As competition from online streaming services, traditional TV networks and premium services like HBO heats up, will Netflix have to start charging its subscribers more to afford the content they want to see?
It's a question some analysts and pundits are asking after Netflix announced a deal for the exclusive rights to Disney films starting in 2016, an acquisition that is rumored to cost between $300 million and $350 million.
It has caused a significant amount of unrest amongst analysts who worry that the costs of the deal outweigh the benefits. Speaking to the Wall Street Journal's Market Watch blog, Albert Fried & Co. analyst Richard Tullo raised concerns about the deal, citing Netflix's “fixed subscriber revenue with little ability to increase rates, compounded by an expanding cost structure.”
UPDATE: Netflix has pushed back strongly against talk of a potential increase in its monthly fee. "We are not contemplating raising the $8-a-month subscription fee for unlimited online viewing," said Netflix Chief Content Officer Ted Sarandos during an interview with famed film producer Harvey Weinstein, according to Reuters.
That central quandary left Bloomberg News asking what is likely an unappetizing question for current subscribers: Will Netflix have to hike its prices to pay off the Disney deal, in addition to its mountain of other expenses? Cliff Edwards of Bloomberg News sat down with Bloomberg TV correspondent Jon Erlichman to discuss the company's options.
Erlichman said the company will probably have to raise its prices if it does not see a significant jump in new subscribers. However, he thought it unlikely that Netflix would introduce a tiered pricing model, under which users might pay different amounts depending on the types or amount of content they want to consume.
"At the end of the day, it really depends on how many subscribers they have by the tim they reach the beginning of this deal in 2016. If they don't have enough, we're going to see high prices," said Erlichman.
The company last year raised the price on its combination DVD-and-streaming subscription, hiking the monthly rate from $10 to $16. It also began offering two new plans, each $8 a month, one for DVD-by-mail and one for streaming only. The backlash from this price hike was immediate: Customers dropped the service in larger-than-expected droves and stock tanked.
During the financial quarter that ended on September 30, 2012, Netflix added 1.2 million new streaming subscribers in the U.S., scraping the bottom of the company's projected growth target for the quarter. By year's end, the company expects total domestic subscriber additions to have been between 4.7 million to 5.4 million, down from earlier estimates of 7 million.
The AP itemizes Netflix's staggering stack of bills, pre-Disney: "Even before signing the Disney deal, Netflix owed $5 billion in Internet video licensing fees during the next five years, including $4.5 billion due before the end of 2015. Netflix's annual revenue this year is expected to total about $3.6 billion."
It is far from certain, of course, that Netflix will actually raise its prices; at this point, it is little more than Wall Street analyst speculation. But as the popular movies and television shows that viewers expect from Netflix become more expensive to license, we wouldn't be shocked if Netflix's subscription prices creep upwards at some point over the next few years.
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