What Does Netflix's New Pricing Test Mean?


Streaming video leader Netflix recently began testing a new pricing scheme for visitors to its website. One of the highlights is a plan that allows users to stream Netflix content on only one device at a time for $6.99 per month. (By contrast, the standard $7.99 plan allows streaming on two devices simultaneously.)

Is Netflix worried about competition from Prime Instant Video?

Netflix's new pricing scheme may be no more than a test that will never be widely implemented. However, it could also be a sign that the company is worried about Amazon Prime as a competitor. While Amazon's video content library is not quite as good as Netflix's, it has been improving rapidly -- and Prime is cheaper than its rival.

Branching out
Until 2013, Netflix's streaming service was a "one-size-fits-all" offering. For $7.99 per month, users received unlimited access to Netflix's content, with the ability to watch up to two content offerings at once with a single account (a feature designed to appeal to families).

However, Netflix found that a few customers -- particularly families with diverse tastes and plenty of Internet bandwidth -- wanted to watch more than two streams simultaneously. In April, Netflix announced that it would create a plan allowing those customers to stream up to four video offerings at once for $11.99 per month. My Foolish colleague Tim Beyers has been one of the Netflix subscribers to take advantage of this upgrade offer.

The recently announced pricing scheme builds further on this differentiation. In addition to the two-stream and four-stream plans, Netflix is now offering some new U.S. customers one-stream and three-stream plans for $6.99 and $9.99, respectively.

The Amazon Prime "threat"
The most obvious rationale for Netflix adding a lower price tier would be a desire to remain competitive with Amazon's Prime service. Prime's regular price is $79 per year, which works out to less than $7 per month. That includes free two-day shipping on most Amazon items, as well as a large streaming video library and other perks.

So far, Amazon Prime has not been much of an impediment to growth at Netflix, which added 6 million streaming subscribers in the U.S. during the 12 months ending in September.

That said, Netflix has about 33 million domestic users and its potential market is finite, though large -- there were about 88 million U.S. households with broadband connections as of June. Meanwhile, Amazon Prime seems to be growing by leaps and bounds. Amazon boasted about adding "millions" of Prime members in the third quarter, and adding more than 1 million new members in the third week of December alone. (Both of these figures include international markets.)

While some people subscribe to both Netflix and Amazon Prime, others are choosing between the two services. As a result, it makes sense for Netflix to grab as much market share as it can before the streaming market nears saturation. Getting a little closer to Amazon on pricing with a "value offering" at $6.99 could help Netflix win some incremental subscribers.

Forget about price increases
If there's one thing this pricing test shows, it's that Netflix subscribers probably don't need to worry about facing a rate increase anytime soon. Netflix is still in growth mode, and as long as that remains the case, the company will not have much of an appetite for price increases.

With Amazon offering Prime subscriptions for $79 per year, it would be unwise for Netflix to push the envelope on pricing. Indeed, if this new Netflix pricing scheme is rolled out more broadly, it will allow people who never need two simultaneous streams to get an even lower monthly price.

Even with some people taking the lower-price plan, Netflix should be able to grow earnings at an impressive rate over the next several years. However, earnings growth is still unlikely to meet the expectations of the most ardent bulls, who are counting on an eventual price increase to turbocharge Netflix's earnings.

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The article What Does Netflix's New Pricing Test Mean? originally appeared on Fool.com.

Fool contributor Adam Levine-Weinberg is short shares of Amazon.com and Netflix. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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