Eyeing Subscriber Growth and Margins, Netflix Tries Out New Pricing Tiers

By Tara Seals January 02, 2014

Netflix is trialing new pricing models, which could replace the $7.99 standard streaming with a range of options that are priced according to usage levels.

An individual plan for $6.99 allows one stream at a time from an account, and a $9.99 subscription allows for up to three people to stream on one account at the same time. The $7.99 tier allows two streams at a time, and an $11.99 per month tier, introduced earlier this year, allows for four streams at one time.

The new levels are merely in the trial stages, but if the uptake is there, it could help Netflix move families, apartment-mates and the like to the higher tiers. And, the $6.99 plan could ostensibly stave off moochers, who use other people’s Netflix accounts for free. It could also tease non-Netflix users into giving the service a whirl where they may not have otherwise done so, boosting that all-important customer pipeline that right now lives in the shadow of possible market saturation. The company already has 30 million streaming subscribers in the U.S.

If we remember, the company has to be careful with pricing: it took a beating when it last raised prices, by 60 percent in the summer of 2011, which lead to the loss of hundreds of thousands of subscribers, a formal apology from Netflix CEO Reed Hastings and a free-falling stock price that fell from its high of $300 in July 2011 to just $63.85 in November 2011.

But also, in a recent RBC survey, 17 percent of Netflix customers said they would be 'very' or 'extremely' likely to dump their subscriptions in the event of even a 13 percent price hike, which would bring the subscription up from $7.99 for streaming-only to about $9 per month.

Offering a range of options could help the company boost its ARPU and aid margins without ruffling too many feathers.

Aside from subscriber growth, Netflix' margins have had investors worried for some time—content acquisition is expensive, so how can it move past its core business model of selling used video content? CEO Reed Hastings has said repeatedly that the over-the-top (OTT) service wants to become a premium outlet, like HBO.

Andre Mouton, an investor who writes for Minyanville.com, believes that despite the Emmy-winning success of originals like House of Cards and comments that the streaming giant has made about producing its own movies and filming things in 4K UltraHD, it simply doesn’t have the financial profile as it stands to become the next HBO.

In an analysis, he noted that "Original content cannot be had for $6/month per viewer, and in order to turn a profit, Netflix must resell content that it cannot afford to produce on its own. That makes it a used video seller."

Therefore, he added: "There's no reason to believe that Netflix will ever be more than what it currently is: a place to watch things a second time. In all likelihood, the streaming giant will continue to charge $7.99 per month. It will continue to pay $6 per month for content, little of it original. And Netflix won't be taking over the world."

By way of comparison, traditional distributors spend exponentially more in content acquisition costs. In the third quarter, Comcast spent $35 per month per subscriber in content costs. As a further point of comparison 2012, Time Warner, Disney and 21st Century Fox had operating expenses of $24 billion for their cable networks.

"That's the equivalent of 250 million Netflix subscriptions, or three times what the video-on-demand company estimates as its total addressable market in the United States," Mouton said. "We're looking at a minimum of $30 per month per subscriber to run one of these cable networks — a ballpark figure, but one that's nearly four times the price of a Netflix subscription."

Edited by Cassandra Tucker

TechZone360 Contributor

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