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Streaming a walk across the pricing tightrope

by David Tice , 26.10.2015

Recently, several video streaming services have made news by increasing subscriber fees, or implementing new fees for “ad free” service. These increases could end up being important landmarks in the evolving maturation of the streaming market. But how much sense do they make?

Looking at media, a variety of businesses revolve around the ad-supported model (you watch/read/listen to our content in exchange for having ads sent your way) and the subscription model (you pay a fee and get our content, sometimes with and sometimes without ads). But there are precious few examples of any medium successfully charging a premium for ad-free content. Have you ever seen a TV network offer a simulcast ad-free channel for a subscription fee? Or a newspaper publishing an ad-free version for a premium?

The reason for this can be seen in a report from our series of reports published under The Home Technology Monitor™ banner, TV’s Digital Connections . In this study, which was fielded for eight consecutive years, we had a question about video streamers’ willingness to pay an extra fee if it meant they could watch streaming TV programs or movies without commercials. For four years in a row, just five percent said they were willing to pay to avoid ads in their streaming content. However, in a complementary question, when we asked people if they were willing to add ads to ad-free video content if it meant they could get the content for free, over two thirds said they would welcome ads for free content. On the face of those data, the argument for asking premiums for ad-free content doesn’t appear to hold water.

We can also put these price increases in the context of past work from another report, our Comparing Streaming Services report published in 2014. This report had information on pricing elasticity for various streaming services.

First, let’s consider Hulu’s pay service offering a new ad-free option for $11.99 per month, four dollars more than their standard $7.99 plan. Referencing our Comparing Streaming Services report, we found that existing Hulu (pay) subscribers were willing to pay up to $9.83 a month (we did not ask them to factor in no ads) – so is being ad-free worth another two dollars a month more, a 20 percent premium?

And, just this week, YouTube announced a “YouTube Red” ad-free channel for $9.99. In Comparing Streaming Services, we found that existing YouTube users were willing to pay up to $1.69 a month for its content (again, we did not ask them to factor in no ads). Here we see a very large gap – with Red’s main features of being ad-free and allowing downloads for offline viewing seemingly valued at an additional eight dollars a month.

Lastly, let’s consider Netflix, which while already ad-free, also recently announced a rise in its most popular plan to $9.99 per month; this followed a previous dollar-a-month increase in 2014. This pattern of increases is something we foresaw in the Comparing Streaming Services report, when we recognized that the increasing cost of creating or licensing exclusive content would be an increasing financial drain, requiring subscription increases. Again, we asked current Netflix subscribers what was the maximum they would pay each month for the service – and their answer, averaged, was $10.38. Thus with a new price point of $9.99, Netflix is getting close to that upper limit reported by subscribers.

I am sure that each of these services did their research and due diligence before rolling out new pricing plans, and there are business or marketing considerations that may not go “by the numbers”. But clearly we are entering a phase in the maturation process where the various streaming services have to start to play catch-up on the increasing costs of content; the days of streaming services licensing library content on the cheap has gone by the wayside as value of having original or exclusive content has become so important to the image and marketing of streaming services.

We saw in Comparing Streaming Services that the range of $10 to $12 dollars a month was the high end of pricing – above that and the people who were happy to pay $7 or $8 a month start to really think about the value provided. Above that $10-12 price point, streaming services may see an increase in churn as people only subscribe for specific months when new content is available, or lose subscribers altogether. The need for revenue may even mean the start of ads or other marketing messaging on services that up to now have always been ad-free.

The pricing equation is always a delicate tightrope to walk in any industry; the important question is how big and resilient is their safety net if they fall off.

For more information please contact David Tice at david.tice@gfk.com.