Consumers are already increasingly frustrated with the rising price of streaming services, but more price increases may be yet to come.
Earlier this week, Amazon (AMZN 1.97%) raised the price of its Prime Instant Video service. Technically, it's keeping the price the same and adding ad breaks, but users can pay more to keep the ad-free experience. There's a reason Amazon snuck in a price increase for its streaming service, and other media companies, including Netflix (NFLX 0.71%), are likely to follow suit.
The cost of content is going up
The Writers Guild of America just came to an agreement with studios to address concerns around compensation from streaming and the impact of artificial intelligence (AI) on their jobs. It appears to have been a big victory for the writers. But that means an increase in costs for studios and streaming services.
Meanwhile, the cost of sports rights, which many media companies are turning to in order to differentiate their streaming services, continues to climb. Total U.S. sports rights fees will rise from $19.8 billion in 2022 to $31.6 billion in 2030, according to analysts at Morgan Stanley. And now pay-TV distributors appear increasingly less willing to pay for sports networks.
Content costs are rising and consumers are demanding more high-quality content from streaming services to justify their high prices. It's a bit of a Catch-22 for the media companies.
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Ad prices are down
One way streaming services are working to keep their pricing low is with ad-supported tiers.
While several streaming companies have increased the price of their ad-free tiers, ad-supported tiers have mostly remained the same price. Media companies want more people to sign up for the ad-supported tier than their ad-free tiers.
The long-term potential for the ad-supported tier of a streaming service is very high. Management can keep the price relatively stable while increasing revenue per user by pulling several levers: ad prices, the number of minutes users stream, or the number of ads per minute of content.
That said, ad prices have come down in 2023. Netflix, for example, agreed to lower prices with some advertisers in July. Overall, ad-supported streamers lowered their ad prices by 5% to 10% at this summer's Upfronts, according to a report from Digiday.
Lower ad prices, at least in the near term, are putting further pressure on streamers' profits.
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Key Data Points
Profit pressure is growing
There's more pressure than ever on streaming services to start generating profit.
Investors started pushing media companies to stem the losses of their streaming services last year, and next year will determine whether some major streaming services meet their initial breakeven projections.
Price increases are one of the fastest ways to bring in more revenue without increasing costs. The downside is some customers will cancel as a reaction to higher prices, and bringing in new customers will become more difficult. In a world where streaming services are already battling significant subscriber churn, only the most differentiated services will thrive.
Amazon and Netflix are two of the most differentiated services. Amazon benefits from its entire Prime ecosystem, the primary benefit being fast shipping on most of its online marketplace orders. Netflix benefits from its breadth of content appealing to a wide and global audience, as well as its superior technology to deliver a good customer experience.
Smaller streaming companies may not fare as well. They'll need to find better ways to retain customers, perhaps by banding together and bundling. Alternatively, moving back to more licensing revenue over going direct-to-consumer may be fitting to some.
Individuals interested in investing in streaming should consider how much pricing power a media company has for its streaming service as a key factor in their investment decision. Netflix remains one of the best streaming service stocks as it manages costs and capitalizes on scale.
