Netflix eyes a pricing overhaul, but can it avoid a revolt?

4:22 PM, Jan 23, 2014   |    comments
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(CBS NEWS) How do you mess with one of America's most popular video services? Very, very carefully.

Netflix (NFLX) is hinting that it's working on an overhaul of its pricing strategy, with plans to eventually offer three subscription options for customers. But nothing is likely to change anytime soon for existing customers, chief executive Reed Hastings wrote in a letter to investors on Wednesday.

There's a reason for Hastings' caution. In 2011, hundreds of thousands of subscribers revolted when the company suddenly hiked its fee, earning the CEO the nickname "Greed Hastings." Netflix was also widely mocked at the time for a short-lived plan to separate its DVD service into a unit called Qwikster.

At stake now is the company's ability to convince customers to pay more, while avoiding the kind of backlash that crimped its stock price and credibility in 2011.

"They were scarred so horribly by the Qwikster debacle that they won't make that mistake again," Wedbush Securities analyst Michael Pachter told CBS MoneyWatch.

Instead, Netflix will likely charge a higher monthly fee - say, $11.99 per month - to new subscribers who want multiple streaming options, while older customers will be grandfathered in. The plan would help cut down on unauthorized usage, which Pachter said is "very smart and something they should do." 

The company hinted about new pricing plans on Wednesday when it announced fourth-quarter results that topped analysts' estimates. Shares of Netflix surged on Thursday, reaching as high as $395.54 in intraday trading, a jump of more than 18 percent. 

Investors were cheered by net income that surged more than fivefold and a domestic subscriber base of 33.4 million, which surpassed analysts' estimates for 33.1 million customers, according to Bloomberg News. Sales jumped 24 percent to $1.18 billion. 

Netflix predicted continued growth, estimating that it will add 2.25 million new domestic customers this quarter. 

Still, a pricing change isn't likely to boost revenue any time soon, Hastings wrote in his letter. 

"If we do make pricing changes for new members, existing members would get generous grandfathering of their existing plans and prices, so there would be no material near-term revenue increase from moving to this potential broader set of options," he wrote. He added that the company is in "no rush" to add new pricing plans and is still researching the idea.

Netflix is also planning a "substantial European expansion," Hastings wrote. That's likely to include France, Germany and Belgium, according to The Hollywood Reporter. 

Netflix has a rich valuation, said Pachter, who has an "underperform" rating on the stock. Among his concerns are the potential for Hollywood studios and television production studios to seek higher payments from Netflix as the service gains in popularity, as well as increased competition from Amazon.com's (AMZN) streaming service.

"The bulls believe they can keep adding customers without increasing content costs," which isn't likely, Pachter noted. 

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