Netflix will raise prices for its US subscribers starting Thursday, and Wall Street is loving it.
Netflix stock was up around 4% in trading Thursday on the news.
The price of Netflix’s lowest-tier plan will not change from $US7.99 monthly. But the most popular, the “standard plan,” which allows HD and two simultaneous streams, will increase to $US10.99 a month from $US9.99. And the highest-tier plan, which supports features like 4K video resolution and four simultaneous streams, will increase to $US13.99 a month from $US11.99.
If subscribers hate price hikes, as Netflix CEO Reed Hastings said last year on an earnings call, why is Wall Street smiling?
The main reason seems to be that investors are confident the increase won’t cause big subscriber losses, as Netflix has continued to improve the quality of its offering over the last year, and therefore has boosted its pricing power. That means the price hike will be a boon for revenue.
“We believe that this price increase will likely be a revenue growth catalyst for the company,” RBC analysts led by Mark Mahaney wrote in a note Thursday.
When assessing the impact of the price hike, RBC cited a proprietary survey that found 31% of respondents were on the “basic” plan, 43% were on the “standard” plan, and 26% were on the “premium” plan. In its last earnings report, Netflix said it had 51.92 million US streaming subscribers. Crunching the numbers, RBC estimated that the price increase would lead to about $US650 million more in incremental domestic revenue in 2018.
That sounds great, but what if a ton of people cancel Netflix because of the price increase?
Though some might, one reason many won’t is simple: it’s still a good deal relative to cable. In a report this summer, UBS analysts found that an average pay-TV package cost over three times as much per hour of viewing as Netflix. The per-hour cost of traditional packages was about $US0.42, while that of Netflix was about $US0.10.
Here’s a chart from UBS that shows how Netflix prices have fared relative to cable prices over time:
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