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Despite Sky-High Earnings, Netflix Raises Prices

TMCnet Feature

April 23, 2014

Despite Sky-High Earnings, Netflix Raises Prices

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By Tara Seals
TMCnet Contributor

Even as it reported soaring profits, Netflix, eyeing future margin issues, has decided to raise its prices modestly, from $7.99 per month to $8.99 or $9.99 per month for its online video service. The change should go into effect later this quarter—and won’t affect existing customers for two years.


The streaming giant reported first-quarter sales, profit and subscriber growth that beat analysts’ forecasts. The company has 48.4 million streaming subscribers, and saw first-quarter net income that spiked to $53.1 million, or 86 cents a share, up from $2.7 million, or 5 cents, a year earlier—and beating analyst expectations of 81 cents per share. Meanwhile, revenue was up 24% to $1.27 billion, matching projections.

To boot, the company forecasts net income of $69 million, or $1.12 a share, with streaming revenue totaling $1.14 billion. And, it plans to add 1.46 million new subscribers in the second quarter globally, including about 520,000 in the U.S. CEO Reed Hastings said in the earnings call that he thinks Netflix can eventually reach 60 million to 90 million U.S. customers over time.

So why the price hike? Put very simply, at the end of 2013, the company had $7.25 billion in licensing commitments over the next five years, according to its filings. And that’s only going to get deeper—chief content officer Ted Sarandos said on the earnings call that the company plans to ramp up production of original content, since original programming like its Emmy-winning House of Cards will be the key to new subs.

Hastings noted that the price increases will directly affect the company’s ability to do that. “Over the last couple of years, we have been improving the content selection on Netflix and broadening it, most recently with the addition of the amazing shows like House of Cards and Orange (News - Alert) Is the New Black, and if we want to continue to expand to do more great original content, more series, more movies, we have to eventually increase prices a little bit,” Hastings said. “We are not doing much. We are doing $1 or $2, depending on the country and all the existing subscribers keep their current price. They don't get it increased. So therefore the revenue increase to Netflix will be quite modest in the short-term and eventually as new members come in, they pay a little bit more and with that we will be able to license much more content and deliver a very high quality video.”

Netflix is also facing new competitive challenges—for one, inking paid peering arrangements with Comcast (News - Alert) and others for delivery of its video traffic. It’s a business model shift for the company.

“The Internet is in constant evolution in terms of the relationships and interconnection that we see,” Hastings said. “So we did end up choosing to pay Comcast to improve the video quality that our members experience. We don't think we should have to, but in the short-term we felt like we had no choice. So we have got that deal in place. In addition, more lobbying for this idea that we think is very natural, which is interconnect as part of net neutrality, it's a stronger form of net neutrality.”

Also, the competitive landscape continues to heat up. Amazon recently released its Fire TV set-top to boost Prime Instant service, and AT&T (News - Alert) this week said that it was teaming with the Chernin Group on a joint venture aimed at incubating over-the-top (OTT) streaming services that AT&T can combine with its network, presumably for managed content delivery.

Hastings however downplayed the competitive issues. “I am a Prime member and most Netflix employees are Prime numbers and it's coming across to most people in our society is, it is very complementary to Netflix,” he said. “People look at them as multiple channels. You saw that Amazon included us on the Fire TV and of course we been before on the Kindle Fires and it's a great relationship all around where we have got unique content, they have got some unique content. They are also doing originals. There are multiple networks out there. It's a very much not a zero-sum game and we are building this ecosystem together that's about Internet video and the more players there are in Internet video, the bigger that ecosystem gets. In the big theme is Internet video is taking share away from linear video. So we are all participating in that transformation


Edited by Maurice Nagle


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