Netflix has increases prices. What should Redbox, the kiosk DVD rental firm do? Thye could cut or maintain prices and gain share. Or they could raise prices, lose some sales and gain margin. Redbox has decided to raise prices:
The new rental rate will be $1.20 per day, instead of the current $1 daily rate. Redbox prices will remained unchanged for Blu-ray discs at $1.50 per day and video games at $2 per day.
Why don’t companies do this more often? One explanation:
[I]t spooked investors, especially because Redbox appears to be picking up customers still stewing over the higher prices at Netflix. Coinstar’s shares plunged 10 percent in Thursday’s extended trading.
To outsiders, sales are more observable than profits/unit, because variable costs are kept private by firms but sales figures are publicized. The market can see lower sales but has a harder time calculating the profit implications – lower sales could mean higher profits. Or stock market analysts are crazy short termists.
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October 31, 2011 at 10:26 am
Diego F.
I’ve been thinking about this issue a lot and it blows my mind. While I guess it is true that sales are easier to see than profits, how much harder is it to see it in this case? Netflix raised prices by 60% and sales dropped by 4%. Isn’t it obvious for an investor, someone who is supposed to be educated in this matters, to at least see that earnings should rise?
Two things that I’m thinking about are the lack of a counterfactual and loss aversion.
After announcing the price hike, Netflix released a sales forecast which predicted that sales would remain pretty much constant. They ended up falling a bit and they had been growing in the past. So perhaps investors think that sales could have been much higher and there is no counterfactual to prove them wrong (but even if this was true, the quid of the question should be profits and not sales).
Also, I guess if the stock price assumed that forecast was right and actual sales end up being lower, it makes sense for the stock to go down but it took a serious dive.
In second place, can loss aversion be a factor? Is it possible that investors smoehow value sales lost more than extra income from the price hike? Does this make any sense?
Also, is it possible that the price of the Netflix stock, and its future income flow, is now seen as less certain? Can this make the market trust Netflix less?
Finally, I’m not sure how being a “crazy short termist” explains this because actually Neftlix’s earnings are growing in the short term.
Here are some figures: http://www.engadget.com/2011/10/24/netflix-us-subscriber-count-drops-by-800k-in-q3-21-45-million-s/