Bloomberg News

Netflix Bets New Content Deals Will Be Mea Culpa to Angry Users

October 14, 2011

Oct. 14 (Bloomberg) -- Netflix Inc. Chief Executive Officer Reed Hastings, reeling from a number of marketing blunders, is forging new content agreements to placate angry customers and reignite subscriber growth.

The mail-order and video-streaming company yesterday announced a third major content deal in as many weeks, acquiring online rights to TV shows from the CW Network owned by CBS Corp. and Time Warner Inc.

“We’re going to show customers the value of the service, and reinforce it’s still the same service you’ve loved,” Steve Swasey, a spokesman for Los Gatos, California-based Netflix, said in an interview.

It may take months to rebuild goodwill, Steve Frankel, a Dougherty & Co. analyst in Minneapolis, said in a note yesterday. He estimates Netflix lost 800,000 DVD customers and 200,000 online users to a price increase and now-jettisoned plans to create separate services for both. According to Swasey, Netflix failed to adequately explain changes that hit almost half of its 25 million-plus customers.

“What most people didn’t get is that this was a price increase for 12 million members and a non-event for 12 million who wanted streaming only,” Swasey said. “We should have said $2 a month for unlimited DVDs just wasn’t covering it.”

The trouble started on July 12, when Netflix announced it would separate its DVD and streaming plans, with each available for $7.99 a month on its own. Customers with both streaming and DVDs saw their bills jump to $15.99 from $9.99. The change didn’t affect users who only wanted online viewing.

Internal Numbers

Netflix had relied more too much on internal numbers that showed 75 percent of customers were opting for the $7.99 streaming plan only, Swasey said. Customers who were also paying $2 more for DVDs would have understood an explanation that the company needed to recoup shipping and handling costs, he said.

Then on Sept. 1, Netflix customers learned they would lose access to newer films from Walt Disney Co. and Sony Corp. after talks to obtain those movies from the Starz LLC cable network broke down. Starz was an early supplier to Netflix. The loss created the impression of a major setback, even though the films were making up a smaller share of viewing.

“That was another issue where we did not get out in front of it as well as we could have,” Swasey said. “We did not say clearly that we didn’t think the price they were asking is the price we should pay.”

Netflix has lost more than 60 percent of its value since July, falling from an intraday high of $304.79. The shares dropped 0.8 percent to $116.04 at 4 p.m. New York time.

Spending Spree

Chief Content Officer Ted Sarandos is on a spending spree. In addition to the CW deal, Netflix signed DreamWorks Animation SKG Inc., producer of the “Shrek” films, on Sept. 26, and Discovery Communications Inc., the maker of “Man vs. Wild,” on Sept. 21. On Oct. 7, the company reached an extended deal with AMC Networks Inc.

Netflix also picked up North American rights to “Borgia,” a 15th century crime drama, and “Lillyhammer,” an original series featuring “Sopranos” actor Steve Van Zandt.

Even with the latest content deals, the company faces the challenge of finding movies to replace Sony and Disney when the accord with Starz expires in February.

“We expect Netflix to concentrate on TV series as well as selected original series such as ‘House of Cards’ until HBO’s contracts with some of the major studios begin to expire in 2013 and beyond,” Frankel said.

--Editors: Rob Golum, Anthony Palazzo

To contact the reporters on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net; Ronald Grover in Los Angeles at rgrover5@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net


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