Price Hikes Won't Solve Netflix's Problem

Price hikes won't solve Netflix's problem of slowing revenue growth. Instead, they will make it worse as the market landscape in the video streaming entertainment industry has changed.

A couple of weeks ago, the video-streaming giant announced that it is raising prices for its U.S. and Canadian subscribers. Depending on the plan, the hike sits anywhere between $1 to $2 per month.

Netflix's price hikes are coming at the wrong time as the competition closes in, and the company is running out of subscribers in its home market.

For years, Netflix has been in the right place at the right time with video streaming entertainment services growing by leaps and bounds. Over the last two decades, the video streaming service pioneer had little competition from video content powerhouses like Disney. That's how Netflix managed to amass 214 million global paid memberships as of Q3 2021, according to Insider Intelligence.

In the last couple of years, the situation has changed, and the competition has begun to catch up with Netflix. As a result, Disney has come up with several streaming entertainment bundles offered below Netflix's price. Disney Plus costs $7.99 per month, roughly half of Netflix's basic plan.

Then there's market saturation. The video entertainment streaming services transformed from an emerging to a mature industry, at least in the U.S. and Canada, where the company is running out of new subscribers.

That could explain the leveling off of Netflix's subscription base in the two countries. It now stands at around 75 million in the fourth quarter, according to Statista.com. In addition, it could explain the decline in Netflix's revenue growth from 35% in 2017 to 16% in 2021. The U.S. and Canada account for about one-third of the company's 221.8 million worldwide subscription base, but they bring in most of its revenues. Thanks to high subscription prices that are four to five times above those of countries like India and Brazil.

"Netflix is a streaming giant that's done very well as the industry leader, taking advantage of the streaming revolution early on," said Conviva CEO Keith Zubchevich. "They led with the DTC subscription model, technology leadership, and leveraging data-driven intelligence offered by the streaming market. This resulted in massive subscriber growth and market domination to date. That said, competition is increasing, their subscriber growth is slowing, and their market share numbers are dropping."

Still, raising prices at a time when competition from Disney and other content producers closes in may help Netflix grow revenues in the short run, but it won't help the company regain its old-growth momentum. Instead, it will send some subscribers to the competition.

"As a single app product without packaging modularity, multiple products, or advertising revenues, the main growth lever they can pull is subscription pricing," said Zubchevich. "As a data-driven company, I'm sure they know the balance between increased revenue offset by subscriber churn to deliver growth, but it's a clear sign of transition from growth through subscriber acquisition as an innovator to subscriber monetization as a mature incumbent. While this strategy is sure to pay off financially in the short term, it's a lever with finite opportunity longer term, and it's a clear sign of tougher times ahead due to fierce competition from all sides."

"Netflix is testing its limits with consumers – my gut is that $20/month is the tipping point. Ultimately, content and services will drive subscribers and engagement," added media executive Scott Schiller.

Corey Ashton Walters, the founder and CEO of Here, said that Netflix's price hike may prompt some of the company's subscribers back to the old DVD and VCR players.

"Netflix subscribers are ready to dust off their DVD and VCR players with the new Netflix price increase,” he said. “Many subscribers could argue that the prices are rising while the quality of content isn't improving. The popular series usually get canceled or removed from the streaming service, which ultimately decreases customer retention, and users will go elsewhere. At the rate that Netflix is at, users will realize that it's overpriced and mediocre, and start canceling their subscription."

Still, not everyone thinks that Netflix's price hike is a bad thing. Dino Ha, founder and CEO of MBX, is one of them.

"With each new year, consumers can expect a price increase as inflation drives the cost of goods and services much higher," he said. "Netflix is keeping up with modern times and the high demand of subscribers' needs. Shows such as 'Squid Game' will drive revenue, but in order to produce these cult-following shows, the prices need to rise to compensate. High quality equals a larger price tag."

Rob Delf, CEO of Fabric, said he sees things heading somewhere in-between. "Raising prices per se is neither right or wrong," he said. "Time and again, it's been shown that consumers will pay more if they think the value proposition is worth it. Rather, the real issue is whether Netflix is utilizing its content data in the best way to optimize the viewer experience. Its enormous catalog of film and TV programming is both an advantage and disadvantage. It offers a dizzying array of choices, but at the same time, it's hard to navigate because the software being used to personalize customer preferences is rudimentary at best.”