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Netflix Tests Price Increases Again

Posted on Thursday, Apr 24th 2014

According to data from analytics firm Qwilt, Netflix (Nasdaq: NFLX)  accounts for 57.5% of all online video traffic compared with 52.5% last year. Analysts believe that Netflix can attribute  part of this success to the recent well-received launches of their home-produced shows such as House of Cards and Orange is the New Black.

Netflix’s Financials
Earlier this week, Netflix reported first quarter results that were mostly in line with market expectations. Revenues for the quarter grew 24% to $1.27 billion, at par with the Street’s projections. EPS of $0.86 was ahead of the market’s forecast of $0.83.

International revenues grew 88% over the year and brought in 21% of the quarter’ share. Domestic revenues grew 25% over the year to contribute 63% of the revenues. DVD revenues continued to dwindle and reported a 16% decline over the year.

Netflix’s home production is also helping drive domestic subscription. During the quarter, they added 4.70 million paid subscribers. Total streaming subscriber base grew 12.04 million over the previous year to 48.36 million.

For the current quarter, Netflix projected revenues of $1.14 billion and EPS of $1.12 compared with the Street’s forecast of $1.31 billion revenues and EPS of $1.01. Netflix expects to end the current quarter with 49.81 million paying subscribers.

Netflix and Net Neutrality
Earlier this year, Netflix entered into an agreement with Comcast that confirmed the closure of net neutrality laws. The recent laws enable ISPs to charge additional fees for better delivery of online content over the Internet. As part of the agreement, Netflix is now getting direct access to Comcast’s broadband network. Known as paid peering, the new setup allows Netflix to connect directly to Comcast’s network instead of going through intermediaries. The terms of the deal were not disclosed, but it is understood that Netflix would be paying Comcast for this preferential treatment. The deal will help Comcast subscribers who are accessing Netflix as they will see improved speed of streaming. Netflix had noted that streaming speeds on Comcast services had dropped from 1.63 MBPS in December to 1.51 MBPS in January.

Netflix’s Price Hike
To manage the payouts associated with such preferential Net streaming and to handle the rising costs of content acquisition and proprietary content development, Netflix has announced intentions to increase prices for streaming services. The new rates will be put in effect later this quarter and would increase the prices by $1-$2 depending on the country the subscriber is in. Existing subscribers will not be charged the increased rates for now. In 2012, Netflix had announced similar plans to increase prices and split the DVD and streaming options. The market did not take the announcements well and both the stock price and the number of subscribers declined. This time around, the market appears to be more understanding and did not see as much a backlash when they tested a €1 price increase in the Irish markets in January this year.

Netflix’s stock is trading at $371.20 with a market capitalization of $22.2 billion. It touched a high of $458.00 in March this year.

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