Answer Happy

The membership of Netflix took a hit in 2016 as a price increase for its US subscribers. In May 2014, Netflix announced that the price of its standard subscription service would increase from $8 to $9. However, established customers were allowed to stay at the $7.99 price for two years. In 2015, Netflix increased the standard price to $9.99. As a result of the pricing plan and the deferred price increase, in May, 2016, the standard pricing plan for long time customers of Netflix increased from $7.99 per month to $9.99 per month. Netflix began notifying customers in April that the price increase would become effective in the second quarter. Netflix was trying to implement price increases more slowly after a 2011 increase led to negative publicity and a customer backlash. In that case, Netflix separated its streaming and DVD services, and charged separately for both services. However, regardless of the implementation of the price increase, the higher monthly prices seem to have impacted the growth of membership among US subscribers. In the two quarters before the price increase, Netflix added net membership of 1.6 million and 2.2 million members. By contrast, the number of members added in Q2 was only 160,000, and in Q3 only 400,000. The Q2 growth in US subscribers was the lowest since Netflix began reporting those numbers in 2012. # US Streaming (millions) Revenue Contribution Profit Contribution Margin Paid Memberships Total Memberships Net Additions Monthly Revenue per Paid Member Percentage Chg. Rev Percentage Chg. Memberships Q2 2015 1026 340 $ 33.1% 41.1 42.3 0.90 8.33 Q3 2015 1064 344 32.3% 42.1 43.2 0.88 $ 8.43 $ 3.7% 2.5% Q4 2015 1106 379 34.3% 43.4 44.7 1.56 8.49 3.9% 3.2% $ Q1 2016 1161 413 35.6% 45.7 47.0 2.23 8.47 5.0% 5.3% $ Q2 2016 1208 414 34.3% 46.0 47.1 0.16 8.75 4.0% 0.6% Source: Netflix 10Q Q3, 2016 $ Q3 2016 1304 475 36.4% 46.5 47.5 0.40 9.40 7.9% 0.9%

According to a Market Watch article on the price increase: Netflix said Monday that customers who learned in April that the price was about to increase had begun canceling their subscriptions, leading to unexpected "churn." Netflix did not flat-out say in its letter to investors that the price increase led to higher churn among subscribers, however, instead saying it coincided with "press coverage" of the rate hike and that subscribers misunderstood "the news as an impending new price increase rather than the completion of two years of grandfathering." The stock market reacted to news of Netflix price increase as well. The stock closed at $102.23 as of March 31, 2016. After the release of second quarter earnings in July, the stock price had fallen to $85.84 per share, a decline of 16%. This decline wiped out almost $7 billion of shareholder value during this period. Most of this decline was immediately following the release of the second quarter numbers. With competition increasing in for streaming services, especially with the growth of Amazon Prime Video and Hulu, the decline in membership growth could be a troubling sign. Questions: 1. From the data in the table, find the demand curve of Netflix subscription services. Plot a fitted line with scattered observation points. (Hint: Use the change of paid memberships as the quantity demanded.) 2. Do you think your model fit your data very well? How can you tell? 3. Is the price significantly related to the number of subscriptions? What are the problems with demand curve you find in part a? How do you solve these problems? 4. Use the information in the case to estimate the price elasticity of demand for Netflix subscription services.