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For the longest time Netflix didn't allow new users to sign up for its service on iOS or Android devices. The fact that Apple or Google, the Alphabetsubsidiary, would take 30% off the top of the company's subscription revenue made it a very difficult decision for Netflix's management.
But Apple has decided to give subscription services a break. Instead of keeping 30% of subscription revenue, it's going to drop its share to 15% after a subscriber's first year. Google quickly followed suit. That's a huge benefit for subscription services like Netflix, Spotify, Hulu, or HBO Now. For Apple's part, it believes giving back more to subscription services is the best way to grow its own services business.
This is huge for Netflix
Apple just effectively gave Netflix a 15% price increase for its mobile subscribers, and Netflix can expect a lot more mobile subscribers going forward. The company opened sign ups on mobile in the fourth quarter of last year. In its letter to shareholders that quarter, management wrote "We recognize that in some parts of the world, mobile is the primary way many people access the Internet."
That's especially noteworthy in light of Netflix's global expansion at the beginning of this year. Netflix is now available in every country except China, North Korea, Crimea, and Syria. In a lot of those countries, mobile will be the primary way people find, sign up for, and access Netflix.
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While users could previously workaround the mobile signup problem by accessing Netflix through their mobile web browser, signing up in the app allows Netflix to capitalize on the trust users have already placed in Apple and Google. Many users would rather have their payment information stored in one place instead of many, and it's simply more convenient to sign up using the app store credentials.
With 47 million U.S. subscribers, Netflix expects the vast majority of its subscriber growth to come from international markets (where smartphones are more often users' primary computing devices). This quarter, Netflix expects to add 500,000 U.S. subscribers and 2 million international subscribers. As most of Netflix's growth going forward will come from international markets and mobile devices, this new revenue split from Apple and Google will prove extremely valuable.
Potential for more subscribers
Perhaps the biggest benefit for Netflix is that it can keep its prices relatively low compared to other premium television networks and streaming services. Even after two quick rounds of price increases, Netflix charges just $10 per month for its most popular tier. That's less expensive than HBO, Showtime, and ad-free Hulu, and many viewers say Netflix's original series are better than any of those other networks'.
The new revenue sharing plans from Apple and Google will allow Netflix to keep its prices at $10 per month (and its international equivalents) for much longer than its previous pricing. The previous $9 per month price in the U.S. lasted all of 18 months.
Keeping prices low means that Netflix should be able to continue attracting more subscribers to its service. Additionally, receiving an increase in revenue from mobile subscriptions means Netflix will have more cash to invest in content, which should also draw more subscribers.
Netflix is certainly one of the biggest beneficiaries of the new app store policy changes. Considering Netflix only started selling subscriptions via its mobile app less than a year ago it remains to be seen how successful this will be. Investors may have to wait at least a year to see the benefits.
The article This Apple Decision Is Huge for Netflix originally appeared on Fool.com.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Netflix. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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