Can Netflix Maintain Big Growth Even With Big Price Hikes?

Hastings Barker Illo - THR - H 2019
Illustration by: Laemeur

Analysts bemoaned the streamer "leaving money on the table" while spending billions on pricey content, but new surveys find that there's a limit to how much consumers will pay.

On Jan. 15, Netflix unveiled a 13 percent to 18 percent price hike across its various plans to $9, $13 and $16 — the largest increase in its two-decade history. The move raises the question: How much are subscribers willing to pay each month before they jump ship to cheaper options?

As Disney and WarnerMedia launch their streaming competitors in 2019 and NBCUniversal preps its own for 2020, even a slight change in price could cause consumers to reconsider where they're spending entertainment dollars.

Netflix competitors already are making moves. Hulu, which surpassed 25 million U.S. subscribers this year, announced its own new prices Jan. 23. The service reduced its cheapest, ad-supported option to $6 but kept its ad-free offering at $12, a dollar cheaper than Netflix's comparable plan. It also raised the price of its 60-channel live TV bundle by $5 to $45 a month.

So far, Wall Street has been encouraged by Netflix's price hike. The company said it added 8.8 million new subscribers in the final quarter of 2018 and closed the year with 139.3 million customers worldwide, 58.5 million of them in the U.S. It forecast adding another 8.9 million in the first quarter of 2019. Analyst Matthew Harrigan of The Buckingham Research Group figures Netflix can raise its price 4.4 percent annually through 2025 and still attract 273 million users by then and 389 million by 2033.

Other observers say the price increase was a long time coming, as the service was "leaving money on the table," as analyst Todd Juenger of Bernstein puts it. Juenger notes that Netflix's bullish guidance even after it raised fees has caused him to ratchet up his expectations, so that now he predicts the streamer to hit his "milestone" number of 300 million worldwide subs about 15 months earlier — in the first quarter of 2024 instead of the fourth quarter of 2025.

Moody's added that, after the price hike, it expects Netflix to reach 200 million worldwide subscribers by 2021 and that it should break even on a cash-flow basis by 2023, even considering hefty expenditures for original and licensed content (an estimated $13 billion in 2018 alone).

But the effects of the price hike have yet to be felt. A TDG Research poll of Netflix users suggests that the streamer is running low on pricing power after its latest fee increase, which saw the cost of its highest tier rise $2 to $16 a month while its middle tier rose $2 to $13 and its cheapest plan went up a buck to $9.

The higher fees, which are effective immediately for new subscribers, mean more consumers may explore other options before committing to Netflix. If they're just as happy with, say, The Man in the High Castle and The Grand Tour at Amazon Prime as they are with Chilling Adventures of Sabrina and Stranger Things at Netflix, they could save some cash because the former's annual plan (which breaks down to around $10 per month) includes free shipping for items purchased at and other perks. CBS All Access, with Star Trek: Discovery and the debut of Jordan Peele's Twilight Zone reboot in 2019, costs just $6 a month with commercials or $10 without them. HBO Now is at $15, while Sling TV offers on-demand programming and a skinny bundle of live channels, including some NFL games, for $25 monthly.

TDG's poll, conducted a month before Netflix raised its prices, indicates that a $1 increase would cause 8 percent of subscribers to cancel, while 16 percent said they'd cancel if the price went up $3 and 22 percent would if it climbed $5. Meanwhile, Hub Entertainment Research predicts that Netflix can expect about a 9 percent churn rate over the next three months as the Jan. 15 price increase is phased in for current U.S. customers. Hence Netflix is focused more than ever on growing internationally rather than domestically.

"Netflix is undoubtedly reaching a level of price resistance across all tiers," says TDG president Michael Greeson. But even while Netflix grows in the U.S., growth in over-the-top usage in general is slowing significantly, which makes it tough for Disney, WarnerMedia and NBCU as latecomers to the Netflix party. In 2019, OTT viewership will grow just 2.5 percent to 205 million people, says eMarketer, and each viewer will watch about an hour and 32 minutes per day, up just 7 percent.

Analyst Michael Pachter of Wedbush Securities, a longtime bear on Netflix, opines: "One would think that they grow more slowly at higher prices, but their guidance says growth will accelerate sequentially in the U.S. Maybe they know something I don't."

This story also appears in the Jan. 24 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.