Netflix Should Raise Prices Again

NEW YORK ( TheStreet) -- Netflix ( NFLX) has a problem.

After a disastrous 2011 and expected sour start to 2012, the company appears to have found a content strategy that can deliver value not only to consumers, but media programmers.

In late July, with the stock priced around where it is now, I made my moderately bullish case in Prepare to Buy Netflix Before It Rises From the Dead.

The keyword there: Prepare.

Headwinds still exist. Monday's 6% decline on reports that Netflix might lose programming from A&E and History Channel proves that point. Short-term noise tends to get in the way of the more important long-term story.

Inversely, in early-to-mid-2011, Netflix touted its growing subscriber count. This bullish noise smokescreened what really mattered -- the underlying bearish themes of out-of-control content costs and old guard media entities calling the shots.

While things do look better at Netflix now, both problems still provide pressure. Reed Hastings must further address them.

First, he needs to do something about the $5 billion in off-balance sheet obligations (just call it "debt"), Netflix owes over the next five years. I understand how Netflix books these costs over time, however, as a show of fiscal sense, the company should make adjustments to ensure investors and make that big number look less ominous.

Structure your content deals differently. Set aside a pot of money to match some of the due dates for those obligations. If Netflix operated from a position of strength, cash-wise, the debt would be less of a concern.

Second, increase spending to secure reruns of shows such as Mad Men, Breaking Bad and Louie C.K.. Push the angle that Netflix can be a partner with cable. As I explain in the above-cited article, it has already accomplished that with AMC Networks ( AMCX).

There's another problem here, though. It's theme number three, but it's been around as long as and is equally as important as themes one and two.

As long as Netflix charges consumers $8 a month, it will have a difficult time collecting premium content. Starz ended its relationship with Netflix for this reason. Simply put, at $8 a month, Starz felt like Netflix devalued its content.

Before it does anything, Netflix should sell its DVD unit prior to Hastings running it further into the ground.

Right now, DVD is a death trap, a suicide rap for Netflix. Hastings has to get out while he's young. Put it up for sale. Somebody will be more than willing to overpay for the business.

From there, raise prices. But do it the right way. Actually use some marketing and customer relations to pull the move off.

Observe how Sirius XM ( SIRI) handled its price hike. Pretty much flawless execution by CEO Mel Karmazin. I'm not a fan of much of what they do over there. But, he deserves credit.

SiriusXM basically said to its customers, "Listen. You really love our service and, given the economics of our business, we have no choice but to raise prices now that we are able." It worked like a charm because, if you really like or find satellite radio useful, an extra buck or two a month most likely means nothing to you.

Of course, Hastings has a history to deal with.

I would be blunt. Make the value proposition. Stress that without DVD, Netflix becomes a different company. A pure play streamer. We have exciting plans both on the content and delivery fronts (maybe preview some of them) and, to ensure that they happen and we remain healthy, we're going to start charging you $9.99, $10.99, maybe even $11.99 a month. Cable keeps getting away with much worse; why should the public treat Netflix, the anti-cable, differently?

If I'm Hastings, I would cut deals with high-profile networks and celebrities to offer customized, ultra-premium programming for an additional a la carte fee. But, that's just a thinking-out-loud aside.

The price hike, this time around, if executed with even a hint of competence, will not hurt the business. In fact, it would likely raise revenue, raise Netflix's profile, allow it to secure much better programming (on that basis, I would consider $12.99 or $14.99 across the board or as a "premium subscription" price) and, as a result, help it return to subscriber growth.

I know the notion of a considerable price hike sounds insane, but the Netflix of late 2012 is many times better than it was in summer 2011. Better content. Elevated user experience. And mobile is that much more relevant.

I think Mitt Romney is an awful human being for saying what he said about the "47%." Forget that he got it all wrong, what he said and the fact that he would even say it -- it's just plain sad.

That said, you're not entitled to $7.99 a month Netflix. When you stop and think about it, it's really pretty absurd that you can pay so little for so much. I am a light user of the service and it paid for itself in a few hours over the course of a few nights.

Again, positioned properly, Reed Hastings can get this message across and come out better off for it. He might want to remove himself from the situation and let somebody else call the shots and face the public on this one. Hire a celebrity that everybody loves as spokesperson.

However it goes down, mark it down, Netflix will sell DVD and, though I am not quite as confident about it, I sniff a price increase coming as well.

With these two moves, Netflix has more than a fighting chance at survival. Without them, or something like them, I'm afraid I might have to switch last year's bear case back on.

At the time publication, the author held no positions in any of the stocks mentioned in this article.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Rocco Pendola is a private investor with nearly 20 years experience in various forms of media, ranging from radio to print. His work has appeared in academic journals as well as dozens of online and offline publications. He uses his broad experience to help inform his coverage of the stock market, primarily in the technology, Internet and new media spaces. He has taken a long-term approach to investing, focusing on dividend-paying stocks, since he opened his first account as a teenager. Pendola, 37, is based in Santa Monica, Calif., where he lives with his wife and child.

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