Netflix U.S. Price Hikes Could Boost 2021 Revenue by $500M Even With Subscriber Cancellations, Analysts Say

Courtesy of Netflix

Netflix is raising prices for U.S. streaming subscribers, coming as it faces arguably its stiffest competition to date and while millions of Americans are struggling financially amid the COVID pandemic.

Is this really the right time for Netflix to flex its pricing power in its biggest market?

According to some Wall Street analysts, the answer is yes — they predict the fee increases will add an incremental $500 million or more to Netflix’s top line in 2021, despite anticipated short-term churn (i.e., people canceling service because of the higher pricing).

Netflix is raising U.S. prices sooner than many analysts expected, after it last hiked them in early 2019. On Thursday, the company said the price of the Standard HD two-stream plan (its most popular tier) is going up by a buck in the U.S., from $12.99 to $13.99 per month. The Premium 4K four-stream plan increased $2, from $15.99 to $17.99 monthly. Netflix’s single-stream/SD-only Basic plan will remain at $8.99 per month. The company earlier this month raised prices in Canada, when it boosted the Standard plan from C$14 to C$15.

Given Netflix’s strong upcoming content slate through Q4 and into next year, the U.S. price increases should net the company $500 million to $1 billion in incremental 2021 revenue (2%-4% higher than consensus Wall Street estimates), according to an analysis by Alex Giaimo, internet and entertainment equity research analyst at Jefferies.

“Bears will argue that the environment is more competitive now than it was during prior price hikes, but we continue to believe the near-term content slate is underrated and considerably stronger than network peers,” Giaimo wrote in a research note. “History shows short-term churn but continued long-term growth.”

A big X-factor: Will Netflix customers feel like the price increases are justified by the content that’s available now and coming up? Giaimo believes Netflix’s content pipeline “can support the hike.” In his note, titled, “Well Worth an Extra $1,” the analyst noted Netflix expects to release more originals in each quarter in 2021 versus 2020. “This advantage will become more visible over the next 6-12 months as competitive content slows while COVID restrictions (and the need for stay-at-home entertainment options) likely persist,” Giaimo wrote.

Other analysts have called out Netflix’s relatively strong content slate. In Q4, the streamer’s original series include Season 4 of “The Crown,” “Emily in Paris” and “Selena.” Film releases include “The Midnight Sky,” directed by and starring George Clooney, “Ma Rainey’s Black Bottom” with Viola Davis and Chadwick Boseman, and Ryan Murphy’s “The Prom” with Meryl Streep, Nicole Kidman, James Corden and Kerry Washington.

The Netflix U.S. fee increases are “modest,” Piper Sandler’s Yung Kim said in a note Friday. In fact, “We believe Netflix had room to increase the price further, but likely balanced the uptick against the influx of new subscribers” in the first half of 2020, Kim wrote, noting that HBO Max at $15 monthly is still higher than Netflix’s Standard plan. The analyst revised estimates for 2021 revenue to be $29.8 billion, $500 million higher than previously forecast. He estimates Netflix will boost revenue per subscriber by 4% next year and 5% in 2022.

When subscription services raise prices, that inevitably leads to some amount of churn. For example, in 2019, the Netflix price hikes led to a 132,000 net subscriber decline in U.S./Canada in the second quarter — but that was followed by gains of 613,000 and 548,000 in Q3 and Q4 2019, respectively, Jefferies’ Giaimo noted. At the same time, Netflix’s U.S./Canada revenue growth accelerated to 25% year-over-year in Q3 and 24% in Q4, respectively.

Netflix’s price hikes come off its slowest quarterly growth in North America — it gained 180,000 subs in Q3, to stand at 73.1 million in the region — since it lost U.S. subs in Q2 2019 following the previous fee increases. For the third quarter of 2020, Netflix overall gained 2.2 million subs worldwide, slightly below estimates. Netflix anticipated the slowdown following the blockbuster gain of nearly 26 million customers globally in the first six months of the year on COVID tailwinds (versus 28 million for all of 2019).

The revenue bump from the latest Netflix price increases will offset revenue deceleration for the first half of 2021 from the tough comparison with 2020, while also helping push the company forward toward “consistent” free cash flow profitability, according to Giaimo.

After Netflix shares closed up 3.7% Thursday on news of the price hikes, the stock was down more than 5% Friday. The decline comes amid a broader sell-off of tech stocks including Facebook, Amazon, Apple and Twitter on overall mixed results and negative investor sentiment toward the sector.

For Netflix, the question was when — not if — it would increase U.S. pricing, even amid intensifying competition from Disney Plus, HBO Max, NBCU’s Peacock and others.

Recent consumer surveys have shown Netflix was well positioned to boost pricing. Piper Sandler’s August 2020 survey of about 600 U.S. consumers found that 52% of Netflix subscribers said they would pay an average of $2.20 more per month. Similarly, 55% of Netflix subscribers said they would be willing to shell out more for the service, per a Cowen & Co. survey of about 2,500 Americans in May 2020.