Shares of Netflix (NFLX 2.63%) surged on Tuesday, climbing 6.5%, after the leading streamer said it would again raise prices, little more than a year after its last price increase. This time, prices are only rising on U.S. subscribers, but it's the streaming service's biggest price increase yet, as subscribers to the most popular "Standard" service, which allows HD viewing and two simultaneous streams, will see prices go up from $10.99 to $12.99. Premium subscriptions will also jump $2 a month to $15.99, and basic subs will see prices go up $1 a month to $8.99.
Investors cheered the news, since it will almost certainly bring in more than $1 billion additional in revenue annually, and probably closer to $1.5 billion, as Netflix has demonstrated its pricing power multiple times before. Past price increases, with the exception of the Qwikster debacle, have done essentially nothing to drive viewers away from the service.
The price increase also comes at a time when Netflix continues to ramp up content spending, but the news will offer some relief to investors worried about the company's burgeoning debt load and its projection that it will lose $3 billion to $4 billion in free cash flow for the second year in a row.
However, the timing of the price increase is curious, coming just two days before it reports earnings on Jan. 17, and the company is facing what could be its most competitive year yet, as Disney (DIS 2.16%) plans to launch its own streaming service and will gain majority control of Hulu, which is putting up its own impressive growth, once the Fox acquisition closes. Meanwhile, AT&T (T 1.50%) is planning its own streaming launch now that it's gained control of HBO and Warner Media, and NBCUniversal, a division of Comcast (CMCSA 1.37%), just announced plans for its own streaming service. In other words, 2019 is shaping up to be the year streaming finally goes mainstream, with deep-pocketed traditional media outlets including Disney/ABC, Comcast/NBC, and AT&T/Time Warner finally jumping into fray. Even Apple could get into the mix.
Doing so will drive up content acquisition costs, will make competition for new subscribers harder, and could even siphon away current customers from incumbents such as Netflix. So for Netflix to raise its price by 17% on its core customer signals a high level of confidence in the stickiness of its service and its ability to fend off new rivals. With seasonally strong fourth-quarter earnings on tap, it seems logical to think Netflix is about to deliver a gem of a quarter. Let's take a closer look.
The big numbers
Netflix gives detailed forecasts each quarter, projecting items such as subscriber growth and contribution margins. In its third-quarter earnings report, the company forecast paid subscriber additions of 7.6 million in the fourth quarter, approaching a quarterly record and bringing its paid membership total to 138 million, though it expected just $0.23 in earnings per share, in part because of the timing of content costs.
Parsing Netflix's quarterly performance ahead of time isn't easy, but there were a couple of positive signs investors should be aware of. Roma, the Alfonso Cuaron-directed drama that hit Netflix streams in December three weeks after it premiered in theaters -- marking the first time the company has respected the traditional windowing process -- gives the company its greatest chance at a Best Picture Oscar yet. Critics have acclaimed Roma, which just won the Critics' Choice Award for Best Picture and has garnered a 96% rating on both Rotten Tomatoes and Metacritic. Netflix has been engaged in an intense Oscar campaign for the film, spending as much as $20 million, according to some estimates. That Netflix might be able to make a Spanish-language movie win a Best Picture Oscar would be something of a double coup for the company, as it's likely to win over millions of fans across Latin America, showing off the power of its global streaming platform.
Netflix generally keeps viewership data close to the vest, but the streamer did reveal that more than 45 million subscribers, or a third of its total, watched the Sandra Bullock thriller Bird Box in its first week on the platform in December, setting a new record for the company. Like Roma, Bird Box was well received, with 88% of viewers giving the movie a thumbs-up on Google, and the movie also inspired a slew of blindfold-related memes on social media.
Between those two successes and the price increase, Netflix seems as if it should have another thing to celebrate when its earnings report on Thursday comes out. We'll learn the details shortly, but it appears it's safe to take your blindfold off. The stock could surge again on a strong beat.
Check out the latest Netflix earnings call transcript.