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Netflix Reports Churn as Subscribers Leave over Price Increase

Subscribers in the rest of the world joined at a higher rate than US users

July 25, 2016 | Video

Netflix stock shares tumbled last week as the company announced subscriber growth rates on its Q2 2016 earnings call. While there are actually slightly more US subscribers last quarter than in Q1—46 million, up from 45.7 million—the company had targeted a bigger increase.

Netflix Streaming vs. DVD Subscriptions Worldwide, US vs. Rest of World, Q2 2013-Q2 2016 (millions)

The issue was subscriber churn. Netflix reported an unexpected exodus of subscribers whose monthly membership rate rose after “grandfathered” rates expired.

In 2015, Netflix raised its new subscriber monthly rates, but let current subscribers continue to pay the old rate, $7.99 per month.

Then, in April, the company began notifying subscribers who had paid the grandfathered rate that they, too, would begin to pay the currently monthly rate, $9.99. Subscribers apparently found this to be too much and left en masse.

As eMarketer wrote in April 2016, user growth was expected to slow over 2016, but not for this reason. Netflix’s July 2016 report also notes that worldwide growth has slowed, with the service up about 2 million subscribers over Q1 2016. For reference, Q1 2016 added nearly 7 million subscribers over Q4 2015.

What subscriber growth there was came mostly from the rest of the world—nearly 2 million subscribers were added in Q2 2016.

Reasons that US Netflix Subscribers Subscribe to Netflix, March 2016 (% of respondents)

Cowen and Company found in March 2016 that 58% of US Netflix subscribers cited cost-effectiveness as a reason to subscribe. With rates going up, that consideration may have led some to unsubscribe.

There might, however, be some good news: US subscribers are more frequently signing up for Netflix because of Netflix original programming—57% of those surveyed by Cowen and Company in February 2016 said they subscribed for that reason, as opposed to 37% in December 2014. It’s worth noting that there was less original content in 2014, of course, though popular shows like &ldqou;Orange Is the New Black” were already airing.

If Netflix continues to provide critically-acclaimed original content, the company might see lost subscribers return. Either way, this is another chapter in the book of repercussions for price increases.

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