Netflix's price hike likely means strong subscriber growth on the way

Netflix series The Crown
"The Crown" (Netflix)

Netflix is soon raising prices for some of its most popular plans, and some industry analysts believe it’s a sign that the streaming media company has another strong subscriber growth quarter on the way.

UBS analyst Doug Mitchelson said the timing of the price increase coincides with what his firm expects will be a strong fourth quarter content slate that could help minimize churn.

“We would expect mgmt. would be unlikely to implement such a price increase if U.S. subscriber trends were disappointing, bolstering our confidence further. Further, we expect less speculation this time as to what the price increase means for future content spending given 2018 has already been indicated at +$1b Y/Y,” wrote Mitchelson in a research note.

Jefferies analyst John Janedis agreed that subscriber growth was probably trending up and adjusted his estimates for U.S. net adds to 825,000 (up from 750,000), and international net adds to 3.8 million (up from 3.65 million).

Mitchelson added that the last price increase—which mostly kicked in in 2016 after a grandfathering period expired—caused noticeable but modest churn relative to the size of the price increase, and that Netflix should be able to apply lessons learned from that experience to better manage this price increase.

RELATED: Netflix is raising prices for its standard and premium tiers

On Thursday, news got around that Netflix was raising the price of its standard service from $9.99 to $10.99 per month, and the price of its premium tier from $11.99 to $13.99 per month. The SVOD explained the price increase as a necessary means of continuing its content spending spree and continuing to add features to its video platform.

The price increases come after Netflix this year already raised prices in Australia, Brazil and Canada. The service also plans to raise prices in the U.K., France and Germany.

Mitchelson said the price increases represent a roughly 10% effective increase to ARPU. Janedis also saw a positive impact on 2018 revenues.

“Assuming no churn, we estimate that a $1 / $2 increase could drive ~$650-700M in incremental revenue in '18. Assuming modest churn to the base of standard / premium subs, we est. the overall incremental rev. impact could be ~$510M (7% of '18E US revenue),” wrote Janedis. “In terms of profitability, we expect the company will invest the majority of the incremental cash flow in programming, maintaining a focus on modest annual EBIT margin expansion (18E: 11%, from 7% in '17).”