We're ankle-deep into what could wind up being the two scariest months for Netflix (NFLX 0.70%) investors. Between its critical third-quarter earnings report in two weeks and the launch of new Apple (AAPL -0.74%) and Disney (DIS -0.06%) streaming video services next month, there are a lot of things that can go wrong for the premium streaming leader. One Wall Street pro seems to think the fallout could be severe unless Netflix tweaks its prices.
Needham analyst Laura Martin feels that Netflix could shed as many as 10 million of its 60.1 million U.S. subscribers at its current monthly rates. With a year of Apple+ being bundled into new-device purchases at no additional cost, and Disney recently selling three-year prepaid plans to Disney+ for roughly $4 a month, it's going to be difficult to stand out with its standard plan's monthly pricing of $12.99. Netflix seems out of touch, especially if the economy sours and consumers brace for a recession. This could be a lose-lose situation for Netflix, but it pays not to underestimate what CEO Reed Hastings can do.
There's another way out
The pricing war is real, and it's easy to see why Netflix can feel the pinch next month with the Nov. 1 launch of Apple+ and Disney+ following less than two weeks later. Netflix at $12.99 a month has been a compelling value proposition for folks paying several times that amount to their cable and satellite television providers, but will those same deal seekers now flock to cheaper new services launching with top-shelf content?
Netflix can respond with a price cut, but that would likely trigger an even bigger collapse in the stock than just the potential slow drain of high-paying members. There doesn't seem a way out for Netflix, but there is a third option -- and a fourth, if you care to get creative.
The third option would be for Netflix to play the same game that Disney and Apple are playing. Offering a multiyear discount now -- before the launch of Apple+ and Disney+ muddle the marketplace -- would help lock in long-term Netflix customers, and it's about the only case where the investing community would applaud what is effectively a price cut. With Netflix prices unlikely to rise in the near term given the suddenly cutthroat nature of this niche, discounted multiyear deals are not likely to cause huge concern among investors.
Another option would be to roll out a more affordable ad-supported version. Netflix has always resisted the urge to jam up its user experience with marketing missives, but it could be one way for it to offer a lower-priced plan without disrupting its premium positioning. As the undisputed top dog with more than a decade of streaming data, it's fair to say that advertisers would love to get in on anything that Netflix may offer on that front. Needham's Martin suggests that Netflix consider a $6 a month ad-saddled streaming plan.
Netflix ultimately has to do something. If can't follow up its jarring second-quarter subscriber miss with another clunker later this month and no new ideas in hand. Locking in members with discounted multiyear plans, a cheaper ad-supported plan, or even a long overdue push into digital rentals will be the only ways it can save its stock if the news will be unpleasant when it reports after the market close on Oct. 16.