Netflix experienced some membership turbulence in 2016 as a price increase was phased in for its...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Netflix experienced some membership turbulence in 2016 as a price increase was phased in for its US subscribers. In May 2014, Netflix announced that the price of its standard subscription service would increase from $8 to $9. . However, established customers were allowed to stay at the $7.99 price for two years. In 2015, Netflix increased the standard price to $9.99. As a result of the pricing plan and the deferred price increase, in May, 2016, the standard pricing plan for long time customers of Netflix increased from $7.99 per month to $9.99 per month. Netflix began notifying customers in April that the price increase would become effective in the second quarter. Netflix was trying to implement price increases more slowly after a 2011 increase led to negative publicity and a customer backlash. In that case, Netflix separated its streaming and DVD services, and charged separately for both services. However, regardless of the implementation of the price increase, the higher monthly prices seem to have impacted the growth of membership among US subscribers. In the two quarters before the price increase, Netflix added net membership of 1.6 million and 2.2 million members. By contrast, the number of members added in Q2 was only 160,000, and in Q3 only 400,000. The Q2 growth in US subscribers was the lowest since Netflix began reporting those numbers in 2012. US Streaming (millions) Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Revenue 1026 1064 1106 1161 1208 1304 Contribution Profit 340 344 379 413 414 475 Contribution Margin 33.1% 32.3% 34.3% 35.6% 34.3% 36.4% Paid Memberships 41.1 42,1 43.4 45.7 46.0 46.5 Total Memberships 42.3 43.2 44.7 47.0 47.1 47.5 Net Additions 0.90 0.88 1.56 2.23 0.16 0.40 Monthly Revenue per Paid Member 8.33 8.43 8.49 8.47 2$ 8.75 9.40 Percentage Chg. Rev 3.7% 3.9% 5.0% 4.0% 7.9% Percentage Chg. Memberships 2.5% 3.2% 5.3% 0.6% 0.9% Source: Netflix 10Q Q3, 2016 Netflix said Monday that customers who learned in April that the price was about to increase had begun canceling their subscriptions, leading to unexpected "churn." Netflix did not flat-out say in its letter to investors that the price increase led to higher churn among subscribers, however, instead saying it coincided with "press coverage" of the rate hike and that subscribers misunderstood "the news as an impending new price increase rather than the completion of two years of grandfathering." The stock market reacted to news of Netflix price increase as well. The stock closed at $102.23 as of March 31, 2016. After the release of second quarter earnings in July, the stock price had fallen to $85.84 per share, a decline of 16%. This decline wiped out almost $7 billion of shareholder value during this period. Most of this decline was immediately following the release of the second quarter numbers. With competition increasing in for streaming services, especially with the growth of Amazon Prime Video and Hulu, the decline in membership growth could be a troubling sign. Based on the above case, answer the following questions: 1. Is it possible to estimate price elasticity of demand for Netflix subscription services? If yes, estimate and comment on your results. 2. What do you expect to happen to Netflix's revenue due to price increase? 3. What do you expect to happen to Netflix's profit? 4. Why did Netflix stock got hammered after releasing the results? 5. Comment on your analysis and suggest what additional information would you require for more accurate analysis Netflix experienced some membership turbulence in 2016 as a price increase was phased in for its US subscribers. In May 2014, Netflix announced that the price of its standard subscription service would increase from $8 to $9. . However, established customers were allowed to stay at the $7.99 price for two years. In 2015, Netflix increased the standard price to $9.99. As a result of the pricing plan and the deferred price increase, in May, 2016, the standard pricing plan for long time customers of Netflix increased from $7.99 per month to $9.99 per month. Netflix began notifying customers in April that the price increase would become effective in the second quarter. Netflix was trying to implement price increases more slowly after a 2011 increase led to negative publicity and a customer backlash. In that case, Netflix separated its streaming and DVD services, and charged separately for both services. However, regardless of the implementation of the price increase, the higher monthly prices seem to have impacted the growth of membership among US subscribers. In the two quarters before the price increase, Netflix added net membership of 1.6 million and 2.2 million members. By contrast, the number of members added in Q2 was only 160,000, and in Q3 only 400,000. The Q2 growth in US subscribers was the lowest since Netflix began reporting those numbers in 2012. US Streaming (millions) Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Revenue 1026 1064 1106 1161 1208 1304 Contribution Profit 340 344 379 413 414 475 Contribution Margin 33.1% 32.3% 34.3% 35.6% 34.3% 36.4% Paid Memberships 41.1 42,1 43.4 45.7 46.0 46.5 Total Memberships 42.3 43.2 44.7 47.0 47.1 47.5 Net Additions 0.90 0.88 1.56 2.23 0.16 0.40 Monthly Revenue per Paid Member 8.33 8.43 8.49 8.47 2$ 8.75 9.40 Percentage Chg. Rev 3.7% 3.9% 5.0% 4.0% 7.9% Percentage Chg. Memberships 2.5% 3.2% 5.3% 0.6% 0.9% Source: Netflix 10Q Q3, 2016 Netflix said Monday that customers who learned in April that the price was about to increase had begun canceling their subscriptions, leading to unexpected "churn." Netflix did not flat-out say in its letter to investors that the price increase led to higher churn among subscribers, however, instead saying it coincided with "press coverage" of the rate hike and that subscribers misunderstood "the news as an impending new price increase rather than the completion of two years of grandfathering." The stock market reacted to news of Netflix price increase as well. The stock closed at $102.23 as of March 31, 2016. After the release of second quarter earnings in July, the stock price had fallen to $85.84 per share, a decline of 16%. This decline wiped out almost $7 billion of shareholder value during this period. Most of this decline was immediately following the release of the second quarter numbers. With competition increasing in for streaming services, especially with the growth of Amazon Prime Video and Hulu, the decline in membership growth could be a troubling sign. Based on the above case, answer the following questions: 1. Is it possible to estimate price elasticity of demand for Netflix subscription services? If yes, estimate and comment on your results. 2. What do you expect to happen to Netflix's revenue due to price increase? 3. What do you expect to happen to Netflix's profit? 4. Why did Netflix stock got hammered after releasing the results? 5. Comment on your analysis and suggest what additional information would you require for more accurate analysis
Expert Answer:
Answer rating: 100% (QA)
ANSWER 1 P ersentage in the price is calculated by using data for month revenue perpaid member in quarter before price increases May 2016 q2 2q6 the p... View the full answer
Related Book For
Posted Date:
Students also viewed these economics questions
-
Netflix experienced some membership turbulence in 2016 as a price increase was phased in for its US subscribers. In May 2014, Netflix announced that the price of its standard subscription service...
