Going by its 2017 fourth-quarter financial report that came out on Jan. 22, Netflix (NASDAQ:NFLX) has proved itself worthy of a price increase,
In spite of a price increase in October, the video-streaming site reported a record-breaking 8.33 million new global subscribers. That figure broke its previous record of 7.05 million new subscribers from the 2016 fourth quarter.
Netflix itself seemed surprised by its subscribers' loyalty. On the earnings call, Netflix CFO David Wells said the company was "conservative" going into the fourth quarter because of the price changes.
What will Netflix do with the extra cash, and will it raise prices again? Let's look at some comments from the earnings call.
Why did Netflix increase subscription prices?
When Netflix raised the price of two of its three streaming plans by $1 and $2 last October, it said it was for the benefit of its viewers, as the increase would allow the company to keep improving its content and the platform.
"From time to time, Netflix plans and pricing are adjusted as we add more exclusive TV shows and movies, introduce new product features, and improve the overall Netflix experience to help members find something great to watch even faster," the company stated.
Netflix has been increasing its content spend by about $1 billion each year to stay ahead of the competition and keep viewers entertained. It spent about $5 billion on content in 2016 and around $6 billion in 2017, and it plans to raise that figure to between $7.5 billion and $8 billion this year.
And Netflix seems eager to keep on this path of steadily increasing content spend relative to its revenue. On the earnings call, CEO Reed Hastings said Netflix expects its content budget to continue to rise along with its revenue in the years to come. "Don't think of $8 billion as some new plateau," he said.
Hastings added that the company understands its responsibility to use the increased revenue to invest in content and the platform to encourage growth in subscribers and engagement.
"So we have to push ourselves to just keep doing more incredible content, downloading, easy-to-use, all the things that we're doing, and thus continue to earn the trust and affection of consumers," he said. That the October price increases had "very little effect" on subscriptions suggests that Netflix is meeting those goals while increasing the value of the service each year.
Netflix seems to have created a healthy cycle. The better its shows are, the more people are willing to pay for them and the more they talk about the shows with other people, thus encouraging even more people to sign up. Netflix has about 55 million U.S. subscribers right now, and it thinks it can reach 60 million to 90 million.
Will Netflix raise prices again?
The recent price increase brought the plan that allows for two screens to stream content at once to $10.99 per month, up from $9.99. The premium service that allows four screens to stream content at once went to $13.99 per month, up from $11.99. The basic service that allows for one screen remained at $7.99.
Hastings said the company is "always cautious" about price increases and said Netflix has "no plans to try to repeat that in any way in the near term." Of course, there's no telling what "near term" means, but there's a good chance Netflix will raise prices again if not at the end of 2018, then sometime in 2019 -- considering the October price boost followed a May 2016 increase for the two-screen plan to $9.99 from $7.99.
As Hastings said on the call, "Customers are tolerant as long as something's improving." If you ask me, people will be willing to hand over a few extra dollars so long as Netflix keeps making new seasons of megahits such as Stranger Things.
If Netflix can use the extra cash from the 2017 price increase to create a noticeable improvement in its titles, then subscribers probably will be "tolerant" of another increase sometime in the next year or so. That's good, since having a way to up the spend from its current subscribers will be crucial when subscriber growth inevitably begins to slow down over time.