What we know about the Netflix price hike

The online video service is planning its first US price hike since 2011 -- the year it lost thousands of subscribers after a failed attempt to split its DVD rental and on-demand services.

Netflix CEO Reed Hastings on first-quarter 2014 webcast
Netflix CEO Reed Hastings Screenshot by Joan E. Solsman/CNET

Chief Executive Reed Hastings provided hazy details about Netflix's planned rate hike, which he downplayed as modest, during a webcast Monday discussing the company's first-quarter results.

"You're talking about a dollar or two difference," he said.

The downplayed, foggy announcement stands in stark contrast to the last instance of a Netflix price hike, one that outraged US members and triggered a wave of defections as management attempted -- unapologetically at first -- to shove through a 60 percent increase.

In 2011, Netflix said it would cleave its DVD-by-mail service from its streaming one. The DVD spinoff would be called Qwikster, and rather than a combined $9.99 bill for both, customers would pay $7.99 for each. The move enraged customers and a chastened Netflix company ultimately aborted the spinoff idea, but not without losing 77 percent of its stock's value in four months and 800,000 subscribers.

The company hasn't touched a US price increase in the three years since, but its ambition to become a must-have part of every consumer's TV budget has driven Netflix to spend more on licensing top content and creating high-budget original programming of its own.

Hastings said that most of the added revenue from the price increase would be diverted back into the company's content budget, which is where most of its spending goes, and that a hike in price was inevitable. "If we want to continue to expand... we have to eventually increase prices a little bit," he said. The company invests in content by licensing television and movies made by others -- such as a deal to get top movies from Disney on its streaming service quickly after they leave theaters -- and increasingly by creating its own television-style programming like "House of Cards" and "Orange Is the New Black." Original content makes up less than 10 percent of the company's total content spending.

The executive said the company is still deciding how long current subscribers would be "grandfathered" in -- that is, how long current members would continue paying their current rate before the higher price applies to them.

He said the length of that period of time would be generous, likely between one and two years. When Netflix raised prices in Ireland, it gave current subscribers there a two-year lag before a price increase hit their monthly bills.

New members who sign up for the service, starting sometime before the end of June, will have to pay at a monthly rate that is $1 to $2 higher than the $7.99 (£5.99) level that allows for two simultaneous video streams and the $11.99 (£8.99) rate for four streams at the same time. The company suggested the increase could happen in any country it serves, saying in a letter to shareholders that the amount of the increase could vary by country. Netflix is available in North and South America, and parts of Europe, including the UK.

The company didn't specify when the price hike for new members would be put in place, nor was there any indication if nonmembers would get any warning about the date of the increase so they can sign up beforehand to lock in the lower price. Netflix didn't clarify which specific countries were under consideration for an increase, nor would it discuss whether lapsed members would be given the chance to sign up again at the current price.

Netflix shares were up by 6.7 percent at $371.98 in after-hours trading, as the company's first-quarter results and its second-quarter projections were better than expected.

 

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