It’s 2023 in America. The consumer price index increased by 6.5% from year to year. Rising inflation raises the cost of doing business, and many companies pass these costs on to their customers in the form of higher prices. for example, Warner Bros. Discovery (WBD -0.08%) It just raised the monthly subscription fee for the HBO Max streaming service by $1 per month, or 7%, effective immediately.
This situation raises one burning question. the mother Netflix (NFLX 0.81%) Preparing to follow suit with its own price hike? More than 73.4 million subscribers in North America want to know.
Why Netflix May Increase Streaming Prices
Netflix is no stranger to price increases. Subscribers in North America have seen their monthly costs increase threefold in the past four years, including an 11% price increase almost exactly a year ago.
Furthermore, management has turned its attention away from maximizing subscriber growth to pursue stronger top-line revenue and bottom-line profits instead. They even stopped offering customer growth guidance that often drove stock market action around Netflix reports in the past. Under this revamped operating model, wouldn’t it make sense to capture another slice of a slight increase in sales by adding a dollar or two to those monthly fees?
And you’ve seen clear signs that Netflix isn’t afraid to tinker with its subscription fees. Just two months ago, the company launched ad-supported plans with dramatically lower subscription fees. So if price-sensitive customers have a problem with higher fees, they can just let us all pay more while they downgrade to the ad-based version. Assuming Netflix’s ad sales make up for the lower subscription costs, everyone wins.
Why the fees may stay the same
Last year’s price increases led to a sharp slowdown in subscriber growth, which resulted in more than a million less Net accounts in the first and second quarters of 2022. Management struggled to explain exactly why watchlists were shortened, but sensitivity to higher prices always entered the discussion. Investors and analysts scratched their heads and slammed the “sell” button, seemingly in unison. Stock prices plummeted. That painful experience could make Netflix think twice about raising the prices of these shows again — with or without lower-cost alternatives on the table.
Furthermore, we don’t know for sure if Netflix’s ad sales will be strong enough to make the ad-based subscription program financially viable. The new option was launched in the midst of the previously mentioned inflation-based economic crisis, which caused an even more severe decline in the digital ad sales market.
Online advertising experts love Alphabet (GOOG 0.97%) (GOOGL 1.09%) and the trade desk (TTD 0.71%) struggling to deliver the revenue growth they are used to as ad buyers delay their marketing budgets until a new announcement. As a result, Alphabet shares have fallen 35% in the past year, and The Trade Desk — which specializes in digital video ads, which are highly relevant to Netflix’s situation — is down 45%. These signs do not bode well for the profitability of a Netflix ad program run by me Microsoft (MSFT 0.30%)A legendary tech titan but relatively new to the digital video ad scene.
Netflix will tell the whole story next week
Given the puts and takes above, it looks like Netflix could have Soon he will raise the prices again, but for this move there will be a price. Therefore, I would be surprised to see a price increase in North America in 2023. Things may be different in other markets, and Netflix has a long history of setting unique pricing policies in each of its nearly 200 target countries. But the US and Canada segment is Netflix’s flagship property where a single change can make a big difference.
However, I’m sure we’ll know Netflix’s pricing plans soon enough. The company is scheduled to report earnings Thursday evening, covering the all-important holiday period in the fourth quarter ended Dec. 31.
Given the rising inflation trend, analysts have to wonder if Netflix plans to take pricing action this year. I was just sharing my opinion on the matter, and you may or may not agree with my analysis, but management will probably determine the outcome on Thursday. I expect co-CEO Reed Hastings to crack a joke about HBO Max’s higher fees and then set the record straight, either way.
It won’t be a guessing game for much longer.
Susan Frye, principal at Alphabet, is a member of The Motley Fool’s board of directors. Anders Beylund has roles at Alphabet, Netflix and Trade Desk. The Motley Fool has positions and recommends Alphabet, Microsoft, Netflix and Trade Desk. The Motley Fool recommends Warner Bros. Discovery. The Motley Fool has a disclosure policy.