It is 2023 in America. The Consumer Price Index is up 6.5% per year. Rising inflation increases the cost of doing business, and many companies are passing those costs on to their customers in the form of higher prices. For example, Warner Bros. Discovery (WBD -0.08%) The streaming service just raised the monthly subscription fee for HBO Max by $1 per month, or 7%, effective immediately.
This situation begs a burning question. is Netflix (Nflx 0.81%) Ready to follow suit with its own price hike? More than 73.4 million North American subscribers want to know.
Why Netflix May Raise Streaming Prices
Netflix is no stranger to price hikes. North American subscribers have seen their monthly costs rise three times over the past four years, including an 11% price increase nearly a year ago.
Additionally, management has shifted its focus to maximizing subscriber growth in pursuit of strong top-line revenue and bottom-line profits instead. They also stopped providing the consumer growth guidance that often drives stock market action around Netflix reports in the past. Under this improved operating model, doesn’t it make sense to add a buck or two to that monthly fee to get another slice of easy sales growth?
And you’ve seen clear signs that Netflix isn’t afraid to mess around with its subscription fees. Just two months ago, the company launched ad-supported plans with dramatically lower subscriber fees. So if price-sensitive clients have a problem with high fees, they slide down to the ad-based version and let the rest of us pay more. Assuming Netflix’s ad sales make up for lower subscriber costs, everyone wins.
Why may the fees remain the same?
Last year’s price hike followed a sharp slowdown in subscriber growth, resulting in over 1 million Less Net accounts in the first and second quarters of 2022. Management has struggled to explain exactly why the viewership list was shortened, but sensitivity to high prices has always been in the discussion. Investors and analysts scratched their heads and slammed the “sell” button, mostly in unison. Stock prices fell. This painful experience could make Netflix think twice about raising prices for those plans again — with or without lower-cost options on the table.
Additionally, we don’t know for sure whether Netflix’s ad sales will be strong enough to justify an ad-based subscription plan, financially speaking. The new option was launched in the middle of the previously mentioned inflation-driven economic crisis, which triggered an even worse downturn in the digital ad sales market.
Like online advertising experts Alphabet (GOOG 0.97%) (GOOGL 1.09%) And Trade desk (TTD 0.71%) They are struggling to deliver the revenue they used to grow as ad buyers put their marketing budgets on hold until further notice. As a result, Alphabet stock is down 35% over the past year, and The Trade Desk — which specializes in digital video advertising, which is highly relevant to the Netflix situation — is down 45%. Those signs don’t bode well for the profitability of the Netflix advertising plan run by Microsoft (MSFT 0.30%)A legendary tech titan but a relative newcomer to the digital video advertising scene.
Netflix will announce next week
Given the above puts and takes, it looks like Netflix to be able to Will raise prices again soon but that move will come at a cost. So, I would be surprised to see North American prices rise in 2023. Things may be different in other markets, and Netflix has a long history of setting unique pricing policies in each of its nearly 200 target countries. But the US and Canada segment is Netflix’s flagship property where a single change can make a big difference.
That being said, I’m sure we’ll know Netflix’s pricing plans soon. The company is scheduled to report earnings on Thursday evening, covering the all-important fourth-quarter period ended December 31.
Given the rising inflation trend, analysts have to wonder if Netflix is planning to take pricing action this year. I have just shared my views on this, and you may or may not agree with my analysis but management will probably settle the score on Thursday. I expect co-CEO Reed Hastings to joke about HBO Max’s high fees and then set the record straight one way or another.
This will no longer be a guessing game.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Alphabet, Netflix and Trade Desk. The Motley Fool holds and recommends positions at Alphabet, Microsoft, Netflix and Trade Desk. The Motley Fool recommends Warner Bros. Discovery. The Motley Fool has a Disclosure Policy.