Why Netflix Is About to Raise Prices

Netflix's (NASDAQ: NFLX  ) content costs are increasing on seemingly every front: acquisition, creation, and distribution. Even though the battle is heating up with Amazon.com (NASDAQ: AMZN  ) and Netflix would like to keep its prices low, you have to wonder if Netflix can keep the cost of a subscription at its current level. The cost of a streaming package is only $7.99, that's almost half the price of a movie ticket in New York City . Can prices remain this low going forward in the face of deals like the one with Comcast (NASDAQ: CMCSA  ) ?

On Jan. 22, Netflix filed a letter to shareholders  with the SEC that highlighted the company's "evaluation of plan tiering." This is the warning shot that price increases will be coming. To the company's credit, it went further to say that "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 near-term impact on your pocket.

This language is vague, but if the company pairs pricing with its costs then it could lead to quality/stream matrix where you may pay $7.99 per month for one stream of SD video, your neighbor pays $9.99 per month for one stream of HD video and your cousin with three kids pays $14.99 per month for three streams of HD video. The company experimented with different price tiers for multiple streams, but with the Comcast news and other carriers likely following then it may be raising the price for HD vs. SD as well.

The "Net Neutrality" sugar high
The deal with Comcast is the first volley in the Net Neutrality war. Sellside analysts can say that the Comcast deal is good for consumers until they are blue in the face, but the reality is that your bill is going up over the long term. The fact that this may not contribute to it over the next 12 months is simply a sugar high.

Netflix has been battling for years over whether it would need to pay more to pipe its content over Comcast's last mile. The recent DC District court decision that the FCC overstepped its legal authority in preventing broadband providers from throttling Netflix traffic seemed to be the last nail in the coffin. Verizon had already been accused of slowing down traffic for both Amazon and Netflix, but Comcast is trying to push through a massive merger and would like to avoid the bad press that a battle with Netflix would create.

More cable deals are likely to follow, possibly at worse metrics
It's true that nobody knows the increase in the payment size that Netflix will have to cough up for this deal. There has been speculation that the payment that had been going to Cogent will now be going to Comcast but there is no basis for that guess. What we do know is that Netflix has its back to the wall as half of its $3 billion in content liabilities are coming due in the next 12 months, so it will do anything it can to reduce or stabilize costs. This cost stream is likely to increase as well as it strikes deals with other broadband providers who can blame the ISP access point for slow traffic and strong arm a payment from Netflix.

Actors don't take IOUs
The recent $400 million debt offering is supposedly for general corporate purposes "including capital expenditures, investments, working capital and potential acquisitions" which probably means content creation costs. It also came in correlation with Netflix confirming season 3 of "House of Cards." Considering the success of this brand, the production price tag is likely increasing.

Even the state of Maryland is reaching into Netflix's pockets
Now that the company has confirmed a script for season 3 of its hit show, Governor Martin O'Mally of Maryland is rethinking the tax holiday offered to the company for filming in Baltimore. The state will probably come to the table by June which would allow for a February 2015 debut but this action shows how dependent Netflix is on the good will of third parties.

A price hike would likely take place sooner than later. The last time the company raised prices on existing customers, it sparked a backlash that resulting in Reed Hastings apologizing in September. When the summer rolls around and people are more apt to be spending time outside, it is simply easier to decide to unplug for a few months.

 

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Read/Post Comments (6) | Recommend This Article (6)

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  • Report this Comment On March 03, 2014, at 6:29 PM, AceInMySleeve wrote:

    Streaming margins have and will continue to increase for Netflix. The cost of peering with Comcast directly is likely on par or lower than going through Cogent. There's no story here.

    Netflix can easily raise prices in the future because they are by far the best customer value around, which is how they are exploding past HBO who has been in the business for decades.

  • Report this Comment On March 03, 2014, at 9:15 PM, EddieEsco wrote:

    I would gladly pay $15, heck even $20/month for access to the instant streaming subscription. I have saved so much money from cancelling cable and I always have something to watch on Netflix.

  • Report this Comment On March 04, 2014, at 1:00 AM, TessieQ wrote:

    Netflix is full of beans! They trumpet how great their selection is for streaming when in reality it's NOT all that great. They have very few "first run" movies available on streaming. While they do have several "current" TV shows on streaming, they DO NOT have ALL the episodes available, especially from the past year or so. And they don't have those episodes available on DVD rental, either! WHEN will we get "recently current" episodes/years of Dr. Who, Phineas and Ferb, Game of Thrones, etc.?! SO frustrating! One plus we've discovered on Netflix is apparently they bought entire catalogs of UK productions. Old movies and TV shows that never even made it to PBS. We've been enjoying a lot of those shows for months now. But...AGAIN...some are incomplete, such as Midsomer Murders and Murdoch Mysteries.

  • Report this Comment On March 04, 2014, at 1:38 AM, ManoftheRepublic wrote:

    Now distribution and licensing, yes I could see that happening.., But the content creation thing is a MAJOR LIE.. The money that a production company can get is WAY down all across the country.., Most major production is going to either Canada (cheap prices and generous tax breaks) or South America where prices are so cheap that they do not need tax breaks,,,

  • Report this Comment On March 04, 2014, at 1:41 AM, ManoftheRepublic wrote:

    Couple the Canada and South America thing with what Apple has done to post production (the same thing they did to type setting) and yep, content creation is way down..

    And every yahoo with a computer thinks that they are God's gift to finish editing.... I have watched production values go down, editing quality go down and color correction.... being done by blind monkeys...

    It really is sad..

  • Report this Comment On March 04, 2014, at 6:23 AM, hbk72777 wrote:

    "TessieQ wrote:

    Netflix is full of beans! They trumpet how great their selection is for streaming when in reality it's NOT all that great. They have very few "first run" movies available on streaming. While they do have several "current" TV shows on streaming, they DO NOT have ALL the episodes available, especially from the past year or so. And they don't have those episodes available on DVD rental, either! WHEN will we get "recently current" episodes/years of Dr. Who, Phineas and Ferb, Game of Thrones, etc.?! SO frustrating! One plus we've discovered on Netflix is apparently they bought entire catalogs of UK productions. Old movies and TV shows that never even made it to PBS. We've been enjoying a lot of those shows for months now. But...AGAIN...some are incomplete, such as Midsomer Murders and Murdoch Mysteries. "

    You nailed it. They are not a competitor to cable, they're a glorified tv channel. With cable, I get 300 channels plus ondemand for $80. They want, after price increases, $10-20 for 1 channel? No thanks. My nephew has it for his cartoons, Even that content has gone down. No more Wubbzy, Gabba Gabba etc, They seem to take away, but rarely add to it. People also quickly forget that they took away half of the service when they removed DVD's by mail, which made it a %100 price increase if you wanted to keep it.

    Amazon Prime is another one who better watch it, they want to go to $140 a year. Plus, they've taken away many seasons of shows that used to be free, and are now charging for them. Also, the add on items, even with Prime, you still have to pay a minimum to get it shipped to you.

    These companies are getting too big for their britches. I don't know wha they think the American people have in their wallets, but most people I know haven't gotten a raise in years due to the "economy".

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