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Netflix Tests Cheaper Subscription As Amazon Looms

Netflix is testing a cheaper subscription for new customers as the online video company prepares for what likely will be another competitive onslaught from Amazon in 2014.Amazon looms

Netflix, the biggest video-streaming service, is offering a plan for $6.99 a month that lets people watch on only one screen at a time. The company’s basic streaming service currently costs $7.99 a month and lets customers watch on two screens at the same time.

The new offer, which was posted on the company’s website, is part of a broader set of test subscriptions for new customers based on how many screens they use to access the service. The company is also testing a $9.99 subscription for viewing Netflix on as many as three screens simultaneously, and it has had an $11.99 four-stream plan available for a while.

“Whether we offer any of these tiers generally will depend on the results of the tests,” says Jonathan Friedland, a Netflix spokesman.

Netflix is trying to increase the revenue it gets from subscriptions to help it buy more licenses to stream movies and TV shows and pay for the creation of its own content, such as 2013 shows House of Cards and Orange Is the New Black.

The company is also competing with the Amazon video-streaming service included in its Prime subscription, which costs $79 a year and offers free two-day shipping.

“The new plan likely has at least two goals: 1. Attract the more value-conscious consumer. 2. To more effectively compete with Amazon Prime,” Arvind Bhatia, an analyst at Sterne Agee, wrote in a note to investors Tuesday.

Amazon Prime subscribers get free access to the Prime Instant Video streaming service for effectively $6.67 a month.

“While the lower price could attract new subscribers, it could also somewhat cannibalize current subscribers, given how easy it is to cancel and re-sign up for the service,” Bhatia said.

The move may also weaken Netflix’s ability to raise prices in the future, which is an important part of the long-term bull thesis on the stock and is needed to offset rising content costs, he added.

Netflix is probably checking to see if it can extract an extra $1 to $4 per month from households that watch the service on multiple devices, says Michael Pachter, an analyst at Wedbush Securities.

“They have the data to show them how many households stream on a single device, and they are probably weighing the lost revenue from those households converting to a lower-priced plan against the revenue gains from charging for multiple devices,” he explains.

The $6.99 test may also help Netflix respond if Amazon unveils a stand-alone video-streaming service that is not tied to Prime. Such a service, which has been speculated for at least a year, would likely be priced at $4 or $5 a month, according to Pachter.

Netflix shares slipped 0.4% to $365.47 on Tuesday, but they have risen almost 300% in 2013.

Pachter expected Amazon’s streaming-video expansion in the past year to cut into Netflix’s market share, but that did not happen. Amazon Prime subscribers are likely wealthy enough to afford the $79-a-year fee and a monthly Netflix plan, he theorized in a note to investors this week.

If Amazon unveils a stand-alone service, the lower price point may appeal to value-conscious Netflix subscribers, Pachter says.

“Should it happen in the next year, we think that Netflix growth will stall, and we would expect Netflix’s share price to tumble.”

Amazon spokeswoman Sally Fouts declined to comment.

Amazon shares climbed 0.7% to $396.10 on Tuesday. The stock rose more than 57% in 2013.

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