Longtime Netflix (NASDAQ:NFLX) subscribers are going to see the prices for their streaming plans move higher this year. The video industry disruptor protected existing digital accounts when it bumped the monthly rate of its most popular plan from $7.99 to $8.99 in May 2014 and again up to $9.99 in this past October, but that generous grandfathering window is about to close.
"We will phase out this grandfathering gradually over the remainder of 2016," Netflix writes in Monday's letter to shareholders. "We are rolling this out slowly over the year, rather than mostly in May, so we can learn as we go."
More than half of Netflix's nearly 47 million domestic streaming accounts are currently paying just $7.99 or $8.99 a month for a plan that offers high-def videos on as many as two screens at the same time. It's been implied that most will start paying $9.99 a month like the other half of Netflix's subscriber base, but that's not the only option.
Netflix doesn't want to lose the value proposition of $7.99 a month, especially since a couple of rival services have recently planted the flag at $8.99 a month. This is why Netflix also now offers a $7.99 a month plan for new subscribers. It's limited to standard-def streaming and just one device at a time, but it wouldn't be a surprise if some of the penny-pinchers paying $7.99 a month under the grandfathered protection that starts expiring next month decide to give that a shot.
Another option, of course, is that folks kiss the service goodbye. Netflix doesn't see that happening.
"We expect only modestly increased churn from ungrandfathering, partially because these members have been with us for a reasonable period already, and because our content continues to improve," Netflix writes.
It's true that they have been around the longest, but surely some of them stuck around because they feared that canceling at $7.99 a month meant coming back at $9.99 a month if they should decide to jump back in later. Now that incentive is gone. It should have some impact. However, Netflix is right about content improving.
It had $7.1 billion in streaming content obligations when it pushed prices up from $7.99 two years ago. It's $12.3 billion now. If Netflix has committed to paying 73% more for content over the past two years, are you really going to complain about a 25% increase?
Now let's talk about an option that few are talking about, but one that may prove to be even more lucrative. Half of Netflix's existing users will have to decide between leaving, paying $9.99 a month for the plan that they are currently enjoying, continue to pay $7.99 a month for a scaled-back service, or upgrade to the $11.99 a month plan.
The highest-priced plan offers access to even higher-quality UHD streams on as many as four screens at the same time. Right now this may not seem like such a big deal. High-def is enough, and most people don't have the kind of broadband connectivity to facilitate the chunky files of UHD, HDR, or 4K. That will change, and Netflix is making sure that it will be there. The first season of Marco Polo is HDR-enabled, and those higher-quality streams are available only to folks on the $11.99-a-month plan.
"We are expanding our HDR content catalogue rapidly," Netflix writes, and this is a company that has a funny way of staying one step ahead of the audience. If they're working on supply, the demand will follow. It always does, and that's going to make $11.99 a month -- as much as 50% more than what folks are paying now -- the more desirable choice.
It's the new ceiling, and knowing Netflix, it may not be long before an even higher ceiling gets put in.
Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends 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.
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