Netflix, Inc. Raises the Ceiling

Netflix may be contemplating a rate increase.

Jan 23, 2014 at 12:32PM

Netflix (NASDAQ:NFLX) has stuck to its basic $7.99-a-month unlimited streaming plan since the inception of the streaming service as a stand-alone platform, but that may be about to change. 

One of the meatier nuggets to come out of Netflix's blowout quarterly report last night is that it's contemplating new tiered pricing that may include a price increase. 

It's been nine months since Netflix introduced a plan that sets subscribers back $11.99 a month for a service in which four users can stream various content at the same time. The basic $7.99-a-month plan only allows for a pair of concurrent streams. Netflix has also tested other pricing plans with different limitations, including a $6.99 monthly plan that only offers standard definition with just one active stream at a time.

Netflix revealed yesterday that it expects to ultimately settle on three different pricing options. That alone wouldn't be much of a story. Netflix has been testing different price points with varying features since last spring. However, there was more to Netflix's comments in its letter to shareholders:

If we do make pricing changes for new members, existing members would get generous grandfathering of their existing plans and prices, so there would be no material near-term revenue increase from moving to this potential broader set of options. We are in no rush to implement such new member plans and are still researching the best way to proceed.

The part in bold was actually written in bold by Netflix. It's not just talking about new plans. Clearly "generous grandfathering" would only be necessary if prices were moving higher, even if it's in no rush to roll them out. In fact, Netflix later referenced "grandfathering" again in the letter when discussing its move to increase prices in Ireland earlier this month. Existing members can keep their original lower pricing for another two years there, and that may be the approach it follows here. It goes without saying that grandfathering someone into a lower rate should help with retention rates.

Merely acknowledging an increase -- even if it's "in no rush to implement" the move -- is a major shift in Netflix's message. Piper Jaffray analyst Michael Olson asked Netflix executives about "tweaking out its pricing" during last year's first-quarter earnings call.

"I think we were pretty clear in our letter about that," CEO Reed Hastings insisted at the time, referring back to that period's shareholder letter in which Netflix said it was "very happy with membership growth at this low price point."

A stateside increase would likely force more bears into hibernation, raising the ceiling of average revenue per user. It would no longer be a matter of how big Netflix's subscriber rolls can get but rather how much it can make off each account. 

Video buffs may lament the end of $7.99 a month, but shareholders are going to love it when it happens.

Your living room experience isn't just going to cost you more
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

Longtime Fool contributor Rick Munarriz owns shares of Netflix. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. 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. The Motley Fool has a disclosure policy.

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