Net­flix tests lim­its of price hikes for orig­i­nal shows

Daily Local News (West Chester, PA) - - BUSINESS - By Michael Liedtke AP Tech­nol­ogy Writer

SAN FRAN­CISCO >> Net­flix is test­ing the fi­nan­cial lim­its of its stream­ing video ser­vice as the ris­ing cost of pro­duc­ing orig­i­nal pro­gram­ming pushes up sub­scrip­tion prices.

The lat­est re­minder came Mon­day with the com­pany’s thirdquar­ter earn­ings re­port, which re­vealed that Net­flix added 370,000 U.S. sub­scribers. That marks its sec­ond con­sec­u­tive quar­ter of slow­ing U.S. growth since lift­ing a two-year rate freeze and in­creas­ing prices by as much as 20 per­cent for more than 20 mil­lion ex­ist­ing sub­scribers.

While the lat­est quar­terly sub­scriber gain ex­ceeded man­age­ment’s mod­est pro­jec­tions, it fell far be­low the 880,000 U.S. cus­tomers that Net­flix picked up at the same time last year. The de­cel­er­a­tion oc­curred even though the lat­est pe­riod in­cluded the July de­but of “Stranger Things,” which turned into one of the sum­mer’s sur­prise hits.

Net­flix is now far­ing far bet­ter over­seas as it tries to di­ver­sify its video li­brary to suit the tastes of 189 other coun­tries. The com­pany added 3.2 mil­lion in­ter­na­tional sub­scribers in the third quar­ter, sur­pass­ing the 2.7 mil­lion it gained at the same time last year when it was op­er­at­ing in about 130 fewer coun­tries.

In­vestors were thrilled with the in­ter­na­tional progress and the bet­ter-than-ex­pected show­ing in the U.S. Net­flix’s stock surged nearly 20 per­cent to $119.91 in ex­tended trad­ing.

The drop-off in U.S. sub­scriber gains un­der­scores the del­i­cate bal­anc­ing act the com­pany is try­ing to pull off as it seeks to re­tain and at­tract cus­tomers while also fi­nanc­ing its am­bi­tious ex­pan­sion over­seas amid fierce com­pe­ti­tion from Ama­zon and HBO.

It’s an ex­pen­sive chal­lenge, which is why Net­flix raised the price for its most pop­u­lar U.S. plan from $8 to $10 per month. And the pres­sure to con­tinue in­creas­ing rates ev­ery few years seems likely to con­tinue, though Net­flix CEO Reed Hast­ings said Mon­day that that there are no plans to raise prices again any­time soon.

On av­er­age, Net­flix said, it is col­lect­ing 10 per­cent more for its sub­scribers world­wide than a year ago. About 25 per­cent of the U.S. sub­scribers still cov­ered by the rate freeze im­posed in 2014 will have their prices raised by year’s end.

“With more rev­enue, we can

rein­vest to fur­ther im­prove Net­flix to at­tract new mem­bers from around the world, while con­tin­u­ing to delight our ex­ist­ing cus­tomers,” Hast­ings wrote in a let­ter re­view­ing the third-quar­ter re­sults.

After spend­ing $5 bil­lion on orig­i­nal pro­gram­ing and li­cens­ing rights to other shows this year, Net­flix has ear­marked another $6 bil­lion for next year. Only Walt Dis­ney Co. and NBC are spend­ing more on pro­gram­ming, based on an anal­y­sis of 2015 data, ac­cord­ing to the re­search firm IHS Markit. Net­flix ex­pects to of­fer 1,000 hours of orig­i­nal shows and movies next year, up from 600 hours this year.

But the price in­creases that help finance new shows threaten to be­come coun­ter­pro­duc­tive if they drive away too many of the ex­ist­ing 47.5 mil­lion U.S. sub­scribers or dis­cour­age po­ten­tial new cus­tomers from sign­ing up.

Net­flix does not dis­close how many of its sub­scribers can­cel each quar­ter, but Wed­bush Se­cu­ri­ties an­a­lyst Michael Pachter es­ti­mates that about 1 mil­lion U.S. house­holds opened new ac­counts from July through Septem­ber. That means about 600,000 sub­scribers aban­doned the ser­vice dur­ing the third quar­ter, if Pachter’s cal­cu­la­tions are ac­cu­rate.

Even at $10 per month, RBS an­a­lyst Mark Ma­haney con­tends that Net­flix re­mains a bar­gain for the av­er­age U.S. sub­scriber, who watches about 60 hours of pro­gram­ming each month, more time spent view­ing other pop­u­lar cable TV chan­nels. By Ma­haney’s cal­cu­la­tions, the av­er­age Net­flix sub­scriber in the U.S. is pay­ing the equiv­a­lent of 17 cents per hour of pro­gram­ming watched ver­sus a range of 25 cents to 38 cents per hour for ev­ery hour of pro­gram­ming watch­ing on AMC, FX, CNN, CBS, Com­edy Cen­tral and Nick­elodeon.

For that rea­son, Ma­haney be­lieves Net­flix will still be able to raise its monthly prices by a few more dol­lars dur­ing the next four years and still reach 160 mil­lion world­wide sub­scribers in 2020. Net­flix ended Septem­ber with nearly 87 mil­lion world­wide cus­tomers.

For now, Net­flix is lean­ing on its stream­ing and DVD-by-mail busi­ness in the U.S. to sub­si­dize un­prof­itable over­seas op­er­a­tions. The com­pany is promis­ing to make money in­ter­na­tion­ally next year. Over­all, Net­flix’s third-quar­ter earn­ings nearly dou­bled from the same time last year to $51.5 mil­lion, or 12 cents per share.

Net­flix had hoped to ex­pand into China on its own, but said Mon­day that it will in­stead li­cense some of its con­tent to other providers that al­ready have cleared the coun­try’s reg­u­la­tory hur­dles gov­ern­ing the kind of video that can be shown there.

THE ASSOCIATED PRESS

A per­son dis­plays Net­flix on a tablet in North An­dover, Mass. Net­flix re­ported fi­nan­cial re­sults Mon­day.

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