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Netflix Will Cost More, but You'll Pay Up

In many ways, it wasn't a surprise to see Netflix (NASDAQ: NFLX) raise its monthly rates over the weekend. The leading video service has now come through with increases on its most popular plan for U.S. subscribers six times over the past eight years. We've seen Netflix go from $7.99 a month in the springtime of 2014 for its standard plan to $15.49 a month on Friday, a 94% increase in that time.

Netflix monthly ransoms have eclipsed inflation. The growth rates have probably outpaced what those of you who have yet to cut the cord are paying for your cable or satellite television service. However, Netflix will be just fine. It's now the priciest of the premium streaming services, but you're probably not going to cancel your plan.

Image source: Getty Images.

Quid game

Raising prices has always been part of the growing process at Netflix. There may be an outlier here or there in select territories where it needs to be more aggressive (like the move to slash rates in India by 19% to 60% last month), but the direction is generally higher as the audience and its content catalog expand.

Any increase is a gamble, and we have sometimes seen growth take a hit after an increase. It's been temporary to this point. As shocking as it is to see a 94% domestic increase in the form of six pricing upticks, every move has taken place with Netflix entertaining more subscribers than it had at the previous hike.

Taking its standard plan's monthly pricing from $13.99 to $15.49 is not insignificant. It's the second largest increase in terms of dollars, dwarfed only by the $2 move from $10.99 to $12.99 a month three years ago. The latest increase also makes Netflix the most expensive streaming service, surpassing the ad-free tier of AT&T's HBO Max at $14.99 a month. Again, Netflix will be just fine.

You know what has grown even faster than this 94% increase? The amount of money that Netflix spends on content. A growing audience benefits Netflix, of course, but it also helps viewers. The money that Netflix is making -- as a result of its growing audience -- is outpacing its membership growth. It has more money to spend on content. The cadence of Netflix releases of original TV shows and movies along with the older licensed content it acquires is always increasing. The pace is even more remarkable in terms of international markets now that Netflix has the breadth to earmark more money to different areas. It's the scalability of the business paying off.

It's not a surprise that Netflix is routinely shattering its viewership records. Squid Game raised the bar in terms of the sum of Netflix viewers for a TV show in its latest quarter. On the original-movies front, it wouldn't be a shock to hear Netflix announce later this week in its earnings call that Don't Look Up is about to break the record set by Red Notice just last month.

Netflix will get to the point where it has overplayed its elasticity. It won't be pretty, and the same scalability that has been so explosive in terms of content spend on the way up will be tested on the way down. It doesn't mean folks will be trying to splice the cord they cut back together. Cable and satellite TV are toast. Those prices do keep inching higher every year, and you're getting less. Linear TV is no longer a complete platform the way it was a decade ago, because those viewers no longer have all of the content that everyone's talking about. The real competition for Netflix is the rival streaming services. But, unlike cable and satellite TV, it's not as if folks are choosing just one platform.

Years ago, I called Netflix the "basic cable" of streaming service companies, and that continues to be the case. It's the default streaming service in most homes, and viewers just cherry-pick from the rest based on budgets and preferences. Every price increase introduces uncertainty, and it will be interesting to see why Netflix went for $15.49 instead of $14.99 given the industry's psychological barrier with the $15 ceiling that was just shattered. Then again, Netflix likes to break things -- and over time that has proved to be the right way to go.

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Rick Munarriz owns AT&T and Netflix. The Motley Fool owns and recommends Netflix. The Motley Fool has a disclosure policy.


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