Netflix's (NFLX) Price Hike Affirms Working Strategy

Netflix (Shutterstock photo)Netflix (Shutterstock photo)

Just how well is Netflix’s (NFLX) goal of being the world’s first global television entertainment platform working?

At a time when cable and satellite companies and a handful of media titans are suffering from subscriber losses, the Los Gatos, Calif.-based internet movie streaming giant has decided to raise prices, betting on the stickiness factor of its platform, not worrying that people will cancel the service.

The company last week raised the the price of its most popular U.S. streaming service, previously at $9.99 per month, by 10% to $10.99 per month. Its premium service, meanwhile, jumps 17% to $13.99 per month from $11.99. Both new pricing plans, which offer high-definition viewing on multiple screens, take effect in November. The company said it will begin notifying current subscribers about the price bump October 19.

On the news, Netflix shares surged last Thursday as much as 5.4% to a new all-time high of $194.49. On the Friday the stock tacked on as much as 2.3%, reaching $198.92 to end the week up almost 10%.

Why the immediate jump in the stock? Obviously, the more money Netflix charges for its service that will translate to higher revenue and profits. And the latter had become a great source of concern over the past several quarters as Netflix stock had taken off, implying more risk. This is because CEO Reed Hastings at the Code Conference in California in May, had forecasted for the company to not only spend some $6 billion on content in 2017, but also said that expenditures will rise even more going forward.

Netflix is betting that original content such as popular hit shows such as the House of Cards, Narcos and Orange is the New Black, among other titles, would be the key differentiator from competing platforms such as Amazon (AMZN) and Hulu. Plus, Hastings has not been shy about wanting to take on premium TV services such as Time Warner’s (TWX) HBO. While Hastings has shown he can push all the right buttons, he had not — until this point — answered investors’ questions about how long would it take for the content spend to pay off.

The price increase just answered that question in a big way.

Investors are now betting that the price increase will give Netflix the both the time and liquidity its needs to sustain its massive global expansion. Analysts are also showing confidence that the price bump won’t cause a significant number of cancellations. “We believe that Netflix’s pricing power has increased materially over the past few years as their content slate and technology has improved,” said RBC Capital Markets analyst Mark Mahaney in a note Thursday.

Netflix, which will report third-quarter earnings on October 16, also understands that despite the increase, its prices are highly competitive to new online TV services from Hulu and YouTube, which are entering the market at about $40 per month. To that end, Netflix, which promised it would take more risks, is taking a smart one here. And investors will be rewarded for it.

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

This article appears in: Investing , Stocks , Investing Ideas , Technology
Referenced Symbols: NFLX , AMZN , TWX

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