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Netflix Chickens Out at $8.99

It's going to cost new Netflix (NASDAQ: NFLX  ) subscribers a little more to stream old episodes of Dexter and the new season of Orange Is the New Black. The leading premium online video service announced on Friday that it's increasing its monthly rate for new members by a buck, to $8.99.

The stock moved 2% higher on the news. It may not seem like much, but it's actually the stock's biggest single-day gain since it popped after announcing quarterly results last month. It's fair to say that the 12.5% rate increase isn't exactly news. Netflix has been talking up the move for a few months now.

It originally floated the increase during January's earnings call. It tempered the potential move by pointing out that it was "in no rush to implement" pricing changes, and that existing members would receive "generous grandfathering" of their current plans and prices. It was more explicit three months later, explaining that the monthly rate of its flagship streaming service would increase to $8.99 or $9.99. It chose the more conservative path, and that's a shame. 

There are few entertainment services that are as valuable as Netflix. Consumers know it. There are now more than 48 million streaming subscribers worldwide, with more than 35 million of those living in this country. Most would gladly pay a buck or two more to keep the content going. This is a true economy of scale where the service gets better as its subscriber base grows. Its streaming content obligations have ballooned from $5.7 billion a year ago to $7.1 billion today, because Netflix knows that it can divvy up the costs across a wider base of Web-tethered members.

That's also why it's a bummer to see Netflix wimp out after teasing shareholders by throwing out that $9.99 price before settling for the lowest point to satisfy eventual subscribers. It's been five years since Netflix introduced streaming as a standalone service. It's a safe bet that your cable bill has moved a lot higher than this 12.5% move in that time, and you're not getting a lot more bang for your buck. Even (NASDAQ: AMZN  ) -- Netflix's nearest rival in the digital smorgasbord niche -- went with a 24% increase to Amazon Prime earlier this year. 

Sure, Amazon's Prime also includes two-day shipping of Amazon-warehoused goods, monthly Kindle e-book rentals, and other digital goodies. However, the price to consume Prime Instant Video did in fact balloon up to $99 a year. 

Apologists will argue that Netflix is right to go with the more conservative increase. Why push its luck? If it went with $9.99, it would be that much harder to recruit new members. That's definitely true, but wouldn't that also make it more likely that today's subscribers stick around? After all, "generous grandfathering" in this case translates to two years of keeping current members at $7.99 a month. If a 25% boost would be a deal breaker for potential new accounts then it's also a stiff price for its 48.35 million customers to let their memberships lapse until they return when the next wave of new content arrives. 

Netflix is a bargain for viewers at $8.99 or $9.99 a month. It would have been a better deal for investors at $9.99, even if we would have had to wait two years for the deluge of price increases to kick in. Then again, will Netflix still be at $8.99 in two years? I get it. I see what's happening. CEO Reed Hastings is a genius.

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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 May 10, 2014, at 7:01 PM, dellis915 wrote:


    I think you are assuming a world in which netflix is competing with cable/satellite.

    The reality is that it may be competing more with Hulu, Amazon prime, internet tv, YouTube, and even free high quality over the air channels.

    I've dropped our cable TV service. How much TV do I really care to watch anyway? I haven't missed anything. Netflix greatness reflects in the price of the service as well as the programming IMHO.

  • Report this Comment On May 11, 2014, at 3:36 PM, alnuxserio wrote:

    One more reason to use to get ALL Netflix regions from American to UK and Latino

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Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

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