Netflix will increase its prices by 13 to 18 percent,the biggest increase since Netflix started its streaming service years ago. The new prices will take effect immediately for new subscribers and will be phased in over three months for existing subscribers.
They comes two days before the company releases quarterly earnings .Netflix (NFLX) stock has seen a tremendous amount of growth in the last year and the new price announcement doesn’t seem to have dampened that at all. In fact, the Netflix stock saw a 6 percent increase today morning at market open and remains steady at around $355 a share.
Its shares jumped 6.3% after the video streaming company said it was raising prices for its US subscribers. Other internet stocks including shares of Alphabet Inc., Amazon.com Inc. and Apple Inc., also rose following the announcement. The S&P 500 communication services index, which includes Netflix and Alphabet, climbed 1.5%. S&P 500 technology stocks advanced 1.4%.
The streaming giant said,“We change pricing from time to time as we continue investing in great entertainment and improving the overall Netflix experience.”
According to the New York Times,the company’s appetite for content means it has to spend big resulting in what’s known as negative free cash flow. More money is going out the door than coming in a difference that Netflix covers by borrowing even more.
Netflix’s strategy has been to aggressively spend on content. Its annual spend is now north of $12 billion but it is not yet being offset by subscription and other revenue, leaving the company in debt. Last October, it borrowed another $2 billion in a bond offering.
Multiply that by the hundreds of hours of original content that Netflix produces every year, and the cash starts to bleed out. The company had negative free cash flow of $2 billion last year. It expects that figure to rise to about $3 billion this year and about the same next year. That has added to the company’s debt: up to $12 billion before it proposed borrowing another $2 billion in October through a bond offering.
Spending big on content while keeping prices modest has helped Netflix expand its customer base, about 58 million in the United States and 130 million worldwide. Those figures will be updated Thursday as part of its earnings report.
But Netflix technically isn’t losing any money. In fact, it claims a profit every quarter since accounting rules allow entertainment companies to record most of their production or licensing costs later on.
The hike comes during a period when streaming options are continuing to multiply. NBCUniversal,Disney,Apple and WarnerMedia are prepping major subscription launches before the end of this year.