As announced earlier,
Netflix Inc. (
recently raised its subscription prices. Domestic new subscribers
will now pay $8.99, which is a $1.00 hike from the previous pricing
plan of $7.99 per month. International new subscribers (Europe and
United Kingdom) will be paying a little bit more than $1.00 due to
foreign currency conversions.
The modest price increase reflects Netflix's cautious approach as
it does not want to repeat the 2011 debacle. In Jul 2011, Netflix
raised the prices of its combined streaming and DVD-rental package
by 60% that enraged customers, resulting in substantial subscriber
The company's decision to split the DVD business into a separate
entity also did not go down well with investors. Netflix's share
price plummeted from a high of $300.0 in July to a low of $60.0 by
the end of 2011.
However, we believe that the current price increase will not hurt
Netflix's growth prospects due to the selective nature of the plan
and measured approach. Streaming prices are only increasing for new
users, as existing subscribers in both the regions will enjoy the
current $7.99 plan for the next two years. The company is also
keeping the prices for the loss-reporting DVD segment same.
Netflix's superior content portfolio is a major attraction for
subscribers. The company's growing investments in original program
pipeline will boost subscriber base. Its continuous focus on
improving customer engagement will also play a significant role in
limiting any churn rate due to this price increase.
Netflix is completely dependent on its streaming service that
accounted for almost 90.0% of the revenues in first-quarter 2014.
Streaming revenues jumped 45.8% from the year-ago quarter to $1.14
billion. Most significantly, streaming contribution margin surged
to 18.5% from 7.0% reported in the year-ago first quarter.
To ensure better streaming quality, Netflix has agreed to pay
annual fees to
. However, these agreements are expected to increase Netflix's
operating costs. Moreover, the Federal Communications Commission's
(FCC) recently proposed rule that will allow Internet Service
Providers (ISPs) to charge fees for faster connections is a
headwind for Netflix.
The new rule will allow other ISPs such as
to demand additional fee for better transmission quality, which
will add to Netflix's already rising cost burden. Netflix has $7.25
billion due for content streaming obligations, out of which $2.97
billion needs to be paid within the next 12 months. After that
period, Netflix needs to pay $3.27 billion within the next three
In such a scenario, the modest price increase will help Netflix to
somewhat offset the rising operating costs in the near term. We
believe that Netflix's expanding content portfolio, innovative
content pipeline for the second half of 2014 and expansion into new
international markets are the major positives that will continue to
boost its subscriber base.
Currently, Netflix has a Zacks Rank #3 (Hold).
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