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Netflix CFO: We Still Have Pricing Power

11 Nov, 2014 By: Erik Gruenwedel

Netflix CFO David Wells

SVOD pioneer looking at ‘sizable’ expansion in 2015. Hopes to sign-up more than 50 million international broadband households

Undeterred by soft domestic subscriber growth due in part to a $1 price hike enacted at the end of the second quarter, Netflix remains bullish on its ability to raise prices and lure domestic subscribers, CFO David Wells told an investor group.

Netflix is also planning to launch service in six or more new countries in 2015.

Speaking Nov. 11 at RBC Capital Markets 2014 Technology, Internet, Media and Telecommunications confab in New York, Wells acknowledged the SVOD pioneer has a “question” or two on price increases following soft subscriber additions in the most recent fiscal quarter. Netflix raised the $7.99 monthly fee to $8.99 at the end of the second quarter.

Price hikes remain a sensitive issue to Netflix following the 2011 debacle that saw 800,000 subscribers drop the service and the company's stock tumble 75% due in part to a 60% price increase to a popular streaming/disc rental plan.

When asked if subscribers could see a price hike every two years or so, Wells agreed it is management’s intention to “capture” more of Netflix’s value. But he also cautioned against expecting a singular global pricing “event.”

Instead, Netflix hopes to derive more value through current pricing tiers. It also doesn’t foresee a price hike outside the United States.

“We haven’t confirmed the long-term price elasticity issue. There’s definitely something to short-term price elasticity because the coincidence of lower [sub] acquisitions to the price increase means there’s some effect there,” Wells said. “I think we still have pricing power.”

Wells said the subscription streaming pioneer would like to attract 10% of the 500 million to 600 million “addressable” broadband households outside the United States. He said Netflix expects to generate 50% of revenue internationally in the near future.

To do that, Netflix is looking to emulate the September six-country Western European launch strategy that included France, Germany, Belgium, Austria, Switzerland and Luxembourg. Wells did not disclose countries, regions and possible launch dates.

“You should expect that next year’s market will see a sizable expansion. Something on the order of this [year’s expansion] or even potentially more,” he said.

Meanwhile, Wells said that despite lower sub growth and Wall Street concerns, Netflix remains positive toward attaining previous projections of 60 million to 90 million broadband household sub penetration in the U.S.

Specifically, the CFO contends there are 90 million households paying substantially more than the monthly $9 Netflix subscription for video — a market share he feels the SVOD service can move upon.

“It’s an addressable market. We’re not saying were going to get to 90 million subs [in the U.S.],” Wells said. “We’re saying we have the potential for customers within that market of 90 million subscribers.”

The CFO said Netflix continues to have “healthy” growth with 2014 fiscal-year domestic subscriber projections from 5.5 million to 5.6 million. Wells said there isn’t a slowing demand for Netflix in high-penetration domestic markets (such as the San Francisco Bay Area), but rather heightened competition from other services, which include Amazon Prime Instant Video and Hulu Plus.

Indeed, Wells said Netflix management contends that if rival HBO, with 30 million pay-TV subs, launches its SVOD service priced around Netflix, it would significantly up its domestic sub base.

At the same time, the executive acknowledged that the 6.3 million net sub additions in 2013 likely benefitted from the hype generated by Netflix’s first original programing such as “House of Cards” and “Orange Is the New Black” — marketing events not easily replicated.

“The novelty factor does wear off after a while. [But] we still feel we have plenty of growth in the U.S. market,” Wells said.


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