Netflix price hike probably not the last for cord cutters

Netflix is raising the prices on its most popular subscription plans. Will that cause consumers to cool their streaming video spending?

Probably not.

Consumers have become attached to Netflix and other subscription video services such as Hulu and Amazon Prime Video and the immediacy of binge viewing the services offer. And even though low monthly prices have helped drive adoption, price increases — at least one the size Netflix announced Thursday, $1 or $2 more per month — won't necessarily lead to defections.

"Netflix has a lot of headroom for price increases," said Michael Greeson, president and principal analyst for The Diffusion Group, a research firm in Plano, Texas. "The service offers tremendous value even at the higher, but still very low, monthly costs."

In fact, demand is so strong that analysts expect consumers, whether they've cancelled cable or just added these streaming services to their monthly entertainment bill, to swallow further price hikes — which could come from Netflix or its major competitors, Hulu and Amazon.

Amazon, for starters, hasn't risen the price of its Prime service — $99 annually for free shipping, along with Prime Video, Prime Music, unlimited photo storage and other perks — in more than three years. It only began offering Prime Video ($8.99 per month) separately last year. So it could be due for an increase sometime soon.

Hulu, which is owned by four major entertainment companies, began as a free viewing site with advertisements. It launched a subscription service seven years ago and now costs  $7.99 monthly with limited commercials and $11.99 monthly for commercial-free viewing.

Netflix's move, Greeson said, "gives permission to other (streaming) providers to consider price increases. Of course, their economics and user base will vary, but I think Amazon Prime and Hulu subscribers could tolerate a small price increase just about as well as Netflix."

U.S. consumers are expected to increase their spending on streaming services by 17% this year to $9.6 billion, and another 13% to $10.9 billion next year, according to consulting firm PricewaterhouseCoopers.

Helping drive all this: the growing number of homes with broadband Internet service, expected to hit nearly 100 million this year, up from 97.6 million last year, according to The Diffusion Group. The number of broadband homes has surpassed those with pay TV service, the research firm estimates.

Netflix — in nearly half of U.S. broadband homes, according to Park Associates — has angered customers with past price hikes. Six years ago, Netflix lost 800,000 U.S. subscribers when it raised the prices for its plan offering streaming video and DVD rentals from $9.99 to $15.98.

Two years ago, Netflix raised by $2 the price for its most popular standard plan for new members -- current subscribers got the increase over several months last year -- a move that led to a growth slowdown, as some subscribers left.

This one should go much more smoothly, says Scott Devitt, a technology analyst at Stifel Financial Corp., in a note to investors Thursday. Netflix is "still the best value on the consumer Internet," he said.

Netflix is charging new customers $10.99 monthly, one dollar higher than the previous rate, for the most popular plan: high-def video watchable on two simultaneous screens. The $11.99 premium plan, which lets you run Netflix on four screens and get 4K video, goes up $2 to $13.99. It keeps its most economic plan the same, at $7.99.

Add them all up

If consumers are paying for all of these services — and all of them theoretically increase in price — some may wonder if it's really worth ditching cable for streaming alternatives.

Say you subscribe to all three major players, Netflix, Amazon and Hulu, as about 7% of subscribers to broadband-delivered TV services do, according to Parks Associates, an Addison, Tex.-based market research firm. Do that and your monthly cost is $28-$35.

Add in Hulu's live TV service or one its competitors, say you want live sports or news, and your monthly bill increases by $20-$70. That gets you into the $50-$100 range.

Want to see Game of Thrones? Better add HBO Now, which costs $14.99 monthly (unless you subscribe to DirecTV Now, which lets you add it for $5 a month).

And that's without considering great niche video services such as Fandor, Filmstruck and Qello, each of which has its own monthly fee.

More major players are entering the streaming fray, too, including Disney, which has an ESPN subscription service planned to launch next year to be followed by a Disney movie offering in 2019.

There's so many new streaming services that despite their willingness to let you leave whenever you want, some consumers may have accumulated multiple subscriptions and lost track of how much they are spending.

"Hypothetically, if you keep cobbling together this experience and ... it is now the price of a large pay-TV package you might go, 'OK, this doesn’t really make any sense'," said Bruce Leichtman, president and principal analyst for Leichtman Research Group, a Durham, N.H. research firm that tracks media and entertainment.

Conventional wisdom is that cord cutting is the main driver of growth in streaming services. But in reality, Netflix and other Internet video services are attracting even more consumers who already have traditional pay-TV packages than those who have cut the cord or who have never had pay TV.

Only 15% of those who get Netflix or another service do not have a pay TV service, Leichtman says. That suggests less price sensitivity, because those pay-TV customers are already paying more than $80 monthly, on average, he says.

Consumers who already pay $80 or more for pay TV subscribe to Netflix, Amazon and Hulu because each has developed its own library of top-notch content — the cost-intensive productions that drive these price hikes.

Consider the recent PrimeTime Emmy Awards, held last month. Netflix's The Crown earned 13 nominations and Master of None, which won an Emmy last year, got six nominations.

Amazon had four nominations this year: three for Transparent, which has earned star Jeffrey Tambor best comedy actor Emmys the two previous years, and one for Catastrophe.

Hulu wound up among the big winners this year with five Emmys, including best drama, for The Handmaid's Tale. Each service won additional Creative Arts Emmys, too.

In the end, it will likely take more than a $1 to $3 price hike — $12-$36 a year — to convince a subscriber to drop Netflix, Amazon or Hulu.

"Keep in mind that aside from Amazon and Hulu, Netflix’s main competition in the premium home TV and movie space is probably HBO," says Parks Associates senior analyst Glenn Hower. "Netflix might not have Game of Thrones, but offering hits like House of Cards, Orange is the New Black, and Stranger Things for a lower subscription price still puts Netflix at a competitive posture."

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