Customer price sensitivity

Netflix’s success in attracting customers has been due in part to subscriber losses from the cable TV industry. While cable’s channel bundle video subscription product still offers the largest selection of entertainment, the poor user experience and increasing price point has caused some customers to re-evaluate.

Why cable TV price increases drive consumers to Netflix

The previous part of this series showed the steady decline in cable-TV bundle video subscribers. So, in assessing Netflix’s success in gaining subscribers, it’s helpful to examine the underlying trend that’s pushing consumers away from traditional pay-TV. The chart above portrays the rapid price increase for a cable video subscription and helps to illuminate recent consumer behavior.

Comcast is a substantive example of the underlying trend, with its 22 million homes serviced, representing approximately 25% of the cable industry. Cablevision has had to face its own difficult competitive dynamic due to a geographical overlap with the aggressive Verizon FiOS, while Charter has only recently begun to convert to digital and HD television, allowing for immediate rate hikes as service improves. But Comcast, the largest cable TV provider, captures the industry-wide trend closely. The company’s rate hikes of 4% to 6% per year greatly outweigh inflation and wage growth in the U.S. of roughly 2% per year.

As long as wage growth fails to keep pace with cable TV price growth, cable rate hikes will continue to pressure consumers’ disposable incomes, forcing them to decide where to make cuts. With the Netflix price of $7.99 per month and a sufficient amount of quality content to access, the company will continue to gain as the cable pricing trend endures.

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