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Netflix might finally do something about freeloaders: cut prices for everyone else

AP Images/Melinda Sue Gordon
If Netflix doesn’t keep growing fast, its share price could prove to be a House of Cards too.
By John McDuling
Published Last updated This article is more than 2 years old.

2013 has been a stellar year for Netflix.

The popular streaming service’s share price has soared 295%, making it the second best performing company on the S&P 500 (behind only Tesla). Its risky foray into original programming has been well received, with shows like House of Cards winning critical praise and prestigious awards. Subscriber growth has chugged along, and the company climbed through the 30 million paid customers mark, surpassing HBO (which amusingly, still insists Netflix is not a competitor). In light of all this, CEO Reed Hastings’ 50% pay hike, quietly announced overnight, looks well deserved.

Netflix shares are now so expensive that the company also felt comfortable enough to scrap a poison pill plan it put in place last year to safeguard it against a takeover. But there’s still plenty of blue sky built into the company’s lofty valuation (it still trades on a stratospheric multiple of about 200 times next year’s earnings) which means it needs to continue growing rapidly to avoid disappointing investors in the future.

We’ve already discussed how there were two real options facing Netflix in the quest for sustained growth. It could either crack down on the estimated 10 million freeloaders using the service, or raise its prices. But it faced an enormous backlash when it tried to raise prices in 2011.

The latest news suggests it is therefore going for the first option. Bloomberg reports that the company has quietly been testing cheaper packages that cost $7 a month, but can also only be used on one device. (The currently currently charges $8 a month to use its service on six devices, two simultaneously, or $12 a month for its family plan, which allows four devices to stream simultaneously.)

Netflix aims to add another 6 million paying subscribers in 2014.  There are still about 60 million US households without the service, but the marketplace for online streaming is also getting more competitive, with Amazon, Google and Hulu (backed by Fox, NBC and Disney) all competing.

Replacing the $8 subscription with a cheaper one-device only subscription, if that’s Netflix’s plan, would force all the college students and cheapskates who borrow their friends’ Netflix passwords to make a choice: sign up for Netflix or go without. It would therefore be a simple way to achieve that audience growth target in one fell swoop—assuming, of course, that enough of them agree to pay.

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