It's been a humbling year for Netflix (NASDAQ:NFLX). The world's leading premium streaming service has suffered through back-to-back quarters of missing its own subscriber targets. The shares are trading 11% higher in 2019, but that's less than half the market average.
Investors haven't felt the same about Netflix since Disney (NYSE:DIS) and Apple (NASDAQ:AAPL) unveiled and then launched their shiny new premium streaming services. Disney+ and Apple TV+ hit the market at low enough price points that you can sign up for both and still pay less than you would for a month of Netflix, and the former industry darling might be kicking itself for raising prices for the fourth time in five years earlier this month.
A price cut at this point would rattle investor confidence, but Netflix could have a clever way out of this springtime's significant hike that may be triggering an uptick in churn. Mobile and consumer electronics blog BGR is reporting that Netflix is testing discounted plans in India for customers willing to pay for more than a month at a time, a strategy that Disney and Apple used to hit the ground running with a steady base of long-term subscribers ahead of last month's launch. Netflix is taking a page out of its competitors' playbook, and hopefully this isn't the last time it borrows from the models of its smaller-yet-hungrier rivals.
Getting it right the next time
Netflix has marched to the beat -- or Reed -- of its own drum, and that's served investors well until this year. CEO Reed Hastings has ignored analysts calling for Netflix to embrace everything from digital advertising to video game rentals, and his reluctance to follow the herd has been the right call. Hastings has always been a step ahead of everybody else, but something isn't right if the historically conservative Netflix is finally overshooting its public guidance.
There's something different about the overnight success of Disney+ and, to a lesser extent, Apple TV+. Disney had 10 million subscribers by its second day of availability, and we know those viewers aren't going anywhere because most of those Mandalorian watchers paid for at least a year -- and in some cases two, three, and even four years. Apple is offering recent buyers of its devices a free year of access. Netflix sticking to a month-to-month plan seems out of touch, and what it's testing in India -- offering some subscribers the ability to pay for a year at a 50% discount with a 30% price cut for six months and 20% for three months -- could be a sign of things to come closer to home. I know I can't be the only one who saw this coming.
"Netflix isn't likely to drop its prices, but it's not going to raise its prices anytime soon, either," I wrote last month. "It wouldn't be a surprise if it tried to lock in subscribers with prepaid plans offering discounts for a year or more."
India, naturally, isn't the U.S. market, and steep markdowns is just the price of doing business in the populous but still developing country. We may never see a 50% discount here, but some kind of price break to keep customers locked in for larger chunks of time would obviously help retention at the expense of average revenue per user. Discounted annual plans are obviously working for Disney+. Netflix may as well strike before its net subscriber count peaks in its home country.
Why stop there? Why not bite the ad bullet, at least as a way to offer a cheaper entry-level price point? Needham analyst Laura Martin is suggesting that strategy, and she's had a pretty good read on how this industry is playing out. How about digital rentals and purchases for content not on its catalog? It can't afford to let one of its smaller rivals gain traction on that lucrative front. Netflix has a lot to learn from the newer players, and now that it can't just phone it in as it pursues its audience's discretionary income, it's time to copy what's working elsewhere.