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Does Netflix Have a Pricing Problem?

By Stephen Lovely - Aug 19, 2019 at 4:52PM

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Its second quarter subscriber numbers disappointed, and cheaper competitors are coming.

Netflix (NFLX 4.15%) has been the most popular streaming video on demand (SVOD) service since its launch in 2007. As the elder statesman of the streaming space, it has set many of the norms for the industry. For a while, that included pricing.

But Netflix has periodically hiked its subscription fees over the years, and not all of its competitors have followed suit. Now, new rivals are poised to enter SVOD at lower price points, even as investors process last quarter's disappointing Netflix subscriber figures. Does the company have a pricing problem?

A pile of cash

Image source: Getty Images

What should Netflix cost?

Netflix debuted at a price of $7.99 per month -- just over $11 in today's dollars. There have been a few price hikes since then, though only the most recent -- just this year -- raised the price of that baseline plan. Previous hikes affected only the pricier two tiers. Netflix's middle plan is its most popular, and that price has gone up three times since its introduction. 

Past Netflix price hikes have generated some grumbling, but the company has never suffered much -- until, perhaps, now. In the second quarter, it announced disappointing subscriber figures and actually posted a net loss of subscribers in the United States. Was the latest price hike to blame?

It certainly seems to have been a factor. In a letter to investors, the company conceded that areas affected by the price hike missed subscriber projections by "slightly more" than other regions. Netflix raised its price in the U.S. and in about 40 Latin American markets. While the price hike was announced in January 2019, it rolled out to existing customers months later, which is why the second quarter figures are relevant.

Cheaper competition

Hulu, Netflix's first true competitor, launched in 2008 with a bold proposition: free streaming. By 2010, though, Hulu killed off its free subscriptions and kept only its paid SVOD option, which had debuted later on. It has not stopped trying to undercut Netflix, though: The service actually lowered the price of its SVOD subscription earlier this year in an apparent response to Netflix raising its own prices (Hulu increased the price of its live TV service at the same time, but that is a less-direct competitor to the exclusively on-demand Netflix).

Netflix hasn't had much trouble staying more popular than its cheaper counterpart. Soon enough, though, Hulu won't be the only major streaming service with a low price tag. Walt Disney (DIS 1.64%) is set to release Disney+ this year, which will reportedly feature a smaller content library than Netflix and a smaller price to match: $6.99 per month. Disney also controls Hulu.

There's plenty of reason to worry about subscription fatigue in a streaming market that is poised to become exponentially more fractured. But subscription fatigue isn't just about options -- it's also about price. It seems safe to say that cheaper services make more appealing additions to multi-subscription households. Granted, not all of Netflix's new competitors are going cheap: AT&T's WarnerMedia is reportedly plotting an eyebrow-raising price of $16 or $17 per month.

Netflix's dilemma

There have been cheap streaming services before. Some, like AMC's Shudder and NBCUniversal's now-defunct Seeso (NBCUniversal is owned by Comcast) have targeted specific genres. Cheap services were often positioned to be supplementary -- supplementary, presumably, to the mega-popular Netflix.

But in a future in which The Avengers is on Disney+ and The Office is on Comcast's streaming service, subscriptions might look a whole lot more diverse. And in that world, Netflix can't expect lower-cost options to orbit around it, hoping to fill leftover spaces in budgets. A more fractured market will mean more subscription churn and more combinations of streaming services. It will only get harder to convince customers to lock such significant chunks of their streaming budgets into just one service.

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