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Morningstar | Netflix Increases Prices Across the Board in U.S.; Disney+ Could Be The Value SVOD Upon Launch

Netflix announced price increases for all three of its U.S. streaming plans on Jan. 15. The increases, which range from 13% to 18%, will take effect immediately for new subscribers while existing subscribers will see the new prices over the next three months. While the timing of the announcement two days before releasing earnings is a little strange, the price increases are in line with the firm’s need to generate additional revenue to help offset the ongoing cash burn which is projected to be $3 billion in both 2018 and 2019. We expect that the firm will likely lower its prices in overseas markets like India where its current prices are well above its competitors. We are maintaining our narrow moat rating and fair value estimate of $120.

As a result of the price hikes, the standard Netflix HD and the 4K family plans both increase by $2 to $13 and $16 per month, respectively, and the base plan now costs $9 per month, up from $8 previously. The price hike potentially increases the attractiveness of Disney+ which we expect to debut in the fall at a sub-$10 price point. We also continue to believe WarnerMedia’s planned subscription video on demand, or SVOD, offering at a price above $15 is a strategic blunder as the firm needs to gain traction in what will be a highly competitive marketplace in 2019 and beyond. Conversely, NBCU’s announcement on Jan. 14 that its new SVOD offering will be free to existing pay-TV customers looks to us like a sensible approach to quickly build an audience.

The new prices have placed the 4K plan above the $15 price of HBO which some Netflix bulls have cited as the price umbrella for Netflix, above which its pricing power will ultimately get tested. The price increases for 2019 are larger than we anticipated, and while we do not believe that the price increases will cause mass defections, we do think that the higher prices and news flow about them will cause some churn and decrease the likelihood of new subscribers joining. We do believe, however, that the point at which investors will discover, once and for all, how much consumers value the Netflix offering is marching steadily towards us. We believe piercing the $15 veil while other firms ready new SVOD offerings will push consumers to make choices between SVOD offerings in ways they have not had to in the past.