1 Chart That Shows Why Netflix Can Raise Its Prices

Netflix recently increased its price in the U.K., but it has room for more.

Adam Levy
Adam Levy
Jun 16, 2015 at 8:00PM
Consumer Goods

Last week, Netflix (NASDAQ:NFLX) upped its subscription price in the U.K. by another 50 pence. The streaming service increased the price by a whole pound last year at the same time U.S. subscribers were told their price would increase by a dollar. At today's exchange rate, British streamers will be paying the equivalent of $11.68 per month when the price increase goes into affect.

With new streaming services from Time Warner's (NYSE:TWX.DL) HBO and CBS's (NYSE:CBS) Showtime pricing their services well above Netflix's standard price, there's still room for Netflix to increase its price. And there are plenty of reasons it could justify yet another price increase, but this one chart sums it up pretty well.

The one chart that shows why Netflix can raise its prices

Source: Compiled by author, based on letters to shareholders 

Netflix periodically updates investors on the total number of hours streamed by its subscribers. In the fourth quarter of 2011, Netflix says its 23.5 million subscribers enjoyed over 2 billion hours of video. By the first quarter of 2015, that number climbed to 10 billion hours spread among its 62.3 million global subscribers.

The average Netflix subscriber now streams about 106 minutes of video per day, nearly twice as much as in the fourth quarter of 2011. In the U.S., estimates have climbed even higher, with BTIG analyst Rich Greenfield saying the average subscriber in the U.S. streams over two hours per day on average.

At those levels, the average household with a Netflix subscription probably watches it more than any other television network. As such, it ought to command pricing more similar to premium networks such as HBO and Showtime. HBO's new HBO Now service is priced at $14.99 per month, and Showtime's upcoming streaming service will cost subscribers $10.99 each month. At $8.99 per month in the U.S., Netflix still has room to increase prices in relation to other premium networks.

How did Netflix get there?
It's highly unlikely the median time spent watching Netflix per day is anywhere close to the average. Netflix subscribers have bought into the idea of binge watching, viewing multiple TV episodes in a row or hosting an impromptu movie marathon.

Netflix started making more deals for exclusive and more premium content in 2012, moving away from the bulk package deals it had previously purchased from media companies. Even with competition from other streaming services, Netflix has been able to curate a strong library of high-end content.

The biggest impact on Netflix's streaming library has been its growing list of original productions. This year, Netflix plans to triple the amount of original television programming it produces compared with 2014. Netflix says original productions are its most efficient programming on a dollar-per-hour-streamed basis. That implies that more originals mean more streaming per user.

How to actually raise prices
After raising prices last year, Netflix may be somewhat hesitant to raise prices for its huge base of U.S. subscribers once again. Of course, its decision in the U.K. indicates that it's not too worried about losing subscribers to a price increase abroad.

The good news is that Netflix doesn't have to raise its prices, since it already charges $11.99 per month for 4K streaming. Netflix CEO Reed Hastings believes we're only two to four years away from widespread adoption of 4K video, which means Netflix may upgrade its standard service to 4K video, increasing its average price per subscriber.

Continued price increases coupled with subscriber growth in the U.S. will help the company fund its aggressive international expansion plans. If Netflix can execute, it may find itself more profitable than HBO.