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Netflix Hikes Rates, Tries to Outrun Debt

Aditya Kishore
10/6/2017
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Netflix has raised its prices in various markets, including the US and UK, according to reports. The company also plans to increase its rates in several European countries.

Pricing for its mid-tier plan, which allows users to stream two separate shows simultaneously, is now $1 higher, going from $9.99 to $10.99 per month. The higher-priced tier, allowing for four simultaneous streams and Ultra HD content, went up $2 to $13.99 a month. The entry-level plan, however, remains unchanged at $7.99.

In the UK, the mid-tier plan went up by 50p to £7.99 ($10.42) per month, while the four-stream version is now GBP £9.99 ($13.02).

Wall Street liked the announcement, with Netflix Inc. (Nasdaq: NFLX) shares rising 4% to an all-time high and peaking at $194.39 late yesterday before dipping slightly. Analysts had expected a price rise as content development and acquisition costs continue to ramp up for the company. Netflix Inc. (Nasdaq: NFLX) -- and some analysts -- believe that its customer acquisition and churn is mainly dependent on the content library the company offers, and it is betting heavily on an original content strategy to drive continued subscriber and revenue growth.

Netflix is committed to spending $6 billion just on original content development this year, and expects that to rise in coming years. It is even adding feature films to its roster, with 40 films expected to be released this year along with a broad slate of TV dramas, comedies, documentaries and studio shows. For that reason, it expects that it will not be cash-flow positive for the foreseeable future.

The reason that Wall Street is largely content with this money-losing strategy is that Netflix's subscriber base is growing at a staggering pace. The company had 103.95 million subscribers around the world at the end of the last quarter, and expected to add another 3.65 million in the third quarter.

But its finances are concerning to some. A report in the Los Angeles Times earlier this year found that Netflix was carrying $20.54 billion in long-term debt and obligations in order to fund its content pipeline. Its net cash outflow in 2017 is forecast to grow to as much as $2.5 billion, up from $1.7 billion last year.

That level of debt is raising some eyebrows.

But Netflix countered these claims by splitting that $20 billion figure into two, and saying that $15.7 billion of the total is "streaming obligations," i.e., content contracts with studios. It described these as "future content expenses that will go through the income statement over time."

Netflix also said that "every broadcaster, cable network and streamer that has licensing agreements uses the same structure." It offered the example of Disney/ESPN, which "has $49 billion in similar commitments for sports contracts."

Still, opinions appear split even among Wall Street analysts . Many believe Netflix has reached a scale where it is able to carry this debt burden relatively easily, but others point out that much of the optimism around the company's prospects are tied to its ability to keep pulling in customers at a remarkable rate. And sooner or later, gravity brings down everyone.

The price rise, while clearly driven by the burden of content development, is unlikely to have a huge impact on subscriber acquisition or retention. Firstly, Netflix is not touching the basic, lowest-priced tier. These are likely to be the most price-sensitive subscribers -- and they won't be affected.

As for the rest, no one likes a price rise, but going up $1 after three years doesn't seem that unreasonable. And while many cord-cutters have moved to OTT due to the high costs of pay-TV, not every Netflix subscriber is a cord-cutter. Even among who that are, price is one driver of subscription, not the only one.

But the price rise does serve to remind everyone of the balancing act that Netflix is required to pull off, between spending big on content and still keeping prices low: If prices rise too much or too often, it will lose subscribers. And now dramatic subscriber growth is what the company's future is based on.

— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation

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mendyk
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mendyk,
User Rank: Light Sabre
10/18/2017 | 9:44:33 AM
Re: Familiar ring
I'd like to meet the shareholder who is content with operating losses as long as the customers are happy.
kq4ym
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kq4ym,
User Rank: Light Sabre
10/18/2017 | 9:05:22 AM
Re: Familiar ring
It is indeed interesting to watch giant companies, in a real sense, gamble with investor money. Operating at a loss for years, but with the promise that they'll hit the pot of gold at the end of the rainbow seems to keep the promise going for a long long time. Some win, some lose. At least the customers now seem to be on the win side despite minor subscription fee increases.
Joe Stanganelli
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Joe Stanganelli,
User Rank: Light Sabre
10/6/2017 | 4:08:08 PM
Re: Familiar ring
@mendyk: At least they've found a way to lose money more efficiently and faster. ;)
Joe Stanganelli
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Joe Stanganelli,
User Rank: Light Sabre
10/6/2017 | 4:07:23 PM
OTT contract lock-in next?
With all of these rate hikes over the years, combined with the proliferation of OTT as a viable alternative (let alone supplement) to traditional cable, I'm waiting for the other shoe to drop -- when Netflix, Hulu, and other OTT content providers start offering contracts with locked-in prices the same way the cable companies do.
mendyk
100%
0%
mendyk,
User Rank: Light Sabre
10/6/2017 | 12:04:42 PM
Familiar ring
"We lose money on every customer, but we make up for it on volume." Little wonder why the disconnect between business performance and company valuations gets wider every day.
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