Streaming content pioneer Netflix (NFLX 0.10%) quietly raised prices in the U.S. and Canada last week. Millions of people flocked to the service at the pandemic onset as they were all of a sudden spending more time at home. That created a surge in demand for in-home entertainment, and Netflix benefited as a result. But Netflix is not alone; after getting a several-years-long head start, Netflix now has to deal with several major competitors.
Therefore, Netflix's announcement of price increases has broader implications. Let's take a closer look at why this is good news for investors.
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Netflix is committed to not starting a price war
Netflix said the cost of a basic plan would increase by $1 to $9.99 per month, the standard plan by $1.50 to $15.49 per month, and the premium plan by $2 to $19.99 per month. The increases further cement Netflix as a premium service compared to other streaming providers. Therein lies one of the broader implications of the price hikes: Netflix is choosing not to compete on price.
Netflix is undoubtedly the leader in the streaming industry, with nearly 225 million paying subscribers. Netflix could have chosen to decrease prices if it wanted to stop the competition from gaining traction in the industry. That decision could have fueled years of fierce battles with financially stronger rivals. It's unclear who would win that sort of battle, but it would be expensive for everyone that participates.
Following the one announced in October of 2020, these latest price increases show Netflix's commitment to not starting a price war.
Netflix is confident that customers will stick around
Additionally, hiking membership prices should give Netflix more money to spend on content. This is an area of competitive advantage for Netflix. Having the most subscribers gives Netflix the ability to spend more on content. That's because it can spread the cost across a broader base. For instance, if Netflix implements a $1 per month price increase on 200 million members, it would generate an extra $200 million in revenue per month and $2.4 billion for the year. Netflix can create a lot of new movies and shows for $2.4 billion.
To put those estimates into context, in the nine months ended on Sept. 30, Netflix spent $12 billion on content. At that same time, Netflix was on pace for annual revenue of $30 billion. If the price increase doesn't cause too many people to cancel their subscriptions, the pricing move will boost revenue higher still.
Overall, Netflix is betting that its customers are willing to pay higher prices because they feel they are getting a good value. So far, that has been true. Netflix has grown from $3.2 billion in revenue in 2011 to $25 billion in 2020. Meanwhile, operating profits have expanded from $376 million to $4.6 billion. Netflix's price-increase announcement should reassure shareholders that its strategy is working; competition is not a significant concern; and it can continue its steady leadership in streaming content.
