Just when you thought things couldn't get worse for Netflix, here's a tidbit of information that could have significant consequences for the company: in a Q&A session at the Goldman Sachs Communacopia conference on Wednesday (replay here), CFO David Wells conceded that while cancellations due to the price increase announced in July accounted for most of the 1 million downward revision in end of quarter subscribers, the change has also adversely impacted new subscriber acquisitions (though he declined to quantify by how much). I believe this is the first time a Netflix executive has acknowledged a double whammy resulting from the price increase - both higher than expected churn and a slowdown in additions.
This is exactly the issue I called out last week in "Netflix Q3 Subscriber Loss Could be Churn AND Acquisition Related," noting that although many observers immediately concluded that the Q3 revision was entirely churn related, the reality is that a deviation from expected additions is an equally important factor in determining the final September 30th subscriber count. In his remarks, Wells attributed the impact to word of mouth and the news coverage the pricing change received (both of which presumably deterred some amount of prospective subscribers from signing up), but also added that "we're still digging in to understand it."
I'm not surprised by the acquisition slowdown, as Netflix has been a huge beneficiary of its loyal and enthusiastic subscribers recommending the service to others, a trend that accelerated as the streaming offering became stronger over the past 2 years, connected devices proliferated, and the buzz factor grew. I have no idea whether Netflix ever quantified exactly how significant subscriber recommendations were in driving new acquisitions, but common sense suggests that if the company angered a material segment of its subscriber base (as it did with the price change), their enthusiasm to recommend Netflix to friends would falter.
Looking ahead, a big question to ask is if the price increase caused an acquisition slowdown, what impact might the Qwikster DVD split be having on acquisitions during these last 2 weeks of Q3? Is it possible that Netflix is going to post a Q3 subscriber number south of the 24 million reforecast, as the Qwikster impact ratchets churn and further slows acquisitions? Going a step further, what will the Qwikster split's impact be on Q4 acquisitions (and of course churn)? When the price increase was originally announced, Netflix made a point of saying it expected Q4 would be back on track and could well be the company's first billion dollar revenue quarter. All of that seems completely out the window now, meaning Q4 performance is anyone's best guess.
The key takeaway here is that there are multiple - and often inseparable - drivers of subscriber retention and acquisition. Actions like an onerous price increase that may only directly impact current subscribers and therefore be perceived as containable, can quickly turn into an out-of-control brush fire that harms brand image and new subscriber acquisitions as well. All of this is playing out in a very public way for Netflix, as the company grapples with the consequences of its actions that have thrown it into completely uncharted territory well into 2012.
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