Could Recent Price Hike Be Blessing in Disguise for Netflix?
Stock surged on price hike news
Netflix (NFLX), the video streaming leader, has decided to hike the price of its US subscription plan. The market seemed to welcome the decision as the stock rose more than 5% the day after the announcement on October 16, 2017.
The price increase won’t apply to entry-level customers who will continue to pay $7.99 per month. However, the mid-tier segment with the highest user base will pay $10.99 per month compared to the previous $9.99. Likewise, the company’s premium users with 4K (4,000 pixel) streaming facilities will pay $13.99 per month compared to the previous $11.99. The price increases will start next month. New subscribers will be charged the new rates.
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Impact of the price hike
In 2016, Netflix increased its rate from $7.99 to $9.99, which could be why the company missed subscriber growth that year. However, things could work out differently this time around. The company’s subscriber growth outside the United States remains strong. A loss in US subscribers could be offset by subscriber additions outside the United States. From the chart above, you can see that international subscriber growth has outpaced domestic subscriber growth.
It’s also important to note that since the price is still low compared to what other pay-TV operators charge, it could mitigate subscriber loss due to pricing. DirecTV’s (T) rates start at $35 per month, which is expensive in comparison. Other video streaming operators, including Hulu and Amazon Prime (AMZN), don’t have as much original content as Netflix, which could give Netflix an extra edge over those rivals, at least for the time being.
The US online video streaming market is dominated by just a few players—Netflix, YouTube (GOOG), Amazon, and Hulu. Netflix’s decision to hike its rates could be a model for other operators.
Price hike to offset content costs
In order to keep expanding its content, Netflix may need to make huge investments. This year, it intends to invest $7 billion on content compared to $5 billion last year. In 2018, it plans to invest $7 billion–$8 billion on content.
These huge investments not only dented the company’s cash flows but also increased the company’s debt level. Higher rates could end up as a blessing in disguise since it could boost Netflix’s revenue as well as support content expansion.