The Silver Linings in Netflix's Price Hike

Check out the latest Netflix earnings call transcript.

At this point in the streaming video revolution, not many more Americans need to be sold on the value proposition of Netflix (NFLX 1.74%). Its massive library of content, both original and licensed, speaks for itself. That said, consumers usually get a bit put out when companies raise prices on them, and that's what Netflix is doing, to the tune of 13% to 18% depending on which plan you're on.

But, as MarketFoolery host Chris Hill and MFAM Funds' CIO Bryan Hinmon explain in this segment of the podcast, CEO Reed Hastings doesn't have much to worry about with this move, even in a more competitive streaming landscape.

A full transcript follows the video.

This video was recorded on Jan. 15, 2019.

Chris Hill: Let's move on to Netflix. Netflix shares are up 6% this morning after the company announced it's raising prices. Depending on the plan, prices are going up anywhere between 13% and 18% per plan. This is taking effect immediately for new customers. Existing customers are going to be grandfathered in over the next few months. Not at all surprised that shares of Netflix are up. We love to see companies with pricing power. This has demonstrated in the past that it's a company with pricing power, and they're flexing their muscle right now. Good for them.

Bryan Hinmon: I think there are two sides to this story. The first is, they can do this because the gap between what consumers pay for a subscription to Netflix and what consumers pay for alternatives is wide, especially given the value proposition. The average Netflix bill is about $100 a year. The average Comcast bill is about $1,000. The average DirecTV bill is about $1,400 a year. Of course, that Netflix subscription cost doesn't include internet, but most people are going to have that anyway. There's a huge gap between what you're paying for Netflix and what you're paying for the next man up, the alternative. And then, frankly, I think that consumers believe that Netflix is raising prices not just so they can pad their bottom line, but so they can invest in the consumer experience, invest in more content, and make that value proposition even stronger.

I think Netflix has earned the right to raise prices because of how they've handled this in the past, which is typically, they make the product a heck of a lot better, let users enjoy that, and then they charge for it. That lag, that delay, has earned them the goodwill to be able to do this.

Hill: It is interesting timing, though. As you said, they've absolutely earned the right to do this. I completely agree with that. They're doing it at a time where, arguably, the competitive landscape is more competitive than ever before. Hulu is beefing up their offerings, Disney, these new streaming services are coming online. I can imagine at least one of Reed Hastings' lieutenants saying, "I'm not sure we want to do this in this environment." On the other hand, it's also easy for me to imagine someone saying, "No, let's do this now, before Disney's streaming really gets off the ground and some of those others, as well."

Hinmon: Yeah. I want to go back to the value proposition here for Netflix. Think about the breadth of things that you can consume there. Even in raising their prices here, it's still going to be cheaper than HBO Now. The cost per hour you spend watching is still so much more advantaged in Netflix's case.

The other thing that's worth talking about here is, I think Netflix is probably going to be the one that has to lead in pricing with all of these competitors. The reality of this business is, they all spend a ton on content, and they're not really making any money right now. This buys those other firms a little bit of breathing room to raise their own prices, as well, and keeping them in the same ballpark.

The other side of this coin that I alluded to with my first comment is, does Netflix actually need to do this? They're spending more than $10 billion in content. They have almost $20 billion in content obligations per year. Their debt costs are rising. The last debt that they issued in late 2018, I think it was, was almost at 6% interest rates for $1.9 billion. Their debt costs are rising. They've got 135 million, call it, subscribers. Getting a couple of bucks more across, that pays their interest costs for the year. So this allows them to continue what they hope is the flywheel of investing in great content, growing their subscriber base, and having very loyal customers.

Hill: It's obviously been a phenomenal long-term ride for Netflix shareholders. In the short term, for anyone who looked at Netflix shares right before Christmas, when it was over $230 a share, and thought, "For Christmas, I'm going to buy myself a couple of shares of that," well, well done! Now it's north of $350. That's worked out.

It's interesting, I hadn't thought of that before, the point you touched on about competitors and how they may view this. Yeah, now that you mention it, whether it's Disney or Hulu or any other service, I'm sure they're, maybe not popping the champagne, but they're probably pleased to see this. "The cost of Netflix is going up? Great! This either gives us an ability to market lower prices more aggressively, or it gives us the cushion to bump up our price a little bit."

Is there anything on Netflix you're watching these days? Or you're just immersed in conference calls?

Hinmon: I'm mostly immersed in conference calls is the right answer. But my favorites are Making a Murderer. I can't wait until they have a another season there. And I like Hip-Hop Evolution, which I believe is coming out with its second season.

Hill: I'm completely unfamiliar with that show.

Hinmon: Get with the program.

Hill: [laughs] Give me the 30-second description of Hip-Hop Evolution.

Hinmon: [laughs] It walks you through the evolution of hip-hop.

Hill: It's a documentary. It's not a fictional series.

Hinmon: Right.

Hill: All right. Did Rob Burnett turn you on to that?

Hinmon: No, that's my own jam.

Hill: Rob knows more about music than just about anyone I know. Anything cutting edge, when it comes to music, I assume Rob is right on top of it. One of our colleagues.