Netflix (NFLX -0.66%) enacted price increases in several markets over the last few months. Most recently, it announced a price increase for U.K. viewers, with its standard plan increasing 1 pound and premium viewers paying 2 pounds more per month.
The move follows price hikes in the U.S. and Canada at the end of last year, and it's very likely Netflix will make additional price increases in other markets, particularly Europe, in 2021. That's despite increased competition from Disney (DIS 2.46%) in Europe and other regions. Here's why investors should expect more price increases and what it means for Netflix's bottom line.
More European content is coming
Netflix's overarching pricing strategy revolves around providing more content for its viewers.
"We're just basically assessing, OK, how many new popular titles have we delivered, what are local language originals in that particular country looking like, what's the slate that's coming looking like, what are the fundamental metrics, right, engagement and churn," Chief Product Officer Greg Peters said on Netflix's third-quarter earnings call. "And we say do we believe that we're really delivering more value to our members and, if so, do we think it's the right time to go back and ask them to pay a bit more so we can again keep that cycle going," Peters added.
Netflix is producing more content in Europe. The region was one of the first to come back online with productions last year, as management noted in its third-quarter letter to shareholders. Netflix expects to release more originals in 2021 than it did in 2020 despite the production shutdowns it experienced last year.
What's more, the European Union recently proposed a new measure requiring on-demand video-streaming services to include 30% European (or British) works. If ratified, the law could push Netflix to create or buy even more local content in Europe, and pass related costs onto viewers.
Precedent for price increases
A Netflix price increase in Europe would coincide with a price increase from Disney. The House of Mouse announced plans to raise prices in Europe by 2 euros per month, or the local equivalent, with the introduction of Star-branded content on Disney+. Disney will also increase prices in Latin America with a bundled Star offering.
The Disney+ price will still remain well below the average Netflix price throughout the world. That said, its content library is still minuscule compared to Netflix's. The planned price increase for Disney+ gives Netflix more room to test price increases in some regions without fear of subscribers abandoning the service for a lower-priced competitor.
It's also worth noting Netflix has followed a pattern for its price increases in the past. It usually tests a price increase in Canada before expanding similar price changes in the United States. Then it tests in the U.K. before moving its attention to Europe. It tested a price increase in the U.K. in March of 2019 before raising prices in Europe in April that year.
If the pattern holds, Netflix could announce its decision to raise prices in Europe in the next month or two.
What a European price hike means for investors
The EMEA (Europe, Middle East, and Africa) region is Netflix's second largest, but also its most diverse, market The company doesn't release details about any specific sub-regions, but it's been established in many European markets long before expanding to the Middle East and Africa. Therefore, it's likely the bulk of its 62 million EMEA subscribers are based in Europe.
If Netflix raises its price by an average of 1 euro per month on about half of its EMEA subscribers, that translates into additional annual revenue of about half a billion dollars at today's exchange rate ($1.22 per euro).
Netflix would likely reinvest practically all of that revenue in additional content directed primarily at the European market. So, there might not be much short-term impact on free cash flow. Due to the way Netflix accounts for content spending, however, the media company will see improvements in profitability.
More importantly, the content investments should lead to greater long-term net subscriber additions. As mentioned, the EMEA region is still smaller than the U.S. and Canada region despite having a much larger population. Europe has more than twice as many people as the U.S. and Canada, so there's still a lot of potential left on the continent.