This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Netflix Price Hike Reflects Strategy Cracks

NEW YORK ( TheStreet) -- Netflix's (NFLX - Get Report) subscription rate hike is revealing some cracks in the company's business model.

"We believe the move shows that Netflix's old pricing model was unsustainable as the company was losing money on a cash basis, which it masked through accounts payable increases and accounting treatments on the income statement," wrote Janney Capital Markets analyst Tony Wible, in a note.
Netflix CEO Reed Hastings

According to Wible, Netflix has seen a 275% increase in its off-balance sheet obligations over the past year, and the quality of earnings has eroded with its push into streaming.

>Click here to take our Netflix price hike poll.

Netflix will be further pressured by its expansion into Latin America and the looming Starz deal, which Wible said were likely factors in management drastically increasing pricing.

Netflix's prior pricing model was clearly faulty. Streaming-only subscriptions stood at $7.99, becoming a popular option for new subscribers. The combo package (DVD and streaming) was $9.99, which meant consumers were essentially paying just $2 for the DVD aspect of the subscription.

According to Bank of America analyst Nat Schindler, Netflix pays about 80 cents to ship a single DVD, and the average customer on the one-DVD plan had historically rented three DVDs per month. This puts the average monthly shipping cost for one DVD plan at $2.40, costing Netflix 40 cents a month per subscriber.

"Clearly not a supportable long-term business model," Schindler noted.

While it is too early to know whether this new pricing structure will be successful, there has already been an outcry from subscribers on the Internet, with many declaring they are going to cancel their membership altogether.

There's some fear that higher prices will drive consumers elsewhere, like to Amazon's (AMZN) streaming service or to Coinstar's( CSTR ) Redbox DVD kiosks.

>7 Netflix Deals: Will Content Costs Bust Its Bottom Line?

But the consensus on Wall Street is Netflix will be able to offset any churn in subscribers.

"A price increase at Netflix is not something done haphazardly," Morgan Keegan analyst Justin Patterson noted. "This is a company that tests seemingly every element on its site and has strict return on investment thresholds on content licensing and subscriber acquisition. Raising prices therefore only occurs if management believes subscribers can be nudged toward streaming-only plans or pricing power exists on the hybrid side. Either scenario enables Netflix to license more streaming content, which we view as a long-term positive for subscriber growth, retention and free cash flow."
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
NFLX $105.44 0.00%
AAPL $112.34 0.00%
FB $89.89 0.00%
GOOG $614.34 0.00%
TSLA $247.69 0.00%

Markets

Chart of I:DJI
DOW 16,351.38 +293.03 1.82%
S&P 500 1,948.86 +35.01 1.83%
NASDAQ 4,749.9790 +113.8740 2.46%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs