Video-streaming pioneer Netflix, Inc. (NFLX 9.01%) has been one of the hottest stocks on the market, notching a 200% gain over the past three years. The number of subscribers has more than doubled, from 50 million in late 2014 to 104 million as of its second-quarter financial release.
It's no coincidence that this phenomenal growth followed the company's foray into original content at about the time it decided to own, rather than merely produce, its best shows. That has led to massive investments in its original programming, amounting to more than $6 billion for 2017. To help finance a steady stream of new shows, it will be raising prices on its mid- and top-tier plans in the U.S., beginning this month.
Netflix has a checkered past when it comes to price increases. In late 2011, Netflix decided to charge separately for DVD rentals and streaming. At the time, streaming was included in the $7.99 DVD plan. With the split, subscribers had to choose or pay $7.99 for each -- and many revolted, as the company lost 800,000 subscribers during the quarter.
Netflix didn't raise prices again until May 2014, increasing the price for new customers from $7.99 to $9.99 for the most popular plan. The company grandfathered in existing subscribers, however, for two years, and the increase didn't take effect until mid-2016. While growth slowed during the quarter the increase took effect, it grew nonetheless, and it has accelerated since.
Just a buck!
Netflix is taking a more measured approach to its current increase. New subscribers in the U.S. will still pay only $7.99 for the basic plan, which includes one stream. The most popular standard plan, which includes HD and two concurrent streams will increase by $1 to $10.99 per month. The premium plan, with four concurrent streams, HD, and Ultra HD is increasing $2 to $13.99 per month. These increases takes effect immediately for new subscribers, while current customers will be notified about the increase on Oct. 19, and "the price change will roll out to members over the course of the next several months."
This move is timed to coincide with the coming release of the second season of Netflix's blockbuster show Stranger Things, which is scheduled to make its debut on Oct. 27. The increases will help finance shows such as The Crown, House of Cards, and Stranger Things, which led Netflix to 91 Emmy nominations this year, bettered only by HBO.
You get what you pay for
As long as Netflix continues to produce top-level original programs, customers are unlikely to defect en masse. In its most recent quarter, the company added a Q2 record of 5.2 million new subscribers, handily beating the company's usually reliable forecast. In its quarterly shareholder letter, Netflix said that "we underestimated the popularity of our strong slate of content, which led to higher-than-expected acquisition across all major territories."
RBC Capital Markets analyst Mark Mahaney believes that Netflix has increased its pricing power because of the quality of its content and improvements in its technology. He posited that the increase will result in incremental domestic revenue of about $650 million for 2018 and additional contribution profit of $274 million.
Even after the price increase, Netflix is still the best streaming deal out there, and I believe the subscribers will just keep coming.