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Netflix tests price-increase limits for original shows

Michael Liedtke
Associated Press

San Francisco — Netflix is testing the financial limits of its streaming video service as the rising cost of producing original programming pushes up subscription prices.

The latest reminder came Monday with the company’s third-quarter earnings report, which revealed that Netflix added 370,000 U.S. subscribers. It marks its second consecutive quarter of slowing U.S. growth since lifting a two-year rate freeze and increasing prices by as much as 20 percent for more than 20 million subscribers.

While the latest quarterly subscriber gain exceeded management’s modest projections, it fell far below the 880,000 U.S. customers that Netflix picked up at the same time last year. The deceleration occurred even though the latest period included the July debut of “Stranger Things,” which turned into one of the summer’s surprise hits.

Netflix is now faring better overseas as it tries diversifying its video library to suit the tastes of 189 other countries. The company added 3.2 million international subscribers in the third quarter, surpassing the 2.7 million it gained at the same time last year when it was operating in about 130 fewer countries.

Investors were thrilled with the international progress and the better-than-expected showing in the U.S. Netflix’s stock surged nearly 20 percent to $119.91 in extended trading.

The drop-off in U.S. subscriber gains underscores the delicate balancing act the company is trying to pull off as it seeks to retain and attract customers while also financing its ambitious expansion overseas amid fierce competition from Amazon and HBO.

It’s an expensive challenge, which is why Netflix raised the price for its most popular U.S. plan from $8 to $10 per month. And the pressure to continue increasing rates every few years seems likely to continue, though Netflix CEO Reed Hastings said Monday that that there are no plans to raise prices again anytime soon.

After spending $5 billion on original programing and licensing rights to other shows this year, Netflix has earmarked another $6 billion for next year. Netflix expects to offer 1,000 hours of original shows and movies next year, up from 600 hours this year.

But the price increases that help finance new shows threaten to become counter-productive if they drive away too many of the existing 47.5 million U.S. subscribers or discourage potential new customers from signing up.

Netflix does not disclose how many of its subscribers cancel each quarter, but Wedbush Securities analyst Michael Pachter estimates that about 1 million U.S. households opened new accounts from July through September.

That means about 600,000 subscribers abandoned the service during the third quarter, if Pachter’s calculations are accurate.