In July 2011, Netflix decided to separate its DYD-by-mail service from its strea

Question

In July 2011, Netflix decided to separate its DYD-by-mail service from its streaming video service. In addition to the hassle of receiving two bills instead of one, Netflix subscribers now had to pay about $16 for both services, when they previously only paid about $10. Many Netflix customers were outraged by this decision, and the company reportedly lost about 1 million of its 25 million subscribers due to this decision. In response to the uproar from customers and investors, Netflix co-founder and CEO, Reed Hastings, posted a letter of explanation on the company website. He did not apologize for the decision to split the services and raise prices, which he maintained was the right strategic decision given the importance of streaming video to Netflix's future. However, he acknowledged that he should have done a better job of communicating the rationale for the change to customers in advance of making the change. Consider the following additional information and estimates: Prior to the split, Netflix had about 25 million subscribers who were paying an average subscription fee of $10 per month. After the split, Netflix estimated the following: 21 million subscribers would continue with the streaming video service. 12 million of those subscribers would also continue with the DVD-by-mail service. 3 million users would subscribe to DVD-by-mail only. The new subscription fee for each sen-ice is $8 per month. Assume that variable costs of the DVD-by-mail sen-ice (for shipping, handling, and DVD replacement) are $0.40 per movie exchange and that the average user exchanges 5 movies per month. The variable costs of the streaming video sen-ice are negligible. Determine how much Netflix's monthly profit would increase or decrease with the new pricing and subscription structure. If you were a Netflix shareholder, how would you react to this change Optional: This is an opportunity for you to research what actually happened to Netflix's stock price in the days and months after the price change. Do you think Netflix made the change to boost short-term or long-term profit In your opinion, was Netflix's decision to separate the streaming video from DVD-by-mail a good one

Explanation / Answer

1)New pricing:
Revenue:
straming video=21mn*8=$168 mn
DVD by mail =12mn*8=$96mn
DVD by mail> total=168+96+24=$288 mn

Variable cost: srtreaming video=0
DVD by mail=(12+3)*0.4*5=$30mn

Contribution margin=288-30=$258mn

Previous structure:
Revenue=25mn*10=$250mn
variable cost=25*0.4*5=$50mn
contribution margin=250-50=$200mn

2) I will be happy with the change as the net profit of the comapny is increasing by which the share value will increase and it benefir investors

3)They did this for long term growth as having two business seperately will increase the real value of the firm

4)Yes , this a good move

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