Netflix set to 'grow like crazy' despite price increase

Netflix's decision to bump up its subscription rate for new members has been met with disdain in some quarters, but analysts say the price increase is unlikely to drive away viewers.

In fact, tech watchers say it will only strengthen the company's reputation for high-quality video content.

"I always felt like they were going to inch the prices up," says Kaan Yigit, president of the Solutions Research Group in Toronto. "In the short term, a dollar or two is not going to make an impact on [customer] penetration."

The planned price increase for new sign-ups "might take the edge off growth a little bit, but they're still going to grow like crazy," says Greg O'Brien, publisher and editor-in-chief of Cartt.ca, a news site covering the Canadian cable industry.

"Even factoring in the price increase, they might be at 50 million subscribers by the end of the second quarter."

As part of its first-quarter earnings report on Monday, the video-streaming service announced that sometime before July, it will raise its subscription price by $1 or $2 per month for new customers, an investor-pleasing move that saw Netflix share prices jump.

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Netflix is currently available in 41 countries. Solutions Research Group estimates there are about 3.5 million Netflix subscribers in Canada and 31 million in the U.S., in each case with a current subscription price of $7.99 a month.

Much stronger today

Some tech watchers have expressed concern that the price increase could pan out as badly as Netflix's previous attempt at a rate hike.

The Calif.-based company lost about 800,000 subscribers in 2011 after announcing a price increase for U.S. customers. At the time, Netflix CEO Reed Hastings went so far as to issue an official apology.

That was clearly a chastening episode in the Netflix story. But three years later the company is in a much stronger position, says Gregory Taylor, a post-doctoral fellow at the Ted Rogers School of Information Technology Management at Ryerson University.

"That was a different age, as far as Netflix goes, because at the point, it was still dealing a lot with mail-in DVDs, and that's not really their business anymore," says Taylor.

He says the latest price hike is a "bold move by Netflix, but I don't think it comes with the same elements of risk for them as there were in 2011."

Since then, Netflix has come to be seen as a game-changer for the cable television industry. Not only does it provide an ever-growing library of movies and TV shows, but it has made a successful foray into original programming, including the Emmy-winning political series House of Cards, the comedy-drama Orange Is the New Black and a documentary about 2012 presidential contender Mitt Romney.

O'Brien says the Netflix trajectory is similar to that of HBO, which began as a movie channel and soon grew into a beloved destination for compelling original shows.

"When they hit on the idea of original content and produced a huge hit in The Sopranos, [HBO's] subscriber numbers jumped like crazy," says O'Brien.

Content driven

According to Netflix, the stated aim of the upcoming price increase is to "acquire more content and deliver an even better streaming experience."

Forbes magazine estimates the rate increase could add between $600 million and $1.2 billion US to the company's revenues within the next two years.

Michael McGuire, a media analyst for U.S. consulting firm Gartner, says that Netflix can use the precedent set by House of Cards to justify the price hike.

"There is a way to point that out to consumers, to say, 'Look, you have to pay for quality programming, and if we're the only place you can get it, can a buck or two matter?'"

Still, while the future looks bright, the biggest likely hurdle for Netflix is internet bandwidth consumption, says O'Brien.

According to a report from broadband research company Sandvine, Netflix accounted for over 30 per cent of prime-time internet traffic in North America in the first half of 2013.

Streaming video requires a lot of bandwidth, and in order to manage its growth, Netflix has had to sign deals with internet providers, such as Comcast in the U.S., to ensure that its video content gets priority delivery to customers.

Netflix's incredible growth has not gone unnoticed by both traditional and newfangled broadcasters in the U.S. and Canada. Google and Amazon have both ventured into video-streaming and original content.

Meanwhile, O'Brien reported earlier this year that Rogers Communications had spent $100 million to build a video-streaming service of its own called Showmi.

Part of the motivation behind Showmi, O'Brien says, is to buy streaming rights for Hollywood films that would not be available on Netflix, thus ensuring that Netflix's offerings in Canada remain inferior to those on the American version of the site.

"Nobody is unassailable," says O'Brien. "[Rogers] could certainly pose a threat to Netflix in Canada."

Yigit, however, feels a Rogers move like this would be a risky venture.

"If Rogers is able to buy some prime rights and keep them off the table and Netflix access, they could limit its growth. But to launch something that's going to compete at that price point and still grow without cannibalizing their own core business, that's a difficult equation to master."

For all the challenges — and challengers — facing Netflix, Yigit says the company's current strength is because there is no viable competitor.

"The one thing that surprises me a great deal is if you look around the globe and you say, 'OK, is there a service that's similar in scope and delivery?' There isn't."