Netflix Chickens Out at $8.99

Netflix raises prices, but it could have gone even higher.

May 10, 2014 at 5:30PM

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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Rick Munarriz owns shares of Netflix. The Motley Fool recommends and owns shares of and Netflix. Try any of our Foolish newsletter services free for 30 days. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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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.

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