Why We Believe Netflix Will Continue To Raise Subscription Fees Periodically In Coming Years

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Streaming giant Netflix (NASDAQ:NFLX) has decided to raise subscription prices in Europe. [1] This is in-line with our long term view of the company. We believe that Netflix has enough room to raise prices of its subscription packages in both the domestic and international markets and the company will continue to increase prices at periodic intervals over the next few years. Netflix’s pricing power comes from the exclusivity of its’s current and future original content, along with the repository and complementary nature of its services. Consequently, we believe that Netflix’s average revenue per subscriber will be around $10.30 domestically and $9.00 internationally by 2022.

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Netflix Hikes Subscription Prices In Europe

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Netflix has decided to raise prices for its subscribers in Europe. [1] The standard Netflix subscription will now cost €9.99, a €1.00 increase over the previous subscription fee. The price hike will be applicable to subscribers in most of the countries in which Netflix operates, including Germany, France and the Netherlands. The company is also raising its prices in Switzerland from CHF 12.90 to CHF 14.90. Netflix had already increased prices in the UK and some of its Nordic territories earlier this year. The company has justified the increase, stating that it was necessary in order to “continue providing good series and films” to its subscribers.

Why Netflix Can Continue To Increase Prices Periodically

We believe that Netflix has enough room to raise prices of its subscription packages. At a base package of less than $10 per month domestically and around $11 internationally, Netflix’s subscription fee is considerably cheaper than an average pay-TV plan, which is generally in excess of $60 per month. The company’s service is also relatively cheaper as compared to other streaming alternatives such as Sling TV, HBO Go etc. As a result, Netflix has enjoyed a degree of pricing power and has been able to raise its subscription fee in the past domestically as well as internationally. [2] [3]

The online streaming market is very competitive, and Netflix faces tough competition from content providers such as Dish Network, Sony, Apple, HBO, etc. The company also faces competition from local players in the international territories it operates in. These services have an advantage over Netflix as they mostly broadcast live content whereas the same content is usually made available on Netflix after it is syndicated. However, Netflix has an advantage of its own as it functions more like a repository and users can access much older content which might not be readily available on other streaming services. Additionally, Netflix has a tendency of being viewed as a complementary service rather than a competing service to various pay-TV operators. The end users could potentially form the same opinion of the company when it is compared to other streaming services in the future. Netflix has also increased its attractiveness further by investing in original content. The company is no longer considered just an aggregator of popular content from other networks and has come of age as a provider of engaging and interesting content on its own. The company plans to build on the success of its original shows, such as House of Cards and Orange Is The New Black, by growing the percentage of its spending dedicated to original content in the coming years. We believe that the exclusivity of Netflix’s future original content, along with its repository and complementary services, should keep the competition at bay. Consequently, Netflix can continue to increase prices at regular intervals, which will help in increasing the company’s average revenue per subscriber at a faster rate.

Our Projections For Netflix’s Average Revenue Per Subscriber

We believe that Netflix will continue to increase the pricing of its streaming service at periodic intervals for the next few years. As a result, the company’s average revenue per subscriber will increase throughout our forecast period. According to our calculations, Netflix’s average revenue per domestic subscriber was around $7.88 in 2014. This figure is below the company’s actual domestic base price of $8.99 as revenues in an year are a mixed result of full contribution from subscribers who subscribe for the whole year, reduced contribution from subscribers in the grace period, partial contributions from net new subscribers that are acquired throughout the year and no contribution from free trial subscribers. When prices were increased to $8.99 in May 2014, existing subscribers were given a grace period of 24 months during which their subscription charges would remain at $7.99. [3] Going forward, we expect the average fee to trend upwards as the 24-month grace period for the pre-May 2014 subscribers runs out and they also migrate to the $8.99 plan. As stated earlier, Netflix has also shown the propensity to raise prices at regular intervals so we have also factored in probable future rate hikes. Consequently, we believe that Netflix’s average revenue per domestic subscriber will be around $10.30 by 2022.

As for international operations, we believe that the recent price hikes will not have much effect on Netflix’s average revenue per subscriber in the near term as the company is in the midst of a massive international expansion campaign. Netflix is currently present in around 50 countries and intends to expand into 200 countries by the end of 2016. As a consequence of this expansion, the company will have a lot of customers who are bound by promotional offers or are in the trial period. Resultantly, average revenue per subscriber will remain around 2014 levels of $7.46 for the next few years. However, the figure will start climbing from 2017 onwards once Netflix’s international expansion campaign starts to wind down and the company starts increasing its subscription fees in order to attain profitability in its international operations. Taking a longer term view, we believe that average revenue per international subscriber will be around $9.00 by the end of our forecast period.

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Notes:
  1. Netflix Raises Subscription Price in Europe, August 18, 2015, The Hollywood Reporter [] []
  2. Netflix Introduces New Plans and Announces Price Changes, July 12, 2011, Netflix US & Canada Blog []
  3. Netflix Hikes U.S. Streaming Plan by $1 per Month for New Members, May 9, 2014, Variety [] []