I got the idea this week to compare Ariba's historic supplier network fee increases to Netflix's increases (for mailed DVDS, not streaming) and what I found might surprise you. But first, let me state a few caveats about our sources of information and the assumptions behind the analysis:
- Sources: We used this Spend Matters analysis as the basis for the calculation on Ariba: Ariba Network Price Hike: Plan for Increased Supplier Fees in September 2010. The source for the Netflix calculation is based on the Netflix SEC filings, Seeking Alpha analysis and Spend Matters estimates based on recent-year trending
- The original introduction of network fees for the ASN in 2004 (previously it was free) is challenging to depict in chart format (or otherwise) since it impacted a minority of suppliers at a fixed rate (theoretically, the price increase was astronomical in percentage terms, going from nothing to $550 per year in 2004); given this, we did not factor in a price increase in 2004 in our calculations, despite the fact for some suppliers, it was massive, because for most, it was nothing
- Ariba network fee increases have not historically hit suppliers at the same time given volume thresholds, mid-year introductions, etc. Given this, I had to take some license with the actual mid-year percentage calculations, but attempted to be conservative in these estimates
- Ariba network fees are based on individual qualifying supplier trading relationships for transactional connectivity. The overall cost to do business for suppliers on the network suppliers that meet trading thresholds with multiple buying organizations is significantly higher
Sources: Spend Matters research, Netflix SEC filings, Seeking Alpha
What's the bottom line? The real cost per DVD for the average Netflix customer has seen a CAGR of only 3% since 2004 (although recent year-over-year increases have been higher). Customers are paying roughly $3.60 per DVD, on average, we estimate, at this point in 2011 per DVD rental with Netflix, provided 2007-2010 CAGR trending holds (at most, the recently announced price increase will tack on another 8-10 cents when it takes effect for existing customers, owning to the fact the applied percentage growth rate per DVD rental based on recent year CAGR factors in a 14% 2011 price increase already). In comparison, the real cost increase for a typical supplier meeting chargeable thresholds on the Ariba network has seen a CAGR of over 20% between 2004 and 2011 per trading relationship. But of course both sets of price increases only tell part of the story.
Speaking as a consumer of Netflix streaming service, I can say we're watching more movies and TV recordings than ever before (which we'll now be paying for separately based on the new streaming fee, not to mention what our cable company will eventually tack on for excess bandwidth usage). DVD turnaround/mail times are also faster which also sometimes causes us to watch more, lowering the cost per rental; in downtown Chicago, we sometimes mail DVDs in the morning and receive a new one the next day (although usually, the return/delivery cycle time is 48 hours). By comparison, from a price perspective, certainly Ariba's largest transacting suppliers have seen actual price increases based on multiple trading relationships of 400% or more in certain years. But contrast this with the many small suppliers that continue to transact for free or next to nothing on the network. And those suppliers, often realize tremendous value from the Ariba network, especially if they know how to work it effectively for new business, given the new promotional and lead generation activities which Ariba has opened up, including but not limited to Discovery (some of which are now also charged for separately).
Regardless, this analysis -- as down, dirty and conservative as it is -- shows that it's critical to look past the basics of simple price increase announcements and to dig into the true costs for consumers and businesses of using cloud-based solutions providers. Indeed, we're all paying for doing business in the cloud, but some of us, especially in the supplier community, are paying far more each year than others. Business-to-business suppliers, however, don't have the same voice as Netflix's 23.6 million subscribers, which explains the lesser media coverage for one announced price increase versus another.