Netflix's Price Hike Is Already Working

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. 

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.

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.

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. 

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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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 July 22, 2014, at 4:11 PM, pauldeba wrote:

    This is not a well researched article. The price increase was June 1st signups and after. So, the first free month would not have affected ARPU at all. The mix of paying and free customers would and the increase in the Euro, Brazilian Real and British Pound also would. But the article's story is about the domestic price increase (I'm assuming it is not about the Ireland one) and that categorically had zero effect.

  • Report this Comment On July 22, 2014, at 4:58 PM, TMFSigma wrote:

    @pauldeba - the price increase started in early May for U.S subscribers. Netflix's Q2 ended on June 30, so you'd expect ARPU to start getting a lift in the quarter that just closed, with the main impact further down the line.

    -Demitri

    @TMFSigma

  • Report this Comment On July 22, 2014, at 4:59 PM, AceInMySleeve wrote:

    Did users that free trialled through May pay the old or new price for their first month in June?

    There are other things that affect ARPU as well.. the number of simultaneous streams and the slope of the growth curve through the quarter (which changes the number of paid months in the divisor).

    I'm not a skeptic here. I think Netflix has enough data to measure the impact and trust them that it's noise. Further there was almost no signs of an angry public. Like amazingly silent on that front if scouting the social webs.

  • Report this Comment On July 22, 2014, at 5:12 PM, AceInMySleeve wrote:

    The results this quarter were exceedingly boring, which given a 12.5% price increase is good news.

    NFLX took a bath earlier in the year but it was part of a general bloodbath in high P/E tech stocks. Unless that recurs I don't see a justification for a substantial retracement.

  • Report this Comment On July 22, 2014, at 5:47 PM, TMFSigma wrote:

    Hi @Ace - I agree about the noise in the ARPU number but we can at least be sure it will be impacted from all the new subs in Q3. Given that management thinks they'll add 1.3 million at the new prices, they do have some confidence that it isn't hurting growth.

    And yes, boring results this quarter, for sure. Usually those shareholder letters are some pretty exciting reading but not this time (e.g., gift cards).

    Best,

    Demitri

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