It’s a question that everyone in the industry has been asking and we’re about to see just how price sensitive Netflix viewers are – a question that will also go a long way toward answering the broader segment question for SVOD providers.
Netflix is bumping prices on its subscriptions $1 for its basic plan, $2 for its most popular HD standard plan and $2 for its highest tier, 4K Premium. The 18% increase for the two premier plans is the biggest it’s ever jumped.
Wall Street approved, with the stock price increasing 5% immediately after the Associated Press reported the hike, which will be phased in over three months for 58 million existing subscribers in the United States. New subscribers will pay the increased price immediately. Some Latin American countries where Netflix bills in U.S. dollars will also see the increase. But two critical market – Brazil and Mexico – won’t… at least not now.
Originals driving price hike
The company pointed to its ongoing original content investments as the root of the price hike. It spent nearly $13 billion on content in 2018 and likely will continue apace, especially as new services emerge in the U.S. market – like Disney, NBCUniversal and AT&T’s WarnerMedia, which are all scheduled for this year.
In 2017, following Netflix’s last $1 price increase on its HD plan and $2 on its 4K plan, a report from Earnin showed a stutter in growth among lower-income subscribers… which didn’t see a price increase in 2017. And, to be fair, Netflix’s growth in that demo had essentially been flat for the previous five years. But among all U.S. consumers, the company still added more than 1.25 million new subs in Q4 2017 following the increase, and another 5.05 million globally.
As Netflx CEO Reed Hastings said in a video call following its Q4 earnings release in January: “So many people are talking about Bright or Stranger Things (season) 2 or The Crown that that is what pulls in people who haven’t yet joined. All their friends are talking about the shows, that is the dominant accelerator.”
The bottom line
Content is still the motivating factor for viewers, and good content is worth a couple of extra bucks. For Netflix, the price hike was estimated to have resulted in more than $650 million in incremental revenue, according to an RBC analysis. Its own study found 31% of U.S. users were on the basic plan, 43% on the HD plan and 26% on the 4K plan.
With an increase in the basic plan this time around, it’s possible there may be an actual decline among lower-income users who may be more price sensitive, but the demo that takes the HD and 4K plan – 69% of Netflix’s subscribers in the U.S. will remain and grow in coming quarters. After all, the price of a Netflix subscription remains a fraction of standard cable offerings, which averaged $107 in the U.S., according to Leichtman Research.
And that leaves plenty of room for growth for Netflix and the other OTT services that are continuing to change how we watch TV.