Is Netflix Hiking Its Prices?

Editor's Note: A previous version of this article understated the number of streaming subscribers. The Fool regrets the error.

Something's afoot at Netflix (Nasdaq: NFLX  ) .

Over the weekend, tech blog Engadget uncovered a disparity in pricing plans being offered to potential customers.

Using different browsers, computers, and locations, Engadget's Sean Hollister unearthed Netflix pitches for disc-less streaming plans at $7.99 and $8.99 monthly price points.

Yes, Netflix testing out an unlimited streaming plan without DVDs is news in of itself. It's not necessarily a surprise since it launched a similar plan in Canada last month, but it's noteworthy.

However, the real interesting point for shareholders -- since "streaming only" plans are likely to be a hard sell -- is that both of the trial balloon plans point out that DVDs can be added, starting at $9.99 a month.

Wait a minute! Isn't Netflix currently offering a monthly $8.99 plan that includes both unlimited streaming and disc rentals -- with one DVD out at a time? Yes. It seems as if Netflix isn't just gauging the market's interest in a disc-less plan. We may very well be seeing Netflix in the early stages of trying to push a rate hike across.

Bucking the trend
"It's about time," investors can argue.

Over the past few quarters, subscriber growth has outpaced top-line gains. Netflix is generating less revenue per account, and the obvious explanation is that folks have been gravitating from its flagship $16.99 plan that comes with three physical rentals at any given time to the $8.99 plan that also offers unlimited streaming but with only one DVD out at a time.

Netflix has kept its plan prices largely intact after slashing them several years ago. It seemed necessary at the time. Blockbuster and Wal-Mart (NYSE: WMT  ) were gunning for Netflix's model, and there were rumored rumblings of Amazon.com (Nasdaq: AMZN  ) entering the market.

Wal-Mart bowed out at the first whiff of a price war. Amazon turned its attention to Europe. Blockbuster was pesky for a while, but fiscal responsibility found it moving away from aggressive pricing -- and fiscal irresponsibility found it filing for bankruptcy reorganization this summer.

In short, Netflix is the runaway leader in this surprisingly barren niche. It owns this space with 16.9 million subscribers. Its guidance calls for it to close out the year with as many as 19.7 million couch potatoes aboard.

If it ever wanted to raise prices, now would seem to be the right time. It is not contractually obligated to shackle itself to any particular price point, the way that Sirius XM Radio (Nasdaq: SIRI  ) is two years into a three-year rate freeze mandated by the FCC.

Two-thirds of Netflix's subscribers are now taking advantage of the unlimited streaming that it offers members at no additional cost. Churn is at a historical low. The recession appears to be fading in the rearview mirror. If it could ever pull off a margin-widening pricing increase, now would seem to be the perfect time.

Or is it?

Streaming barbarians at the gate
After letting Netflix run away with the unlimited streaming model for three years, the likely competitors are finally getting antsy.

Coinstar's (Nasdaq: CSTR  ) Redbox promises to reveal its digital strategy this month -- which likely means an announcement come Thursday night along with its latest quarterly report.

Amazon.com dodged questions during last week's conference call, but played with analysts along the way. "There is room for a lot of innovation," CFO Tom Szkutak said, without speculating in public as to what his company's next move will be.

Then you have tech darlings Apple (Nasdaq: AAPL  ) and Google (Nasdaq: GOOG  ) hoping to make a splash this holiday season with their Web-tethered set-top gadgets. If either one succeeds in the living room -- clearly not a given since Apple TV has stalled in the past and Google is running into some serious resistance from major networks -- what's to stop either company from rolling out subscription plans?

Apple runs iTunes, the leader in piecemeal video rentals. Google owns YouTube, the world's top video-sharing website.

In other words, Netflix may want to tread carefully here. Raising the price of its entry-level unlimited plan by a buck is unlikely to be a deal-breaker, especially if it's limited to new subscribers. If anything, churn should improve dramatically if existing subscribers know that the plan will cost more if they cancel and renew later.

However, despite its gargantuan lead, Netflix can't assume that it has ridiculous pricing elasticity beyond that. A few months from now, this should be a far more competitive market than it is today.

How high do you think Netflix can raise its plan prices? Share your thoughts in the comment box below.

Google and Wal-Mart Stores are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers selection. Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor recommendations. The Fool owns shares of Apple, Google, and Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 25, 2010, at 11:05 AM, feldmail wrote:

    Rick, TWO THIRDS of Netflix's subscribers are now streaming, NOT 1/3 as you indicate above.

    This is about your 10th article about the impending plan for CSTR to get into digital. Being that there are tons of streaming/digital offerings on the market, why do you continue to push the Coinstar party propaganda line? They are ONLY discussing digital to give an apparence of relevancy. Fact is, Coinstar will never compete in this market.

