Why Netflix Just Raised Its Monthly Subscription Fee (Again)

Source: Netflix

Source: Netflix

The cost of Netflix’s most popular subscription plan just went up again. And it turns out that the reason behind the price hike, which will see you paying a dollar more each month for the same service, is content: both licensed content that the company increasingly wants exclusive rights to, as well as its growing arsenal of original content.

Netflix recently raised the cost of its monthly subscription to $9.99, and Chris Welch reports for The Verge that it didn’t take Netflix chief executive Reed Hastings very long to explain the price hike in his quarterly letter to the company’s shareholders (PDF). Hastings wrote that the move is all about content ad the money needed to secure it, explaining that raising the cost of a monthly subscription will enable Netflix “to acquire and offer high quality content, which is the number one member request.”

Hastings also seemed to dismiss the loss of EPIX and its extensive catalog of movies, and suggested that their loss doesn’t affect the way people use Netflix’s streaming service. He explained, once again, that Netflix decided not to renew its agreement with EPIX because the content provided by the deal wasn’t exclusive, was offered to U.S. customers only, and was “offered in windows even further behind other premium Pay TV outlets.” Hastings wrote of the removal of EPIX content from Netflix’s platform, “So far, we’ve seen no material reduction in US feature film viewing as we have so many other films for members to enjoy.”

The new $9.99 rate for Netflix’s most popular plan marks the second time that the company has upped its rates since 2014. Existing members won’t need to pay the new price until next October. But if you avoided the first price hike and are still paying the old $7.99 rate, you’ll begin paying $9.99 in May. The pricing for a standard-definition, one-screen-at-a-time plan remains unchanged at $7.99, and the ultra-high-definition four-screen plan also remains unchanged at $11.99.

The price hike is clearly aimed at helping Netflix to expand its streaming options, and stay competitive in a market where there are myriad options for users who want to stream their favorite movies and TV shows, and discover new content to love. Hastings wrote, “It is a great time to be a creator of content because studios make content to sell content (not to withhold it) and there are new bidders for their product. Some studios will choose to license content to SVOD services like Hulu, Amazon Prime Instant Video and Netflix. Others may not. We have a lot of content to select from.”

The $1 price hike will also aid Netflix in its continued push into original content, with television shows and now its first feature film under its belt. Hastings wrote of the push in his letter to shareholders, “Just three years into our originals strategy, we have come a long way and our content is increasingly recognized for its quality and breadth.” He added, “This year, we garnered a Netflix-record 34 Emmy nominations, across 11 of our original series and documentaries and won four. Netflix and HBO were the only networks to have 3 shows competing for best series honors this year.”

Nathan McAlone reported for Business Insider on the company’s most recent earnings call, Hastings and other Netflix executives said that shows like “House of Cards” and “Orange Is the New Black,” not licensed content, are what creates “desire” in Netflix subscribers.

The idea is that original content gets people addicted to Netflix’s platform — and makes them willing to pay a little bit more per month to access the shows that they’re hooked on. It’s clear that Netflix’s subscribers do appreciate the company’s original content, but it’s not clear if they’ll be willing to put up with continued price hikes to finance the increasing amounts of money that the company will spend to produce said content.

Early this year, Jay Yarrow reported for Business Insider that Netflix could spend as much as $5 billion on programming in 2016, according to Janney analyst Tony Wible. Wible explained that that figure would exceed the “$4.5 billion of estimated programming collectively expensed at HBO, Amazon, Starz, and Showtime in 2014.” As Netflix gains more subscribers — and charges them more for its streaming service — that enables the company to afford more content, both licensed and original.

However, the growth of Netflix’s user base wasn’t quite what analysts and investors expected in the company’s latest financial quarter. As Dan Frommer reports for Quartz, Netflix added only 880,000 U.S. streaming subscribers in the quarter, down from 980,000 in the same period a year ago and below its forecast of 1.15 million. And Hastings had a puzzling explanation for the disappointment.

The chief executive blamed the dip in growth to the switch to chip-enabled credit cards. As credit card companies send new cards to their customers, many are issuing new card numbers, as well. If people forget to update their card number on Netflix, then they can’t automatically pay their bill, and that leads to “involuntary churn.” Frommer notes that it’s plausible that people have forgotten to update their Netflix accounts, or, if they’re on the fence about continuing their subscription anyway, have used the annoyance of having to change their card numbers to make the decision easier.

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