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Straight Talk Media & Entertainment

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Netflix has blamed lower-than-expected subscriber growth on its move to “un-grandfather” long-time customers from their old $7.99 monthly rate to its standard $9.99. While getting people to pay more is rarely easy, the company faces a more fundamental challenge: changing from what consumers want Netflix to be to what industry dynamics dictate it must become.

The subscription video-on-demand (SVOD) provider added 1.7 million new subscriptions in the second quarter of 2016, having forecasted growth of 2.5 million. The company attributed the shortfall to the process of shifting customers that had signed up before May 2014 at $7.99 per month to the $9.99 paid by new subscribers since then.

The unavoidable costs of moving from quantity to quality

Netflix needed to increase prices in order to offset growing investments in original content. Such is the importance of originals that the company has also reduced the number of third-party titles in its catalog to free up funds. What’s the problem with this strategy? Many of Netflix’s subscribers don’t appear to have bought into it.

What consumers want Netflix to be: a Spotify for TV

According to a number of surveys, despite the availability of acclaimed titles such as House of Cards, Orange Is the New Black, and Beasts of No Nation on Netflix, many consumers still value the size of Netflix’s catalog above all other factors. In other words, they would rather Netflix was a platform for all kinds of video, rather than the carefully curated HBO-like service it aspires to be.

What Netflix must become: just another TV service

Clearly, Netflix can’t afford to buy all the TV shows and movies in the world. But neither would studios be willing to sell. Playing Netflix off against Amazon or Comcast for exclusive rights boosts the prices content owners can charge – and prevents the emergence of any overly powerful provider. And just as Netflix has reduced what third-party content its buys, content owners have limited what they will sell.

Netflix’s strategy is working – to an extent

As studios play hardball with rights to their content, originals have granted Netflix more control over its destiny. Originals also provide a uniqueness, which explains why Netflix can confidently claim that its lower-than-expected subscriber growth was definitely not down to competition from the likes of Hulu and Amazon Prime Video. If anything, a Hulu or Prime subscriber is also likely to be a Netflix customer.

Where will this strategy leave Netflix as competition evolves?

The consumer’s desire for a single place for all their TV and movie needs has not gone away. That battle will continue to be fought between traditional TV operators and consumer technology companies such as Amazon, Apple, and Google. Netflix will remain an important and influential force in this emerging competitive landscape, but will become increasingly beholden to these platforms in varying degrees, much like today’s TV channels.

Straight Talk is a weekly briefing from the desk of the Chief Research Officer. To receive this newsletter by email, please contact us.

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