The past couple of years have been rife with uncertainty for Netflix (NFLX +0.53%) investors. After climbing to an all-time high during the pandemic, the stock has been decimated, plunging as much as 75%. However, after shedding nearly 1.2 million subscribers during the first half of 2022, in recent quarters, Netflix appeared to be back on track. After back-to-back subscriber increases, the company debuted a lower-priced, ad-supported tier and announced plans to rein in account sharing by charging for viewers outside the member's household, designed to underpin future growth.
Netflix investors were justifiably taken aback this week when reports emerged that the company was cutting its subscription price in a vast number of international locales. The move left market watchers scratching their heads, wondering exactly what Netflix hoped to gain by cutting prices, just as the company appeared to be getting its groove back.
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By the numbers
Netflix reportedly cut prices in "more than three dozen countries in recent weeks," according to The Wall Street Journal. Other estimates put the number much higher. Netflix lowered prices in "more than 100 territories globally," according to research released by data and analytics firm Ampere Analysis. The price cuts were not enacted in any of the company's largest markets, including those in North America or Western Europe.
The price cuts varied across locations and viewing tiers, according to Ampere. The biggest discounts were implemented across the basic tier, with decreases ranging from 20% to nearly 60%, effective immediately for both new and existing subscribers. There were fewer discounts applied to the standard tier and fewer still to those in the premium tier. The tier with the fewest price cuts was the mobile tier, which is already heavily discounted and a key offering in markets with low broadband penetration.
The revised pricing structure was enacted in wide swath of countries and territories, including Egypt, Kenya, Libya, Bulgaria, Croatia, Venezuela, Nicaragua, Vietnam, Thailand, and the Philippines, among many others, according to Ampere.
The price cuts come at a curious time in the evolution of Netflix, when the company has introduced measures designed to increase revenue, not cut it.
Additional revenue drivers
In early November, Netflix debuted its long-awaited Basic with Ads tier, which launched in 12 countries, including Canada, France, Germany, and the U.S. The plan started at $6.99 per month for U.S. viewers.
Netflix also began rolling out plans in recent months to reduce password-sharing. In a growing number of countries, members are required to provide a primary address for the main account. In most cases, viewers living outside the household are given the option of paying an additional monthly fee to add a subaccount. The new policy is currently being tested in Canada, New Zealand, Portugal, and Spain, with other locations expected to follow in the coming months.
These two policies -- cutting prices while trying to increase revenue -- appear at odds, until you dig a little deeper.
NASDAQ: NFLX
Key Data Points
A silver lining for Netflix
Netflix has a vast treasure trove of data regarding its viewers and their preferences. It stands to reason that the company's latest move is also backed by data. In all likelihood, the strategically deployed price cuts are expected to attract new subscribers, especially in countries where it doesn't have a large market share. The price cuts will no doubt lower Netflix's average revenue per user (ARPU), but if the company has done its homework, it should attract a sufficient number of new, paying customers to more than make up for revenue shortfall caused by lower prices.
Furthermore, it appears the price cuts were focused on many smaller or more emerging markets, particularly those that pay in U.S. dollars. The strength of the dollar in recent years has caused viewers in some countries to pay far more for a subscription than their peers. This move may be a way of leveling the playing field while encouraging new members to sign up.
Finally, this dark cloud has a silver lining. The number of subscribers affected by the price cuts is somewhere in the neighborhood of 10 million subscribers, according to Ampere Analytics. That amounts to roughly 4% of Netflix's total subscriber base of roughly 231 million.
J.P. Morgan analyst Doug Anmuth estimates the new lower prices will only reduce revenue by 2% to 4% -- at least initially. "This is an estimate on our part, and it should also be offset by attracting more subscribers," Anmuth wrote in a note to clients. "We also believe management likely anticipated these price reductions at the time of fourth-quarter earnings." He further suggests investors should "buy the pullback."
At first glance, it's easy to conclude that the price cuts were an act of desperation on Netflix's part, scrambling to increase its subscriber count, no matter the cost. The more likely conclusion, however, is that Netflix knows exactly what it's doing, orchestrating a carefully constructed strategy to grow its subscriber base and increase its revenue -- a genius move on the company's part.
Investors should watch for a bigger-than-expected decline in Netflix's revenue over the next several quarters. Furthermore, a deceleration or decline in its subscriber growth could suggest that the price cuts failed to attract the requisite number of new subscribers -- which could spell trouble for the streaming giant.
