The long hinted at Netflix (NASDAQ:NFLX) price increase for new U.S. subscribers has finally come.
In an email that went out to subscribers with the subject line "Important Membership Information," the company announced it would be raising prices $1 for new members while promising exisiting customers their rates would not change for two years. Here is the text explaining the pricing change that appeared below a header that said "Thanks for being a Netflix Member":
In order to continue adding more movies and TV shows, we are increasing our price from $7.99 to $8.99 for new members. As a thank you for being a member of Netflix already, we guarantee that your plan and price will not change for two years.
You can review your membership details at any time by visiting Your Account. As always, if you have questions, we are happy to answer them. Please call us at any time at 1-888-357-1516.
–The Netflix Team
Below the pricing info the email had a section touting recently added content including the movies Jobs, Turbo, and Don Jon, along with the TV show House and a new season of Netflix original House of Cards.
The list of new content was clearly a not-so-subtle intent to remind anyone angry about a two-years-out price increase that Netflix offers a lot of stuff and is a good value. In general the company took the softest approach possible to announcing what amounts to a tiny price increase. In addition to the two-year grandfather period for existing customers, Netflix also had floated rumors of a $2 per month price increase, making the $1 bump feel like a giveback.
Clearly CEO Reed Hastings is a little gun shy about price increases after the 2011 debacle where he attempted to effectively double prices by splitting the company's DVD service from its streaming video offering. The recent increase seems unlikely to anger anyone -- it's hard to imagine people storming out over a $12 a year increase.
What does the increase mean for Netflix's bottom line?
In the first quarter of 2014 Netflix had 34.4 million domestic subscribers, and the company forecast a gain of 650,000 paying users over the quarter. Getting an extra buck out of each new member won't immediately make a huge impact on the bottom line, especially for a company that spent $2 billion on content and had $799 million in domestic revenue for the first quarter of 2014. But as the member base grows and existing subscribers hit the price increase, the company can expect hundreds of millions of new income without much in the way of expenses it wouldn't already be paying.
The cost of doing business for Netflix has always been expensive and it has increased recently as companies including Yahoo (NASDAQ: YHOO) and Microsoft (NASDAQ:MSFT) have entered the original digital streaming content space where Netflix already competes with Amazon (NASDAQ:AMZN) for projects.
Netflix also recently reached deals with Comcast (NASDAQ: CMCSK) and Verizon (NYSE: VZ) to pay for the right for the service's customers to get higher streaming speeds from the cable and telephone companies that serve as Internet service providers. The cost of those deals have not been released yet, but assume it's not cheap and assume that Netflix will have to make similar deals with other cable companies or risk having its customers throttled off.
Netflix had to raise prices
Netflix gets a lot of attention and it has an impressive subscriber base, but it has never been a huge money maker. Raising prices in this fashion is a very safe method of increasing revenue without causing subscriber revolt. If anything the company is being too cautious -- with such generous grandfathering it could have gone up $2 a month without causing people to give up their subscriptions.
Still Hastings is showing caution while also addressing his company's long-term need for more revenue. Similar price increases should be implemented in Netflix's markets across the world and without angering anyone Hastings will have given his company's revenue a massive boost. His handling of this situation is the exact opposite of the 2011 pricing debacle and shows that as badly as that situation was handled it taught him an important lesson.
It's hard to find any fault with a move that should conservatively produce over $400 million in annual revenue -- even if that bump is two years away. The price increase makes Netflix a healthier company and protects its ability to spend lavishly on content, which is key to the growth and retention of subscribers.
Daniel Kline is long Microsoft. The Motley Fool recommends Amazon.com, Netflix, and Yahoo!. The Motley Fool owns shares of Amazon.com, Microsoft, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.