BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Netflix Price Increase: Is There A Billion Hidden In Those Couch Cushions?

This article is more than 9 years old.

Netflix reported earnings ahead of expectations, but the numbers still don't amount to much with just $53 million in earnings on a $1.27 billion in revenues. Fortunately for shareholders -- and unfortunately for subscribers -- that's about to start changing. Netflix announced plans to raise prices by $1-2 per month, initially for new customers but eventually for everyone, "to acquire more content and deliver an even better streaming experience." With the company set to surpass 50 million streaming subscribers by the second half of 2014, the price increase could add between $600 million and $1.2 billion to the company's revenues within the next two years. And if all goes according to plan, Netflix can potentially experience the opposite effect it did when it last tried to raise prices in 2011.

Not so Qwikster

Back then, the company first separated out subscriptions for DVD rental and streaming and, in the process billed separately for each of them. Some people saw a 60% price increase and unsurprisingly canceled their subscriptions. It was a disastrous idea and the company paid dearly. The stock fell, subscriptions fell, Netflix needed to access the capital markets to meet its financial obligations. What had been one of the best stories in tech was suddenly the worst business idea since New Coke.

And yet, Netflix has recovered more than beautifully. Not only are original shows like House of Cards and Orange is the New Black being talked about in almost the same vein as HBO programming, but the company has gained millions of streaming subscribers, become profitable, and successfully stabilized its international expansion to the point where it can claim the existing non-U.S. footprint is near breakeven. (Netflix being Netflix, instead of reaching profitability overseas it will start expanding again, however. "We intend to continue our international expansion over the coming years, so our near term profits will be quite modest as we invest in this large global opportunity," the company said.)

It's going to cost you

To pay for growth -- as well as more content -- Netflix is going to start increasing prices everywhere. In fact, if you happen to live in Ireland, you've already seen this as the price there went from €6.99 to €7.99 in January. Netflix says the move had "limited impact." That means few people canceled as a result. And so it feels emboldened to roll out $1-2 increases across the world, beginning later this quarter. At first, only new customers will pay. While that might slow the influx of new subscribers, it's important to note that psychologically, the cost will remain below the important $10 threshold in the U.S. even if a full $2 increase is seen here. In Europe, no one will see higher than €9.99 either.

And for existing subscribers, Netflix is playing a much different game than it did back in 2011. Instead of smacking people with a giant price increase, it's telling its current customers: You get rewarded for being here. The price increase will come sometime down the road (again, exactly when is TBD.) It's likely that people will see new content on Netflix before they see a higher bill, which should ease the pain for a lot of folks. In fact, it would hardly surprise to find that subscriber churn rises only a small amount once the price increase goes into effect this time.

Value add

The financial effect of all of this on Netflix is going to take some time to calculate. In raw dollars, the figures above give you a sense of the impact on revenues. The price increases will vary by market, so calculating an average dollar figure will depend on where subscribers come from. (Consider the difference between 3 Brazilian reals at about $1.35, 1 euro at $1.38, 1 British pound at $1.68).

And it's not like Netflix will allow all of this to drop to the bottom line. The company has $7.1 billion in streaming content obligations already. It's certain that it will use some of this new-found income to take on more as Netflix stated in its shareholder letter. Still, this shows some leverage in Netflix's business model that wasn't there 3 years ago. And it ought to lead to greater profitability down the road. This isn't a Qwik... er quick, fix, but rather it's likely to be a good one. Few subscribers are likely to mind, even though no one is generally a fan of paying more.

Follow me on Twitter. Read the rest of my Forbes posts here.