The Math Behind the Plan – The Hollywood Reporter

When Netflix raises the price of its streaming packages, Wall Street takes notice.

So when the streaming giant raised prices on its plans in North America by $1-$2 on Jan. 14 — basic plans will be $9.99 and the next tier will be $15.49 — the immediate reaction from the market was positive: Its stock price jolted upward.

The argument in favor of higher prices is that they underline the breadth of programming and value of the service, while boosting cash that can go into financing or acquiring content. When Netflix last raised prices in late 2020, its subscriber count only continued to grow (the global pandemic likely helped).

Earnings and average revenue per user, helped by price increases, are becoming more important to Netflix’s stock performance, Wells Fargo analyst Steven Cahall suggested last year. And the analyst also believes there may be a connection by price changes and subscriber retention.

Cahall on Jan. 18 highlighted that management’s decision to raise prices could be a positive sign for recent subscriber trends. “We think Netflix tends to raise prices when churn is low, and this could stimulate more bullish views around fourth quarter 2021 and 2022 net adds,” he wrote.

Evercore ISI analyst Mark Mahaney echoed that in a Jan. 16 report, saying: “We view this price hike as coming from a position of strength, likely supported by strong engagement and viewership in the fourth quarter.”

But given increased streaming competition from companies like Disney, WarnerMedia and ViacomCBS, some investors worry that Netflix has less “pricing power,” meaning that it can’t push up the monthly service cost without losing some subscribers through ever-volatile churn.

Credit Suisse’s Douglas Mitchelson commented on price hikes even before they were announced, pointing out investor “concerns that Netflix will have a harder time raising prices when there is more competition in the marketplace.” But he also highlighted a counterpoint, arguing that “Netflix’s usage would suggest the service is a very cheap entertainment option, even for international households.”

That value-driven positioning allows the company to structure its pricing from a global perspective, offering cheaper plans in markets where it needs scale, while raising prices in mature markets to drive cash flow.

With the latest moves, Netflix appears to be reorienting its U.S.-Canada market around maximizing ARPU (average revenue per user), the gold standard of subscription revenue metrics (Netflix refers to it as average revenue per membership).

According to the company’s last quarterly financial report, North America already had the highest ARPU in the world at $14.68, up from $13.40 a year earlier. The new price hikes will only drive that figure higher.

Netflix's Average Revenue Per User in the U.S. and Canada

At the same time, the company is investing in lower-cost offerings in Latin America (where its ARPU was $7.86 per user last quarter) and parts of the Asia-Pacific region (where it was $9.60).

Just last month Netflix slashed prices in one huge market where it has relatively low penetration, India, lowering the price of the “Basic” plan from $6.60 to $2.60, and its mobile-only plan to under $2. The “Standard” plan was cut to $6.60 from $8.55. The consulting firm Omdia estimated last month that Netflix only had 4.4 million subscribers in India, compared to 74 million in the U.S. and Canada.

Many of Netflix’s competitors, meanwhile, are seeing their ARPU decline globally as they seek scale in North America and expand into new markets. Disney+’s ARPU fell 9 percent to $4.12 per subscriber in fiscal Q4, while HBO Max’s ARPU began to fall in Q3 2021 following the launch of the less-expensive ad-supported tier last June. It ended Q3 at $11.82 per subscriber.

That increased cash flow and pricing power, coming at the same time as many competitors see their ARPU fall, suggest a bullish few years ahead for Netflix, despite the competitive landscape, BMO Capital Markets analyst Daniel Salmon argued Jan. 17.

“Increases in the U.S., Canada and South Korea show continued pricing power,” Salmon wrote. “This supports the expanding free cash flow profile, on which more investors are focused after high-multiple businesses have been re-valued.”

He forecast that the company will “start generating consistent positive free cash flow during 2021 and drive substantial growth through 2030, when we estimate free cash flow reaches $24.8 billion.”

The question for Netflix’s competitors is whether they can get the scale needed to raise their ARPU accordingly.

A version of this story appeared in the Jan. 19 issue of The Hollywood Reporter magazine. Click here to subscribe.

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