It hasn't even been two years since Netflix's (NFLX -0.51%) last price hike, and analysts are already calling for another one.
Jefferies' Alex Giaimo said Monday morning that he thinks a price increase is likely in the near to mid-term, predicting an increase of $1 or $2 sometime next year. The move would come after Netflix bumped up prices on most U.S. subscribers from $11/month to $13/month just last year, an effective 18% price increase.
Image source: Netflix.
Why a price hike may be coming
After the Qwikster debacle of nearly a decade ago, Netflix had been reluctant to raise prices, but that approach may be changing, especially after its aggressive price hike last year. Management believes that as the company adds more content, the service becomes more valuable to subscribers, and therefore it's appropriate to charge more.
COO Greg Peters explained on the recent earnings call, "And it's not so much sort of an all priority plan that we have but really more using those signs that we've done a good job at building more value for our members, which indicate to us, hey, it might be time to go back to them and ask them for a little bit more so that we can then invest that further into amazing stories, great content, better product experiences and create even more value for them."
As a pure-play streamer, Netflix's content budget ultimately comes directly from subscribers. The company believes that more content grows the subscriber base, so there's a flywheel effect between raising prices, adding content, and growing its user base. As long as Netflix's prices are below the equilibrium point between supply and demand, it makes sense to raise them, both to increase profits and to add to the content budget.
When Netflix raised prices early last year, it did see some increased churn in its second quarter, the period following the price hikes. It only added 2.7 million subscribers globally, compared to its own forecast of 5 million, and its domestic subscribers declined by 130,000, its first decline since the Qwikster era -- though the second quarter is a seasonally slow period. In its letter to shareholders, the company acknowledged, "Our missed forecast was across all regions, but slightly more so in regions with price increases."
Even though Netflix lost some U.S. subscribers, the value of those subscribers still rose substantially with the price hike. Domestic streaming revenue rose 21.4%, even though the company's subscriber base had only increased 7.4% year-over-year. While Netflix needs to be careful not to soak its subscribers, it's easy to see from those numbers above how the company benefits from a price hike, as nearly all of those additional fees flow to the bottom line.
In 2020, the pandemic has pulled forward millions of subscribers for Netflix. Through the first half of the year, the company added nearly 26 million subs globally, nearly as many as it did in all of last year. If subscriber growth has been pulled forward, then it makes sense that price hikes would also come earlier than they otherwise would have.
What it means for investors
If Netflix passed along a $1/month price hike for most of its subscribers, it would raise prices on the average subscriber from $10.90/month to $11.90, or 9.2%. Though another price hike could cause some churn, it almost certainly wouldn't drive 9% of subs off the platform, especially considering that Netflix would still be cheaper than HBO Max.
That extra $1/month price hike would translate into nearly $2.4 billion in incremental annual revenue -- assuming there's no impact on churn -- which would flow straight to the bottom line, or could be used to increase the company's content budget or avoid taking on additional debt. The streaming company has also said that it intends to grow its operating margin every year, rising from 16% this year to 19% next year, which would be aided by a price hike.
Netflix shares moved with the market on Monday, as talk of a price hike was just speculation from a single analyst, but investors (and customers) shouldn't be surprised to see one next year. With its massive library and surging subscriber base, the company has earned it, and it will benefit its stakeholders over the long run.
