Will Netflix raise prices in wake of Disney deal?

Remember when everyone was worried about Netflix’s rising content costs? These days, apparently, not so much. Yesterday Netflix committed to pay something likely in the neighborhood of $300 million for exclusive subscription VOD rights to Disney (BTIG Research analyst Rich Greenfield estimates it could be as much as $450 million in 2017 depending on the exact size and performance of Disney’s release slate) and its stock went up by more than 14 percent.

One reason it went up so much, apparently, is that a lot of people expect Netflix to raise prices to help offset the cost of the Disney deal. For the record, Netflix chief content officer Ted Sarandos told Harvey Weinstein at the UBS Global Media and Communications conference Wednesday, “We are not contemplating” raising the $8 a month price for unlimited streaming, which was something less than a Shermanesque denial.

Still, I suspect Netflix is not, in fact, contemplating a price hike, or at least doesn’t want to contemplate one. The Starz deal fell apart last year in part because Netflix refused to raise its price or create a new premium tier as Starz had demanded. The last thing Netflix wants to do is signal that it is willing to modify its own business model to accommodate content owners because there would be no end to where that would lead.

The reason I think Netflix wanted to get the Disney deal done and announced four years before the meat of it even takes effect, in fact, is to give itself time to use the deal as a lure to other studios and to build up its subscriber base in the meantime. It’s an big bet by Reed Hastings, to be sure, but given what happened the last time Netflix tried to raise prices, betting on the come probably seems less risky.

 

 

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4 Comments Subscribers to comment

  1. Netflix Chief Content Officer, Ted Sarandos, has been quoted as saying that prices will not increase as a result of the Disney deal.

    http://articles.chicagotribune.com/2012-12-05/business/chi-netflix-promises-not-to-raise-prices-for-disney-films-20121205_1_live-action-and-animation-studios-sarandos-new-star-wars-movies

  2. Yes, I referenced that in the second paragraph.

  3. Economics dictate that there is only so much content that you can put into, and so much profit that you can make out of an $8 per month plan.

    I don’t understand why $8 has to be a sacred price, and why creating a different tier (while keeping the $8 basic tier) would be a problem.

    Maybe I am missing something?

    1. @dylanzhou — I agree that’s what the economics indicate. I don’t think Netflix can afford to do another such deal without raising prices. That’s another reason I think Disney was willing to do the deal now, when its current pay-TV deal with Starz still had two-plus years to run.

      The pay-TV window is a shrinking asset for the studios right now because the legacy distributors — HBO/Show/Starz — are putting more money into originals. They’re not going to pay what they used to for movie rights in the old pay-TV window. Netflix had competitive reasons for buying its way into that window with Disney but it probably shot its bolt with that deal. Thus, Disney managed to get a richer deal in the pay-TV window than it would have by renewing with Starz, or by going with one of Starz’ direct competitors. But that rich deal probably isn’t available to any other studio now since Netflix can’t afford it and no Netflix competitor currently has the reach to justify it. In a sense, first-mover advantage goes to Disney.

      As for why the $8 price point is sacred, or why a premium tier is a non-starter, I think Netflix has just made a strategic decision not to recreate the cable business model. It’s marketing itself right now as an adjunct to cable service, which is already expensive and getting more so. Netflix believes, probably correctly, that it is fairly constrained in what it can do pricing wise right now.

      Also, If Netflix starts paying higher licensing fees on the theory that it can put that content in a higher-priced tier, every programmer is going to demand high fee/premium tier treatment. Not only would that lead to higher content costs overall but it would screw with Netflix’s basic business model.

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