-
The table below shows the returns on two stocks ABC and XYZ, and the return on the market portfolio in each of three possible scenarios ("G", "M", and "B"), as well as the likelihood of each of these...
-
Ford Motor Company announced that the price of its F-150 pickup trucks is going to increase by only the inflation rate for the next 3 years. If the current price of a well-equipped truck is $28,000...
-
The chief accountant for Ramsey City needed to make adjusting entries before preparing the citys financial statements for calendar year 2022. She wrote a brief paragraph to guide her assistant in...
-
The data given in the table below are the midterm scores in a course for a sample of 10 students and the scores of student evaluations of the instructor. (In the instructor evaluation scores, 1 is...
-
Which (if any) of the following expressions are equivalent? (a) Summarize r per r ( ) add count as ct (b) Summarize r add count as ct (c) Summarize r by ( ) add count as ct (d) Extend TABLE-DEE add...
-
The Bonferroni adjustment is made by multiplying the P-value by the number of___________________ . In Exercises 3 and 4, fill in each blank with the appropriate word or phrase.
-
Suppose that we modify the Solow growth model by allowing long-run technological progress. That is, suppose that z = 1 for convenience, and that there is labor-augmenting technological progress, with...
-
interest rate on the bond payable was 12%, the income tax rate was 40%, and the dividend per share of common stock was $0.75 last year and $0.40 this year. The market value of the company's common...
-
On 12/31/2021, 7-Eleven acquired 75 percent of Speedway's net identifiable assets for $177,000. The book value of Speedway's assets was equal to $210,000 at the date of acquisition. The fair value of...
-
Check my work 29 its Rundle Company produces commercial gardening equipment. Since production is highly automated, the company allocates its overhead costs to product lines using activity-based...
-
Consider Tom, who is eligible for government health insurance and consumes two goods, "insurance" and "all other goods." Health insurance and other goods trade off dollar for dollar (there is no tax...
-
n 2-2) Let , (x) = sin ,,x, with eigenvalues ,,= n/L, for n = 1, 2, 3 ... over the interval 0 x L, noting that the weighting function is 1. a. Show that the integral f(x)m (x) dx = 0 for n m. b....
-
The opportunity cost of any decision that you make involves giving up something. This is your highest alternative of a decision to accomplish an activity. Explain your opportunity cost of taking this...
-
The North West Ontario Health Authority (NW) is changing its processes as an organization. Over the last three years the government agency has tried to operate more like a business. Since it has a...
-
How does containerization differ from traditional virtualization in terms of resource isolation, overhead, and application deployment? What are some common security concerns associated with each ?
-
Question 3, (20 points) Stopstinx is an over-the-counter drug that is used to treat chronic foot odor. To be effective it must be taken daily. During an A/B marketing test, researchers found the...
-
Consider the combustion of methanol below. If 64 grams of methanol reacts with 160 grams of oxygen, what is the CHANGE in volume at STP. 2CH3OH(g) + 3O2(g) 2CO2(g) + 4H2O(1) The volume decreases by...
-
Visit a major consumer website such as www.jdpower.com. What types of ratings do they include? What descriptions do they give of their measurement process? If possible, take a survey on the website....
-
List and briefly describe each of the five dimensions of CSVs.
-
Define each component of true customer loyalty.
-
You have just been telephoned by the chief accountant of a listed company client, Randerston plc, to tell you that there has been a computer breakdown and that some parts of the data concerning...
-
Consider the following situations: (a) Assume that you are a partner in a two partner practice with total practice income of 250 000. One of your clients (a private limited company with a turnover of...
-
You have been asked by your audit partner to be senior in charge of the audit of a small public limited company. Unbeknown to the partner, you hold 1000 of the 100 000 shares in the company. Do you...
![Mobile App Logo](https://dsd5zvtm8ll6.cloudfront.net/includes/images/mobile/finalLogo.png)
Study smarter with the SolutionInn App