Netflix Prices Will Increase, And Here’s Why

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Popular video streaming service Netflix is set to increase subscription fees for the service for some customers from next month.

New subscribers will be the first to pay the higher fees, while long-term subscribers won’t pay the increased rates until later. In October Netflix announced that the price of its standard high definition plan would increase to $10 per month, up from $9 for recent signups and $8 for long-term customers.

Netflix will gradually raise prices for existing users

At first it was thought that the new $10 rate would be implemented in May, but now the company says that it will introduce the price hike over the course of 2016. It calls the strategy “un-grandfathering.”

Over 50% of Netflix subscribers had been grandfathered into the lower rates, according to the company. Each and every subscriber is set to receive an email detailing new plans and options before the price increase affects them.

Netflix also set to offer a lower-priced $8-per month plan alongside the $10 plan. At the lower price point videos will only be available in standard definition and only one person can use the account at a time.

For $12-per month users can get videos in ultra-high definition and access to the account on four screens simultaneously. Subscribers will be asked to choose one of these options, but can also choose to unsubscribe from the service.

Lessons learned from 2011 Quikster disaster

Netflix says that the ungrandfathering program is designed “to reinforce brand trust” and to “learn as we go.” It is a good show of customer loyalty from the company.

However CEO Reed Hastings acknowledged the fact that Netflix doesn’t “particularly need the revenue in the short term, so it’s fine to just spread it out,” during a call with investors. The extra revenue will reportedly be used towards licensing and the creation of better content.

It looks like lessons have been learned from the Quikster debacle in 2011. The company hiked prices by 60% for customers who used both its streaming and DVD-by-mail services, almost without warning.

It then span off the DVD-by-mail business into a company named “Quikster,” and told customers they could no longer buy both services from Netflix. It later reversed the decision while maintaining the price hike, and subsequently lost almost 1 million customers.

Netflix is prepared for some “modest” customer losses this time around, but believes that most people will stay, “partially because these members have been with us for a reasonable period already, and because our content continues to improve.”

Earnings report gets mixed reaction from analysts

The company reported its latest earnings on Monday. First quarter results beat earnings-per-share estimates but investors are still worried about how the company will drive subscriber adds in Q2.

Most analysts cut share price targets, some left them the same and a couple increased them. FBR & Co. analyst Barton Crockett boosted his price target from $100 to $104, calling the Q1 results “decent.”

In the U.S. market Netflix added 2.23 million subscribers, which is more than the 1.77 million that Wall Street firms had estimated. It also beat Netflix’ own guide of 1.75 million as predicted by the management team.

Netflix is set to face increased competition from Amazon’s standalone subscription offering, which is known as Prime Instant Video. It looks like challenging times are ahead for Netflix, with some worried that the market is displaying high levels of saturation.

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