The Netflix Price Increase Won't Be Its Last

Netflix (NFLX 1.88%) subscribers in the United States will probably see an increase in their monthly bill within the next few months. The streaming video on demand leader announced another price increase for its most popular plans. Customers on the $9.99 per month plan will soon pay $10.99. $11.99 per month subscribers will pay $13.99. Those using its $7.99 budget option won't see an increase.

This is Netflix's third price increase for U.S. subscribers in the last three and a half years. With CBS's Showtime over-the-top service priced at $11 per month, and Time Warner's (TWX) HBO Now priced at $15 per month, Netflix appears to still have room to increase its pricing further. What's more, demand for Netflix is increasingly inelastic as it grows its slate of critically acclaimed originals and more consumers cut the cord and rely on streaming for television entertainment.

Image source: Netflix.

Netflix is a premium product without premium pricing

Half a decade into its original content strategy, Netflix has quickly climbed to the top of the pile. The "network" was nominated for 91 Emmy awards this year. That's better than everyone except HBO (110). It won 20 awards, again only trailing HBO (29). While it missed out on the biggest award of the night, Netflix has clearly made its mark on the television industry.

According to a recent survey, 79% of millennials say Netflix has the best original content. But Netflix's price doesn't reflect the quality of its product.

Netflix originals are on par with (if not better than) HBO's. It also has a catalog of great licensed content that gives viewers plenty to watch while waiting to binge on the next season of Stranger Things. Nonetheless, you can still get a Netflix subscription for less than any other comparable streaming service if you opt for the standard definition service.

Even though Hulu just won the Emmy for Outstanding Drama Series, Netflix certainly has a better overall slate of originals. It had three nominations in the category. But Hulu's commercial-free plan still costs $1 more per month than Netflix's most comparable plan.

While Netflix is starting to come close to its competitors pricing, there's still room for its to increase the monthly cost in the U.S. It shouldn't be a surprise if U.S. subscribers see another small price increase within the next couple of years. The quality of its content will ensure not too many subscribers leave.

Price increases support Netflix's international growth

Netflix isn't raising prices everywhere, but the U.S. is one of a few markets that have recently seen a price bump. Canada and Australia saw price increases earlier this year. The key is that it's only raising rates in mature markets where growth has slowed. In its rapidly growing international markets, Netflix is keeping prices low.

In effect, higher-priced subscribers in mature markets will subsidize lower-priced customers in nascent international markets. That should enable Netflix to maintain its international subscriber growth pace, which has been between about 3 million and 5 million in each of the last four quarters.

Fueling that growth is the expansion of its globally licensed content -- both original and syndicated. That's led to significant growth in the company's content budget as well as its cash burn. Content Chief Ted Sarandos says the company may spend up to $7 billion next year after spending $6 billion this year. Management wrote that it expects to burn $2 billion to $2.5 billion per year in cash as it takes more original content production in house.

The rate increase should help alleviate some of Netflix's reliance on debt to support its content spend. With 50 million existing subscribers in the U.S., investors can expect roughly $600 million in additional revenue next year. Combined with revenue from new subscribers, Netflix should be able grow revenue faster than it increases its content spending on an absolute basis.

Eventually, Netflix will increase prices for international subscribers as well. But as long as the company is adding around 4 million subscribers every quarter, it ought to keep its prices where they are and follow the same playbook as it did in the U.S.