  • Report this Comment On October 25, 2010, at 11:36 AM, BioBat wrote:

    feldmail is correct. It's 2/3 of subscribers are now streaming which is why Reed Hastings said Netflix is now a streaming company that also rents DVDs.

    As for competitors getting into the space. No one has a plan because no one can yet compete in the subscriber realm. Apple and Google, both flush with ridiculous amounts of cash know as much and have integrated Netflix onto their own devices rather than trying to compete with the market leader. Coinstar - they don't even deserve a mention when talking about streaming and Amazon is stuck on the higher margin pay per view offering.

    I don't think Netflix thinks it has unlimited price elasticity either. They'll figure out what works.

  • Report this Comment On October 25, 2010, at 11:59 AM, TheeShawn wrote:

    $10 per month for netflix is a bargain imo. If they raise my monthly rate by $1 I could care less at the moment. I'd even go $15 per month without biching much.

    The better they get with their streaming library, the stronger the value over paying for pay-per-view and premium channels thru cable. Speaking of which, I've cancelled all of them.

  • Report this Comment On October 25, 2010, at 12:31 PM, dkolka wrote:

    I agree, just signed up this weekend for the 1st time and it couldn't have been easier to do to begin watching movies. My normal routine is/was to rent/buy a movie via iTunes, but the normal 1-2 hour download became unbearable. They could charge 19.99/month and I would still do it. Thats 5 videos from iTunes and 3 from DirecTv which was my other method for renting movies. Quality is lacking but that will improve.

    As an investor and now subscriber they should raise rates, 7.99 is way to cheap for the value provided.

  • Report this Comment On October 25, 2010, at 3:18 PM, colddish wrote:

    Netflix's user fees seem under-priced. They should go up. At least a little.

  • Report this Comment On October 25, 2010, at 4:24 PM, TMFBreakerRick wrote:

    feldmail and BioBat, you're both correct. It is two-thirds and NOT a third. That's my mistake, and I know better. Let me get that fixed.

    Thanks.

    As for the Redbox digital strategy, well, the price point being bandied about this summer when Redbox began feeling out potential subscribers was a mere $4.99 for unlimited streaming. Obviously it's going to have to own up to that price and deliver a worthy digital catalog. However, the point in bringing it up is that streaming subscriptions are coming.

  • Report this Comment On October 25, 2010, at 6:01 PM, nin4086 wrote:

    As technology matures and fixed costs are recovered, pricing is supposed to go down not up. If Netflix increases prices, they would open the doors for competitors and although their top line will grow for a while (due to lack of alternatives for their subscribers at this time) it will be a bad move in the long run. We have to remember that Netflix merely distributes content and does not own it. Its value is in the following items which are all easily copied --

    1) Recommendation engine : They got it from crowd-sourcing so there are more than a dozen of these which Netflix rejected any competitor can use

    2) Library : It is not difficult for competitors to build it.

    3) Video delivery network : There are several providers of the same.

    In the long term, video delivery over the internet will be a price competitive utility service. So far Netflix has succeeded so well because of the sheer mismanagement at Blockbuster.

  • Report this Comment On October 25, 2010, at 6:31 PM, norman1066 wrote:

    In the Q&A following last weeks' earnings call Netflix fielded a question about pricing. They basically said that they always have, are currently, and always will constantly test their pricing plans and customer's reactions to different prices.

    What is really interesting here is that they are essentially saying that DVD by mail costs are a very small proportion of their total costs when a customer has a means by which to stream. It is truly fascinating how rapidly their streaming technology is being adopted. Hopefully this all translates across national boundaries into Canada and beyond. Reed certainly seemed confident about Canada as they are promising further expansion and they have only been operating there a month or two.

    While I would be willing to pay more for our Netflix subscription they have said in the past that low price drives sub growth and right now they want all the subs they can muster. Let's hook 'em all before we start raising prices. Earnings will take care of themselves.

  • Report this Comment On October 25, 2010, at 7:17 PM, stan8331 wrote:

    I wouldn't personally gripe about paying a little more, but I don't think it would be a good idea for the company. Apple, Amazon and Google may not offer any viable threats at the moment, but when your competitors have pockets that deep (Apple has 500% of the NFLX market cap in CASH), any price increases should be approached with great hesitancy.

  • Report this Comment On October 26, 2010, at 3:09 PM, renitentInv wrote:

    I agree with stan, a price increase should be approached with a healthy amount of preparation and skepticism. I also think it would be beneficial for Netflix to start to challenge competitors for more timely movie releases in their streaming service.

    So if a small price hike could help them generate some short term revenue increase to aid in the effort it might be the right move. It is definitely a balancing act, but I believe Netflix's subscriber base gives them more wiggle room than people afford them.

  • Report this Comment On October 26, 2010, at 4:04 PM, Doris411 wrote:

    When discussing the potential for Netflix to shift to all-streaming plans primarily, it would be wise to remember that there is still a lot of content that is only available by DVD. About two thirds of my Netflix queue is NOT available to watch instantly.

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