Netflix (NFLX) is raising prices (again), but exactly how much are subscribers willing to pay?
The streaming giant said on Tuesday that for U.S. subscribers, it will increase its most basic, standard-definition plan from $8 to $9 per month; its most popular HD streaming plan from $11 to $13 per month; and its most expensive plan, which allows 4K streaming on multiple screens, will go from $14 to $16 per month. The increases are effective immediately for new subscribers, and will be rolled out for existing subscribers over the next three months. The last time Netflix raised prices on U.S. subscriptions was October 2017.
The announcement was well-received by investors, with Netflix's stock up 6.5% on Tuesday and analysts heralding the price hikes as good news for Netflix's balance sheet.
"With Netflix frequently tapping the debt markets on several recent occasions, the price hike could help ease concerns with a growing deficit on free cash flow to fund a likely continued escalation in Netflix's content spending, which likely topped $13 billion in 2018," wrote CFRA's Tuna N. Amobi in a note to clients on Tuesday. Netflix reports its fourth quarter earnings on Thursday, Jan. 17.
TheStreet's Eric Jhonsa estimated that the increases could deliver more than $1 billion in additional revenue annually. But the latest hikes also raise the question: Is there a limit to how much people are willing to pay for Netflix, particularly with a raft of competitors on the horizon?
According to Per Sjofors, founder of Atenga Insights and an expert on how pricing influences consumer behavior, consumers will mostly tolerate incremental price increases between $1 to $2 -- but may think twice when a price reaches a certain threshold.
"$10 and $15 are psychological price points where a lot of potential subscribers will stop, or never start it in the first place, because they feel it's no longer worth it," Sjofors said. His research indicates that if Netflix were to jack up prices for its most popular option above the $15 price point, they would run the risk of losing both sales volume and revenue for that tier.
That risk will be magnified as more players enter the market, according to Sjofors. Competitors including Apple (AAPL) , Disney (DIS) and Time Warner (T) are planning streaming services that could arrive this year -- which could also force consumers to re-evaluate how much content they're willing to shell out for, and what they're really getting for their buck.
"What we have seen is that the whole OTT market is getting more and more fragmented, just as cable was fragmented. If anything, these new channels are going to accentuate that trend," he added, referring to the risk of subscribers dropping off alongside price increases. "Historically, Netflix has been poor in messaging the value of their service in conjunction with a price increase."
Pricing power in the U.S. also won't necessarily translate to other markets, according to Moody's Neil Begley.
"The U.S. is their most mature market, and when you look at what's going on here, it makes sense why they did what they did: People are using it as a cable replacement," he noted.
While Netflix could raise prices in areas like Europe down the road, cable TV is far less expensive in those markets so the same "cord cutting" phenomenon we see in the U.S. doesn't exist there, Begley said. And a similar calculus should apply in other markets across the world, with pricing power considered on a country-by-country basis based on factors that include the comparative costs of cable and of competing over-the-top streaming services.
"Every country is going to have a different story around those economics," he added.
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