A crackdown on password-sharing likely boosted Netflix subscribers by about 6 million in the third quarter, and the streaming pioneer is expected to set the stage for price increases when it reports earnings on Wednesday. JPMorgan analyst Doug Anmuth estimated that the move would convert about 33 million households sharing accounts into paying customers by the end of 2025. Still, he also said that many new subscribers are taking its cheaper ad-supported tier instead. Whether that will ultimately be enough to offset higher prices is another question.
The company has already raised its prices in previous years, and its shareholders have come to expect it to do so regularly as competition from newer streamers like Walt Disney (DIS.N) and Amazon’s Prime Video grows. But a report this week that Netflix may soon start raising the price of its ad-free tier in the US and Canada is causing some investors to pause.
Netflix has resisted joining rivals like Walt Disney in hiking ad-free prices this year, and even the company’s cheapest ad-supported tier delivers better average revenue per user than the more expensive options. However, the company hasn’t been able to grow its subscriber numbers as fast as some analysts had expected, and it now faces stiffer competition in its core market of the United States.
As a result, the only profitable prominent streamer is beginning to feel pressure from its shareholders to do more to boost revenues. Unlike other services, which usually include ads in their free plans to attract more viewers and increase overall revenue, Netflix has relied on its content investments to drive growth. But as more original titles are released, those investments’ costs rise, making it harder for the company to keep raising its rates.
A recent study from CivicScience suggests that if Netflix raises the prices of its ad-free tier, 39 percent of those affected by the change will cancel their subscription outright, and 31 percent will choose to stay on with the service but switch to the ad-supported tier. A significant percentage of users could make or break Netflix’s business.
In its latest shareholder letter, the company has tried to reassure investors that competition and password sharing are the more significant reasons for its problems. The company will try to tackle both issues by improving its catalog and introducing stricter anti-sharing measures. But the reality is that in a market with so many other streaming choices, price hikes have consequences, and the only way to avoid churn is to produce enough compelling content to make up for them.