Netflix Had $1 Billion Reasons to Raise Prices

Netflix (NFLX 2.40%) has been riding high, spurred on by its viral movie Bird Box, the success of interactive offering Black Mirror: Bandersnatch, and its dominating performance at the Golden Globes earlier this month. Additionally, after a brief hiccup last year, subscriber growth came roaring back, adding more than 5 million new subscribers last quarter alone -- far exceeding expectations.

In the wake of the company's latest successes, Netflix is increasing the monthly cost of its subscriptions in the U.S., the first such increase since it raised prices in October 2017.

Wall Street was happy to see the price hikes and it's clear why -- they'll likely add over a billion dollars to Netflix's top line over the next year. 

Image source: Getty Images.

The fine print

Netflix is continuing with the measured approach it has taken with recent rate hikes. New subscribers in the U.S. will pay $1 more per month at $8.99 for the basic plan, which includes one stream. The standard plan, which is the most popular and includes HD and two concurrent streams will increase by $2 to $12.99 per month. The premium plan will also see a $2 price hike to $15.99 per month for four concurrent streams, HD, and Ultra HD. These increases take effect immediately for new subscribers, and will be rolled out to existing subscribers over the next several months.

Data source: Netflix. 

By keeping the price increases to a dollar or two, Netflix is avoiding the negative press it weathered when it began to charge separately for streaming and DVD rentals back in 2011. The price went from as little as $9.99 for both to $7.99 each, sparking outrage and headlines touting the "60% price increase." This resulted in Netflix losing more than 800,000 customers that quarter. 

"We change pricing from time to time as we continue investing in great entertainment and improving the overall Netflix experience for the benefit of our members," a Netflix spokesperson said. 

During its third-quarter conference call, Netflix may have signaled the upcoming price increase, when chief product officer Greg Peters said (emphasis mine), "Our job is to focus on, invest in providing our members [with] incredible experiences, more great content, great product experiences," Peters said. "When we do that and we do it well, we earn the right to increase [the] price a bit." 

Will it move the needle?

Netflix doesn't provide details of how many customers opt for each pricing plan, so it's difficult to determine just how much the company will benefit from this move, but using third party estimates could get us close. A survey in mid-2018 found that 30% of customers subscribed to the premium tier, 43% chose the standard plan, and 27% opted for the basic plan, according to data from Parks Associates.  

In its most recent quarter, Netflix reported about 57 million paying U.S. subscribers. Using the above estimates, the company will add about $300 million per quarter, or $1.2 billion per year to its coffers from its latest price increases.

This will help offset the company's soaring content spending which topped $8 billion in 2018, with an estimated 85% of that total spent on original programming. It will also improve Netflix's cash flow. In its most recent shareholder letter, the company signaled that it may have reached peak cash burn, saying "We currently see next year's negative FCF (free cash flow) as roughly flat with this year." So far in 2018, the company has produced FCF of negative $1.7 billion, and said "we anticipate that FCF will be closer to -$3 billion than to -$4 billion for the full year 2018." 

A smart move

Based on recent events, Netflix customers are unlikely to object to the rate hike. The company said that 45 million customers, or nearly a third of its total subscriber base, viewed its smash hit Bird Box in the first seven days of its release. Netflix also just revealed the release date for the third season of its fan-favorite series Stranger Things, which will debut on July 4, 2019. The company also added five Golden Globes to its trophy case, more than any other network or streaming service. 

Considering all its recent wins, Netflix has earned itself a little price increase.

Check out the latest Netflix earnings call transcript.