Price Hikes at Streaming Giants May Fuel Churn Rates As Consumers Opt Out

Price Hikes at Streaming Giants May Fuel Churn Rates As Consumers Opt Out

As Hollywood executives think about the next phase in streaming strategy, major services will be able to see how loyal their customers become as subscription prices rise during economic downturns.

Such services as Disney , Netflix, Apple TV and Amazon’s Prime Video have all brought up their monthly prices by $2 to $3, signaling the end of a honeymoon period when entertainment companies, fully aware of the competitive streaming landscape in front of them, were willing to price their streamers low to attract subscribers. David Zaslav’s Warner Bros. now runs HBO Max. Discovery, will also see a price hike of some kind in 2023 as the company prepares to merge the prestige streamer with Discovery .

It may seem counterintuitive to raise prices when consumers are more aware of their spending, especially since streaming companies, such as Netflix, have experienced slower subscriber growth in the past year. Higher prices won’t convince subscribers to stay if churn is always lurking under their beds.

It’s still a risk that companies are willing to take, as the costs of producing high-profile, tentpole productions, which streamers use to retain and attract customers, remain high. (Netflix’s fourth season of Stranger Things cost more than $30 million per episode, while Amazon’s Lord of The Rings: The Rings of Power cost about $58 million per episode, making it the most expensive show, per episode, in history).

Ian Greenblatt is J.D.’s managing director of technology media and telecom intelligence. Power says that streamers that have done so before will be the most resistant to churn.

In other words, services like Netflix and Hulu, which launched in the early 2000s, have a head start over others. Greenblatt states that time in game and in consumers’ heads is important. The longer a sub has been around, the more likely they are to stay one.” “Amazon and Netflix are the most at risk from increased fees .”

Newer services like Apple TV , which launched in late 2019 and doesn’t have a back catalog of content to rely on, could have the hardest time retaining and attracting subscribers with its recent price hike, which saw the monthly subscription price increase from $4. 99 to $6. 99.

Francois Godard, Enders Analysis analyst, notes that Apple TV is the least watched and most exposed to churn. In contrast, the launch of Netflix’s new ad-supported subscription tier is poised to be a “handy option for consumers seeking cuts in spending,” he says, especially for users who otherwise might have canceled their Netflix subscription because of its higher price point (the standard subscription jumped from $13. 99 to $15. 49 a month in January).

Hulu, Disney , and ESPN are all part of Disney’s streaming service. They are also well-positioned to resist subscriber churn because of quality programming and growing subscriber reach. Greenblatt says: “Its content collection is diverse enough to entertain, or at least justify its monthly price to nearly every demographic. The feared in-home outcry about its cancellation is enough to justify its monthly fee.”

Peter Csathy of Creative Media, chair, says Disney’s franchise power helps it maintain its hold on subscribers, despite price rises. The entertainment giant also benefits from having a strong subscription bundle that has “notably lower churn” and accounts for more than 40 percent of Disney ‘s year-end domestic subscriber count, Disney CFO Christine McCarthy said during the company’s Nov. 8 earnings call.

“Our history shows that price increases across our streaming business don’t significantly increase cancellations or churn,” Disney CEO Bob Chapek stated during the earnings call. “We believe that we still have some headroom there.”

However, in terms of pure financials, Netflix’s Reed Hastings-and Ted Sarandos-run company is more likely to feel the effects from subscriber churn. This is because Netflix’s business is primarily driven through subscriptions, unlike Amazon or Apple, which have strong commerce and hardware businesses that drive most of their revenue.

Csathy states that Apple TV and Netflix are the most vulnerable because they lack significant’must-have’ content franchises. “Disney is more secure than Netflix and Apple TV because it has its Magic Kingdom franchise. Netflix is the most vulnerable because it only makes money with its content. Apple, on the other hand, uses content primarily for marketing purposes to increase sales of core products such as iPhones and Macs. Netflix is more at risk of increasing its subscription prices. Apple can afford it because Apple TV is only one cog in its overall machine and not the sole cog for Netflix .

Similar to Disney, Disney’s economics are not solely influenced by streaming. However, the company can rely on its linear TV businesses and parks to bring in significant revenue. Godard states that “the context in which a stressed economy exists is difficult to gauge”, even though it’s clear economic trends, such as high inflation and potential recessions in many other countries, will impact churn as consumers reconsider their entertainment options.

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Source: J.D. Power TMT Intelligence Report, October 2022

This story was first published in The Hollywood Reporter magazine’s Nov. 9 issue. Click here to subscribe.

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