Why Netflix is in a win-win position as it continues to hike prices
· Business Insider
Ben King/Netflix
- Netflix is getting back to basics after bowing out of the bidding war for Warner Bros.
- The company has raised prices and is looking to expand its ad business.
- An analyst said that "there are fewer cancellations than people expect" when streamers raise prices.
Netflix is in an enviable spot despite losing the Warner Bros. bidding war.
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Media analysts are bullish on Netflix's prospects ahead of its first-quarter earnings report on Thursday, as it pivots away from buying HBO by flexing its pricing power and scaling its budding ad business.
This optimism follows what may be a win-win move by the streaming giant: raising prices again.
If customers on Netflix's ad-free plan pay $2 more a month, the streamer reels in more money. Netflix is forecasting revenue growth of up to 14% in 2026, which Wall Street says is achievable.
And if subscribers decide $19.99 a month for the standard plan or $26.99 for premium is too steep, they can trade down to its $8.99 ad tier, which is the same price as the Paramount+ ad plan and less than comparable offerings from Disney+, Hulu, HBO Max, and Peacock.
"By leveraging an industry-low priced ad-supported offering, Netflix can aggressively push price on the top end while recapturing users looking to reduce their monthly bill," analyst Robert Fishman of MoffettNathanson wrote in a mid-April note.
While customers may grumble about streaming price hikes, there's reason to think they're unlikely to quit Netflix. The streamer has long had an industry-low cancellation rate, which was 1.7% in the US in February, according to subscription data firm Antenna. Besides, Netflix is a bargain on a dollar-per-consumption-hour basis, UBS researchers wrote last year.
"We think there's more runway than most people believe to increase subscription prices," said Luke Stillman, an analyst at advertising research firm Madison & Wall. "Every time you see subscription prices going up, there are fewer cancellations than people expect, and there's pretty low elasticity to price increases."
A Netflix spokesperson declined to comment ahead of Thursday's earnings.
Ad-ing more subscribers
By hiking prices, Netflix can also reap another less-obvious benefit: growing its ad tier.
The best ad businesses are scaled, meaning advertisers can reach massive, diverse audiences at once. If Netflix can ramp up its ad tier sufficiently, it can command higher ad rates and land bigger brand deals, said Mike Proulx, the marketing research director at Forrester.
Proulx believes that Netflix's latest hikes are "essentially price-pinching" ad-free subscribers, with a goal of "forcing them into their ad tiers, in order to gain that scale" in its ad business.
Some analysts disagree, given that Netflix's ad-tier subscribers are less lucrative than its ad-free customers.
"I think the last thing they really want is to have their happiest customers, the most loyal subscribers, churn down because of a price increase," said Hernan Lopez, who founded media consultancy firm Owl & Co.
Netflix has said it expects to double its ad revenue this year, from $1.5 billion in 2025 to around $3 billion. MoffettNathanson projects that the company will then grow ad revenue to $4.4 billion in 2027, $5.8 billion in 2028, and $7.3 billion in 2029.
Less than four years after launching an ad business, Netflix is pacing to be one of the 20 biggest ad sellers outside China this year, Stillman of Madison & Wall said.
The company said last fall that its ads reached 190 million viewers, though many of those viewers are on shared accounts.
"They're going to continue to take share," Stillman said of Netflix's ad business. "They're also spending more on content than their competition, and we think that that is a big part of gaining further traction."
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