Why Netflix Is About to Raise Prices
Netflix's content costs are increasing on seemingly every front: acquisition, creation, and distribution. Even though the battle is heating up with Amazon.com and Netflix would like to keep its prices low, you have to wonder if Netflix can keep the cost of a subscription at its current level. The cost of a streaming package is only $7.99, that's almost half the price of a movie ticket in New York City . Can prices remain this low going forward in the face of deals like the one with Comcast ?
On Jan. 22, Netflix filed a letter to shareholders with the SEC that highlighted the company's "evaluation of plan tiering." This is the warning shot that price increases will be coming. To the company's credit, it went further to say that "If we do make pricing changes for new members, existing members would get generous grandfathering of their existing plans and prices" so there would be no near-term impact on your pocket.
This language is vague, but if the company pairs pricing with its costs then it could lead to quality/stream matrix where you may pay $7.99 per month for one stream of SD video, your neighbor pays $9.99 per month for one stream of HD video and your cousin with three kids pays $14.99 per month for three streams of HD video. The company experimented with different price tiers for multiple streams, but with the Comcast news and other carriers likely following then it may be raising the price for HD vs. SD as well.
The "Net Neutrality" sugar high
The deal with Comcast is the first volley in the Net Neutrality war. Sellside analysts can say that the Comcast deal is good for consumers until they are blue in the face, but the reality is that your bill is going up over the long term. The fact that this may not contribute to it over the next 12 months is simply a sugar high.
Netflix has been battling for years over whether it would need to pay more to pipe its content over Comcast's last mile. The recent DC District court decision that the FCC overstepped its legal authority in preventing broadband providers from throttling Netflix traffic seemed to be the last nail in the coffin. Verizon had already been accused of slowing down traffic for both Amazon and Netflix, but Comcast is trying to push through a massive merger and would like to avoid the bad press that a battle with Netflix would create.
More cable deals are likely to follow, possibly at worse metrics
It's true that nobody knows the increase in the payment size that Netflix will have to cough up for this deal. There has been speculation that the payment that had been going to Cogent will now be going to Comcast but there is no basis for that guess. What we do know is that Netflix has its back to the wall as half of its $3 billion in content liabilities are coming due in the next 12 months, so it will do anything it can to reduce or stabilize costs. This cost stream is likely to increase as well as it strikes deals with other broadband providers who can blame the ISP access point for slow traffic and strong arm a payment from Netflix.
Actors don't take IOUs
The recent $400 million debt offering is supposedly for general corporate purposes "including capital expenditures, investments, working capital and potential acquisitions" which probably means content creation costs. It also came in correlation with Netflix confirming season 3 of "House of Cards." Considering the success of this brand, the production price tag is likely increasing.
Even the state of Maryland is reaching into Netflix's pockets
Now that the company has confirmed a script for season 3 of its hit show, Governor Martin O'Mally of Maryland is rethinking the tax holiday offered to the company for filming in Baltimore. The state will probably come to the table by June which would allow for a February 2015 debut but this action shows how dependent Netflix is on the good will of third parties.
A price hike would likely take place sooner than later. The last time the company raised prices on existing customers, it sparked a backlash that resulting in Reed Hastings apologizing in September. When the summer rolls around and people are more apt to be spending time outside, it is simply easier to decide to unplug for a few months.
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The article Why Netflix Is About to Raise Prices originally appeared on Fool.com.David Eller has no position in any stocks mentioned. 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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