Streaming provider Netflix has just upped its fees, moving from $7.99 to $8.99 per month for a basic subscription in Canada. The first such increase in two years, it’s likely that most patrons won’t begrudge the hike too much, considering it a worthwhile price to pay for home access to the company’s cache of TV shows and movies.
But how high is too high? Will subscribers start to jump ship once Netflix pushes their customers over, say, the $15 limit? $20?
One survey conducted last year found Netflix may have a few fee hikes left before it bumps into the answer.
A survey of 3,114 people in the United States and here in Canada by TiVo’s Digital found that 39 percent of current subscribers would be willing to pay between $12 and $15.
Another survey conducted by Atenga found that $14.99 was the price at which things changed for Netflix, competition-wise.
“”You can see that they can increase prices all the way up to $14.99 with no material loss in subscribers,” said Atenga CEO Per Sjofors, who offered some advice for the firm on elasticity. “So, Netflix should increase their price to $14.99 and use the added revenue to license more content and develop more of their own content. This is the only way they can sustain growth and increase shareholder value.”
The potential problem for Netflix may be worse when looked at through a generational lens. Another survey of 6,567 college students found that barely a third had their own account. But that, of course, may be mitigated by the fact that most college students are far from the peak earning years of their parents, whose accounts they are presumably using.
First announced in August and then initiated last week, Netflix increased by one dollar both the basic and standard subscription rates to $8.99 and $9.99, respectively, while their premium plan — allowing for four simultaneous streams and featuring ultra high-definition 4K content — moves up $2 to $13.99 monthly.
Of course, the aforementioned surveys are conducted in U.S. dollars, where most subscribers have the Standard plan, which now costs $10.99 a month, up from $9.99 a month. That means Netflix could raise it subscription rates by another 37 per cent to $14.99 before it starts to lose out to would-be rivals.
So is this price jump a result of Netflix listening to the advice of Per Sjofors? It does sort of sound that way. Ostensibly, it’s to aid in reaching the company’s stated goal of producing more of its own content and relying less on movies and TV licensed from other networks and studios.
Netflix has already seen the benefits from catching entertainment lightning in a bottle with shows like Stranger Things, which is set to release its second season on October 27.
“Look, when we produce an amazing show like ‘Stranger Things,’ that’s a lot of capital up front and then you get a payout over many years,” Chief Executive Reed Hastings said to Marketwatch. “Seeing the positive returns on that for the business as a whole is what makes us comfortable that we should continue to invest and integrate to basically self-develop many more properties.”
Ted Sarandos, Netflix’s chief content officer, said recently that the streaming service will likely have to increase its content budget to $7 billion in 2018, up from $6 billion for 2017 and $5 billion in 2016.
But the drive to produce more of its own shows may peter out at some point, says Rich Greenfield, a Netflix analyst for BTIG. “The question is how much content do you need to create, and at what point do you have enough?” says Greenfield to Business Insider.
Will there come a time when subscription costs outweigh the benefits for the average viewer? That’s unlikely. Greenfield says that Netflix’s customer base isn’t going anywhere and that there’s even room for more providers alongside Netflix.
“The average American is still watching four to five hours of TV a day,” says Greenfield. “This won’t be winner-take-all, there will be lots of winners.”
“The key asset that Netflix has is size. It’s 100 million subscribers ahead of all of its peers,” said Greenfield. “This size gives it the ability to invest more heavily in content, which leads to more content that consumers want to watch, more watch time, and stickier subscriber. It’s a virtuous circle that’s really fuelling Netflix.”
Netflix’s price increase is also said to be well-timed to line up with Netflix’s release next Monday of its third quarter earnings report, with expectations that revenue will reach $2.97 billion US, an almost 30 per cent bump from last year and seven per cent more than last quarter, based on strong subscriber growth.