Over the past two weeks, two separate analysts have said they expect Netflix (NFLX -1.74%) to raise its subscription prices as soon as next year. Jefferies analyst Brent Thill and Pivotal Research analyst Jeffrey Wlodarczak both think the streaming video leader can still raise its price despite increased competition over the past year.
But the impact of COVID-19 on the broader entertainment industry may have increased the value of Netflix relative to other options. That gives it room to raise its price.
Image source: Netflix
The only place to watch new series and films every month
Netflix has been able to mostly maintain its torrid pace of releases throughout the pandemic despite shutting down productions all over the world. Management owes its ability to maintain its 2020 release schedule to its model of releasing every episode of a series at once, which necessitates a long lead time on productions.
Meanwhile, competitors -- both traditional TV networks and new streaming options -- have had to postpone releases. Movie theaters have been shut down and big releases pushed to 2021. Sports were postponed and seasons shortened. With so little content on other platforms, consumers have become increasingly familiar with that "ta-dum" Netflix intro sound.
Netflix saw a surge in subscribers earlier this year, as many people signed up and many people stayed subscribed through the summer. While Netflix may see a reversion in its growth numbers over the next couple of quarters, it appears to have gained while other competitors such as cable TV and AT&T's (T 1.66%) HBO Max have struggled to capitalize.
With strong engagement and affinity for its original series and films, Netflix is building on its virtuous cycle, Wlodarczak points out. More subscribers mean more money to spend on content. Fresh content targeted at underserved demographics expands the appeal of Netflix. Fresh content provides more value for subscribers, increasing engagement and reducing churn. And broader appeal and greater engagement are the key ingredients to another successful price hike.
The centerpiece of home entertainment
2020 has accelerated cord-cutting, which benefits streaming services. More and more traditional media companies are moving to streaming as cable subscription and advertising revenues decline. But the increase in streaming competitors should only make Netflix more valuable in light of the alternatives. Some colleagues disagree.
Netflix is still priced at a value, especially compared with offers such as AT&T's HBO Max. HBO Max is priced at $14.99 per month, compared with $12.99 per month for Netflix's most popular plan. Meanwhile, Netflix has more desired content for most households. And if consumers are looking to build a bundle around a few streaming services, Netflix -- not HBO Max or any other competitor -- is going to be the centerpiece of that bundle the majority of the time.
So, as more media companies launch streaming services, practically inviting consumers to cut the cord, Netflix actually becomes more valuable. And if consumers put a higher value on Netflix, they'll pay more.
What a price increase means for investors
Thill estimated that if Netflix raised pricing on its plans by $1 or $2 per month, the company could generate an additional $500 million to $1 billion in revenue in its first year. That might not sound that big for a company expected to bring in over $29 billion in revenue next year, but the impact on Netflix's free cash flow could be massive.
Netflix expects free cash flow to come in around negative-$1 billion this year. That number is likely to increase next year as it pushed lots of production from this year into next year, but it'll start dropping again in 2022. Reducing cash burn by $1 billion from a price increase would accelerate Netflix's path to breakeven cash flow, which is a key milestone for the FAANG stock and its investors.
