Netflix's pricing power ‘will remain intact,’ media analyst says

Bank of America Senior Internet and Digital Media Analyst Nat Schindler joins Yahoo Finance Live to preview Netflix's fourth-quarter earnings, anticipated price hikes, and the outlook for the company as it joins the gaming space.

Video transcript

AKIKO FUJITA: Well, let's turn our attention now to shares of Netflix getting a bit of a lift here up 1.4%, although we've seen the broader tech sector up in the session. Netflix gearing up to report earnings after the bell today. And our next guest is expecting this year to get better after a tough 2021.

Let's bring in Nat Schindler, Bank of America Senior Internet Digital Media Analyst. We've got our very own Ali Canal joining in on the conversation as well. Nat, set this up for me, because we were talking about this this morning saying there's been a lot of concern about maybe not a signature franchise being able to lead subscribers or more subscribers to Netflix. But I feel like we talk about that every few quarters, and yet they still seem to be the place to be in streaming.

NAT SCHLINDER: Well, back in the days of "House of Cards," a single franchise was all Netflix had. Now, you're putting out massive franchises on a weekly basis. So giving a single franchise, even "Stranger Things," enough of a belief that it's going to boost the company that much or boost subscribers that much, it's probably not. It's more the total amount which drives this company.

BRAD SMITH: OK, and so the total amount, and on what price as well? Because in your note, you also kind of cite the price hikes as well that they've seen. And you're estimating an incremental revenue of $960 million in 2022 from those price changes. And so walk us through where the pricing power may start to fizzle out or if that will remain intact.

NAT SCHLINDER: I suspect it will remain intact. Netflix has not seen substantial churn when they've raised prices in most markets. There's a short-term bump right when they do it, and it usually comes right back down and subscriber growth returns really rapidly. So I think consumers, and you can look at total number of hours consuming Netflix content, it just keeps going up.

So they're getting more value out of Netflix every year. So paying another $1.00, maybe another $1.50 in this case for the mid-price range is not that much to ask, especially when they're seeing prices rise for everything else.

ALEXANDRA CANAL: And, Nat, want to follow up on those price increases because the "Wall Street Journal" reported that Netflix raising prices amid these signs of slowing subscriber growth could suggest that Netflix is reaching a ceiling of some sort. So what do you think about that report and really the long-term impact that these price increases could have?

NAT SCHLINDER: Well, I didn't see that specific report. But, look, they raised prices 18 months ago when they weren't seeing slowing at all. There would be no way to justify the same. They were saying slowing subscriber growth. You are seeing near peak numbers in the US where they did raise prices. That's not surprising, with 80 million households with Netflix right now.

Cable peaked out at 110, but with password sharing, 80 million's probably not far from the peak in the United States, Canada level. And they're raising prices. Can they keep raising prices? I suspect they can, because they keep adding content at a high rate.

So if you keep on adding content, spending $20 billion incrementally each year on content, that's content that those subscribers cannot even consume in a given year. So they're adding upon adding upon adding. It's layering on. So the value you're getting for Netflix keeps going up. So will consumers keep paying it? I suspect they will as long as they're still increasing their number of hours of viewing.

ALEXANDRA CANAL: And in your note, you specifically called out growth in Asia as one of the key drivers for Netflix in 2022. What are you looking for in the earnings report today or the call when it comes to that international expansion? Because Netflix has doubled down in the past that they want to be a global powerhouse.

NAT SCHLINDER: Yeah, I mean, that's clearly been the story, actually, for several years. I mean, as I said, the numbers in the US have been going up but not going up very much. I mean, as we-- the UCAN region, or the United States and Canada, the last few years prior to COVID was going up two to three million, and then went up a lot during COVID years, but now this year is probably going to go up about a million.

That's not really driving the numbers when you're talking about Netflix adding in the mid-20 millions a year in net subscriber additions. So where is that coming from? Parts of Europe are beginning to become heavily penetrated, like the UK. But other parts still have a lot of growth, like Germany and France.

But a lot of it is coming out of Asia, where a lot of this great content that they have created recently, like global phenomenons like "Squid Game," are driving new subscribers. The big question that needs to be answered is, can they hold these subscribers? Will they stay and be permanent subscribers? Or will they just come on when a "Squid Game" comes on and then leave right after?

AKIKO FUJITA: And Netflix has talked a lot about that crossover appeal, that kind of content-- I mean, "Squid Game" right there, but in the past it's been a show like "Narcos" that really does work across multiple markets too. How much of that do you think, that template, do you think Netflix turns to, increasingly-- I mean, it feels like if you look at something like "Squid Game," the costs were lower, the payoff was really big, and it wasn't just about one market but it was, to your point, a global phenomenon?

NAT SCHLINDER: Yeah, that's very hard to do. And they admitted, they call it their zeitgeist shows-- whether it's "Stranger Things" or it's "Squid Game," it's very, very hard for them to predict what will be a zeitgeist show. And they admit this freely. But, one, they're taking a lot of swings at bat.

And that's the value of Netflix is that they're going to take so many swings at bat. You compare that to HBO, yeah, they're making great content, but they don't make a lot. And because of that, if they miss, it's a bigger deal. Netflix takes a lot of swings at bat and occasionally get something like "Squid Game," which is very low cost-- certainly relative to something the US, certainly relative to what Amazon just finally put a name to with "Lord of the Rings."

This is low price but high volume. They will get those. Will I be able to predict it? No. Will they be able to predict it? No.

BRAD SMITH: While we have you, it's been a hot start to 2022 with regard to deals in the gaming space. So for Netflix, which has added more content, more titles on the gaming front as well as of recent, do you foresee any type of add-on for Netflix in making an acquisition strategically to kind of bolster that side of the business? And what kind of revenue benefits would you expect to come out of that?

NAT SCHLINDER: I would-- I think it's very hard to ever bet on Netflix buying something. Because if you look back in their history, they are one of the least acquisitive companies I've ever seen. I think they have bought two companies in total. So they are very non-acquisitive. They are a build it there type of company, build it in-house type of company.

So you know, maybe. But again, I would not ever bet on that kind of outcome, because they have a history of not doing it. On what's happening in the gaming space for them, I still consider the gaming area for them, at best, poorly fleshed out upside.

And what I mean by that is they still haven't really elucidated a clear gaming strategy. And most of their gaming content to date, or all of it, is just really extensions of their television IP-- so taking something like "Stranger Things" and making it into some sort of game to build on that hype. That's great. That might create a very small amount of incremental revenue, but more likely just creates marketing buzz around their shows.

For them, I don't see them any time soon getting into the Activision or EA Game of creating $60, $70 console titles and really going for that business. And I probably wouldn't be excited if they did. It's a really expensive, tough business.

BRAD SMITH: Nat Schindler, Bank of America Senior Internet and Digital Media Analyst joining us here today, as well as Alexandra Canale, who is of Yahoo Finance-- Yahoo Finance's own, Alexandra. Thank you so much for joining us, both of you here today, Alex and Nat.