3 Reasons Netflix Will Survive Its Subscription Price Hike

Those of you who are Netflix (NASDAQ:NFLX) customers are certainly aware by now that the cost of your subscription is about to rise, from $1 to $2 per month, depending on your plan. The news went viral in a matter of minutes when it broke back on Jan. 15. To that end, those of you who own Netflix stock are understandably concerned.

The price tag is still negligible for most consumers, but there are a growing number of cheaper alternatives. Perception is everything.

This is one of those (many) cases where worry isn’t necessary though. Obviously some paying members will revolt by unsubscribing, but most won’t, for three key reasons.

3 Reasons This Won’t Ruin Netflix Stock

Don’t misread the message. Streaming giant Netflix has a number of issues to address, not the least of which is its increasingly negative free cash flow. The figure reached a record-breaking $1.31 billion last quarter, with no end in sight. Despite the business model’s unusual nature, the trend isn’t indefinitely sustainable.

Simultaneously, now that Netflix has proven and even developed the whole business of piping in digital video content straight to consumers, legitimate competitors are stepping up their game.

Case(s) in point: Hulu, co-owned by Comcast (NASDAQ:CMCSA), Walt Disney (NYSE:DIS) and a couple of other media players, continues to add subscribers, as does Amazon.com (NASDAQ:AMZN) to its Prime platform.

Hulu, in fact, countered Netflix’s recent price hike with a price cut. Disney, meanwhile, still intends to launch its own standalone streaming service later this year, drawing on its hit franchises like Star Wars and Marvel’s Avengers universe.

They’re all good reasons to wonder if Netflix stock will ultimately be up-ended by the price increase, even if it hasn’t happened yet.

Of all the things that could prove problematic, however, higher prices isn’t one of them for thee related reasons.

1.Americans unaware of subscription-based spending

Earlier this month, management consulting firm Waterstone Group published some recent findings from a recently-conducted survey that indicated U.S. consumers have no idea how much they’re actually spending on subscription services like Netflix or Spotify.

Of them, 84% vastly underestimate how much they spend per month on recurring services.

And, on average, they weren’t even close. Even given extra time to think about it, consumers estimated they spent around $112 per month on subscriptions, but actually spent closer to $237.

The lack of awareness is arguably unhealthy for America’s household budgets, but as long as consumers aren’t bothering to crunch the numbers, most won’t think twice about the extra couple of bucks they’ll now be shelling out for Netflix.

2.More hours spent watching

“Netflix prices, compared to the value it provides, is still attractive if you look at Hulu, HBO, etc.,” explains Ravi Dhar, the director of the Center for Customer Insights at Yale School of Management.

Dhar goes on to say, “How much does a movie cost in a theater? Compare that to how much content people watch on Netflix and its cost. It is still far more economical and easy to justify.”

And Netflix watchers are certainly extracting more value from their Netflix subscription. The average Netflix subscriber streams 64% more content than Hulu customers do.

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Netflix is also winning the war for perceived value when stacked up against traditional cable television.

Though the average one hour and eleven minutes per day watching the service’s videos is less time than most consumers spend watching cable television, much of that cable time is split up among several television channels, and focus may be minimal.

And, even though viewers are watching more cable television, they’re paying dearly for it. Whereas traditional cable television costs roughly 67 cents per hour actually watched by subscribers, according to number-crunching from CordCutting.com, Netflix’s cost per hour works out to about 12 cents.

3.First to market, most market share

Finally, it’s more of a qualitative reality than a quantitative idea, but being the first to the market has helped Netflix cultivate a loyal following that simply may not want to go to the trouble of unsubscribing.

Nearly 90% of streaming subscribers are Netflix customers, and though that doesn’t preclude them from adding another competing services, it does make it clear which provider is the go-to choice. Though Netflix needs to work on margins and profitability, the hard part, establishing the biggest customer base is done.

And as reminder, although Netflix has been bumped around by previous price increases, none of them stopped the company’s long-term growth train.

Bottom Line for Netflix Stock

To be clear, being the biggest and most successful in a particular business doesn’t inherently translate into profitability.

It matters. Amazon may well be losing money with Prime, but it’s offsetting that loss by inducing sales of merchandise. The average Prime customer spends roughly $1300 per year shopping at Amazon.com, versus only $700 per year for non-Prime members.

Disney and Comcast, meanwhile, can use repurposed existing content to populate Hulu’s library, lowering its net costs. Netflix, meanwhile, only makes money by selling subscriptions to its service. It’s still not clear profits and positive cash flows are reliably meaningful with that monolithic model.

What should be clear to owners of Netflix stock, however, is that most of the company’s subscriber base isn’t going anywhere despite the rising cost of its service.

That loyalty is at least something for Netflix stock to build on.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter

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