Netflix Defends US Price Hikes, Says 'Entry Price' Remains 'Affordable'
Netflix changes pricing “from time to time” as it continues “investing in great entertainment and improving the overall Netflix experience,” said the company Thursday in its quarterly shareholder letter. The price increases Netflix imposed this week on U.S. subscribers will help “lift” average selling prices as the hikes are phased in for existing customers over Q1 and Q2, it said.
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“We want to ensure that Netflix is a good value for the money and that our entry price is affordable,” said the letter, marking the company's first public comments on the price increases. Revenue in Q4 was $4.18 billion, below the $4.2 billion guidance in its Oct. 16 forecast. Netflix had 1.53 million paid net subscriber additions in the U.S. in the quarter (it had projected 1.5 million U.S. paid net adds). Internationally, paid net adds were 7.3 million, compared with 7.6 million in the October forecast.
After regular U.S. trading, the stock fell 4 percent to $339. Analysts said investors were disappointed with Q4's 5.2 percent operating margin performance, though it slightly beat the 4.9 percent October forecast. Q1 guidance was also lackluster, they said. Netflix is projecting 1.6 million U.S. paid net adds and 7.3 million paid net adds internationally in the quarter, roughly on par or only slightly above those in Q4.
After Netflix announced U.S. price hikes across the board Tuesday (see 1901150037), analyst speculation reached a near-frenzy about how subscribers would react, and how senior management would address them with Thursday's Q4 financials. Senior executives were expected to have fielded more questions about the hikes in their quarterly earnings interview scheduled for Thursday evening. The basic-tier subscription goes up $1 a month to $9, and the standard tier will cost $2 more monthly to $13. The premium tier also rises $2 monthly to $16. The higher prices take effect immediately for new customers.
Even “minor” price increases can have “significant implications” for Netflix, said The Diffusion Group Wednesday. Anticipating an early-2019 price hike, the company canvassed nearly 2,000 U.S. Netflix customers in December and found a hypothetical $1 monthly increase would force 16 percent to downgrade to a lower tier or cancel the service altogether.
The rate of “likely cancellations” doubled, and downgrades tripled, when TDG asked Netflix subscribers how they would react to a $3 monthly price hike, it said: “While TDG believes that Netflix will endure any short-term backlash from these increases, it is undoubtedly reaching a level of price resistance across all tiers." Other streaming providers should be watchful of any Netflix fallout, it said. Netflix is "the most highly valued" service with "the most loyal subscribers," it said. "If it encounters resistance at these pricing levels, undoubtedly others will, as well."
Though Netflix raised pricing about a year earlier than Cowen & Co. expected, it views the price hikes as “a positive” because they will help fund the “ongoing virtuous cycle” of original content procurement and subscription growth, it said Wednesday. It conceded “our estimates will prove too aggressive” if Netflix is unable to continue growing U.S. subscribers.
Cowen’s monthly survey of 2,500 U.S. consumers found 4K TV household penetration more than doubled to 19 percent in Q4 from 9 percent in Q4 2016. The “continued growth” in U.S. 4K TV penetration “should represent a tailwind for greater adoption” of the Netflix premium subscription tier, it said. It estimated premium-tier accounts were 26 percent of all Netflix U.S. subscriptions in Q4. The premium tier, now $16 monthly, offers 4K HDR content and allows four simultaneous streams on a single account.