Netflix Raises Prices as Content Spending, OTT Competition Heat Up

Netflix confirmed that it is raising prices on all tiers of its subscription streaming service in the US and a small number of other markets. The company is looking to plow more money into original content that it will need to fend off a slew of well-heeled rivals that are looking to take their cut of the expanding direct-to-consumer OTT video market.

Here's how the new pricing stacks up for Netflix Inc. (Nasdaq: NFLX)'s three tiers:

  • The one-stream, standard-def-only plan rises to $8.99 per month, from $7.99.
  • Its two-stream plan, which provides HD streaming quality, jumps to $12.99 per month, up from $10.99.
  • Its four-stream plan, which includes a library with support for Ultra HD/4K, High-Dynamic Range and Dolby Atmos, rises to $15.99 per month, from $13.99.

The new pricing applies immediately to all new Netflix subscribers and will be applied to existing customers on a phased approach over the next few months. The increases primarily affect Netflix's US streaming base (58.46 million subs at the end of Q3 2018), and in countries in Latin America and the Caribbean where Netflix bills in US dollars, such as Uruguay, Barbados and Belize.

“We change pricing from time to time as we continue investing in great entertainment and improving the overall Netflix experience for the benefit of our members," a Netflix spokesperson said in a statement to Light Reading.

AP, which broke the news of the price hikes, said it marked Netflix's largest since launching its video streaming service some 12 years ago.

Notably, T-Mobile CEO John Legere said via Twitter there's no changes coming to the company's Netflix On Us campaign "for now" amid the price increase:

Netflix is raising prices as it continues to invest heavily on originals that help it gain and retain customers. It spent about $8 billion in 2018 to create and license content, and analysts expect that to grow to $12 billion this year. Netflix also needs to protect itself as other studios threaten to pull some popular library content into new direct-to-consumer OTT products from media powerhouses such as Walt Disney Co. (NYSE: DIS) and AT&T Inc. (NYSE: T)'s WarnerMedia later this year, and by NBCUniversal LLC in 2020. (See Can NBCU Crack the Economics of OTT?, Disney Dispenses Details About Its New Streaming Service and AT&T CEO: Our SVoD Service Won't Be 'Another Netflix'.)

With respect to specific fare, Netflix's price increase arrives as it prepares to launch the final season of Orange Is The New Black, the third installment of Stranger Things, puts more money into full-length films and introduces new tech-oriented features such as "interactive" programming like Black Mirror: Bandersnatch and updated interfaces.

Wall Street appeared unconcerned that the price increase might cause subs to flee the service, as it puts Netflix in better alignment with direct-to-consumer SVoD products such as HBO Now and Hulu. Netflix shares closed up $21.70 (6.52%) to $354.64 Tuesday.

"For many users, Netflix is an indispensable video service. There will not be much backlash (for now)," Paolo Pescatore, an independent industry analyst, said in emailed comments, noting that he expects Netflix price increases to reach other countries in the coming months.

Can Netflix keep this going?
Still, some analysts wonder if Netflix can sustain its model and the need to spend so heavily on content in order to remain relevant and competitive as companies like Disney double down on OTT and pair that with their marketing chops.

Speaking at a media event during last week's CES in Las Vegas hosted by Ooyala Inc. , Laura Martin, analyst with Needham & Co. , noted that Netflix has disrupted the studio model by spending the bulk on content creation and less on marketing, while traditional studios tend to spend somewhat equally in those areas.

Netflix, she warned, will be challenged by "marketing juggernauts" such as Disney and WarnerMedia, and that Netflix's will find itself in jeopardy of burning through its cash and going bankrupt if the company is unable to access capital markets within a year.

"If we freeze them again, they're going under," she said. "I think the traditional content creators have the winning formula," she said.

Craig Moffett, analyst with MoffettNathanson LLC , said the rate increase will add about $720 million more in revenue than modeled for Netflix in 2019, and expects the company to plow that back into its content and marketing strategy.

"The market doesn’t require Netflix to slow down their investment spending (yet)," he wrote in a blog post, holding that AT&T and Comcast don't have that same luxury. Netflix, he added, has "no interest in a price war for subscribers. Theirs is, instead, a spending war against competitors -- even Amazon -- who are not willing to play that game."

In a recent podcast with American Cable Association (ACA) CEO Matt Polka, Moffett also discussed the effects of Netflix's transition to a closed media system rather than a broader value chain that includes syndication revenues and other tactics and strategies that help to spread out the risk.

"The only way you can mitigate that risk is by getting enormously large," Moffett said. "That's a hard game to win at, and I'm not sure it's a game that even Netflix can win."

— Jeff Baumgartner, Senior Editor, Light Reading

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