Strong Competition Necessitates New Strategies for Streaming Services

Netflix was founded as a video-rental company in 1997. In 1999, they started mailing customers DVDs in their iconic red envelopes. However, the Netflix that we know today started to take shape when they began offering their subscribers the opportunity to stream some films and TV shows through the Internet in 2007. Netflix was truly breaking new ground.

Fast forward 15 years, and Netflix is no longer the only streaming service available. Competitors include Disney+, Hulu, Paramount+, HBO Max, Amazon Prime Video, Apple TV+, and Peacock. There are more streaming services than ever, which means that competition for subscribers is more intense than ever. Companies are being driven to find novel solutions to keep viewers engaged with their platforms.

New ad-supported tiers at Netflix and others

Netflix spent years saying that they would have not have ads on their platform. Not having ads was a major selling point over competitors. For many years, customers expressed a strong aversion to being subjected to advertisements if they already purchased a paid subscription.

However, serious competition has forced leadership to seriously rethink their long-running strategy. Subscription growth at Netflix plateaued at the end of 2021 (with over 220 million subscribers globally). And fewer new Netflix subscribers continue their subscriptions past their first month. Research firm Antenna reports that of new Netflix subscribers who joined in May, 22% canceled within one month. This is an increase from 17% in the same period last year. Additionally, Netflix has a password-sharing problem, with estimates of up to 100 million other households using the accounts of the 220 million paying users. (Netflix intends to begin charging a password-sharing fee in 2023.)

How can you increase revenue if your subscriber numbers are petering out? One answer is to embrace ads. Netflix is not alone in this revelation. Warner Bros. Discovery Inc.’s HBO Max is now offering an ad-supported service, and Walt Disney Co.’s Disney+ has plans to launch their own ad-supported tier soon.

Additionally, market research on competitors such as Hulu and HBO Max showed that customer satisfaction didn’t decrease for users of their ad-supported tiers. This helped Netflix leadership to move forward into this new ad-supported frontier.

The price has not been announced yet, but it is assumed that the ad-supported subscription would be less than their lowest-priced option today of $9.99. Netflix originally announced in July that the new tier will premiere in early 2023, but Netflix has told some ad buyers more recently that the ad-supported service will launch on November 1.

Offering ad-supported memberships to their platform does have the potential for backlash among some of Netflix’s customer base. However, Netflix will still have ad-free memberships, allowing their customers to choose the best tier for themselves (a very simple but very powerful concept in pricing). And the market research on competitors indicates that consumer preferences and perspectives may have shifted to the point where this move has little downside risk with the potential for significant revenue generation. Netflix estimates that this new ad-supported tier could reach up to 40 million viewers by the 3^rd quarter of 2023.

Microsoft has been contracted to provide the technology to allow Netflix to place ads on its platform. Netflix also hired 2 Snap Inc. executives to lead their advertising push. According to ad buyers, Netflix plans on charging advertisers approximately $65 for reaching 1,000 viewers (a measure known as CPM, or cost per thousand). Netflix aims to eventually increase the price to $80 CPM by allowing advertisers to focus on specific segments. Current reports from buyers indicate that Netflix would like to limit the annual spend per brand to $20 million so that subscribers do not see ads from any single source too often, but a statement from Netflix said, “We are still in the early days of deciding how to launch… No decisions have been made.”

Using ads should help Netflix be more competitive. After all, some of Netflix’s competitors do not rely solely on streaming subscriptions for revenue. For instance, Amazon and Apple both offer streaming services as part of a larger business model with additional revenue streams. It seems wise of Netflix to find additional revenue streams of its own.

After all, Netflix is already cutting costs in response to slowing subscriber growth, including laying off more than 400 people this year, reducing cloud computing costs, limiting employee orders of company merchandise to $300 per person per year, hiring more junior employees that can be trained up, and closing offices in Salt Lake City and California. More revenue would be helpful.

But Netflix should not rest on its laurels. Earlier this year, Amazon announced that they will be rolling out a beta program for a new ad format that uses technology to virtually insert brands or products into TV shows or movie scenes after they have already been filmed or produced. Comcast Corp.’s NBCUniversal also reported recently that it will offer advertisers a similar technology for its Peacock streaming service.

