Netflix (NASDAQ: NFLX) announced four price increases for its service within the 58 months from April 2014 to January 2019. Combined with continued subscriber growth, the price increases have led to phenomenal revenue growth for the streaming leader. And Netflix has dutifully taken that revenue and reinvested it in more and more content for its audience. It's on track to invest $15 billion in cash on content this year.
Management says it'll ask for higher prices at some point in the future, but pushing another increase in 2020 seems unlikely. Here are three reasons why Netflix won't raise its prices again next year.
Image source: Netflix.
1. It front-loaded the most recent price increase
The price hike Netflix announced at the start of the year was its biggest ever. While it had been asking for an extra dollar per month for subscribers of its most popular plan in the U.S. with every price change, it increased the price by $2 per month at the start of the year.
What's more, the most recent price increase made it the first time any Netflix streaming subscription wasn't available for $8 per month. The lowest-priced plan increased to $9 per month this year.
The higher prices have translated into strong revenue growth despite Netflix's subscriber growth slowdown. Average revenue per user increased 22% year over year last quarter, and was up 16.5% in the U.S. Combined with subscriber growth, total revenue increased 31% year over year, and management expects another 30% increase in the fourth quarter. That's faster growth than the growth in cash spent on content, and importantly led to a very profitable quarter for Netflix over the past three months.
The current pricing ought to support Netflix's increased content spending in 2020 without the need to ask subscribers for more.
2. Retention challenged by current pricing
Netflix's management finally admitted to something that was obvious in its second-quarter earnings report. The new pricing has increased subscriber churn.
Management says the percentage difference in the U.S. is minimal -- maybe 0.1% -- but small changes in churn can have a big impact given a subscriber base of 60 million. Indeed, an increase of 0.1% in monthly subscriber churn translates into an additional 180,000 subscribers leaving Netflix in the third quarter. Netflix notably fell short of its third-quarter U.S. net add forecast by 280,000 subscribers.
"There's a little more [price] sensitivity. We're starting to see a little touch of that," CEO Reed Hastings said on the company's earnings call. That comment indicates Netflix might have to take a breather on price increases as consumers adjusted to its current pricing.
Image source: Netflix.
3. New competitors with low price points
Perhaps the biggest challenge facing Netflix pricing in 2020 is the emergence of several new competitors, most with lower prices. Apple and Disney will debut their streaming video services next month priced at $4.99 and $6.99 per month, respectively.
Comcast's NBCUniversal is expected to launch Peacock at a price point below Netflix's and also offer a free ad-supported version of the service to its cable subscribers. AT&T's WarnerMedia will launch HBO Max early next year, but its price will likely be comparable with Netflix's high-end subscription.
Consumers only have so much they can spend on discretionary purchases like streaming entertainment. Management admitted the new streaming options may be a "modest headwind to our near-term growth" in its letter to shareholders. That's not to say the pricing of competitors will determine Netflix's pricing. "I think the pricing of our competitors, we don't feel is real significant factor in determining what we can charge for our service," product chief Greg Peters said on the earnings call.
He notes that every streaming service will offer a differentiated slate of content, so their value shouldn't be determined by relative pricing. But if consumers are offered enough content to satiate their streaming appetite from competitors at a lower price point than Netflix, it'll be a lot harder for the company to raise prices. It's yet to be determined whether that'll be the case, and Netflix argues it's more likely new competition will steal engagement and spending from linear television than incumbent on-demand services.
Listening to subscribers
Netflix isn't considering an upper bound on its pricing. Peters said he's happy to "let our subscribers sort of tell us as we add more value along where that right price should be. We're really more focused on listening to subscribers and sort of walking that path with them."
Right now subscribers are telling Netflix it needs to let off the gas on the price increases. Higher churn rates and strong interest in forthcoming competition shows Netflix is nearing the upper limit of its pricing power for right now. This year's price hike should be enough to hold it over through 2020, even with further increases in content spending.
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Adam Levy owns shares of Apple and Walt Disney. The Motley Fool owns shares of and recommends Apple, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney, short October 2019 $125 calls on Walt Disney, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.
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