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New shows, customer gains give Netflix muscle to hike prices

New shows, customer gains give Netflix muscle to hike prices

By Reuters | Updated: 24 January 2014 19:53 IST

Netflix Inc , riding high after another strong earnings report, is in better shape to raise prices for new U.S. customers to its movie and TV streaming service than it was in 2011, when a price hike sent its stock into a downward spiral.

On its side is the addition of award-winning original series like "House of Cards" and an expanded library of TV shows and films that have made it a proven force in Hollywood with 35.6 million U.S. subscribers.

The expectation that Netflix is headed toward a price increase was one of the factors that sent its stock upward by more than 16 percent following a better-than expected earnings, analysts said.

Shares leaped 16.5 percent on Thursday to $388.72 on Nasdaq, beating their all-time closing high of $380.58.

"They're giving too much value to the consumer," said Needham and Co analyst Laura Martin, who rates the company a "buy." "They absolutely need to raise prices."

On Wednesday, Netflix signaled it might consider an increase when the company said it was testing tiered pricing plans to replace or supplement the $8 price paid by most of its U.S. members. It stressed the existing customers would be able to keep the $8 price for a time.

In 2011, Netflix raised prices for some customers by as much as $6, or 60 percent. The company lost more than 800,000 U.S. subscribers in the third quarter after the price increase, it said then, and a quickly aborted plan to separate its DVD-by-mail business.

Netflix's stock fell from $298.73 a share in mid-July, when it posted the price changes on its blog, to $69.29 by the end of the year.

This time around, the company made clear it intends to gingerly raise the notion of a price hike. Last year, it introduced a higher $12 option for subscribers who use four streams at a time. In a letter to its shareholders that "eventually" it hoped to offer new members a selection of "three simple options to fit everyone's taste."

Netflix did not say whether the $8 price would remain an option.

Evercore Partners analyst Alan Gould expects Netflix will raise its core domestic price for new members by $1 to $9, while locking in the current price for existing members for two years, as it recently did in Ireland. That should help reduce cancellations, he said.

"I think they can easily do a buck without a backlash," Gould said. Two dollars "might be a stretch," he said.

A new pricing structure could take a year or longer for the company to institute, if it does so at all, Netflix CEO Reed Hastings said in an interview.

"If we do make pricing changes for new members, existing members would get a generous grandfathering of their existing plans and prices," Hastings and Netflix CFO David Wells wrote in bold type in a letter to shareholders.

Not every analyst, however, thinks Netflix should alter its pricing scheme.

"They're making money, so raising prices should be the last resort," said Wedbush Securities analyst Michael Pachter, who rates Netflix"underperform." "A price increase solely to make more money is counter to the way they have run the company."

A price hike, said Pachter, should be considered only if Netflix's margins shrink due to increases in its costs to secure content or deliver it online.

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