Netflix's Price Hike Is Already Working

Video streamers are paying a bit more to access Netflix's library, and that's OK.

Demitrios Kalogeropoulos
Demitrios Kalogeropoulos
Jul 22, 2014 at 3:33PM
Consumer Goods

Millions of Netflix (NASDAQ:NFLX) subscribers can't be wrong: Its streaming service is worth paying just a little bit more to access.

The online video giant recently boosted prices by $1 a month on the standard streaming plan. However, in contrast to its 2011 pricing debacle, Netflix this time limited the increase to new members while giving existing subscribers an extension of their current cost. 

That seemed to do the trick. This year's tweak didn't halt growth -- or lead to a "wave of cancellations" like Netflix had to endure in 2011. Instead the company added 570,000 streaming members in the U.S. last quarter, which was slightly above management's forecast. CEO Reed Hastings and his team now project that the third quarter should bring 1.3 million new subscribers into the fold, the same result as last year. The price change is having only a "minimal" impact on member growth, they told investors.

But the hike is already starting to be felt in Netflix's financial results. Take a look at the company's average revenue per user, or ARPU. That figure climbed to new high last quarter of nearly $7.80 per month.

Source: Company financial filings.

ARPU should improve more significantly in the quarters ahead as new members grow to a larger percentage of the subscriber base over time.

With some help from the price boost, profitability also expanded yet again this quarter. Sure, Netflix more than doubled its earnings over last year. But the better news for shareholders is that this past quarter marked the 10th out of the last 11 in which contribution margin improved. That figure is quickly approaching 30%, which the company says it should hit sometime next year.

Source: Company financial filings.

Of course, Netflix didn't boost prices simply to pad its bottom line. The increase was meant to fund major investments in content spending and a continued push into expensive original shows like Orange Is the New Black. Two of those series, a new season of The Killing and a new comedy, BoJack Horseman, will launch next month. Management also seems excited about the prospects for Marco Polo, a historical adventure show that Chief Content Officer Ted Sarandos called "ambitious" in a conference call with analysts.

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Ambitious doesn't come cheap, though. And you can see evidence of a big ramp-up in content commitments by way of Netflix's streaming content obligations. Those rose by $600 million since the prior quarter and now total close to $8 billion. 

Source: Company financial filings.

While that's a significant jump in obligations, it means that further improvements in Netflix's library are on tap. And we know from the early results of this price boost that Netflix's customers see real value in a growing content library.