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Netflix to raise prices as earnings jump sends shares higher

Watching “House of Cards” on Netflix is about to get more expensive, and investors are cheering.

The company that popularized binge-watching said Monday it plans to charge new customers $1 to $2 a month more for its online video service, starting later this quarter. Netflix Inc. (Nasdaq: NFLX) also reported first-quarter profit and subscriber growth that beat analysts’ forecasts. The shares soared.

The price increase reflects growing confidence that original shows like the political thriller “House of Cards” and exclusive movies will continue to attract new subscribers, even with soccer’s World Cup starting in mid-June, a distraction the company said will temporarily slow user growth. Netflix currently offers unlimited Web viewing for $7.99 a month.

“The earnings leverage of even just a dollar is pretty substantial,” said Daniel Ernst, an analyst at Hudson Square Research in New York who recommends buying the stock. “For what Netflix provides, it’s an incredible value for consumers.”

Netflix rose 6.5 percent to $371.19 in extended trading after the announcement. The stock gained 0.8 percent to $348.49 at the close in New York and has retreated almost 20 percent from its closing high of $454.98 set on March 4.

Netflix, which now has 48.4 million streaming subscribers worldwide, announced the new prices, along with quarterly results, on its website Monday. The company predicts it will sign up 1.46 million new subscribers this quarter, including about 520,000 in the U.S.

Current customers

The price change won’t affect current customers for one to two years, Chief Executive Officer Reed Hastings said on a webcast. That means fans of the women’s prison series “Orange is the New Black” won’t face higher prices when that show returns June 6. The Los Gatos-based company predicts “slight headwinds” when the FIFA World Cup starts June 12 in Brazil and siphons viewers away.

The company, the world’s largest online-subscription service, ran afoul of customers three years ago when it split its DVD-by-mail business from streaming and increased prices by 60 percent for people who wanted both. Adding $2 to the current price amounts to a 25 percent increase.

“I thought for a long time they could raise prices but they’ve always been really disciplined by that,” Ernst said. “They’ve learned their lessons.”

Content costs

Hastings is acting to address the rising cost of licensing movies and TV programs from Hollywood, whether it’s exclusive films from Walt Disney Co. (NYSE: DIS) or original shows. At year end, the company had $7.25 billion in such commitments over the next five years.

“‘House of Cards,’ for which season 2 debuted in February, attracted a huge audience that would make any cable or broadcast network happy,” Hastings said in a statement. “The on-demand nature of Netflix means that as we promote season 2, we can still see significant new enjoyment of Season 1.”

Netflix added 2.25 million new domestic streaming customers during the quarter, in line with the company’s January forecast and bringing the U.S. total to 35.7 million. International customers increased by 1.75 million, to 12.7 million, or 150,000 more than predicted earlier this year.

First-quarter net income soared to $53.1 million, or 86 cents a share, from $2.7 million, or 5 cents, a year earlier, beating the average 81-cent estimate of 31 analysts. Sales advanced 24 percent to $1.27 billion, matching projections.

Quarterly outlook

For the current second quarter, the company forecasts net income of $69 million, or $1.12 a share. Worldwide streaming revenue will total $1.14 billion, the company said. Analysts are projecting profit of 98 cents on revenue of $1.32 billion.

The company plans to use proceeds of the price increase for new content, Hastings said, adding he expects little additional revenue at first. He also said he’s more confident Netflix can reach 60 million to 90 million U.S. customers eventually, and that original programming is now the biggest driver of new signups, not free trials.

Hastings announced his opposition to the Comcast-Time Warner Cable merger in a letter to shareholders today. In March he criticized Comcast (Nasdaq: CMCSA), Verizon Communications Inc. (NYSE: VZ) and others for trying to charge online TV providers to deliver shows over their networks.

Netflix Monday called out AT&T (NYSE: T), the largest landline phone company in the United States, for offering video-streaming speeds that trail phone companies with inferior technology.

AT&T provided an average speed in March of 1.73 megabits a second for Netflix’s service on fiber-based connections, slower than CenturyLink Inc. (NYSE: CTL) and Windstream Holdings Inc. (Nasdaq: WIN) which use older DSL lines, Netflix said.

AT&T could improve its speeds by using a free interconnection with Netflix, the video company said.

Netflix also said this quarter it will integrate its service with a cable set-top box for the first time in the United States. As with Europe, the company will start with cable providers that use TiVo Inc. (Nasdaq: TIVO) equipment.

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