To increase profits after the Hollywood strikes hit the streaming industry this year, Netflix chose the easiest and most lucrative option: raising prices to drive growth in its ad-supported subscription tier.
The move may boost the streaming giant in the short term, but some industry experts worry that Netflix’s lack of alternative growth options may hurt the company in the future.
Before the actors’ strike ended, Netflix announced it would raise prices and promote its ad-tier package in early November, joining fellow streamers, including the Disney/Hulu package and Warners Bros., in pushing customers to ad-driven subscriptions. With the change, Netflix hopes to boost subscription numbers and revenues, especially in markets where growth has stagnated.
“There’s that kind of an underlying question — raise prices and grow the ad tier, but then what do they do after that to keep growing?” said David Heger, an analyst at Edward Jones. “They’re kind of reaching full saturation in terms of the number of new subscribers that you’re gonna see.”
Despite being the marquee streaming service and one of the few profit-making streaming companies, Netflix’s growth has slowed. Netflix’s revenue in 2023 through the first three quarters is $ 24.9 billion, a 4.6% increase from the previous year’s $ 23.8 billion. The streaming giant’s net income for 2023 is 4.5 billion, a 2.2% increase from the prior year when it earned $4.4 billion in profits.
TARGETING AD TIER THROUGH PRICE HIKES MIRRORS THE REST OF THE INDUSTRY
Netflix’s move to make its ad-tier packages more attractive is part of an industry-wide shift. Entertainment companies want to make their streaming platforms profitable and encourage price-conscious customers to switch to their ad-tier subscriptions, which are often cheaper for consumers and more lucrative for companies, which can draw revenue from the monthly customer cost as well as advertisers.
After reporting its third-quarter earnings, Netflix increased its prices in the U.S., with the basic plan going from $9.99 to $11.99 and the premium plan from $19.99 to $22.99. However, it kept its most popular non-ad package steady at $15.49, and its ad-tier option remained unchanged at $6.99. Similar adjustments are happening in the U.K. and France. Less saturated markets did not receive price hikes in the recent move.
Warner Bros. Discovery recently raised the monthly price of its Discovery+ streaming service to $8.99 from $6.99. The company’s ad-supported platform remains at $4.99 monthly. Even Amazon, whose Prime video comes with Amazon Prime memberships, has begun adding advertising to its service.
Netflix could not be reached for comment.
“There’s no better time to raise your prices than when everyone else is raising prices,” said David Lieberman, Associate Professor of Professional Practice in Media Management.
THE STRATEGY
Offering ad-tier subscription packages that are attractive to customers looks to drive up the subscriber ceiling in each market after the company’s password-sharing crackdown in May. When Netflix cracked down on password sharing, the company essentially gave subscribers two options. Those sharing an account could pay an extra $8 for each household other than the original holder, or the people in those additional households could strike out on their own and make a new account with the $7 ad tier.
After the password-sharing crackdown, some households could have split their bill, and others could have made other arrangements to address the added cost. Still, someone has to pay, said Ben French, an Ampere Analysis media and entertainment analyst.
“It’s not the easiest thing in the world to do. It’s more convenient sometimes just to sign up,” French said.
The price hikes associated with the move could also persuade current subscribers paying for the more expensive non-ad packages to switch to the cheaper ad-supported alternative, boosting long-term revenue growth for Netflix.
For example, because of the price increase, Netflix’s premium subscribers will have to pay $22.99 instead of the previous $19.99. Instead of paying the extra $3 a month, some might consider subscribing to the ad tier, slashing their monthly bill by $15.
This could drive Netflix’s revenue because it keeps subscribers on the platform who might have walked away if not for the cheaper alternative. The switch in accounts has no cost for Netflix, and they also collect ad revenue on top of the subscription price.
The cheaper option may also entice those who have already walked away by being a more cost-effective option if they want to return for the next hit movie or series.
“Not all would-be subscribers were converted immediately into a Netflix subscription, but when they want to watch that next show, they’ll have to figure out a way of doing that,” said Richard Broughton, executive director of Ampere Analysis, who analyzes the television, film, and communications industries.
Since its release last year, Netflix’s ad-supported tier has reached 15 million subscribers, triple the amount since May. The company’s latest earnings report showed that 30% of new sign-ups in the third quarter were in the ad tier, showing signs that the move is working.
FEELS LIKE A SECOND PRICE HIKE SINCE MAY
There’s potential trouble for Netflix because even with the new cheaper subscription option, customers have felt their wallets stretched more than once in the last year. Though Netflix had not officially raised prices for a year before the password crackdown, consumers who were faced with paying the extra $8 per household or signing up for a new account felt the pain of a new bill. When Netflix then increased prices across the board — effectively a second price hike for subscribers — some felt it was too much to stay on with the streamer.
Eric Von Habsburg, 30, is a therapist at a private nursing home in North Carolina who first subscribed to Netflix in 2015. He said he used to use Netflix daily but canceled his premium ad-free subscription after the latest price hike.
The password-sharing crackdown hit him in May since he shared his account with three family members. He decided to keep the account for himself since his family was not interested in paying extra to share the account.
He subscribes to the Disney/Hulu package, Paramount+, and Dropout despite canceling his Netflix subscription.
“The updated password-sharing policy, while it did piss me off severely it, apparently, didn’t stop me from begrudgingly keeping the subscription,” he said. “This latest price hike, though, was truly the last straw.”
Subscribers may not have liked Netflix’s recent moves, but investors have despite the troubles in the sector.
Netflix’s stock is up 52% for the year, significantly outpacing the S&P 500, which has grown 15.5%. Other streaming companies haven’t fared so well. Disney’s stock has fallen, and Warner Bros. Discovery is trailing behind the S&P 500 for the year.
“It’s a disastrous group, and making any money in it is very difficult,” said Alec Young, chief investment strategist at Mapsignals. “I don’t even like to look at these stocks. They’re just a total disaster.”
WHATS NEXT?
To be sure, Netflix has had short-term success with its ad tier, as evidenced by subscriber growth and the company’s stock gains, and there’s potentially room to grow in international markets, albeit at a lower value per subscription.
Still, as competition heats up in streaming and consumer budgets continue to be squeezed by inflation, Netflix will face increased pressure to continue growing profits without pushing prices higher.
“Netflix is in a situation where it’s fairly saturated, and so in terms of revenue growth, you’re looking at only a few ways of doing that; raising prices is one way to do that,” said Heger, the Edwards Jones analyst.