Tuesday, October 25, 2011

Netflix Stocks Sink as Subscribers Flee

As the third quarter has come to a close Netflix has had some shocking realizations. It was during the start of the third quarter that they made the announcement that they were now charging separately for DVD streaming and DVD rentals.  This would result in a large price increase for consumers of the Netflix package.  Despite this Netflix still was able to earn $62 million at the end of the third quarter.  But this did not keep the demand of Netflix stocks from shifting.  The demand curve for Netflix stocks had a severe inward shift after it announced its massive loose of subscribers.  At the end of the third quarter, Netflix reported its consumer base shrinking by almost 1 million.  This is the first time the consumer base of Netflix has shrank in many years and analysts say that this shrinking is not done yet.  They predict that there will be an even greater loss of subscribers by the end of the fourth quarter in December.  Netflix itself warns stockholders that it is not going to be profitable in the upcoming quarters.  This drop in shareholders and consumers can both be explained by the law of substitutes.  Many DVD rental companies are out there and for the longest time Netflix has held the most consumers.  As soon as the price is increased though, we see the substitution effect take place and consumers take their money other places that are cheaper.  Things like Vudu and Blockbuster offer similar services that Netflix does; now that Netflix has increased their prices, consumers are choosing the cheaper option.  This increase in price of Netflix streaming and postal services also shows the effects of a price rising above equilibrium.  The increased price has caused a excess supply proving that is it in fact above equilibrium. 



Eric M said...

Nick, I find this quite interesting! I find it curious to see that Netflix, a company that has been on a sharp rise in popularity and value since its inception in 1997, would suddenly lose customers with a price increase. However, this definitely follows the laws and principles of economics. This also hints toward an elasticity present in the consumers as a reaction to price change. Netflix is a movie rental/streaming company, which is in fact a luxury as a form of entertainment. As you mentioned, customers will look to other alternatives. To extrapolate what you already said, buyers not only look to other DVD/streaming options, but to different media entertainment altogether! Good work, Nick. This is quite interesting, and with the company expanding its market into Europe in 2012, starting with Spain, it will be interesting to see how the company grows in productivity and value. How will the European culture/economy respond to Netflix?

Anthony Escobar said...

I also find this quite interesting, but I'm very puzzeled as to why a flourishing company that many people had grown to love want to start charging more for there services after raking in a whopping $62 million in ONE quarter. I just want to know their motives behind raising the prices and losing about a million customers.
I wonder if they weighed the costs and benefits well enough and made a decision that would ultimately benefit them.

NFLX stock quote said...

This article is very interesting, I like it.