Less than 18 months after the previous Netflix (NFLX) price increase, the company is at it again, increasing the price of its most popular plan to $9.99 per month.
Investors cheered the move, sending NFLX stock up 5% after the announcement.
The new price goes into effect immediately for new subscribers signing up for NFLX’s two-stream plan. If you were waiting to subscribe right before the next season of House of Cards, you can still get the single-stream option for $7.99 per month.
NFLX Stock in a Changing Streaming Landscape
The streaming video-on-demand environment is much different now than it was during the last Netflix price increase.
HBO launched HBO Now, and Showtime followed in its path with its own standalone streaming option. Dish Network (DISH) launched Sling TV, which offers around two dozen live TV networks streaming over the internet. And Hulu has expanded its offerings to include a $12-per-month commercial-free option.
The noteworthy thing about all of those services is that they all cost more than NFLX.
Even Showtime, which arguably doesn’t have the same breadth or quality of programming as Netflix, charges $10.99 per month. HBO charges $14.99 per month.
Only Amazon (AMZN) Prime offers a commercial-free streaming service for less than Netflix, but Amazon generates billions of dollars in retail sales to make up for any losses from its streaming service.
NFLX stock owners can’t afford the same loss-leading prices as Amazon Prime.
Paying More to Get More
This Netflix price increase coincides with an increase in NFLX’s content costs.
Starting next year, the company will begin a contract with Disney (DIS) that is expected to cost around $300 million per year. The amazing thing is that it looks like NFLX got a deal on that content, since it was negotiated in 2012 and it will include the upcoming Star Wars movies.
Total content costs for 2016 are expected to increase to $5 billion.
Additionally, Netflix is continuing to invest in original content. Netflix is expected to triple the amount of original content it finances this year.
Next year, the company will start producing more content in-house, including the new Chelsea Handler talk show. Bringing production in-house costs more, but ultimately provides NFLX with more control over its original content.
NFLX stock owners will experience more risk because a flop hurts more, but a winner offers much bigger rewards.
Bottom Line
Last year, NFLX stock owners saw domestic subscriber growth slow in the third quarter — the first full quarter after the price increase. NFLX management later said that slowdown likely would have happened regardless of the price increase.
There was also a €1 Netflix price increase in Europe in August, so NFLX stock investors will get a sneak peek at any impact that might have on international growth when the company reports earnings on Wednesday.
It remains to be seen, however, how a price increase actually impacts existing subscribers. The previous Netflix price increase had a grandfather period of two years, so some NFLX subscribers will see a $2 price increase starting in May. Current NFLX subscribers paying $8.99 per month won’t see their $1 price increase go into effect until next October.
Overall, the latest price increase is a bullish development for NFLX stock and leaves the service competitively priced with other streaming video-on-demand offerings, but it does portend continually increasing content costs.
As of this writing, Adam Levy was long AMZN.
