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Netflix faces challenge in raising prices as growth slows

Netflix's stock price dropped by as much as 13 percent in after-hours trading Wednesday after adding fewer subscribers than analysts had expected.
How much more will people pay for Netflix? Not much.
How much more will people pay for Netflix? Not much.Courtesy Netflix

Streaming video company Netflix stumbled Wednesday after reporting that it added fewer subscribers than Wall Street analysts had expected in the second quarter of 2019.

That shortcoming was magnified by analysts' concerns that the company may not be able to continue to raise prices without losing subscribers, which has been seen as an important way for the company to improve its business.

Netflix said it added just 2.7 million subscribers outside the United States in its second quarter, coming in well below the 5 million that Wall Street analysts expected. Netflix also revealed that it did not add any subscribers in the U.S.

Netflix's stock price dropped by as much as 13 percent in after-hours trading Wednesday after the company released the numbers as part of its quarterly earnings report.

The company said it expected to add 7 million new subscribers in the third quarter and that it would reduce pricing in India.

The company, run by chief executive Reed Hastings, has experienced strong growth in the past two quarters gaining 18.4 million paid net additions, but the company explained in an investor note that price increases may have had an effect. In May, Netflix raised the price of its standard plan from $10.99 to $12.99 per subscriber per month, while the premium monthly plan rose from $13.99 to $15.99.

“The drop in U.S. subscribers suggests that viewers on lower pricing tiers dropped Netflix as a result of the price increase, given that the average subscriber is now paying significantly more than Netflix had previously guided," Eric Haggstrom, forecasting analyst for media analytics company eMarketer, said in a statement.

Netflix confirmed that price had become an issue in relation to subscriber growth.

"Our missed forecast was across all regions, but slightly more so in regions with price increases," the company noted in its letter to investors.

Michael Pachter, managing director of equity research at investment bank Wedbush Securities, told NBC News that the lack of U.S. subscriber growth was "troubling" since the company's biggest competitors — most notably Disney and AT&T — will soon launch their own streaming services.

Netflix still retains licenses for two of its most popular shows “Friends” and “The Office,” but those shows will soon move to rival streaming services.

“I think it suggests they are bumping up against a ceiling on what they can charge without losing subscribers," Pachter said.

Pachter said he calculated that Netflix stands to lose around 65 percent of its viewing hours over the next few years, but added that some pieces of content, like the Adam Sandler and Jennifer Anniston movie, “Murder Mystery,” may have been poorly reviewed but still won 73 million households in the first four weeks on the service.