Video streaming giant Netflix's (NASDAQ:NFLX) worldwide expansion continues to progress, and one key pillar of its strategy is growing its library of original content developed specifically for various foreign markets. Populating its platform with locally produced fare should entice more subscribers in those countries, and the company plans to spend a not-insignificant fraction of its $7.5 billion to $8 billion original content budget this year on such series and films.
While Netflix is currently issuing debt to finance the growth of its content library, the company's long-term success will depend on its ability to not only grow its viewer base, but also to boost the prices it charges subscribers without causing too many to cancel.
In that vein, reports have recently emerged that the company is testing an "ultra" tier that may be a harbinger of things to come.
More pricing options?
Across Europe, some users are being offered a new "ultra" plan priced at either 16.99 euros or 19.99 euros per month. (At current exchange rates, that would be in the neighborhood of $20 or $23.) It isn't immediately clear what ultra tier customers will get that its standard or premium subscribers don't, as different customers are seeing different variations.
Some subscribers are being offered the ultra plan option, but are not experiencing any changes to the lower-tier offerings. Others are reporting that if they want to keep the ability to watch ultra HD or 4K programming, they'll have to move to the new, highest-priced tier. Other viewers report seeing changes to the number of concurrent streams they can have, with the maximum number decreasing in all but the highest priced plans.
The ultra tier could offer four concurrent streams of ultra HD or 4K video, similar to Netflix's current premium plan. The company may be looking to split its top tier into two new ones. It could also attempt to cut down on password sharing by decreasing the number of simultaneous streams allowed for subscribers to the lower-priced tiers. This would ultimately result in customers either choosing a more expensive plan, or cutting off the access of friends and family members who had been piggybacking on their accounts -- which presumably would lead a fair number of them to pick up subscriptions of their own.
Netflix currently has three pricing tiers. The basic plan costs $7.99 a month, and allows access to standard definition streams on one device at a time. The standard plan costs $10.99, permits viewing from two devices at once, and provides streaming in HD, when available. The premium plan runs $13.99 per month for up to four concurrent streams, and includes HD and ultra HD when available.
This is only a test
"We continuously test new things at Netflix and these tests typically vary in length of time," wrote Netflix spokeswoman Smita Saran. "In this case, we are testing slightly different price points and features to better understand how consumers value Netflix. Not everyone will see this test and we may not ever offer specific elements included in the test to our members."
Netflix has used similar tests previously to assess members' willingness to pay higher subscription rates. Last May, it tried out a variety of pricing strategies in Australia before announcing a price increase for subscribers there in late June.
Testing the waters
Netflix has taken a much more measured approach to price increases since the ill-fated "Qwikster" fiasco of 2011 -- an attempt to split its DVD and streaming services in a way that resulted in a 60% price hike for members who chose to keep both -- and which resulted in 800,000 subscribers cancelling.
It isn't surprising that Netflix would continue to assess the potential for price increases. According to a recent survey by Piper Jaffray, 64% of customers said they wouldn't drop their subscriptions unless the price went above $15 per month. With all three existing plans currently below that threshold, it's clear the company still has pricing power and room to experiment with subscription plans -- and as an investor, I think it's wise for it to do so.