One thing you can say about Netflix (NASDAQ:NFLX) CEO Reed Hastings is that he's a master of misdirection. Thursday's move to bump the monthly cover charge for its streaming smorgasbord up to $9.99 was a genuine surprise, unlike last year's increase that was telegraphed well ahead of the move.
"We want to take it very slow," Hastings said in addressing a potential price increase during July's earnings call. "Things are going well. There's no reason to be disruptive."
Well, an 11% increase less than three months later doesn't seem like something being done at a glacial pace. This is in contrast to last year's increase -- when Netflix went from $7.99 a month to $8.99 a month -- and let investors know well ahead of time that an increase was in the works.
It's an interesting approach, and one that can really move the needle next spring. Why wait until then? Well, last May's increase grandfathered in existing subscribers at the $7.99 price point for two years. Analysts believing that this would drop them off next May at $8.99 will now have to raise their forecasts, as those tens of millions of accounts will be paying even more after Gramps moves on.
A skeptic can always argue that the higher price will result in an uptick in churn, and that may be true but weren't these the same naysayers believing that Netflix would struggle to grow its membership base after last year's initial increase? We've seen Netflix grow its global subscriber base by 15.5 million to hit 65.55 million over the past year.
How much is too much? We don't know. Netflix's pricing elasticity remains a mystery. Cord cutters don't seem to be flinching, probably because the fat cable bills that they were paying were going up by a lot more than a buck a year.
Netflix is also transparent about its costs. It has $10.1 billion in streaming content obligations on its books, up from $7.7 billion a year earlier. More subscribers paying more is giving Netflix the flexibility to offer its viewers more, and that widens the gap between Netflix and a sea of pretenders. The 11% increase in the monthly rate doesn't seem so bad knowing that Netflix has seen its programming obligations soar 31% over the past year.
It won't end here. When UBS analyst Doug Mitchelson jacked up his price target on the stock this summer, he did so partly because he saw more than routine plan hikes boosting revenue per subscriber. He was eyeing the upside in the potential of bundling or promoting third-party services.
That is neat, but it's also just the beginning. There's low-lying fruit to be had if Netflix follows its lesser competitors into offering digital rentals of movies and shows that are not already in its catalog. It might never happen. Offering rentals could force producers of superior content to hold out for pay-per-stream paydays instead of up-front contracts. However, with so many ways for Netflix to cash in on its growing audience -- and we'll find out how big that user base is when Netflix reports quarterly results on Wednesday -- the only thing we know for sure is that $9.99 isn't the end.
It's not the ceiling. It's a temporary floor.