What if they cap out? The danger of using a pay-per-subscribtion model for digitalized information goods

It’s most likely that all of you will probably know Netflix by now. Netflix offers its subscribers a streaming service which can be described as an entertainment platform. Subscribers get unlimited access to TV shows and movies for a flat fee monthly subscription. Netflix achieved to capture a lot of customers in the video entertainment market. The key to their growth is rooted in the digital nature of their service and products, eliminating any sort of physical transportation, thus granting Netflix the ability to reach customers all over the world.

Netflix’s vision is to make streaming service is available on ‘every screen with an internet connection’. They first introduced their service for personal computers in the year 2007. From 2009 and onwards, Netflix partnered with several electronic manufactures to enable streaming on several devices like the smart TV, Xbox, PS3 and many other internet connected devices. By extending their portfolio of compatible devices Netflix made their service more accessible to customers. This was Netflix’s first step to reach the masses of the market. The second step of Netflix to capture more customers was to expand geographically. In the years 2010, 2011, 2012, and 2013 Netflix spread its service to Latin America and the Caribbean, the United Kingdom, Ireland and the Nordics and lastly to the Netherlands.

These developments have led Netflix to over 50 million subscribers, using 1000 and more kind of devices, in over 40 countries. Over the last 7 years the company has made an enormous expansion and will probably even grow further. Currently, revenues are growing due to the increasing amount of subscribers, but it seems like the rate of increasing subscriptions is already dropping. This years realized amount of subscriptions did not make the prospected ones, nor the ones of last year’s. It may be premature, what will happen if Netflix expansion opportunities caps out and the market will get saturated with their services?

Netflix’s business is based on a pay-per-subscription model. When growth by expansion is reaching its max, so will the accompanied revenues. Netflix currently offers 2 kinds of subscriptions, one better and more costly than the other. Trying to shift the subscriptions to their superior service is one way to achieve further revenue growth, but would still be very limited. Raising the monthly fee has also proven to be a no-go, as last quarter’s results show that the realized amount of subscriptions were far beneath the prospected ones, most likely in result of raising the subscription tariffs by 1 euro/dollar.

What do you think about this and what should Netflix possibly do in order to prevent this?







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