Could Netflix Average Subscription Fees Rise?
Netflix’s (NASDAQ:NFLX) average subscription fee has historically declined due to a large number of free trial subscriptions offered by Netflix to drive subscriber growth, as well as strong demand for its lowest priced $8.99 plan, which included DVD rentals (one at a time) and unlimited streaming service.
Netflix competes with cable and satellite operators like Time Warner Cable (NYSE:TWC) Comcast (NASDAQ:CMCSA), Dish Network (NASDAQ:DISH) and DirecTV (NASDAQ:DTV) for streaming and pay-TV services, and video rental services like Redbox.
While our base case scenario leads us to a price estimate of $106, which is well below the market price, we investigate what factors could drive a change in this view. In particular, rising average subscriber fees could add 40% upside to our current estimates.
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Average prices have increased in the range of $1-$8 for its lowest to highest priced plans. Also the revised pricing structure, which includes a new streaming only option, could impact the outlook for average subscription fees going forward.
We recently wrote on the new pricing plan suggesting that the new pricing plan could potentially grow the subscriber base without too much deterioration to average pricing though we need to see some more data before updating these estimates. (See Netflix’s New Pricing Plans & Streaming Only Offer.)
As the subscriber base grows in part due to the new streaming only offerings, we currently expect Netflix’s average subscription fee will continue to fall to around $10 by 2017. However the Trefis community predicts that the fee will rise to $13, which represents a significant 41% upside to our price estimate for NFLX stock.
Two Drivers for Our Rationale:
1) Wider Movie Catalog for Online Streaming
As Netflix makes a greater number of titles available online, the number of customers upgrading to the premium packages is likely to decline. The company recently wrote in its blog that Netflix members are already watching more TV episodes and movies streamed instantly over the internet than on DVDs and that they expect this trend to continue.
Since a majority of Netflix members are using the low priced plan of $8.99 (one DVD at a time with unlimited streaming), we think that customers wouldn’t find it very valuable to move to a higher rental package (of up to 8 DVDs at one time), especially when there’s substantial content available online.
2) Streaming Only Plans
Netflix recently started its streaming only business in Canada and the US. Since the costs for streaming movies online are cheaper compared to DVD shipments and the company is negotiating more content deals with content carriers, this provides incentive for the company to pass on the cost advantage to customers in the form of lower subscription fee.
Netflix’s monthly subscription fee has decreased from $17.00 per month in 2004 to $11.40 per month in 2010, and we expect this to decline to $9.60 by the end of Trefis forecast period. However, the Trefis community points to a much more sanguine view on pricing as mentioned above. Tell us what you think.