A Blog by Jonathan Low

 

Jan 17, 2019

Why Netflix Is Raising Its Prices Now

Mobile technology has exponentially expanded the market for viewing content. As a result, the cost of that content has risen and more competitors have entered the business. The result is that costs are starting to threaten profit margins.

Netflix is trying to stay ahead of the competition. By raising prices it is calculating that the customers lost due to price increases will be more than offset by those kept or newly attracted by better content. It is a risky bet, but then so was taking on DVD rental. JL


Edmund Lee reports in the New York Times:

Spending big on content while keeping prices modest has helped Netflix expand its customer base, about 58 million in the United States and 130 million worldwide. (But) the stakes for owning content have risen. The company had negative free cash flow of $2 billion last year. It expects that figure to rise to about $3 billion this year and about the same next year. That has added to the company’s debt. “There’s never been so much TV and movies being created around the world. So the game is on.”
Netflix is raising prices.
Given how much it has been spending on content, the move isn’t surprising, but the latest jump — anywhere from 13 to 18 percent depending on the subscription plan — is the biggest increase since Netflix started its streaming service a dozen years ago. That’s going to hurt some consumers.
Many of its users pay for the service even if they don’t consistently watch its content, partly because of its attractive pricing. A bare-bones subscription, for instance, had cost $8 a month. But fee increases at Netflix are inevitable. One of reasons: Netflix burns a lot of cash.
The company’s appetite for content means it has to spend big, resulting in what’s known as negative free cash flow. More money is going out the door than coming in, a difference that Netflix covers by borrowing even more.
“We change pricing from time to time as we continue investing in great entertainment and improving the overall Netflix experience,” the company said in a statement announcing the changes, which apply just to United States customers.


Netflix’s most popular plan, which gives a customer two simultaneous streams, will get the largest increase, to $13 a month from $11. Still, it’s cheaper than HBO, whose streaming service costs about $15 a month. The $8 a month plan will now cost $9, and the high-end version, which allows for four simultaneous streams, jumps to $16 from $14. (The new prices took effect Tuesday for new subscribers. For existing customers, the increases will start in about three months.)
Netflix, which will report quarterly earnings on Thursday, has committed to spending over $18.6 billion on content. That’s for shows and films that won’t appear on the service for months, whether it’s the next season of “Stranger Things” or the forthcoming lineup from the super producer Shonda Rhimes.
It also includes content that’s currently playing, like “Friends,” which ran on NBC from 1994 through 2004 and is owned by AT&T’s WarnerMedia. The show is wildly popular on the service. Worries that it would leave Netflix prompted an outcry on social media. “The only reason I have an account with Netflix is to rewatch ‘Friends,’” one customer said.
That helps to explain why Netflix agreed to pay AT&T approximately $100 million to keep the show through this year, a threefold increase from what it had been paying on average.
Original shows owned by Netflix are also expensive. “Stranger Things,” whose new season will become available this summer, costs as much as $8 million per episode. Netflix has to pay for all of that up front.

Multiply that by the hundreds of hours of original content that Netflix produces every year, and the cash starts to bleed out. The company had negative free cash flow of $2 billion last year. It expects that figure to rise to about $3 billion this year and about the same next year. That has added to the company’s debt: up to $12 billion before it proposed borrowing another $2 billion in October through a bond offering.
Spending big on content while keeping prices modest has helped Netflix expand its customer base, about 58 million in the United States and 130 million worldwide. Those figures will be updated Thursday as part of its earnings report.
But Netflix technically isn’t losing any money. In fact, it claims a profit every quarter since accounting rules allow entertainment companies to record most of their production or licensing costs later on.
The stakes for owning content have risen. Big-pocketed players like the Walt Disney Company, AT&T and NBCUniversal plan to compete with Netflix with streaming services of their own. Both Disney and AT&T’s WarnerMedia plan to unveil their products by the end of the year, and NBCUniversal, owned by Comcast, is working on an ad-supported model streaming service that it plans to make available in early 2020.
Not to be left out, Amazon offers a streaming service as part of its Prime shipping program for $13 a month, or $120 a year. Hulu sells an ad-free service for $12 per month. (Disney will take control of Hulu once it completes its acquisition of the bulk of Rupert Murdoch’s Fox business, sometime around the middle of the year.)
There is also Apple, which has spent well over $1 billion to create original TV shows. The boom in streaming has increased costs throughout Hollywood, where competition for talent and property has intensified.
As Netflix’s chief executive, Reed Hastings, said in October: “There’s never been so much TV and movies being created around the world. So the game is on.”


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