment to the subscription fee was uncalled for and they were not prepared for it. The company announced to its subscribers on the 11th of July 2011 that it would be splitting the charges for its two services, DVD and streaming. Those who ordered DVD on mail received a price change from $9.99 to $7.99 while those who wanted the streaming service would have to pay an additional cost of $7.99, therefore, paying a sum of $15.98 for the subscription.
Before the price change, Netflix had a total of 24.6 million subscribers. However, with the price change and the consumer discontent experienced over summer, the Wall Street analysts made a loss estimation of 600,000 subscribers from 24.6 million subscribers. However, this was an underestimation for Hastings the CEO at Netflix reported a loss of 800,000 subscribers. Nevertheless, Netflix had no other choice but to stick to their decision if they were to survive, with the hope that the subscribers they lost during the price change would eventually return after feeling that they made their point.
