Netflix said on Thursday that members of its standard streaming service, which gives access to high-definition content, will see the price increase to $11 a month, up from $10. Subscription prices for the premium service, which has ultra HD content, will go up to $14 monthly, up from $12. The company said customers would be notified of the change based on their billing cycle, beginning on Oct. 19.
Shares of Netflix were rising 0.2% to $194.86 on Friday morning. That's after the stock gained more than 5% on Thursday, closing at an all-time high of $194.39.
The price increases aren't surprising given that Netflix is plowing money into creating original content. Netflix's chief content officer Ted Sarandos said at the Vanity Fair New Establishment Summit this week that the company would commit $7 billion next year to content, compared to the $6 billion set aside in 2017. That's as rivals like Amazon.com Inc. (AMZN) - Get Report have pledged to spend $4.5 billion on content, while Hulu intends to spend $2.5 billion this year.
"From time to time, Netflix plans and pricing are adjusted as we add more exclusive TV shows and movies, introduce new product features and improve the overall Netflix experience to help members find something great to watch even faster," the company said in a statement.
Several analysts applauded the change and subsequently upped their price targets on the stock. Rosenblatt Securities analyst Alan Gould, who raised his price target to $225 from $200 and kept a Buy rating, said the move shows how strong Netflix's pricing power is. Gould projects that Netflix could spend as much as $15 billion per year on content by 2021 and $25 billion annually by 2025.
"In our opinion, Netflix is building a content moat and amortizing it over a global direct-to-consumer audience," Gould wrote in a note to clients on Friday. "It has the largest global subscriber base allowing it to be the lowest cost provider on a per subscriber basis. Furthermore, it has minimal distribution costs and as Netflix produces more of its own content it becomes the producer, distributor and retailer allowing it to maximize profit."
Gould added that he expects Netflix to increases prices by another dollar per month next October. The company may skip a subscription price increase in 2019, as Disney moves its content to its own streaming platform, but that price increases will increase in 2020.
The last time that Netflix issued a price increase was in 2014. When that happened, Netflix used a lengthy grandfathering process which meant that some subscribers continued to pay lower prices until 2016. The decision was meant to reward the loyalty of existing customers, but it ended up being confusing for a lot of people, said Stifel analyst Scott Devitt. As a result, many people ended up cancelling their subscriptions and Netflix's revenue took a hit. It eventually bounced back in 2015.
"This time around, with clearer messaging and no grandfathering, there should be less confusion even if members are initially unhappy about the increase," said Devitt, who maintained his Buy rating and $200 price target on the stock.
Even at $10.99, Netflix's standard plan is still $1 cheaper than Hulu's No Commercials plan, said Wedbush analyst Michael Pachter, who hiked his price target on Netflix to $88 from $82 on Friday, and kept an Underperform rating. He doesn't expect Netflix will see much subscriber churn from the price increases.
"Netflix has learned quite a bit about consumer behavior regarding price increases over the years, and we think the company's nuanced approach may minimize subscriber disruption this time around," Pachter explained. "Since the most value-conscious consumers will not see their plan increase in price, the members most likely to cancel will have no reason to."
Oppenheimer analyst Jason Helfstein, who raised Netflix's price target to $215 from $200, believes the added profits from the price increase will go toward funding international content.
More of What's Trending on TheStreet: