1-23-14 12:14 PM EST | Email Article

By Therese Poletti, MarketWatch


SAN FRANCISCO (MarketWatch) -- Netflix Inc.'s earnings were better than expected, but the real surprise was the comment in the company's shareholder letter that the streaming and video rental company is testing different pricing levels, with the hopes of having three different options.


Netflix said in its fourth quarter letter to shareholders that since last year it has been "testing 1-stream and 3-stream variants, as well as SD/HD variations, at various price points," Netflix (NFLX) CEO Reed Hastings wrote. "Eventually, we hope to be able to offer new members a selection of three simple options to fit everyone's taste." Such tiered pricing could cut down on account sharing by limiting the number of devices that can use a single account at once unless the account holder pays more.


Investors love the possibility of higher pricing. Wall Street analysts have been calling for Netflix to raise its prices, as they are worried about impending saturation in some markets, especially in the U.S. Netflix demonstrated in the fourth quarter that it still can grow subscribers as it makes more progress in its international expansion. It added 1.74 million subscribers outside the U.S. and 2.33 million in the U.S. during the fourth quarter. Its shares jumped over 17% in after-hours trading.


In the post-earnings interview with two analysts, who conducted it live over a Google Hangout, Hastings was asked about the new pricing tests, including one test of $6.99 for one stream. Hastings said, "I wouldn't read too much into the $6.99 other than we're testing some things. And we're continuing to try to figure out, you know, how to evolve to a good-better-best plan that makes sense to consumers and feels fair."


He added that for existing customers, the company planned to grandfather "very generously." Read a recap of the live blog.


Still, it seems clear that investors are hoping that the company's testing with various price levels leads to an eventual price hike for some customers. But it might be good to remember the summer of 2011, when Netflix raised prices. That hike did not go over well with consumers, and its stock plunged.


A memory of that explains why Hastings & Co. are going about the current price testing so deliberately and trying to find different levels that will not lead to another big fallout among its customers again. It's a fine line the company is trying to walk. At least it does appear Netflix has learned from its past mistakes.


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-Therese Poletti; 415-439-6400; AskNewswires@dowjones.com


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01-23-14 1214ET

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Morningstar - 2014/1/23 - UPDATE: Netflix investors like price testing chatter
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