Coverage: Netflix bumps up popular subscription price

Netflix’s most popular version of its online streaming service will increase to $10 annually, up from $8.99 annually. The move has built-in protection for the company’s existing customers, who will be given a grace period before they too must pay the extra $1 a year.

Michael Liedtke of the Associated Press had the story:

Netflix is raising the price of its Internet video service by $1 for new customers in the U.S., Canada and some Latin America countries to help cover its escalating costs for shows such as “House of Cards” and other original programming.

The new price of $10 per month for Netflix’s standard plan – its most popular – marks the second time in 17 months that Los Gatos, California, company has boosted its U.S. rates by $1. The trend reflects the financial pressure that Netflix is facing as it competes against Amazon.com, HBO and other services for the rights to TV series and movies that will expand its audience.

Netflix’s 42 million existing U.S. subscribers are being insulated from the price bump. That’s a move CEO Reed Hastings is taking in an effort to avoid a repeat of the customer backlash that stung the company four years ago when it raised rates by as much as 60 percent for subscribers who wanted Internet video and DVD-by-mail rentals.

The abrupt price increase in 2011 triggered an exodus that cost Netflix more than 800,000 subscribers and caused its stock to lose 80 percent of its value in a tumultuous 13-month period.

The experience taught Netflix to reward its existing subscribers as higher prices are phased in on new customers.

Lucas Shaw of Bloomberg explained why Netflix is able to push up its prices:

Existing customers will have a grace period of varying lengths before prices go up for them, the company said on its website. The increase affects the plan that lets two viewers use a subscription at once. Prices for the so-called one-screen and four-screen plans aren’t affected.

With more than 65 million subscribers worldwide, Netflix is counting on customer gains and higher prices to sustain revenue growth and finance the cost of its film and TV offerings. The company has $4.3 billion in programming costs over the next year, and almost $5 billion more for the following three years.

“It feels like they are confident in how well they are growing and that they have the consumer love to push the price,” Rich Greenfield, an analyst at BTIG LLC who recommends buying the stock, said in an e-mail.

Netflix has said it plans to mostly complete its global expansion by the end of next year. It’s added Australia, New Zealand and Japan in 2015 and is now in more than 50 countries. The company will begin selling its streaming service in Spain, Portugal and Italy later this month.

Mirima Gottfried of The Wall Street Journal explained why Netflix is under pressure to increase its prices:

But bears might just as easily view it as a sign that Netflix’s rising content costs, expected to be $5 billion in 2016 versus about $3 billion this year, are getting too steep for the company to maintain its margins. Netflix is investing more heavily in original programming and will have to pay about $300 million to Walt Disney under a deal that begins in 2016.

It is unclear exactly how much price increases affect subscriber growth rates. After Netflix’s last round in May 2014, the company initially blamed lower-than-expected U.S. subscriber additions in that year’s third quarter on the $1-a-month step-up. It reversed that the following quarter, saying the previous decline would have happened even without the price change.

Still, the landscape is different this time around. HBO has launched its stand-alone streaming service HBO Now, and numerous others, including CBS, Viacom and Dish Network have followed. Hulu has also beefed up its offerings, and a number of pay-TV providers have begun offering “skinny” bundles to give customers cheaper options.

Granted, it will take a quarter or two of subscriber numbers for investors to see which side is right. The risk is that any slippage could confirm Netflix is more vulnerable to competitive pressures that for now are only anecdotal.

Mike Snider of USA Today explained the company’s stock did after the announcement:

Shares of Netflix closed up more than 6% after the streaming video provider raised the price of its basic monthly service by $1.

The Los Gatos, Calif.-based company’s stock hit a high of $115.05, up 12% from its intraday low, before closing at $114.93.

The $8.99 monthly plan that lets subscribers have two concurrent high-definition video streams will now cost $9.99 monthly. The other monthly plans, a $11.99 four-screen HD video plan and a $7.99 one-screen standard definition plan, remain the same.

The new $9.99 pricing is for new customers; current subscribers will continue paying $8.99 for the next year before the increase kicks in.

“To continue adding more TV shows and movies including many Netflix original titles, we are modestly raising the price for some new members in the U.S., Canada and Latin America,” the Los Gatos, Calif.-based company said in a statement. “As a thank you to existing Netflix members — who aren’t already benefiting from grandfathering — we will maintain their current price for a year.”