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The Impact Of Netflix's Price Rise

This article is more than 8 years old.

Netflix recently raised the monthly price for its streaming service in the U.S. by $1, and made somewhat similar adjustment to its international streaming plans as well. The increased pricing will apply only to new customers whereas the current subscribers will continue to pay the same price for two years. We believe that unlike 2011, when the abrupt price changes led to an exodus of large number of customers, the current price increment will be rolled out without affecting the company’s subscriber growth materially. Netflix has been much more communicative about its pricing strategy this time, and the increase is significantly less than what it was in 2011. Overall, our analysis shows that Netflix can add roughly $500 million in annual incremental revenues in the U.S. alone by 2017 with this move. This will help it support its margins which may come under threat from rising content costs. We have incorporated these expectations in our pricing model.

Our $281 price estimate for Netflix stands at a discount of about 20% to the market.

See our complete analysis for Netflix

With The Price Increase, Netfix Can Add Additional $750 Million In Annual Revenues By 2017

Netflix’s average monthly revenue per subscriber in the U.S. stood at $7.57 in 2013, or 95% of the actual price of $7.99. The average realized price differs from the actual because of promotional discounts and free trials. This implies that $1 increase in monthly price will result in average monthly revenue per subscriber going up by $0.95. Assuming that this price increase takes effect in mid 2014, and current subscribers are shifted to new price plan after two years (mid 2016), we conclude that Netflix will generate additional revenues of $18 million, $60 million, $310 million and $549 million in 2014, 2015, 2016 and 2017 respectively. The table below summarizes these findings which are based on the assumption that the subscriber base will grow from 33.4 million at the end of 2013 to 49.4 million by the end of 2017. Additionally, we expect Netflix to gain roughly $200-$250 million in incremental revenues from price changes in international markets, taking the global total to more than $750 million by in 2017.

High Customer Satisfaction And Content Leadership Will Help In Smooth Roll Out Of Price Increase

Netflix’s content leadership and improving customer satisfaction have been the primary reasons behind its success, and will help the company in mitigating the impact of new pricing on its subscriber growth. Given the company’s statements during its recent earnings announcement, we deduce that the churn levels may have come down. Therefore, net additions are being fueled by a lower number of disconnects rather than the strength in gross subscriber additions. That’s positive news for the company but also signals a maturing business. In addition to this, Netflix’s focus on bringing original content has paid off. The season 2 of House of Cards was a big hit and more original content is lined up for this summer. This will help the company mitigate the slowdown in subscriber growth due to seasonality and offset the impact of the upcoming soccer world cup. Netflix is also trying to reduce the window of delay in terms of syndicating its original content in international markets and has made its original episodes available as early as one week or 24 hours after they were released in the the U.S.

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