Reed Owes Steve $26.31: Retail Missteps 3

At least that ‘s one way to figure it. I’ll get to the math shortly but let’s set the stage. Last week (July 12 to be exact) Netflix introduced new pricing. Predictably, the corporate spin (look for the July 12 entry) was that this was both the lowest pricing ever and the best possible thing for customers.

The customers, evidently, disagreed.

A Google search for ‘Netflix  pricing dissatisfaction’ turns up 893,000 results. And while the business blogosphere (and Wall Street) think the new pricing is a great thing, it resulted in an awful lot of grumbling. (The first page of the aforementioned Google search yields 5 negative links out of 10. Let’s agree that 50% constitutes an awful lot.) The Atlantic’s Daniel Indiviglio offered perhaps the best dissection of the change.

Let’s take a look through the prism of the marketer’s dream/nightmare: A focus group of one. I’ve been on an economizing kick since gas prices started rising earlier this year. My big expenses–mortgage interest, property tax–aren’t reducible. So I went looking for recurring expenses, especially ones that had risen.

That brought me to Netflix because my plan cost had risen at the beginning of the year. True, the increase was minimal–a dollar or so a month–but with a toddler demanding our attention and another child on the way it was a no-brainer to cut the cost by a third and go to the one-item-at-a time plan. We made the move–$64.20 a year back in our pockets. Sorry, Reed, but at least I’m still a $130 a year or so customer.

That cut in service, however, did set me to thinking more seriously about streaming. I understood that the selection was limited but I figured the convenience might outweigh that. So it was nice to have the option. I just needed a device to capture the stream. Despite the presence of children I’ve no plans to get a game system anytime soon so I set my sights on the 2nd generation Apple TV. At $99 it was worth considering and even conceivably achievable since such discretionary purchases must now be purchased with cash in hand (another economizing move).

Then came July 12. Suddenly the need to accept a stream became a lot less imperative. Netflix will drop my monthly charge to $7.98 . That means I save about $32.50 a year. Netflix loses that revenue and the cost of my streaming which was nil. They retain the costs of fulfilling and mailing DVDs so I am probably less profitable than before because over 9 months I’ve clawed back and been given over $100 in what Netflix would otherwise show as revenue. Sure Netflix might raise my plan cost. But Redbox charges a buck and the library is free so I still have options.

For now though, Apple has one fewer purchase from this Apple household. If you’ve been waiting here’s the math:

Retail price of Apple TV:                $99.00
Apple Store Gross margin (%) :        26.9%
Apple Gross Margin ($):                $26.31

Now, I don’t have to buy from the Apple store and rarely do. (You may want to search for my earlier Retail Missteps post about Apple.) So maybe $26 is overstated. Let’s presume Apple wants to make a 30% mark-up on the unit:

Apple TV Cost of parts:                   $64.00
30% Mark-up:                                   $19.20
Wholesale cost:                                $83.20

Sure, that leaves the non-Apple retailer with a GM of just 15.8%, but back in the 80s when I worked at Circuit City we accepted 18% on SONY TVs to be able to offer the brand.

Add the lost manufacturing margin and Steve Job’s loss on me is $45.51. I think he should ask Reed Hastings for it. Problem is, Reed just gave me $36 more back so he’s down a c-note on this household.

And we’re probably not alone.

ADDENDUM, JULY 20: There’s a reason they keep me out of the Accounting department. The maximum margin Apple can lose is the $35 difference between the retail price in the Apple store ($99)  and COGS ($64). That’s a whopping 35.3% GM. Play around with the percentages and you come up with store GMs of anywhere from 24.5% to 28.2%.  In any case, it’s the annual value of the recent Netflix price drop for me so my larger point remains the same. And I apologize for the error.


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