Why Netflix has to raise prices

It’s ironic that Netflix shares jumped on Friday in response to it putting up subscription rates when the move itself was a response to more competition.

While subscription price increases have been announced only in its two major and most established markets – the US and UK – it’s hard to imagine it won’t roll out the new price structure in Australia eventually.

Netflix is now the biggest producer of original – non-sports – content in the world and to maintain its edge in the streaming market it needs to offer those content-thirsty consumers more than its myriad competitors that are in catch-up mode.

Netflix has wisely decided not to fight on price – rather better quality and more choice.

While it has experienced its share of program disappointments and flops over the past year, Netflix has not taken its foot off the content-creation accelerator. Thus it needed funding to churn out fresh product and is looking to customers to provide it via increased pricing.

The company will no doubt have researched the market extremely well to assess the point at which subscribers will wear higher prices before switching off and has thus targeted the highest premium package for a price rise of up to 17 per cent from $US11.99 to  to $US13.99. The mid-tier package has increased from $US9.99 to $US10.99. The basic service subscription price remains unchanged.

It has more than 100 million subscribers around the world, and clearly an increase in the price of the service may slow the rate of growth.

Netflix already spends $US6 billion on content and plans to increase that to $US7 billion next year.

Competitors flat-footed

It has a very handy subscriber lead on its competitors – the largest of which are mostly owned by television networks or movie studios – which are desperately attempting to play catch up after years of flat-footed denial that they were being disrupted by internet streaming.

But competitors are now in full throttle with their attempts to slow Netflix’s subscriber gains. Its long-time content partner  Disney recently withdrew its back library from Netflix.

But tardiness in moving into the streaming market allowed Netflix to grow from a share price of less than $US10 four years ago to more than $US194 today – a market capitalisation of $US84 billion compared with CBS at $US24 billion and Disney at $US154 billion.

Netflix did this from a standing start while others already had large program libraries.

But competitors are now in full throttle with their attempts to slow Netflix’s subscriber gains.

A scene from The Crown, a Netflix original series.

A scene from The Crown, a Netflix original series Photo: Netflix

Large traditional television companies had to battle with the concept of cannibalising their own markets and the weight of the big cost base to run them.

Hulu, for example, which has struggled to make significant gains in the market is a joint-venture between Disney, 21st Century Fox, Comcast and Time Warner.

Having worked inside a traditional media company that was challenged by the digital revolution more than 10 years ago and watched the then-management miss opportunities to develop digital properties while witnessing the divisions and denial in the company  ranks, it is easy to appreciate how US content and television companies were slow and disorganised.

While US television networks are now starting to get their acts together on streaming services, the folk at Netflix should be far more concerned about the true innovators like Amazon, Apple,  Google (owner of YouTube) and Facebook, all of which have put down markers into the streaming market.

Meanwhile in Australia there has been no news about Netflix pricing. Given we are a relatively new market for Netflix and a relatively small one, the streaming service may not be in a hurry to raise prices here.

But any rate rise – when it does eventually come – will be good news for the free-to-air television industry which is already struggling to retain eyeballs and advertising.

It would also be welcomed by Netflix’ main rival here, Stan, which could choose to increase its subscriber rates or build additional customers by becoming more price competitive.

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