Netflix (NFLX -0.63%) has been sitting out the price hikes for ad-free streaming services this year, but it could be time for the top dog to stand up and stretch its legs. The Wall Street Journal is reporting that Netflix will raise prices for its most popular subscription tier, which offers access without commercials, shortly after the end of the Screen Actors Guild strike.
Netflix isn't confirming the report, but when the always popular "people familiar with the matter" reach out to the Journal, it's often just a matter of time before it becomes official.
Streaming services have been largely holding firm on pricing for their advertising-supported tiers, a move that should keep churn in check for the most price-sensitive consumers. The battleground for hikes has come primarily from the premium-priced offerings where customers can take advantage of the on-demand platforms without time-consuming ad breaks.
The contagion is also a sign that services expect ad revenue to become more lucrative in the near future, offsetting the widening price differences between the tiers. We likely won't have to wait long for Netflix to confirm or deny the chatter. It will be one of the first companies reporting this earnings season, offering its third-quarter results in two weeks.
Mind the gap
The difference between what subscribers pay for Netflix with or without ads is already pretty substantial. The standard service with ads costs a reasonable $6.99 a month. The standard tier without commercial interruptions will set you back $15.49 a month. It's the largest gap among the streaming services, something that isn't necessarily a surprise since Netflix also happens to be the most successful.
Netflix had 238.4 million global paid memberships at the end of June. It has also been consistently profitable over the last 20 years, a sharp contrast to its hungry rivals that are losing billions a year on their streaming services.
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Despite the pricing difference, Netflix turned heads earlier this year by revealing that it's making up the $8.50 monthly difference in the two tiers through its ad revenue. It's not surprising that Netflix can command a market premium for its marketing missives, especially since it's an audience that has been historically elusive to advertisers. The real shock is that Netflix was able to achieve that kind of success so early and with a limited load of actual sponsored spots eating into the viewing experience.
Netflix waiting until the strikes are over (unlike many of its rivals that announced price hikes this summer) also makes sense. A silver lining in an otherwise poorly received Netflix quarterly update in July is that it boosted its free-cash-flow guidance from $3.5 billion to $5 billion for the entire year.
However, that was based on strike-related shutdowns. The streaming pioneer pointed out that expenses will obviously pick up again once the acting union resolves its dispute, joining the Writers Guild of America.
Despite the sluggish recent top-line gains at Netflix, with revenue expected to climb in the single digits for the second year in a row, it continues to be the market darling of streaming services stocks.
It remains to be seen how large the subscription increase will be, but investors should be comforted that the $6.99 ad-supported tier will still be there as a safety net. If sticker shock prompts someone on the ad-free plan to reconsider, why not just check down to the advertising-saddled offering that will be more than $8.50 less a month?
Netflix knows what it's doing. Prices are going higher for subscribers, and if the hike is successful, the prices will also be going higher for shareholders.
