Netflix officially raised its monthly prices for new customers by $1 to $8.99 in the United States and Canada Friday. What’s surprising about the move isn’t that it happened— Netflix needs to offset the rising cost of acquiring and producing high quality content—it’s that, as a recently as four months ago, CEO Reed Hastings said a price hike wasn’t on his radar. “We’ve been super-happy with the growth we’ve had at $7.99,” Hastings told Maclean’s in December, adding later, “We have no plans to change.”
So what changed? Most likely, Hastings spotted an opportunity. Home-grown shows like House of Cards and Orange Is the New Black have won over critics and are doing well with audiences. That, in turn, makes it easier to convince consumers they are getting good value for their money, even if it costs a little more. Best to strike while the popcorn is hot.
As for Hastings’ earlier denials, you can’t blame him for being a little gun-shy. The last time he tried to hike prices, he very nearly cratered the company. In 2011, Netflix announced that it intended to split the company’s legacy DVD mail order business from its fast-growing streaming business. The problem, however, was that it meant existing Netflix customers would effectively see the cost of their subscriptions double if they wanted to continue receiving both services. Nearly one million people cancelled their subscriptions and Netflix’s stock tanked.
This time around, Hastings is being extra-careful to make sure existing subscribers have little to complain about. Netflix said they will continue paying $7.99 for their packages for the next two years.
The price hike will translate into as much as $600 million in extra cash for Netflix once its existing subscriber base of 50 million is brought into the new pricing scheme, analysts predict. And the number could more than double if Netflix is able to reach its goal of one day matching HBO’s 130 million subscribers. But content costs are rising even faster. Netflix is expected to pay an estimated $3 billion in 2014 as it produces more of its own shows and competes with Amazon, Google and others for online streaming rights. By 2016, Netflix’s content costs are forecasted to swell to as much as $5 billion. In other words, don’t be surprised if $8.99 becomes $9.99 or $10.99 in another year or so—regardless of what Hastings says.