Check out the latest Netflix earnings call transcript.
Netflix (NASDAQ:NFLX) is raising prices yet again for U.S. subscribers. Current subscribers will see their bills climb $1 or $2 per month sometime over the next three months. New users will see higher prices starting today. The company's most popular plan is increasing from $10.99 per month to $12.99 per month.
The extra revenue will go toward Netflix's growing slate of original programming and help it stay ahead of forthcoming streaming services from Disney (NYSE:DIS), AT&T's (NYSE:T) WarnerMedia, and Comcast's (NASDAQ:CMCSA) NBCUniversal.
Those companies have plans to price their services below Netflix's new pricing, but Netflix believes it's earned the right to increase its price by providing enough value for its subscribers, and the move shows it's not afraid of a little competition.
How Netflix decides to increase its price
Netflix's management has explained its philosophy on pricing several times. Most recently, on Netflix's third-quarter earnings call in October, Chief Product Officer Greg Peters explained: "Our job is to focus on, invest in providing our members incredible experiences, more great content, great product experiences. When we do that and we do it well, we earn the right to increase price a bit."
Netflix's original series are consistently ranked as the best by U.S. consumers, not just among streaming services, but all cable networks. In a survey conducted by Morgan Stanley analysts last year, 39% of respondents said Netflix offers the best original programming. That's up 6 percentage points from the same survey a year prior. WarnerMedia's HBO was a distant second, garnering 14% of votes.
So, Netflix seems to have earned the right to increase pricing. Not to mention its previous pricing was well below HBO's direct-to-consumer service, HBO Now, which charges $14.99 per month. Even its most popular plan is still $2 below that price with the recent price increase.
The strategy is to "take that new revenue, invest it back into the model, and that sort of continuous positive cycle we get to keep going," Peters explained in October. "We foresee that will keep going for many years in the future." So, investors and subscribers should expect more price hikes as long as Netflix's investments in content continue to increase the amount of value subscribers receive.
Will subscribers stick around?
There's a few prominent new streaming services set to launch in the back half of 2019 and early 2020.
Disney plans to launch Disney+ at the end of the year. WarnerMedia plans to launch a service with three tiers of content around the same time. And NBCUniversal plans to launch its own service in early 2020.
All three companies have extensive and valuable content catalogs, which include content that's extremely valuable to Netflix. Ted Sarandos, Netflix's chief content officer, has said he finds Disney's film catalog valuable to Netflix because it includes movies people like to watch over and over again. Meanwhile, WarnerMedia can have Friends all to itself if it wants next year, after Netflix is reportedly paying $100 million for the exclusive rights to stream in 2019. NBCUniversal's The Office and Parks and Recreation are two of the top shows on Netflix, but they could be exclusive to NBCUniversal's streaming service starting in 2022.
Netflix provides a lot of value with its originals, but licensed content can be just as valuable to subscribers. As a result, the streaming service may have trouble retaining subscribers at its higher price when lower-priced options like Disney+ or NBCUniversal's service come to market.
Netflix saw greater-than-expected subscriber churn when it raised prices in 2016, so its pricing decisions aren't always perfect. New CFO Spencer Neumann will be under a lot of scrutiny in his first year, so he and his team need to have a lot of confidence this is Netflix's best move financially.