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News of Netflix Price Increase Met With Market Shrugs — For Now

21 Apr, 2014 By: Erik Gruenwedel

What a difference 33 months makes. Netflix April 21 announced it would raise the price of its $7.99 monthly subscription by as much as $2 to new customers in an effort to offset rising content costs, among other issues.

The stock market reacted favorably, with Netflix shares up nearly 7% in afterhours trading. That’s quite a reversal from the late summer of 2011 when Netflix announced a 40% price hike to its popular hybrid streaming, by-mail disc rental plan; backstopped by an ill-advised “Qwikster” rebranding of its pioneering disc business.

Those decisions – accompanied by a tortured PR message — sent 800,000 subscribers bolting for the doors, and Netflix shares into a free fall, jettisoning nearly 75% of their value in a matter of days. There were some calls for CEO Reed Hastings to be replaced.

Since that time Hastings has been loathe to consider a price hike, let alone discuss one — despite facing increased content costs due to Netflix’s burgeoning popularity, subsequent desire for content exclusivity, in addition to aggressive expansion internationally.

Backed by robust 4 million net subscriber additions in the first quarter, and more than 48 million globally, Hastings decided to dip his toes in potentially troubled waters. As a result, the price hike only affects new subscribers, with plans to incorporate existing subs delayed by as much as two years.

“I think [Hastings] is managing this masterfully,” said Wedbush Securities senior analyst Michael Pachter, who maintains Netflix had no choice but to up subscription prices.  “The [total] price increase will not be effective for over a year, to limit defections. Smart move.”

With Amazon recently raising the price of its Prime Instant Video annual fee $20 to its existing 20+ million members (while offering the old price to newcomers), Netflix appears to treading on safe ground.

"I don't think too many consumers are going to be put off by spending a dollar or two a month for the quality, the quantity of content that Netflix has,” Mark Mahaney, managing director of Internet for RBC Capital Markets, told USA Today.

About the Author: Erik Gruenwedel

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