Analysis: Pricing hit unlikely to deter Netflix growth Article by Lisa Richwine (Reuters - www.reuters.com)

(Reuters) - Netflix Inc's star darkened briefly this week after a rare stumble on pricing incensed investors and triggered an unusually dim growth projection.

But longer-term, Wall Street remains enamored of a company expected to ride an expansion beyond U.S. shores and a bigger streaming push that will cushion rising content-acquisition costs.

The company surprised investors by projecting a pause in its normally explosive subscriber growth, sending its shares plummeting as much as 10 percent on Tuesday.

Yet many industry experts and analysts accepted Chief Executive Reed Hastings' view that the slowdown is a mere hiccup before user-growth returns to year-over-year increases.

"There is certainly plenty of room in the market for them to grow," Gartner analyst Michael Gartenberg said.

The new prices "still represent a good value for consumers," who are increasingly turning a wide array of Internet-connected devices to watch television and movies, he said.

Still, a few analysts, including Wedbush's Michael Pachter and Morgan Stanley's Scott Devitt, sounded a note of caution on Tuesday, echoing concerns Netflix had come too far too fast.

Netflix shares were trading nearly 800 percent above levels in early 2009 and the stock has drawn heavy short interest. Reuters Starmine data ranks the stock higher than 86 percent of the stock in its group in how vulnerable it is to a short squeeze.

Devitt expects Netflix shares to "exhibit weakness" relative to its peer group over the next three months."

"Confusion around the impact to the long-term subscriber growth trajectory in the U.S. market will linger on investor minds," Devitt said in a research note, reiterating an "equal-weight" rating on Netflix shares.

Wedbush's Pachter, who has rated Netflix "underperform" for more than a year, thought the company overestimated the number of people who would trade up to costlier plans, which separate costs for DVDs-by-mail and streaming plans. Subscribing to both services will cost more.

Pachter's current 12-month price target is $110, up from his previous $100 target, but far below current levels.

Apart from the price increase, some say the company -- despite touting an international expansion just getting in gear and more revenue for streaming offerings -- will find content increasingly costly as it shores up its library to compete with the likes of Amazon Prime, Hulu and even Wal-Mart's Vudu.

"Their biggest challenge is their content costs are escalating dramatically," Pachter said.

SOME RAISE PRICE TARGETS

Netflix said on Monday it would essentially end the third quarter with the same number, or slightly more, subscribers it had at the end of the second quarter. The company expected cancellations following a vocal backlash over a price increase as high as $6 a month for some customers.

Some analysts see room for its shares to rise further.

Even Barclays analyst Anthony DiClemente, who lowered his Netflix price target to $285 from $315 on Tuesday, kept an "overweight" rating and urged investors to "take advantage of any weakness."

Netflix "continues to execute very well," he said, adding he was optimistic about plans to expand to Latin America later this year and another market early next year.

The company that started sending DVDs by mail in red envelopes has quickly built a streaming service offering movies and television shows. It has grown to 25.6 million subscribers, more than Comcast Corp, the largest U.S. cable company.

Cancellations from the higher prices "will be more than offset" in the fourth quarter by a gain in average revenue per user, Credit Suisse analyst John Blackledge said in a research note. He raised his price target to $310 from $280.

"We view weakness on the results as a buying opportunity," he said.

CEO Hastings said the fourth quarter would show a return to year-over-year growth of new subscribers. The higher pricing will help the company secure more streaming offerings to attract new customers.

"Fewer people are canceling than we expected. Our deals are coming together," Hastings said in an interview.

Netflix shares fell 5.2 percent on Tuesday to close at $266.91 on Nasdaq.

ARTICLE FOUND AT WWW.REUTERS.COM

Optimum Dynamic Pricing Has Application Beyond The Airline Industry

Article by Michael Hurwich, President of SPMG

Background

Have you ever asked the person sitting beside you on an airplane what airfare he or she paid? If you have, it‘s likely you learned that your neighbor‘s ticket price was different from yours. We‘re all familiar with price differences for tickets by type of seat (business vs. economy) and even by flexibility of ticket (refundable vs. non-refundable). Less well known, however, is the fact that ticket prices for similar seats on the same flight can vary every day that tickets for that flight are sold. It‘s all due to a pricing technique called Optimum Dynamic Pricing, and the concept has application well beyond the airlines.

