Netflix will keep raising prices with confidence as its value proposition remains superior to cable TV


CEO Of Netflix, Reed Hastings, attends the red carpet during the Netflix presentation party at the Invernadero del Palacio de Cristal de la Arganzuela on April 4, 2019 in Madrid, Spain.

Juan Naharro Gimenez | Getty Images

Netflix announced Thursday it will raise prices for U.S. customers.

Don’t be surprised if you’re reading the same story next year, and the year after that, and the year after that.

The company’s decision to raise its standard plan by $1 per month, from $12.99 to $13.99, and its premium plan by $2 per month, from $15.99 to $17.99, is an essential part of Netflix’s long-term strategy. It’s why Netflix has a market valuation of $218 billion on just $2.8 billion of net income in the last 12 months.

Netflix’s last price increase was January 2019. The video streamer has largely been able to avoid significant price hikes because it has consistently added subscribers, giving investors a clear growth story. But Wall Street is counting on consistent price increases as customer growth wanes. By that time, investors hope Netflix is an inexpungible staple in people’s homes, much like cable TV has been for the last four decades.

Early evidence suggests Netflix is on the right track. Monthly churn for Netflix (near 2%) is far below that of other streaming services, such as CBS All Access (soon to be renamed Paramount+) and Starz, according to data from Antenna, a measurement and analytics company that tracks purchase behavior.

The key to increasing prices without significant spikes in cancellations or dissatisfaction is to convince customers they’re still getting a superb value. The genius of Netflix over the past two or three years has been a subtle shift away from trying to be HBO and toward being a replacement for the entire cable bundle.

Replacing cable, not HBO

“The goal is to become HBO faster than HBO can become us,” Netflix co-CEO Ted Sarandos said in a GQ interview in 2013.

But that’s not actually what Netflix has done. Netflix has focused on a wide breadth of offerings, including animated kids’ shows, breezy romantic comedies, Adam Sandler movies, reality shows like “Love is Blind,” lowbrow documentaries like “Tiger King,” food shows like “The Great British Bakeoff,” and fun game shows like “The Floor is Lava.” It’s hard to imagine any of these series on HBO. And, sure, it’s got HBO-style fare too — movies like “Roma,” series like “The Crown,” and “Sex and the City” knockoffs like “Emily in Paris.” The full suite is similar to a cable bundle.

Ironically, HBO didn’t want to become Netflix until quite recently, despite Sarandos’s claim otherwise. While HBO made the decision to go direct to consumers as an a la carte application in 2015, HBO chief Richard Plepler focused on premium programming while actively shunning most other content. Only recently, after AT&T‘s takeover of Time Warner (and a new slate of executives), has HBO tried to emulate Netflix with HBO Max.

Netflix’s decision to become the cable bundle lite — excluding live events, news and sports — gives the company an excellent argument to raise rates from a price-value perspective. Netflix’s premium service is now $17.99 a month. The average cable TV bill is about $100 a month, according to LightShed Partners. While there are cheaper digital alternatives, YouTube TV is $64.99 a month. AT&T Now (formerly DirecTV Now) is either $55 or $80 per month. Even Sling TV is $30/month.

Meanwhile, the cable bundle quality is likely to decline in the coming years as most premium content gets pushed to streaming services. This should embolden Netflix to keep raising pricing, as it won’t just be the leader among streaming services (thus justifying it as the most expensive offering), but also an increasingly appealing alternative to cable.

WATCH: Netflix shares move higher after company announces subscription price hike

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