Netflix, Inc. (NASDAQ:NFLX) released earnings numbers for the first quarter of 2014 this afternoon and the company revealed it had performed competently in the period. Earnings beat the expectations of analysts for the three month period and revenue came in in-line with expectations. None of that explained the 7% jump in the company’s value right after the release, however.
The one announcement that made today’s earnings report different from those in the past concerned prices. Netflix, Inc. (NASDAQ:NFLX), sending a strong signal to its investors, said that new customers will see a price hike. “Our current view is to do a one or two dollar increase, depending on the country, later this quarter for new members only.” A company dealing with higher costs needs a way to tweak revenue higher. Netflix just admitted an intention to do that to investors.
To investors, the product that Netflix, Inc. (NASDAQ:NFLX) offers is undervalued at its current price. The problem the company faces is expectations. Increasing the price it charges to it current customers could precipitate a mass exodus. That is something the company can ill-afford in the current atmosphere. A price hike on new customers is a way of increasing ARPU while refusing to offend customers, and even offer them an early adopter bonus.
Netflix has previously alluded to experiments with different tiers of pricing. The company’s differentiators were not expounded upon, and it is not clear if there will be different tiers involved in the company’s new pricing mechanism. All that was made clear in today’s letter to shareholders was that Netflix, Inc. (NASDAQ:NFLX) is headed toward the introduction of increased ARPU next quarter, though it may be marginal at first.
Netflix needs higher pay for higher costs
Netflix, Inc. (NASDAQ:NFLX) is growing rapidly, but the company’s spread is capped by certain truths. Parts of the United States are still unable to receive streaming video reliably because their internet connections are too poor. The company has already added most of the readily available pool of customers in North America, and it has relatively little competitive advantage in foreign markets.
CEO Reed Hastings said that the current $8 per month price will be offered to consumers “for a generous time period.” At some point Netflix, Inc. (NASDAQ:NFLX) will lift the price it charges current customers, a move that would do more to increase the company’s revenue than a launch in any European country.
Original content is expensive, marketing new products is expensive and buying the rights to movies and TV series is expensive. All of that pales in comparison to the cost problems Netflix, Inc. (NASDAQ:NFLX) is likely to suffer once competent competition sets into the streaming industry. Investors have reason to celebrate a price lift, but they may have more reason to worry about the company’s future.