Netflix Hikes Price for New Users - Analyst Blog


As announced earlier, Netflix Inc. ( NFLX ) 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 loss.

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 Comcast ( CMCSK ) and Verizon ( VZ ) . 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 AT&T ( T ) 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 years.

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: NFLX , T , VZ , CMCSK

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