Disney is making major moves

Disney has two major changes on the horizon that will affect its streaming platforms (not counting the addition of an ad-supported membership tier mentioned above). First, Disney is planning a new membership program to offer discounts and perks across its streaming platforms, amusement parks, and merchandise offerings. Discussions are still in the early stages, so no details are currently available regarding pricing or launch date.

Disney envisions this new membership program as their own version of an Amazon Prime subscription, which offers free shipping for Amazon packages, discounts at Whole Foods, and video streaming of films and TV shows. (In fact, some Disney executives unofficially referred to the program as “Disney Prime”.) In shaping its program, Disney studied not only Amazon but also Apple One, which bundles cloud storage, AppleTV+, Apple Arcade, and other services.

Disney’s membership program is supported by CEO Bob Chapek, who has identified cross-selling to customers as a significant opportunity for the company. As a first step, Disney is working to allow subscribers to its Disney+ streaming service to scan a QR code on the service that links to the Shop Disney website. This would allow subscribers to more easily buy merchandise associated with its shows such as T-shirts, themed accessories, and children’s costumes. This feature could be introduced as early as this year.

Disney executives have also discussed possible merchandise tie-ins. For instance, some have pitched offering an exclusive toy version of a “darksaber”—a weapon from the Star Wars-themed series “The Mandalorian”—for sale only to Disney+ subscribers. Disney has a breadth of products and services to potentially cross-sell, including movies, streaming programming, theme parks, a variety of travel experiences (including cruises and private-jet trips), clothing, and toys.

For further discussion on Disney’s new membership program, check out Tim’s Strategic Movements article this month.

Disney’s second major change is still in the planning process, but it could be quite impactful if executed successfully. Disney’s CEO Bob Chapek has recently expressed interest in grouping all its streaming products under its Disney+ brand and tying their streaming business more closely to their theme-parks business. Currently, subscribers must switch to separate apps to view content on Disney+ (which houses their family-focused and franchise content, including Marvel, Pixar, and Star Wars), Hulu (which houses general entertainment), and ESPN+ (which houses sports-focused content).

Disney has already had some success with an all-in-one model in Europe where the Star streaming brand is already a part of Disney+ and includes many shows that are also on Hulu. Chapek referred to this new single-app model as a “hard bundle”, as opposed to a “soft bundle” that requires you to use separate apps for separate streaming services.

One major obstacle to this “hard bundle” plan is that Disney does not currently have full ownership of Hulu. Rather, Disney owns 67% of Hulu, and Comcast Corp.’s NBCUniversal owns 33%. Under a 2019 agreement, Disney can force the sale of Comcast’s stake at fair-market value starting in 2024. Chapek expressed interested recently in acquiring Hulu sooner than that, but Disney and Comcast would have to agree on a valuation first. Disney having full ownership of Hulu would make integration with Disney+ much simpler.

Further unification of Disney’s park business and its media and entertainment content business could be enabled by using data on consumer behavior gathered from Disney’s apps. Chapek explained that theme park activity and Disney+ activity could be used to influence each other. For instance, theme park activity could affect what is presented to subscribers on Disney+, and Disney could provide park attendees with information that influences their park experience based on what they have viewed on Disney+.

Other developments

Across the industry, streaming services are investigating how to improve their value proposition to customers. They are exploring various approaches to bundling and pricing. In some cases, they are considering eliminating products.

For example, Paramount Global is reportedly considering discontinuing its Showtime streaming service and shifting that content into Paramount+, but discussions are in early stages. Likewise, Warner Bros. Discovery has announced that it will combine its Discovery+ service with its flagship HBO Max product. Last month, Walmart Inc. announced that it will offer Paramount+ free to subscribers of its $98-per-year Walmart+ membership.

What will become of all this innovation? To paraphrase a recent opinion about Netflix by the Wall Street Journal’s Holman W. Jenkins, Jr., in an age of high streaming competition, the real question is which streaming services are must-have and which are nice-to-have.

Ultimately, the market will decide.

References

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