Netflix proves it can raise prices without losing customers
Los Angeles: Netflix Inc. used to worry it would alienate customers by raising prices for its streaming service. Not any more.
The company posted its strongest subscriber growth since going public 16 years ago, despite raising prices for most of its customers over the past several months. Los Gatos, California-based Netflix added 7.41 million users in the first quarter of the year, according to a statement Monday, easily topping analysts’ projections.
Raising prices enabled Netflix to boost sales 40% last quarter and quiet investors who fret about all the money the company spends on original series and movies. Netflix will spend $7.5 billion to $8 billion on programming this year to lure more customers to its online TV network, which now boasts 125 million subscribers worldwide.
“You have to earn it by doing spectacular content,” chief executive officer Reed Hastings said on a call with investors. “If you do that, you can get people to pay more because then we can invest.”
The results, including higher earnings and an upbeat forecast, were welcome news to investors. Netflix rose as much as 8.3% to $333.21 in extended trading after the results were announced. The stock was up 60% this year at Monday’s close in New York.
Hastings hasn’t forgotten when a price increase almost took down the company. The stock price fell precipitously and subscribers cancelled over a few months in 2011 after the company split its streaming service from its DVD-by-mail service, a move that amounted to a 60% price increase for customers who wanted to keep both.
Yet a growing segment of the population forgave and forgot, replacing live TV services with Netflix’s on-demand library, even as the company’s average U.S. subscription price rose 12% in the past year. The popularity of the service surged in the US once Netflix began funding original series, such as “House of Cards” and “Orange Is the New Black.”
The production pipeline has since increased to levels that rival the world’s largest media companies. Netflix will release about 700 original pieces of programming this year, including about 80 movies (more than any studio), more than one stand-up special a week and as many unscripted series as any US cable network.
Worth just $20 billion at the end of 2014, when it had only released a handful of original shows, Netflix will likely surpass $140 billion in market value when trading opens Tuesday. Chief content officer Ted Sarandos has used the company’s rise to lure some of the top creative minds from rival studios.
In February, producer Ryan Murphy agreed to leave 21st Century Fox Inc., where he made “American Horror Story,” for a deal at Netflix worth a reported $300 million. Earlier, the company signed “Scandal” producer Shonda Rhimes, who left her long-time home at Walt Disney Co.’s ABC to make shows exclusively for Netflix.
Netflix has told investors it will save money by bringing development and production in-house and avoiding the markups imposed by rival studios. But spending is still growing as the company expands production in areas like film, unscripted series and kids programming. In the last quarter, the company released the documentary miniseries “Wild, Wild Country,” the second season of the Marvel comic series “Jessica Jones” and the horror film “The Cloverfield Paradox.”
Total streaming content obligations grew to $17.9 billion in the first quarter, from $17.7 billion three months earlier, and that doesn’t account for the ballooning budget to market shows. While Netflix reports a profit, its cash flow last quarter was a negative $287 million, and investors will be paying close attention to whether the company plans to take on more debt, as it has every year since it started releasing original programming several years ago.
Netflix has allayed concerns about its cash burn by continuing to add subscribers. On Monday, the company said it aims to add another 6.2 million subscribers in the second quarter. The company is also forecasting a further 41% increase in revenue this quarter, to $3.93 billion, and said profit would rise to 79 cents a share, both topping Wall Street estimates.
This growing output justifies price increases, Netflix says. While $9.99 a month made sense when Netflix was making about as many shows as HBO, which costs more than that, the company can now offer customers as many new shows as several cable networks put together. Bloomberg
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