Question

I. Explore the supply and demand conditions for NETFLIX a) Evaluate trends in demand over time and explain their impact on the industry and the firm. You should consider including annual sales figures for the product Netflix sells. b) Analyze information and data related to the demand and supply for Netflix product(s) to support your recommendation for Netflix's actions. Remember to include a graphical representation of the data and information used in your analysis. III. Examine the price elasticity of demand for the product(s) Netflix sells. a) Analyze the available data and information, such as pricing and the availability of substitutes, and justify how you determine the price elasticity of demand for Netflix. b) Explain the factors that affect consumer responsiveness to price changes for this product, using the concept of price elasticity of demand as your guide. c) Assess how the price elasticity of demand impacts "Netflix's pricing decisions and revenue growth.

Answer 1

Netflix is an American world's largest online movie rental service company.

• 60% of the movies selected based on personalised recommendations.

• Netflix pays $18 per an hour for an entry level positions like call centr along with free subscription Netflix account.

• Netflix employees can take off as many days they want “It's about freedom and treating people like Adults”.

• The most watched show on Netflix is Breaking Bad.

• Netflix serves in 200 countries worldwide.

• Using your roommate or friends Netflix account for watching movies is actually a federal crime.

• Netflix has close to more than 110 million subscribers.

• Netflix offered $40 million for Blockbuster company. But Blockbuster rejected offer and CEO laughed at Netflix CEO’S face.

• Today Netflix valuation $65 billion dollars.

Netflix is a service that participates in a perfectly competitive market. The graph below shows how price and quantity is set based on the dynamics of both the demand and supply. Because Netflix is a part of a perfectly competitive market they are price takers, not price makers. Competition with Hulu, HBO Go, Amazon Prime, and Vudu prevents Netflix from maintaining a monopolistic hold of the streaming market and therefore prevents it from setting its own price. Price increases for potentially elastic and non-essential products and services are risky. However, to increase their business a price rise may be necessary.

I contend that Netflix customers are highly price inelastic in their demand for the company's streaming service. Therefore, Netflix could increase its pricing without losing a significant number of customers. I run through five hypothetical scenarios to determine the impact pricing increases could theoretically have on the company's EPS.

             Let me state upfront that I intend this article to be a theoretical one only. I'm not advocating that anyone make any investment decisions based upon the numbers that follow. However, I think that it brings up an important point that many Netflix (NASDAQ:NFLX) bears (and probably some bulls as well) ignore: the demand elasticity (or lack thereof) of its customers.

             For purposes of full disclosure, I must admit upfront that as a customer of Netflix, I absolutely love the service. I pay $7.99 per month and believe that this is money well spent. But I have always felt extremely negatively about the stock, mostly because I am convinced it has always been overvalued. It currently trades at 179x trailing earnings and 72x forward earnings. My mind cannot justify that valuation of any company, but maybe that makes me a boring investor (and in the case of Netflix over the past couple years, it makes me an incorrect investor). That being said, my views on Netflix's valuation are not important in the context of this article.

               The basic premise of my argument is as follows. Netflix's customers are, for the most part, exceedingly pleased with what they receive. Some enjoy the original content while others love being able to watch their favorite television shows and movies from the past over and over and over again. In micro-economics, one of the first principles they teach you is demand elasticity. If something is price elastic, a small change in price leads to a significant increase or decrease in demand. On the other hand, if an item or service is price inelastic, even a significant change in price only results in a minor change in demand. I would argue that Netflix's customers are very price inelastic when it comes to the online streaming service.