Yesterday Netflix announced that it would split out its streaming and DVD plans and charge 7.99 for each. As these services were previously bundled for $9.99 and since no addition services or features were rolled out, this looks like an effective price hike on the DVD business since a $7.99 streaming-only plan was previously available. The real motive behind the company’s decision to raise prices is unclear though rising content acquisition costs has certainly been a big concern. Depending on the uptake from existing users, this move could have a significant impact on average subscription fees and could skew the direction of growth towards streaming if new users overwhelmingly choose this service over DVD plans - or if DVD customers look to cheaper alternatives from competitors. Neflix competes with Amazon, Apple’s iTunes, Hulu and Dish Network, which recently bought Blockbuster.
We are currently reviewing our $153 estimate for Netflix’s stock based on the new pricing announcement and Latin America expansion. Our current estimate is substantially below the current market price.
Upside Scenario Depends on Adoption
If Netflix can push through this price increase without losing too many DVD subscribers, then it could benefit from a jump in its average subscription fee . This could help the company pay for more new, more appealing content for its online catalog that could then play a vital role in its future expansion .
It also points to the problem of rising costs for content. In the company’s press release it states, “Netflix also announced it is separating its unlimited streaming and unlimited DVD plans in the U.S. to better reflect the costs of each and to give members a choice.” By having customers pay more the DVD services, this helps the company directly offset some of the higher costs in running its DVD business.