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Netflix recovering from Qwikster débâcle, but facing challenges

September 18, 2012

According to market research company The NPD Group, on the anniversary of the failed introduction of Qwikster, Netflix has garnered more US subscribers than ever. One in four US households now subscribe to Netflix, based on data from NPD’s Subscription VOD report.

“Today marks the first anniversary of Netflix introducing Qwikster, its by-mail DVD and Blu-ray service, which was meant to formally separate Netflix’s streaming Watch Instantly service from its original physical disc rental service,” said Russ Crupnick, senior vice president of industry analysis for The NPD Group. “Qwikster came in the wake of several price increases and changes to the service offering that were met with general scepticism from subscribers.”

According to information from NPD’s ‘VideoWatch’ tracking service, the introduction of Qwikster most seriously affected the Netflix ByMail service, which took a tremendous hit on several key tracking metrics. Not too long ago Netflix was the leading source for rentals of physical discs, and had a 35 per cent share of the market prior to the Qwikster announcement. Its current market share is 27 per cent, and Netflix has ceded the lead in the physical disc-rental market to Redbox.

Fuelling the share decline was a 30 per cent decline in the number of disc renters in the US, and a 40 per cent decline in the number of discs rented. Netflix once enjoyed the highest customer satisfaction ratings in the home-video business. Prior to Netflix’s announcements about price increases last year, 82 per cent of the company’s ByMail customers rated Netflix as an “excellent” or “very good” value; however, that rating fell to 63 per cent immediately following the Qwikster announcement, not including customers who simply cancelled their Netflix service altogether.

On a positive note, customer satisfaction on the disc side is rebounding, according to NPD’s data, reaching 74 per cent in the latest quarter; which may indicate the worst of the decline is over and that further defections will be due to shifting usage patterns rather than angry customers.

In fact, Crupnick expects the transition from disc to digital to continue rapidly, as the majority of Netflix customers (58 per cent) are only using Watch Instantly, compared with 12 percent who are only watching discs, and 30 percent who are using both services.

According to NPD’s VideoWatch Digital service, excluding free VOD movies that come with a pay-TV subscription, 8 out of ten paid rentals or purchases of movies in the US source from Netflix Watch Instantly streaming — a level that has been steady throughout 2012.

“Movies may be another casualty of the Qwikster era, because Watch Instantly is increasingly an experience centred on television content,” according to Crupnick. NPD estimates that 80 per cent of streams that occurred between January and August 2012 were television shows. NPD’s new Subscription VOD Report revealed that 36 per cent of current Netflix subscribers view only movies, while 53 per cent view both TV and movie content. Over time, NPD expects the number of “movie-only” subscribers to decline, as Netflix uses its original TV programming to attract and retain new subscribers. “As Netflix shifts to being more TV-centric, they will attract subscribers with a different set of expectations,” Crupnick said.

In fact, NPD is already seeing consumer expectations change. Although seven out of 10 Watch Instantly users rated the service an “excellent” or “very good” value, early streaming customers were more likely to rate the value of Netflix highly. Compared to early streaming customers, today’s customer rates Netflix streaming much lower on “having videos I like”, “current releases”, and “easy to find something new to watch.”

“Netflix has critical advantages in the realm of digital video rentals, including the massive subscriber base, solid value perceptions among customers, and users who appreciate the brand’s linkage to multiple devices and platforms,” Crupnick said. “On the other hand these advantages can only be exercised if the content continues to excite current subscribers and incite new ones. A minority are satisfied with the current collection, and the declining ease of finding things subscribers want to watch, are areas Netflix must address in order to continue domestic streaming growth, especially in the face of improving pay-TV VoD offerings, looming Redbox/Verizon service and competitive over-the-top options from Amazon and others.”



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