Price follows demand

Optimum Dynamic Pricing was developed by American Airlines in the 1980‘s to address the issue of seat pricing. American Airlines‘ management realized that revenues would be maximized if they could sell every seat on a plane, regardless of the actual price charged for the last seat sold. The problem they faced was that demand for airplane seats varies for every flight, every day. Charging a fixed price per seat cannot provide enough flexibility to ensure that all seats on an airplane will be sold. American solved the problem by developing a computer model that assesses the demand for seats by flight on a daily basis and adjusts price accordingly.

Here‘s how it works. At the outset, each airplane is assigned several fare classes, such as business, economy, and discount. The number of seats in each class is fixed. From the day the flight is first available for reservations, the number of seats sold is compared with a forecast of demand for that flight. If the number of seats sold is below forecast, the program will adjust seat prices downward to encourage more sales. If it is above forecast demand, prices remain unchanged. Although prices could be increased when seats on a given flight are selling more quickly than forecast, the rationale used is that the lower priced seats are always the ones sold first and, therefore, those buying later will automatically be pushed to a higher priced seat. Individual pricing decisions are handled entirely by computer, with algorithms that have been developed solely for this purpose. Data input is provided by the company‘s reservation system.

Profit maximization at American and elsewhere

The impact of this type of pricing on profits was substantial: American Airlines estimated that the benefits over a three-year period exceeded $1.4 billion. Since it was introduced, Optimum Dynamic Pricing has become a standard practice in the airline industry, largely because of its impact on profits and competitiveness.

The principle of Optimum Dynamic Pricing has application beyond airfares. In the hotel industry, for example, room prices vary according to demand, vacancy rates, and type of customer. A last minute customer without a reservation typically pays a higher price for a room than someone with a reservation – especially if the hotel‘s vacancy rate is low.

Likewise, the same methodology has been effectively applied in the self-storage industry to adjust prices based on vacancy rates and forecast demand. In each of these cases, the same principle applies: the incremental value of selling a service that would otherwise not be sold is always positive, regardless of the price charged.

Furthermore, and perhaps most importantly, customers are willing to accept that prices vary according to some ground rules, and those who are price sensitive are able to adjust their buying behavior accordingly. The same approach can also be applied to electronic commerce, where sales levels can be tracked and prices changed on a daily basis. For example, a bookseller might establish sales targets for a particular title and, depending on sales, adjust the price accordingly. If sales fail to reach the expected volume within a certain period the price can be gradually lowered. This approach could well have a better impact on profitability than waiting until the book has been on the market for some time and then trying to dump excess stock at bargain prices. 

You paid how much for that ticket!? By Mike Boehm, Los Angeles Times

Article found in the LA Times http://www.latimes.com

A last-minute good seat for a hot show is going to cost you, as arts groups in L.A. and elsewhere adopt dynamic pricing. However, if demand is low, prices will drop accordingly.

How much does it cost to see a live performance in Los Angeles? Increasingly, the answer is "it depends."

Under Center Theater Group's new dynamic pricing, the best seats were priced at $120 when it was first announced that the Ahmanson Theatre's staging of the dark comedy "God of Carnage" would feature the original Broadway cast. But those who waited wound up paying as much as $200 for the same seat locations as Jeff Daniels, Marcia Gay Harden, James Gandolfini and Hope Davis reprised their roles.

But dynamic pricing works both ways. For "God of Carnage," orchestra seats under an overhang turned out to be relatively unpopular, and early birds who'd scored them for $120 may have found themselves sitting next to latecomers who paid $49 each.

Taking its cue from the airline industry, more arts groups are adopting dynamic pricing, in which the cost of a theater or concert ticket escalates for hot-selling shows, while slack demand brings bargains. The concept, which Ticketmasterwill soon be using at pop concerts too, has arrived in a big way on the L.A. scene with its adoption by Center Theatre Group. Starting this fall, the struggling UCLA Live performance series will look to dynamic pricing to help revive flagging box office proceeds for concerts, dance and celebrity speaking engagements at 1,800-seat Royce Hall. The for-profit Pantages Theatre has used dynamic pricing since "Wicked"hunkered down in 2007 for a nearly two-year run.

Ten years ago, the Broadway musical "The Producers" opened commercial theater producers' eyes to the benefits of charging a large premium for the most coveted seats. It's not clear who first tried the concept in the nonprofit arts world, where the decision to go with dynamic pricing can be far more fraught, given the fact that the nonprofits' mission is not to maximize earnings but to stay solvent while serving their community. Experts say Seattle's Pacific Northwest Ballet and the Chicago Symphony were among the early nonprofit users during the early 2000s.

