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Will Netflix’s Latest Price Hike Spur a Customer Backlash?

Netflix is rolling out its biggest price increase to date — including hiking the standard HD plan from $10.99 to $12.99 per month — for all subscribers in the U.S. and parts of Latin America.

The obvious risk: Some customers will see the higher prices as a reason to bail on Netflix, while there’s also the chance the increase will put a damper on new subscriber acquisition. Is the subscription VOD leader pushing its luck?

Netflix, which has reams of data at its disposal to make such business decisions, appears confident that the risk of any consumer backlash is outweighed by the substantial lift in revenue it’s expecting with the fee increases. Analysts project Netflix will see around $1 billion in additional top-line revenue in 2019 from the rate hikes, assuming there’s not a mass exodus of subscribers.

And investors are bullish on Netflix’s move to flex its pricing biceps: The stock rose 6.5% on Tuesday, to close at a three-month high of $354.64 per share.

Sure, nobody is really happy about paying more for what’s ostensibly the same product. But analysts noted that even at $12.99 per month, Netflix’s standard plan represents a great entertainment value, especially compared with traditional pay-TV bundles. And its most popular plan is still two bucks less than HBO Now ($15 per month).

“We don’t believe that [the price increases] will slow subscriber growth, as the new price points remain competitive relative to Netflix’s volume of original and licensed content,” said Neil Begley, SVP at credit rating firm Moody’s.

With Netflix’s U.S. subscriber base at around 60 million, an average monthly increase of $1.50 per sub would bring in $90 million more per month — or $1.08 billion per year in the U.S. alone, per Begley’s assumptions. And to the extent that Netflix raises prices in international markets, that top-line number could more than double, he added. Begley believes Netflix will reach 200 million total paying subscribers in 2021 and will achieve break-even free cash flow by 2023.

It could be Netflix execs feel the time is right to throw the switch given momentum behind its original content: Alfonso Cuarón’s “Roma” picked up Golden Globes wins and has Oscars buzz, and then there was Netflix’s claim that 45 million member accounts watched at least 70% of Sandra Bullock-starrer “Bird Box” in the first seven days, bolstered by Nielsen data. Netflix also banked a company-record 23 trophies at the 2018 Emmy Awards.

But at least one Wall Street analyst is warning that the Netflix price hike will weigh on U.S. subscriber growth. That’s Wedbush Securities’ Michael Pachter, well known for his bearish calls on Netflix. Currently, the analyst has an “underperform” rating on Netflix’s stock, with a 12-month price target of $150 per share (less than half the price it’s currently trading at).

In Pachter’s analysis, Netflix has “fully penetrated” households with above-median income, suggesting that future domestic growth would have to come from lower-income households (i.e. more price-sensitive consumers). “[T]he latest price increase may slow domestic subscriber growth dramatically this year,” the analyst wrote in a note Tuesday.

It’s not an unreasonable point. Netflix’s growth among low-income Americans flatlined in 2018 while Hulu and YouTube paid streaming services continued to add new users, according to data from Earnin, a service that targets lower-income consumers by providing cash advances on their paychecks without interest or fees.

But other research has backed up Netflix’s relative pricing power. In a report last November, Piper Jaffray analysts postulated that Netflix was in a solid position to raise streaming prices on a regular basis. That’s based on the firm’s survey of about 1,100 U.S. Netflix users that found 71% said they felt content on the service has improved. “We believe, as long as the vast majority of subscribers perceive that the service is improving, Netflix will be positioned to periodically increase price,” the analyst team led by Michael Olson wrote in a note.

Actually, Netflix’s price increases more likely will affect subscription rates of other pay-streaming services, according to Mike Bloxham, SVP of global media and entertainment at consulting firm Magid. Netflix subscribers are less likely to cancel their service than customers of any other streaming platform, according to Magid’s research. In addition, the firm has found that consumers are willing to spend a total of around $38 per month for all their streaming services — which could mean Netflix’s price increases will prompt consumers to end their subscriptions to other services.

“Due to [Netflix’s] strong market position, although this won’t necessarily be a popular move, the number of subscribers that will actually churn out of the service as a result will be minimal,” Bloxham predicted.

The Netflix price increases come as Disney, AT&T’s WarnerMedia and Comcast’s NBCUniversal are each poised to launch streaming services of various flavors over the next year. Netflix’s fee hikes indicate that the company has “no interest in a price war for subscribers,” Craig Moffett and Michael Nathanson, principal analysts at MoffettNathanson, wrote in a blog post Tuesday. “Theirs is, instead, a spending war against competitors — even Amazon — who are not willing to play that game.”

Compared with traditional media companies, Netflix still has carte blanche from investors to keep up its aggressive pace of content investment.

“Netflix seems to be betting that the game isn’t (just) to open an insurmountable gap between themselves and their would-be competitors in terms of the size of their subscriber bases, but instead in the sheer tonnage of what they produce in their studios in order to feed the beast,” Moffett and Nathanson wrote.

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