Netflix's Price Hike Is Already Working

Video streamers are paying a bit more to access Netflix's library, and that's OK.

Jul 22, 2014 at 3:33PM

Millions of Netflix (NASDAQ:NFLX) subscribers can't be wrong: Its streaming service is worth paying just a little bit more to access.

The online video giant recently boosted prices by $1 a month on the standard streaming plan. However, in contrast to its 2011 pricing debacle, Netflix this time limited the increase to new members while giving existing subscribers an extension of their current cost. 

Netflix Redesign

That seemed to do the trick. This year's tweak didn't halt growth -- or lead to a "wave of cancellations" like Netflix had to endure in 2011. Instead the company added 570,000 streaming members in the U.S. last quarter, which was slightly above management's forecast. CEO Reed Hastings and his team now project that the third quarter should bring 1.3 million new subscribers into the fold, the same result as last year. The price change is having only a "minimal" impact on member growth, they told investors.

But the hike is already starting to be felt in Netflix's financial results. Take a look at the company's average revenue per user, or ARPU. That figure climbed to new high last quarter of nearly $7.80 per month.

Nflx Arpu

Source: Company financial filings.

ARPU should improve more significantly in the quarters ahead as new members grow to a larger percentage of the subscriber base over time.

With some help from the price boost, profitability also expanded yet again this quarter. Sure, Netflix more than doubled its earnings over last year. But the better news for shareholders is that this past quarter marked the 10th out of the last 11 in which contribution margin improved. That figure is quickly approaching 30%, which the company says it should hit sometime next year.

Nflx Margins

Source: Company financial filings.

Of course, Netflix didn't boost prices simply to pad its bottom line. The increase was meant to fund major investments in content spending and a continued push into expensive original shows like Orange Is the New Black. Two of those series, a new season of The Killing and a new comedy, BoJack Horseman, will launch next month. Management also seems excited about the prospects for Marco Polo, a historical adventure show that Chief Content Officer Ted Sarandos called "ambitious" in a conference call with analysts.

Ambitious doesn't come cheap, though. And you can see evidence of a big ramp-up in content commitments by way of Netflix's streaming content obligations. Those rose by $600 million since the prior quarter and now total close to $8 billion. 

Nflx Ob

Source: Company financial filings.

While that's a significant jump in obligations, it means that further improvements in Netflix's library are on tap. And we know from the early results of this price boost that Netflix's customers see real value in a growing content library.  

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Demitrios Kalogeropoulos owns shares of Apple and Netflix. The Motley Fool recommends and owns shares of Apple, Google (A and C shares), and 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.

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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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