In Southern California, Center Theater Group already has reaped some eye-popping returns: "God of Carnage" grossed $7.8 million, more than double the previous box office record for a nonmusical play at the Ahmanson. Without dynamic pricing, the take would have been $1.5 million less, said Jim Royce, CTG's longtime marketing director.

In the most sophisticated versions, the price fluctuations are guided by computers programmed to constantly sift sales data compiled from online and telephone purchases. Algorithms are applied to information on how fast each seat is selling, compared to past norms. The result can be a parade of price revisions from the day tickets first go on sale until the last curtain falls.

With "God of Carnage," "we were selling tickets like nobody's business," at the opening price of $120 for the best seats, Royce said. As dynamic pricing kicked in, the cost of a premium, front-and-center seat moved to $130, then $175, and eventually to $200. The increases helped drive the average ticket price to $79.89.

Now playing is another hot show, "Les Miserables," and the best seats for weekend performances again are going for $200.

"But," Royce notes, "as a nonprofit, we also have a mandate to make sure that some prices are affordable."

So, while it raises prices for the most desirable seats, the company still reserves some at $20 for each performance under its Hot Tix program. Also, CTG has refrained from applying dynamic pricing to the 515-seat Ahmanson balcony, keeping prices at $42 and $65.

Jeff Loeb, associate general manager of Hollywood's for-profit Pantages Theatre, says that even though dynamic pricing is in effect, a policy of selling some orchestra seats at $25 for each performance hasn't changed. Loeb said there hasn't been any backlash from patrons. "We focused on communicating that the price you're buying at today is not necessarily the price it was yesterday, or what it will be tomorrow," he said. "Hopefully, we've put the right offer to the right patron at the right time."

Performing arts presenters have watched warily over the last decade or so as their customers have been less willing to buy subscriptions, and have waited longer to purchase tickets to individual shows.

Among other things, dynamic pricing is a way to re-train all but the least price-conscious arts-goers to start buying early again. If customers know that prices for the hottest shows will rise if they wait, they would be motivated to get in at the ground-floor price, or to buy a season's subscription before single tickets go on sale and the roller coaster ride begins.

Royce doesn't say so explicitly, but there's a kind of Robin Hood aspect to dynamic pricing. If a company extracts more of what the market will bear from high-rollers, it can use the revenue gains for other purposes — such as maintaining some lower prices to ensure access for the less well-off, or using the additional earnings to float edgier productions not intended to have mass commercial appeal.

For Center Theatre Group, the Ahmanson, with its typical parade of touring Broadway productions and new musicals aspiring toward Broadway runs, has always been a cash cow that helps support less commercial plays at the 739-seat Mark Taper Forum and the 315-seat Kirk Douglas Theatre.

But not all companies are going for it. South Coast Repertory in Costa Mesa says it has no plans to get on board. The Segerstrom Center for the Arts, which looks to touring Broadway productions to generate extra revenue that can support its classical music and dance series, says that it has tried dynamic pricing on a few of its Broadway shows, that it but won't extend the practice to all musicals or to other genres.

The Los Angeles Philharmonic stuck a toe in the water this season, applying dynamic pricing to "a handful" of concerts, spokeswoman Sophie Jefferies said. Although "it's something we're watching and monitoring," she added that it's not being adopted as a business model.

Los Angeles Opera, however, is "seriously considering implementing it," said marketing vice president Diane Rhodes Bergman.

Philippe Ravanas, who chairs the arts, entertainment and media management department at Chicago's Columbia College, said he's been preaching dynamic pricing to nonprofits since seeing the role it played in helping the Chicago Symphony dig out of a financial hole in the early 2000s. He notes a vast increase in receptivity since late 2008.

"Before the financial crisis, the idea was perceived as rather inappropriate for all sorts of reasons," Ravanas said, "from 'this would never work' to 'it's completely unethical' and 'we don't have the time.' I've seen a radical change in the willingness to experiment, to explore and adopt more sophisticated pricing policies since the economy collapsed."

Rick Lester, a former orchestra administrator who is chief executive of TRG Arts, a Colorado Springs, Colo., consulting company, said clients he steered into dynamic pricing last year saw a 24% average increase in their earnings because of higher prices for some seats and increased sales for others.

"I don't think there's anything inconsistent" about nonprofits wanting to improve their earnings, he said. "As business people who work in the arts, we have an obligation to the long-term health of our organizations, and to pay our artists as much as the community can afford."

mike.boehm@latimes.com

Article found at: 

http://www.latimes.com/entertainment/news/la-et-dynamic-pricing-20110706,0,2760675.story