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Wall Street Wants Netflix to Raise Rates
A Move That Could Backfire With New Competitors Looming
by Karl Bode 12:15PM Thursday Oct 25 2012
Wall Street is urging Netflix to raise prices despite recent price hike disasters, and the threat of looming, lower-cost competitors. Netflix this week announced that the company added 1.2 million new US customers during the third quarter, bringing their subscriber total to 25.1 million -- almost a third of all homes with broadband. While the company is profitable, dominating the video market and growing, they missed projected targets, so investors pummeled the stock this week. The lower-than-they-had-hoped additions caused Morgan Stanley analysts to insist that Netflix needs to raise prices:
Netflix spends more on content as a percentage of subscriber revenue (62%) than cable networks, including: Discovery Communications (25%), AMC (34%), Showtime (35%), Scripps Networks Interactive (38%), HBO/Cinemax (48%) and Epix (58%), according to an analysis by Morgan Stanley. That indicates that Netflix’s $8-per-month Internet streaming service is too cheap, Morgan Stanley analysts Benjamin Swinburne, Scott Devitt Ryan Fiftal, Hersh Khadilkar and Andrew Ruud wrote in a research note Tuesday. "We believe the profit-maximizing strategy [for Netflix] is to raise rates rather than go for sub growth," they wrote.
The problem of course is that Netflix's subscriber numbers took a major hit when the company imposed a 60% rate hike earlier this year. It also ignores the growing threats from Amazon, HBO and the coming RedBox/Verizon joint venture, which is expected to undercut Netflix on price when it launches in a few weeks. For what it's worth, Netflix CEO Reed Hastings says there's no price hikes planned,

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