Netflix May Test Just How Essential It Is
The logo for Netflix Inc. sits on an Apple Inc. iPhone smartphone in U.K. (Photographer: Jason Alden/Bloomberg) 

Netflix May Test Just How Essential It Is

Forget dinner and a movie. As cinemas remain desolate, cooler weather puts an end to the enjoyment of safe outdoor dining and Covid-19 roars back across the world, takeout and Netflix sound more appealing than ever. And when something’s as in demand as Netflix is, prices go up.

Netflix May Test Just How Essential It Is

Netflix Inc. released results for its latest quarter on Tuesday afternoon, showing it added fewer subscribers to its base than Wall Street analysts predicted. That sent the stock price tumbling 6% in after-hours trading. Still, investors don’t need a report card to tell them of the increasing utility of the streaming-video service or its market dominance. Everyone’s been living it these last seven months. In fact, it may not have been the arrival of new streaming-video competitors like HBO Max and Peacock that hurt Netflix so much as the partial reopening of restaurants around the U.S. and other countries, with consumers itching to get out of the house.

Now, the changing leaves are making way for frostier temperatures, which pose an added challenge this year for eateries and other indoor locales given how the novel coronavirus thrives in not-well-ventilated confines. Movie theaters also have nothing to show for the time being. For those reasons, it’s going to be the winter of Netflix — and Netflix knows it.

As the company transitions from growth mode to capitalizing on its massive reach, it appears to be inching toward higher subscription rates in the U.S. It’s already implemented them in Canada, where the market often serves as a testing ground for its southern neighbor. The price of a standard plan, Netflix’s most popular, recently increased for Canadians by C$1 (76 cents in U.S. dollars) to C$15 a month; its premium service for 4K streaming went up C$2 to C$19 a month. The last time the company had a price hike in the U.S. was January 2019, so it’s about due for another.

Netflix May Test Just How Essential It Is

As the company improves its product, it will “occasionally go back and ask those members to pay a little bit more to keep that virtuous cycle of investment and value creation going,” Greg Peters, Netflix’s chief operating officer, said when asked about the potential for higher rates during Tuesday’s pre-recorded earnings video call

For further signs that Netflix is thinking differently about pricing: It’s phasing out free trials, so forget about creating phony Gmail addresses to avert a steeper bill. At this point, Netflix doesn’t need to offer free trials as the popularity of its shows travel by word of mouth and meme. Just before the September quarter ended, Nielsen reported that Netflix's "Ratched" starring Sarah Paulson — a prequel to the novel, "One Flew Over The Cuckoo's Nest" — was the top streaming program across Netflix, Amazon Prime, Disney+ and Hulu. In fact, Netflix hogged nine of the top 10 spots. It also expects to have a greater number of new original programs in 2021, though they may lean toward the second half of the year because of the Hollywood shutdown. And there’s simply not much else on television lately.

While it may be in bad form to raise prices during a recession, users continue to suggest they wouldn’t mind paying more for Netflix. That’s because Netflix still provides the biggest bang for your buck relative to any other forms of TV entertainment, and that’s been especially true during the Covid-19 pandemic. Netflix had a relative advantage going into the pandemic because unlike its rivals, most of its productions for the year were already wrapped up. In a survey that Wall Street research firm Cowen & Co. regularly conducts, 53% of respondents said in September that they’d be willing to pay more for Netflix than they already do — a jump from 48% at the end of last year. 

Netflix May Test Just How Essential It Is

Regardless of how long the pandemic persists — and as much of a leader as it is now with 195 million paying members — Netflix’s growth is slowing in the U.S., and so it’s going to need another way to pay for its immense content bills. The company added only 2.2 million net new subscribers globally during the period, missing its own forecast of 2.5 million. And once Hollywood can fully return to filming, the company is likely to ramp up spending again and resume burning cash, as executives reiterated in Tuesday’s letter. Plus, there’s the impending Disney threat. Walt Disney Co. just announced a shakeup that entails reorganizing its media operations around its streaming initiatives. That means the full force and imaginative brilliance of Disney is behind its budding streaming business, and its studios have been given direct orders to make it their life’s mission to propel Disney+. Until now, Disney+ has thrived mostly on brand power while lacking much in the way of actual new content — that’s about to change. 

The streaming wars haven’t been as brutal as the moniker indicates. Netflix has been enjoying an easy lead, and executives may be thinking now’s the time to cash in on its primacy before other fledgling rivals such as HBO Max figure out what they’ve been doing wrong. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.

©2020 Bloomberg L.P.

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