Netflix will report fourth quarter earnings on Thursday and all eyes will be on the streamer’s subscriber growth. This time there is something new for investors and industry watchers: Netflix has raised its prices.
The company raised subscription costs on Friday, a move that caused its share price to rise and eyebrows to rise across the streaming world, as well as the question “why?”
“They clearly believe they still have the pricing power to do it and offer exceptional value for the money,” Andrew Hare, senior vice president of research at media consultancy Magid, told Citizen Free Press Business.
Hare believes that Netflix (NFLX) sees the US and Canadian markets maturing and is trying to offset their growth with ARPU, or average revenue per user.
“There is pressure to drive overall growth, generate positive cash flow, all while keeping up with rising product costs and competition,” he said. “Raising prices is just one of the levers they can continue to pull at the moment, though I’m not sure for how long.”
The streaming media company said Friday that it will increase the monthly price of a US subscription to its standard plan by $1.50 to $15.49 and its basic plan by $1 to $9.99. The premium plan increased $2 per month to $19.99.
In Canada, Netflix’s standard plan was also up C$1.50 to $16.49 and the premium plan was up C$2 to $20.99. His basic plan remained unchanged.
Wall Street was happy about the news, causing Netflix shares to jump about 2% on Friday.
A dollar here and a dollar there may not sound like much, but it matters to both Netflix and consumers.
Mark Zgutowicz, a senior analyst at Rosenblatt Securities, said Netflix spends a ton of money on content around the world, which hasn’t been supported by two of its biggest markets, the US and Canada, where subscriber growth has slowed. “Decreased after several quarters.”
“We estimate that Netflix will spend $17 billion this year globally and that’s $12 billion less in 2020, which turned out to be a low year due to Covid,” he said.
As for consumers, price increases, even $1.50, may be too much considering the influx of services in recent years, from Disney+ to Peacock to HBO Max (which is owned by Citizen Free Press parent company WarnerMedia).
Streaming is eating into consumer wallets, so a price increase for any service, let alone the king of streaming, is notable.
As is the case with Netflix, so is the rest of the industry, so this price increase potentially offers a hint to the company’s streaming rivals that they may also raise their own prices at some point.
“I think it does for Disney+, I’m not sure for others like Peacock or Paramount+ because they don’t have the breadth of content like Netflix and Disney (DIS),” he said. “It gives HBO Max some room to raise prices as well.”
If Netflix continues to generate a regular number of users, Hare believes the company will have to focus on other ways to make its investors happy.
“Subscriber growth in the US and Canada has been a difficult story to tell,” Hare said. “That’s why they need to talk about the global growth story, positive cash flow, new content, new growth opportunities like games, and potentially new business models and markets.”
Of course, Netflix is still Netflix and it’s still hugely popular with its 213.5 million users worldwide.
“In the short term, Netflix remains the number one streaming service both at home and abroad,” Hare said.
What’s after that? It is to be determined. Netflix has challenges ahead in terms of subscriber growth, production costs and evolving consumer habits, Hare said.
“They have reinvented the entertainment industry in the last decade.” he added. “Now begins a whole new era of challenges and opportunities.”
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