Can An Increase In Subscription Rates Impact Netflix’s Subscriber Growth?
In January this year, Netflix (NASDAQ:NFLX) announced that it will be releasing a substantial number of its U.S. customers from price grandfathering on its HD plan. In May 2014, the company had increased its subscription charges, but grandfathered loyal customers allowing them to continue subscriptions at earlier rates for another two years. This grace period will expire in May 2016 for a significant number of consumers and they will have to start paying $2 more every month for their existing Netflix subscriptions. The company believes that given these members have been with Netflix for at least two years; the churn due to the increase in subscription charges thus should not be very high. As Netflix continues its focus on high quality original content and bandwidth-saving plans, it should be able to retain existing subscribers and acquire new subscribers. However, with Amazon Prime and YouTube Red introducing streaming services with increased focus on original content, competition for Netflix is intensifying, which could lead to slower subscriber growth in the U.S.
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UBS estimates that the subscription increase will impact around 35% (17 million) of Netflix’s subscribers in the U.S. In a survey conducted by UBS, 41% of the respondents stated that they would not accept any price increase from Netflix. However, UBS feels only 3-4% of subscribers will actually cancel their subscriptions, given that Netflix provides more value for money compared to a typical pay-tv package. Netflix hopes to justify this increase by providing high quality original content and riding on the popularity of its original shows. A survey by investment bank Cowen revealed that 58% of subscribers pay for Netflix for its original shows. This number is up from 37% in December 2014, indicating the popularity of its shows.
We expect Netflix’s U.S. streaming subscribers to grow at a steady pace and increase from about 50 million in 2016 to nearly 62 million at the end of our forecast period.
While competition in streaming services in the U.S. is intensifying, players do not appear to be attracting consumers via lower subscription charges. YouTube Red has a monthly subscription rate of $10, which is in line with Netflix’s charges of $9.99. While Amazon does not provide video streaming as a stand- alone service in the U.S., it comes along with its Prime Membership of $99 per year, which translates to around $8.25 per month. This is slightly higher than Netflix’s SD subscription of $7.99 per month, but lower than $9.99 for its HD services. However, Amazon Prime members get several other benefits which might lead to regular Amazon buyers shifting from Netflix to its platform after the latter increases subscription rates.
Netflix is increasing its investment in content creation and the acquisition of “exclusive” content as part of an increasing focus on original shows. We believe that, with the popularity of its shows and original content, the company’s U.S. subscribers should continue to grow at a steady pace, despite increase in subscription charges.
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