Why Netflix, Inc Raising Prices Is the Right Move

Netflix is experiencing higher costs as it grows internationally and builds out its original programming. Here's why a modest price increase is the right strategy.

Apr 28, 2014 at 11:00AM

Streaming movie, television, and DVD service Netflix (NASDAQ:NFLX) is growing like a weed. The company is quickly racking up subscribers both domestically and abroad, which has given it solid presence in the war for your living room. Netflix represents a major threat to existing cable providers like Comcast (NASDAQ:CMCSA). To be exact, Netflix added more than 4 million streaming subscribers in the most recent quarter, which represented a higher growth rate than the first quarter the previous year.

After its latest earnings announcement, though, Netflix caused a stir by revealing it would raise prices for new members in certain markets. Some might disagree with this strategy, the last time Netflix raised prices it caused a massive subscriber flight and an ensuing stock sell-off.

You'll recall that in 2011, Netflix planned a stiff price increase for its then-combo service of DVDs by mail and online streaming. At that time, Netflix announced it would increase its membership cost from $10 per month to $16 per month. This caused Netflix to lose approximately 800,000 subscribers over the next few quarters and the company's stock price collapsed by nearly 80%.

Even though the price increase may upset some, it won't have as big of an impact as last time. Here's why I think raising prices is the right move.

This time is different
'This time is different' are the four most dangerous words in the English language, but when applied to Netflix's pricing strategy, it's true. Netflix had little choice but to raise prices on new members. It's busily developing proprietary content in an attempt to lure new subscribers, based on the massive popularity of its shows like House of Cards. Moreover, existing members will be grandfathered in and allowed to stay at current pricing for what the company terms an 'extended time period'.

In addition, Netflix is only raising prices by $1 to $2 per month. That's a far cry from the 60% price increase the company experimented with three years ago. If anything, Netflix could increase prices even more. It's encountering significantly higher costs in its dual efforts to create original content and expand overseas.

Its most recent earnings report barely met expectations. Revenue matched consensus, with earnings per share coming in $0.03 better than estimates. In the current quarter, Netflix expects revenue of $1.14 billion, falling short of analyst estimates, which call for $1.31 billion.

It seems that most consumers flock to Netflix in a 'cord-cutting' move to save money. A typical monthly bill from a cable provider will be much higher than Netflix, even when incorporating Netflix's planned price increase. It's reasonable to assume most Netflix subscribers will stay with the service and accept paying an extra dollar or two, rather than go back to a cable subscription, and pay much higher prices for a great deal of content they don't want or need.

This is why Netflix is such a ground-breaking service, one that poses a huge threat to the cable industry. Netflix is a serious competitor to cable providers like Comcast(NASDAQ:CMCSA), which explains the recent deal struck between the two. Netflix and Comcast recently reached an agreement that gives Netflix a direct connection to Comcast. Going forward, Netflix will provide its services to Comcast's broadband network and pay Comcast for the privilege. This deal represents the first of its kind for Netflix.

Profitability matters
Netflix is doing well to add subscribers every quarter, but costs are increasing as the company gets more ambitious with original content and overseas expansion. As a result, it no longer made sense for Netflix to keep its prices at such low levels. Profitability is a concern for any company and Netflix is no exception.

Netflix is by no means repeating the same mistake it made in 2011, when it tried to pass through a sharp increase on members, and caused a mass exodus of subscribers. A very modest price increase will retain the vast majority of subscribers and allow Netflix to continue providing the quality of services and content that its customers have come to expect. As a result, its price increase strategy makes a lot of sense. 

Your cable company is scared, but you can get rich
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. 


Bob Ciura has no position in any stocks mentioned. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information