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Streaming is finally starting to make money for media companies, but it’s worth noting that to get there, consumers are facing higher subscription costs and increasingly frequent price hikes.
Established media companies have entered the streaming market with the goal of attracting subscribers and competing with the industry leader. Netflix as traditional cable TV packages lose customers. Now, looking for a return on their content investment, Disney, Warner Bros. Discovery and others are eyeing profits from streaming.
Their strategies include rolling out cheaper ad-supported models; launching platform bundles; and cracking down on password sharing, but the price hikes have shown immediate results in favor of profitability.
“The days of prioritizing user growth through low prices are over,” said Mike Proulx, vice president and research director at Forrester.
Disney said last week that its combined streaming services — Disney+, Hulu and ESPN+ — has been profitable for the first time in its third fiscal quarter. While the company added new subscribers, that milestone was largely due to price increases.
CEO Bob Iger said on an earnings call that Disney has “earned” its price point in the market thanks to the company’s innovative contributions and product improvements. He noted that with previous price increases, the company has not seen a “significant” number of customers leaving.
“When we look at our portfolio… we see the consumption growth and the popularity of the products we offer, which gives us the pricing leverage that we believe we have,” Iger said.
Price escalation
Major streaming services have gone through several price hikes and changes over the past few years.
In the past five months alone, four streaming services have announced price increases: Warner Bros.’s Max, Discovery, Comcast Peacock, Disney and Paramount.
Prior to the earnings announcement, Disney announced that streaming price increase $1 to $2 a month off Hulu, Disney+, and ESPN+.
Similar to Disney, Paramount Global said last week in its quarterly report. earnings conference call that its streaming business, centered on its flagship service Paramount+, has achieved profitability.
Paramount noted on the call that global average revenue per user increased 26% for Paramount+, reflecting increase in price in the third quarter of 2023. Meanwhile, increase price further Paramount+’s change will take effect this month, and the company expects to see a financial impact from the change in the fourth quarter.
Although Comcast’s Peacock offered a limited-time annual subscription for $19.99 before the Olympics, the company increase monthly expenses of the ad-supported service to $2 this summer, marking the second price increase of the year. Warner Bros. Discovery also increase the cost of Max Ad-free for $1 per month in June.
“Over the past decade of streaming, there has been a tremendous amount of quality content that has been available at prices well below fair market value. And I think that’s in the process of being corrected,” Warner Bros. Discovery chief financial officer Gunnar Wiedenfels said at an industry conference last year. “We’ve seen prices rise across most of the competition.”
Forrester’s Proulx said that when Disney reported increased revenue in its most recent quarter, it was largely due to increased subscription prices, as user growth and ad revenue alone would not sustain profitability.
That puts the burden of revenue growth on consumers, he said. And consumers are feeling the strain.
According to Hub Entertainment Research, in a survey of 3,000 consumers, 90% agreed that online video subscription prices are increasing more frequently than in the past.
Advertising Support
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Meanwhile, companies are pushing consumers to switch to ad-supported plans — which are often cheaper than ad-free streaming services — in an effort to attract more advertisers, Proulx said.
And many consumers are choosing this option.
“We expect meaningful growth going forward as more subscribers opt for the ad-lite plan, which accounted for over 40% of total global revenue last quarter,” Warner Bros. Discovery’s Wiedenfels said on an earnings call last week. Ad lite refers to Max’s cheapest subscription plan.
Media companies have noted that streaming advertising has increased. Warner Bros. Discovery said on its Q2 earnings conference call that streaming ad revenue doubled from the same period a year ago.
Similarly, advertising revenue increased 16% in Paramount’s second quarter, driven by Paramount+ and Pluto TV, according to the company.
At Peacock, 75% of subscribers were on the ad-supported tier as of February last year, according to Research from Antenna. At the time, that was the largest market share among major streaming services, followed by Hulu at 57% and Paramount+ at 43%. Streaming companies typically don’t disclose their subscription breakdown by tier.
“The ad tiers for all of these companies are very attractive because they can make a lot of money from the ad revenue as well as the subscription fees for that ad tier,” said Tim Nollen, senior media technology analyst at Macquarie.
Netflix CEO scratched resisted advertising for a while but changed course in 2022 after subscriber growth slowed. The company also recently has been removed cheapest basic package, no ads — offers consumers option of the ad-supported options cost $6.99 or two ad-free packs cost $15.49 or $22.99.
Netflix co-CEO Ted Sarandos said in the company Q2 Earnings Call that the advertising tier makes Netflix more accessible to users due to its low entry price. For both tiers, when it comes to price increases, Sarandos said Netflix aims to increase value and engagement before charging subscribers more.
According to Forrester research, generally, price-gouged streaming users are willing to tolerate ads in exchange for lower subscription fees. But ad tiers aren’t immune to price increases. Disney+, for example, is currently raising the price of its ad-supported plan.
Disney took a unique approach launched its advertising tier in December 2022, giving current subscribers the option to pay an additional $3 per month or accept ads. Nearly 95% of Disney+ premium subscribers already pay to keep ad-free streaming, according to Antenna.
Warner Bros. Discovery said on an earnings conference call that it suffered less customer losses than expected in July, after Increase price by $1 on ad-free streaming services.
“Until there is a mass exodus of users, Disney (and others) will continue to raise prices,” Proulx said.
Retain subscribers
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There’s one key thing working in streamers’ favor, says Jon Giegengack, founder of Hub Entertainment Research: On many platforms, users are generally unwilling to sacrifice their desired content even as costs increase.
However, according to Proulx, the total cost of streaming can sometimes exceed the cost of cable TV for certain consumers because the content they watch is broken up across different platforms.
In response, companies including Disney, Paramount and Warner Bros. Discovery have turned to bundling their services into a single, discounted offering. Where streaming is no longer cheaper than traditional TV, the bundles allow consumers to save money while accessing TV content across different services, Proulx said.
For providers, service bundles are an opportunity to increase revenue because they hope fewer people will cancel bundled subscriptions than standalone subscriptions, according to Nollen.
“The new streaming world is not as profitable as the old pay-TV world,” Nollen said. “Everyone has realized that and they’re looking for ways to at least improve its fortunes, and bundling is one of them.”
Streamers are also increasing their total user base by cracking down on password sharing. Last year, Netflix warned members that Accounts can only be shared in a single household, and Disney did something similar. Notification earlier this year. Warner Bros. Discovery is expected to follow suit soon.
But as consumers continue to face rising subscription costs, Giegengack points to broader streaming competition. While low subscription prices initially helped other streamers grow their subscriber numbers, he says they can’t afford to keep doing so.
“The amount of money that people are paying, the amount of content they’re getting so far, it’s really a bargain and I don’t think it can be sustained,” Giegengack said.
Disclosure: Comcast owns NBCUniversal, the parent company of CNBC and co-owner of Hulu. NBCUniversal also owns NBC Sports and NBC Olympics, which holds the U.S. broadcast rights to all Summer and Winter Olympics through 2032.
