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Is Netflix Becoming Too Expensive?

Wayne Duggan

Netflix, Inc. (NASDAQ: NFLX) has another competitor on the way with the Tuesday unveiling of AT&T Inc. (NYSE: T)'s upcoming HBO Max streaming service.

With Hulu and YouTube upping their game and Walt Disney Co (NYSE: DIS) set to launch Disney+ in November, Netflix investors concerned about the service’s rising pricing may have a legitimate beef.

A new survey of more than 1,000 U.S. Netflix users by Kill The Cable Bill found that 24.3% say the service has become too expensive.

Rising Prices

Netflix first launched its streaming service in 2007; it was bundled with its DVD-by-mail service at a price of $8 per month. Starting in 2014, Netflix broke its service into three tiers: Basic ($8), Standard ($9) and Premium ($12).

In 2015, Netflix raised its Standard price to $10. In 2017, Standard tier prices were hiked again to $11 and Premium prices were raised to $14. Earlier this year, Premium prices were raised to $16, Standard prices were raised to $13 and Basic-tier prices were bumped to $9.

Kill The Cable Bill reported that Netflix has been raising prices at a much higher clip than inflation since 2014.

If Netflix had kept pace with inflation, the current price of Basic, Standard and Premium subscriptions would be $8.65, $9.74 and $13, respectively.

For Netflix investors, subscription prices are only a problem if they trigger cancellations, and they must trigger enough cancellations to offset the higher prices the remaining subscribers are paying.

Unhappy subscribers are also getting a new alternative in Disney+ starting in November. Disney+ will reportedly launch with a standard monthly price of $7, roughly a 22% discount to Netflix’s Basic tier.

One Possible Solution

One possible way for Netflix to counter Disney+ for low-end customers who find Netflix too expensive is to offer a free or low-cost, ad-supported tier. Nomura Instinet analyst Mark Kelley recently said Netflix could generate an additional $700 million in annual net income if it incorporated a free ad-supported tier.

“Using what we believe are relatively conservative assumptions (launch of a free tier in the U.S. in 2020, scaling to [one-quarter] of the paid sub base by 2021), we see a potential revenue opportunity of more than $1 billion per year, with nearly $700 million flowing through to net income, given the favorable margin dynamic of the advertising business,” Kelley said.

Netflix has been adamant that it will not have ads on its services, but pricing pressures could force its hand if rising competition and content costs start eroding Netflix’s existing business.

Netflix shares were trading up slightly at $380.04 at the time of publication Wednesday. 

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Photo courtesy of Netflix. 

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