Why price increases could jolt Netflix stock
It seems Netflix is setting the stage for higher prices and a customer revolt. A new $11.99 price point for multiple user subscriptions is a big warning sign that Netflix fears higher pricing will send customers away from its service.
Competition is also heating up. Amazon is securing deals for its Prime service to extend its reach into online TV. Meanwhile, rumors are circulating that Amazon will launch a new proprietary set-top box to take more share from Netflix. Whereas Prime does not have the same size online library, or a DVD-by-mail option, Amazon’s Prime does offer immediately available, pay-per-use streaming options for movies and content it does not have in its unlimited use library. What Amazon doesn’t have, you can still watch for a small fee. What Netflix doesn’t have for streaming, customers have to either order by DVD (and thus pay much more for Netflix) or, failing DVDs, simply go without.
A set-top box could further encourage members to make the switch from Netflix to Prime on higher prices for Netflix’s streaming. After all, Prime also provides for free 2-day shipping for Amazon customers, another value-add that Netflix could never offer for its members.
Likewise, Redbox and Verizon are now in the streaming game. Investors have largely ignored Redbox’s entry into online streaming, but it does pose a real threat if Netflix, Inc. (NASDAQ:NFLX) tries to push higher prices to existing subscribers. Redbox offers online streaming and four movie rentals for $8 per month. For $9, subscribers can swap DVDs for BluRays for HD viewing. If one already uses a Redbox four times per month, streaming, then, costs just $4 more per month.
Redbox’s parent company, Coinstar, Inc. (NASDAQ:CSTR) trades cheaply, at a single-digit multiple of free cash flow. Unlike Netflix, Coinstar, Inc. (NASDAQ:CSTR) generates very regular cash flow from its vending businesses. I’ve written about Coinstar’s excellent free cash flow generation and capital allocation previously.
Bottom line
Investors should take a wait and see approach to Netflix. Given its recent rise, a parabolic 134% move year-to-date, investors are more likely to see downside when Netflix unveils a price increase. Wall Street has a pretty good memory, and it surely hasn’t forgotten what happened the last time the company pushed through new pricing by haphazardly announcing the split of DVDs from streaming.
Buyers beware. Another price increase could cause large-scale subscription cancellations at worst, or higher content licensing renewal fees as content creators see more money for the taking. Either way, Netflix’s business model will keep the company from realizing the future so many investors expect. At $12 billion, Netflix is priced for perfection, not another massive subscriber defection.
The article Netflix: A Question of Pricing Power originally appeared on Fool.com and is written by Jordan Wathen.
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