Netflix's Largest-Ever Price Hike: Why Now?

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Netflix CEO Reed Hastings

Neither WarnerMedia nor Disney+ have announced fees, but Netflix raising its price makes it easier for the two newcomers to undercut their largest competitor.

Consumers took a hit in their wallets, but Netflix investors were celebrating the streamer’s largest price hike in its two-decade history on Tuesday by bidding shares 7 percent higher to $354.64, making it a $154.7 billion company. Meanwhile, Wall Street analysts were pondering the timing of the announcement.

On one hand, the hype surrounding Roma and especially Bird Box makes it the perfect time for a price increase as subscribers are reminded that there is compelling and (nearly) exclusive content on the platform that is worth paying for. After all, even after the increase of 13 percent to 18 percent across the various tiers, a month of Netflix still doesn’t cost much more than the price of a ticket to see Roma or Bird Box in a theater (both had limited runs in part to ensure they qualify for an Oscar).

While the simple approach of comparing production and marketing costs to box office results doesn’t apply, analyst Michael Pachter of Wedbush figures that Bird Box is probably Netflix’s first profitable movie. Netflix disclosed (an unusual occurrence) that 45 million subscribers worldwide watched the film, which Pachter says amounts to 5 percent of viewer attention and equates to 50 cents per user due the film’s ability to attract new subs and retain current ones. That equals roughly $23 million, which is about what Netflix shelled out to make and market the movie. Hence by now, or in the near future, it will turn a profit.

But the fact that Netflix is boasting about viewership numbers rather than hiding them like it usually does suggests to Pachter that Bird Box is an outlier in popularity and that “the remainder of Netflix’s film efforts have largely fallen flat.”

The success of Roma, Bird Box and myriad TV shows also means Netflix believes it needs to keep the original content flowing, thus it needs more money from each subscriber. Tuna Amobi, an analyst with CFRA, says Netflix likely spent more than $13 billion in 2018 alone creating and licensing content.

On the other hand, the timing is tricky because it comes as both Disney and WarnerMedia are getting set to launch products that will compete with Netflix, and both have extensive libraries to populate them with so they won’t need to spend anything near $13 billion annually on content. Neither WarnerMedia nor Disney+ have announced prices, but Netflix raising its price makes it easier for the two newcomers to undercut their largest competitor.

“Some investors have questioned why Netflix would do this, ahead of the Disney+ launch later this year (and the pending loss of some Disney content from the U.S. Netflix service),” Todd Juenger of Bernstein wrote Tuesday in his research note.

He answers the question by writing he doesn’t “believe Netflix spends a lot of time thinking about competition when making their pricing decisions” and, besides, “it’s easier for Netflix to increase prices now than it would be during or after the Disney+ launch.”

The timing is also interesting because it comes two days before Netflix announces its quarterly financial results. Could it be that Netflix wanted to make up for disappointing impending news by announcing positive news (for investors, not customers) now?

Some will conclude that “sub trends must have stalled, so Netflix is entering harvest mode,” says Juenger. But he says his conclusion is that “sub trends must be strong in the U.S. for Netflix to have the confidence to put in this price increase.”

Based on its own guidance, Netflix on Thursday will report that it has 58.5 million paying customers in the U.S. and 79.6 million elsewhere, notes Pachter. While it may exceed its domestic guidance this quarter (in large measure due to Bird Box), the price hike especially impacts lower-income households that may jump ship to Amazon Prime at just $10 a month, a deal that includes free shipping on goods purchased at the e-commerce giant.

After the Netflix price hike, which goes into effect now for new subs and gradually over three months for current subs, users are paying either $8.99 monthly, $12.99 or $15.99.

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.

And Michael Simon of Moody’s calls the price increase “credit positive” and predicts it will lead to the company becoming cash-flow positive by 2023. “We still believe Netflix will reach 200 million total paying subscribers in 2021,” says Simon.