Why Netflix’s Margins Could Narrow

Netflix (NFLX) recently announced that it was hiking its subscription rates across all its plans in the United States. Whether this will affect its domestic subscriber growth materially will become clear in the coming quarters.

Netflix’s domestic market is seeing a marked slowdown. Its number of US paid subscribers increased only 6.2% YoY (year-over-year) in the fourth quarter, down from the 10.9% growth it saw in the third quarter. This drop caused its overall revenue growth to slow in the fourth quarter. The company’s domestic market seems to be reaching its saturation point.

If the hike turns out to be inelastic, the company’s revenue growth should see a nice boost in the coming quarters. However, Netflix faces stiff competition in the United States, particularly from Amazon (AMZN) and Hulu.

Media giants including Comcast’s (CMCSA) NBCUniversal, AT&T’s (T) Time Warner, and the Walt Disney Company (DIS) have all announced that they will be launching their own streaming services soon.

Disney will be stripping its content from Netflix upon the launch of its streaming service. While other companies may not do so, they could increase their acquisition costs for Netflix. Also, the rising demand for actors, directors, and other artists will likely put some pressure on Netflix’s bottom line.

All these factors have contributed to NFLX’s fall of 9% since the company announced its earnings results on January 17. However, the stock is still up 37.7% from its recent trough.