Netflix (NASDAQ: NFLX) is rasing its subscription prices for American customers. Two of the three available plans have already seen their monthly fees increased by a buck or two for new subscribers. Existing customers will see the higher fees take effect over the next couple of months.
It's obvious that Netflix itself hopes to gain something from this price increase. But the company does not operate in a vacuum. Here's why a handful of companies not named Netflix should applaud this pricing change.
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Signing up for Netflix streaming services today, you get to pick between the same three plans as before:
These higher prices are already the norm for new subscribers. Current subscribers get to enjoy the lower prices for a few more weeks, but there's no two-year grandfathering policy on tap this time. The higher prices will be universal within the next couple of months.
The last round of price increases triggered a mild slowdown in subscriber growth, but did not cause a stampede of price-sensitive clients going elsewhere. It's easy to miss the slowdown in this chart of paid domestic subscribers, even though the average monthly fee increased by 15% in 2016:
Price changes in the 10%-17% range may sound harsh, especially less than two years after the last round of pricing boosts. On the other hand, it's hard to get worked up about another dollar per month -- as long as Netflix keeps its award-winning content fresh.
And that's where the money will go. This pricing change should unlock at least $620 million of fresh top-line revenue per year without adding any additional costs. That would be enough to triple Netflix's annual earnings and reduce the company's free cash burn by 28%. There's still more to be done before Netflix can start reporting positive free cash flow, but it's a start. Assuming that American subscribers largely accept the new prices, this will be the start of a strongly positive boost to the company's top and bottom lines.
Rivals might steal some disgruntled customers
Of course, Netflix's streaming video rivals stand ready to accept any subscribers -- current or potential -- who won't make that adjustment. If this becomes a stampede of fleeing Netflix subscribers, chalk that up as a quick win for Amazon.com (NASDAQ: AMZN) and Hulu. These would-be challengers to Netflix's dominant market position can use any help they can get if they hope to stay healthy and relevant for the long run (I say that as an Amazon shareholder and Prime subscriber myself). The streaming video market is still a one-horse race in the U.S., Amazon's and Hulu's recent Emmy wins notwithstanding.
Wells Fargo analyst Ken Sena argues that it's even better news for Walt Disney (NYSE: DIS). The upcoming launch of Disney's own streaming services, based on Major League Baseball's BAMTech platform, could get an adrenaline shot from Netflix's higher prices. This works two ways, in Sena's view. First, the new Disney services could absorb some disgruntled ex-Netflix subscribers. Then, Disney should be able to follow Netflix's lead with future price boosts of its own, given a little more breathing room under the market leader's price ceiling.
T-Mobile both loves and hates Netflix's higher prices
Then there's T-Mobile US (NASDAQ: TMUS), which recently promised to pay your Netflix bills as long as you subscribe to a qualifying family plan from the telecom. This one's a double-edged sword.
T-Mobile foots the bill for a two-screen Netflix plan, which falls under the price increase. So the mobile network absorbs up a slightly larger cost item for its customers here, which works out to $12 per year and participating subscriber. That's both a nice little selling point and a potentially significant little expense.
It's unclear exactly how many T-Mobile subscribers would qualify for this fully paid Netflix plan, and even less clear how many of these potential sign-ups are left unfinished. Coupons, discounts, and sales that require some action from customers who want to take advantage of them are often left untouched. So the total cost of this price increase will surely be far less than the theoretical maximum of $97 million per quarter or $388 million per year.
I hope the companies talked about this before setting up their single-payer partnership. Netflix must have been planning their move for months, and T-Mobile's Netflix policy is only four weeks old.
Time for content partners to celebrate
If there is one clear and obvious winner in Netflix's price increase, apart from the company itself, it would be the content production industry at large. In particular, there must be celebrations going on among common Netflix partners such as Lions Gate (NYSE: LGF-A) (NYSE: LGF-B) and DHX Media (NASDAQ: DHXM). Both of these companies are already producing several Netflix originals, and DHX Media only expects more Netflix orders as Disney moves away to its own streaming platform.
So when Netflix comes up with a larger production budget, that's great news for DHX Media and Lions Gate. It doesn't really matter to them whether Netflix is raising cash from stock offerings or debt papers, or even from larger revenue streams. The price increase falls under the header of organic revenue boosts, but either way, Netflix is doubling down on its content production plans and proving that it has the financial chops to get it done.
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Anders Bylund owns shares of Amazon, Netflix, T-Mobile US, and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Lions Gate Entertainment Class A and Class B, Netflix, and Walt Disney. The Motley Fool also recommends DHX Media and T-Mobile US. The Motley Fool has a disclosure policy.