Last week the streaming giant announced that monthly subscription prices would increase as much as 18%, making it the largest increase since launching the streaming business twelve years ago. Previous rate increases haven’t lost Netflix any subscribers, even though price hikes are wildly unpopular. The new prices kick in immediately for new accounts while existing subscribers slowly roll into the new pricing matrix in the next 90 days.
Netflix’s basic plan increases from $8 to $9; the HD standard plan goes from $11 to $13, and the 4K premium plan rises from $14 to $16. The changes affect subscribers in the US, Latin America, the Caribbean, and a few other countries.
The stock market isn’t worried
Shortly after the announcement that Netflix was raising its prices again, the news sent the company’s stock up 6.5%, indicating strong market approval. The news of the company’s last rate hike in 2017 also sent stock shares up, although it was a less impressive 3%. The prior rate hikes have traditionally had the same positive effect on the stock price.
Paired with the company’s reports of US subscribers at an all-time high of 58 million, the stock news seems to be good for the platform. Except for 2011 when the company paired a price increase with a radically changed business model, the rate hikes have had little effect on subscriber growth. Research indicates that 41% of customers threaten to cancel after price hikes, but only 4% follow through on the threat.
Netflix is on pace to grow 30% in 2019, adding to the 40% growth achieved in 2018 when it outpaced fellow technology giants Amazon, Apple, and Alphabet. Furthermore, analysts expect strong earnings from Netflix when it reports fourth-quarter results later this week.
New prices fund additional content
The expected revenue is most likely headed to shore up Netflix’s huge investment in original content. The company spent about $8 billion on content last year and anticipated even higher spending this year.
Revenue from the price hike will also help ward off the threat from the 2019 launch of Disney and Apple streaming services. Comcast-owned NBCUniversal just announced this week that it plans to launch a new streaming service in 2020. The anticipated competition left Netflix feeling enough pressure to announce $2 billion in debt to fend off the newbies.
Rate hikes are less frequent than it seems
It’s only the fifth time Netflix has raised prices since its streaming service launched. Four of the five price increases were within the last five years, so while it may feel like a common occurrence, over time the price structure has remained quite stable.
Netflix first offered streaming services in April 2007. It was originally a free add-on for the company’s traditional rental-DVD subscribers with a cap on the number of hours per account.
- In 2011, Netflix made its most unpopular pricing decision, splitting the subscription services into a $7.99 one for streaming and a separate $7.99 one for DVD rentals. The bold change in direction cost the company thousands of subscribers, and the stock price plummeted.
- By 2014, the streaming company overcame the subscriber exodus from the change in direction. The monthly subscription price for new subscribers rose to $9.99, although current subscribers didn’t pay more.
- In 2016, Netflix eliminated the grandfathering price scheme which kept long-term subscribers at the original $7.99. All current and new subscribers started paying $9.99. Arguably, this wasn’t a separate price increase from the 2014 hike.
- Netflix subscribers grumbled about the price increases of streaming plans by $1 and $2 in October 2017, but there wasn’t an impact on subscriber numbers.
- The 2018 rate hike announcement this week is the most recent. It is the largest increase since Netflix began streaming twelve years ago.
It’s certainly understandable that hiking prices every year for three years has subscribers worried about climbing prices. My opinion is that the amount of original content and other value added in the last few years justifies this increase. I wouldn’t be surprised to see the company look for an alternative source of revenue to avoid a fourth year in a row increase.
Increased revenue could come from cracking down on sharing
Price hikes aren’t the only measure streaming companies can use to raise revenue. A UK startup video software provider called Synamedia recently unveiled an AI-powered system that flags shared streaming media accounts. The software allows streaming platforms, like Netflix, Hulu, and Amazon Prime to get finer insights into their users’ account behavior. The tracking algorithm detects extreme and unusual traffic which allows the company to predict which users are sharing passwords more than they should.
The software company referenced a study that says about 26% of millennials share the credentials for video streaming services with their friends. If true, media companies are losing out on billions of dollars of revenue. Estimates are that by 2021, credential sharing will account for $9.9 billion of loss in pay TV revenue.
There’s no need to panic, though. There is no indication that Netflix has signed any agreements to use the software. In 2016, CEO Reed Hastings took the position that sharing was part of what makes streaming services so desirable. He said, “We love people sharing Netflix. That’s a positive thing, not a negative thing.”
Legitimate subscribers can keep calm, too. Synamedia’s sniffing software can reportedly tell the difference between authentic and sneaky behavior. It currently ignores users that appear to be on vacation and accounts with a family member who lives away from home. It focuses on looking for differences in geographical location combined with unique viewing patterns.
In my opinion, you don’t need to worry about sharing your password with your BFF. If streaming companies adopt the solution, they are more likely to go after high-value targets, like large-scale operations that are pirating passwords to make money.
In a move to generate enough revenue to justify their outlay on original content and fend off competition, Netflix has raised prices for the last three years running. Although it’s the largest price increase since streaming began at the company, subscribers aren’t expected to defect because of the added value. I expect the company to pursue other streams of revenue next year to avoid consumer backlash.
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