Netflix announced a price increase this week to the standard and premium plans offered in Canada, a move that some analysts believe foreshadows a coming price increase to Netflix in the U.S within the next year.
Tech companies have often used Canada as a testing ground to gauge consumer reaction to price increases, services and new products.
Netflix is no different.
In November 2018, Netflix announced a $1 price increase to Canadian subscribers’ basic plan and a $3 price increase to both the standard and premium plans in Canada.
A few months later, in January 2019, Netflix announced a nearly identical price increase to its U.S. plans.
“Canada is a small market, so [a price increase is] not going to move the needle much on the stock,” said Alex Giaimo, a stock analyst at Jefferies. “What we see often is tech companies tend to use Canada as a sort of a guinea pig or the test market for a broader implementation.”
Canada only represents about 7 million of Netflix’s nearly 190 million subscriber base, but Canada’s small numbers and similarity to U.S. consumers make it a perfect test case for larger moves the company makes in the U.S.
If consumers in Canada don’t respond well, it doesn’t have a large impact on Netflix’s bottom line.
A price increase in the U.S. would spell good news for investors, at least in the short term.
After the last price increase in the U.S. in 2019, Netflix’s share price jumped more than 6% before falling slightly.
But a small increase or decrease in the price of Netflix shares in response to price changes, or even an announcement of a prestigious award, are not that important to investors, said analysts.
What really drives the price of Netflix’s stock are subscribers counts, which are released with every quarterly report.
Netflix stock fell sharply in July 2019, after posting it had lost paid subscribers in the second quarter of 2019, but rose again in October 2019, after the third quarter showed a large increase in paid subscribers.
Netflix lost 126,000 in the second quarter of 2019 but gained nearly 1 million subscribers in the third and fourth quarter of 2019
If Netflix’s subscribers fall, the stock falls. When Netflix adds subscribers, the price of its stock rises.
If Netflix increases its basic plan in February 2020, like Loop Capital Market predicts in an analyst report released in July, it’ll be only the second time Netflix has ever increased its basic plan.
“We are assuming a $1 price increase in the U.S. and much of Europe next February,” said the report by Loop Capital Market.
This is important because Netflix, like most streaming platforms, has a subscriber-based business model.
This means there is a direct correlation between subscribers and revenue.
If the price subscribers pay goes up or the amount of subscribers increases, Netflix’s revenue increases.
“Revenue growth drives content investment, which drives long-term sub growth, and price increases are the most effective way to drive revenue,” said the July report released by Loop Capital Market.
An increase in revenue and content creation would be a bonus for both subscribers and investors.
The biggest draw for subscribers is Netflix’s original content, which makes up its most popular shows and represents the bulk of its content spending.
A $1 price increase for subscribers ultimately means more content to watch.
An overall increase in content, especially popular content, means more subscribers, which then leads to a higher share price in the stock market.
“Tiger King came and then all of a sudden went viral. When something like that happens, the stock goes up, because that’s incremental, new eyeballs that are coming to the platform,” said Giaimo, the analyst at Jefferies.
If a hit show brings new subscribers, that means more revenue for the company.
“The economics behind it are super appealing. So a hit show can certainly move the stock and in a positive direction,” said Giaimo.