The holidays are over, but the pandemic rages on. Throughout COVID-19, the increased time at home has meant a major spike in streaming services, especially for movies and TV shows. All around us, new subscription services are popping up from every major cable network: Peacock (NBC), Discovery+ (Discovery Channel) and many more.
Rising Subscription Rates
According to Strategy Analytics TV & Media Strategies group, the streaming video subscription service saw a 28% increase in the third quarter of 2020, versus the same period in 2019. The trends are showing that not only are more people signing up, but more people are sinking hours into actual viewing and developing new media binging habits.
With strong subscription numbers, it was not at all surprising that in the fourth quarter of 2020, Netflix took yet another price increase to capitalize on the current situation. Meanwhile, other services, namely Disney+, announced a price hike that would be implemented in early 2021.
The accelerated shifting sands of streaming revenue got me thinking, “What is the best value for the dollar?” There is a lot going on in the streaming space and sometimes I find myself at a loss for what to watch or even where to find it. I did a little audit in my household and surprisingly realized that we have a lot of streaming services. Four to be exact! I am not sure if anyone else out there is in the same situation, but we have:
- Netflix (what I would call “Old Faithful”)
- Amazon Video (via my Prime Subscription)
- Apple TV (this came free with my computer, but I’ve kept it)
- Disney+ (a new addition over Christmas for the kids)
For these Major Players, I’ve broken down the important numbers that you should know about each:
* Netflix does offer 3 tiers at $17.99 (premium), $13.99(standard) and $8.99(basic)
* Disney+ with Hulu and ESPN at $13.99, Basic Disney+ $7.99
After a brief analysis, it is clear that Netflix and Amazon are frontrunners when it comes to the amount of shows and movies consumers get for the price they pay, with Netflix coming in at $0.037 per piece of content per year, and Amazon at $0.007. Disney+ seems quite high in comparison, coming in at $0.17 annually, but a much more manageable $0.048 when including the Hulu content.
Apple? Well… we won’t even mention Apple.
For the value of the content, it’s no wonder Netflix and Amazon are clear frontrunners, but what is more surprising is that even with a price premium, Disney+ is by far the fastest-growing service, having launched just over a year ago.
Disney+ impressed investors with a whopping 10 million subscribers signing up on the first day of release, 26.5 million by the end of the first quarter of 2020, 33.5 million in the second quarter, 57.5 million in the third quarter and 73.7 million by the middle of the fourth quarter of 2020, far surpassing the expectation of 60-90 million subscribers by 2024. As you can imagine, this massive amount of subscribers has translated into incredible revenue growth for Disney+ in 2020. Here are the lessons we can learn from Disney’s incredible success.
Customer Segmentation is Key
Segmentation isn’t a new concept, and many big players like Netflix are doing it effectively. However, Disney+ takes their own unique spin on the classic concept; what is different about the Disney+ approach is that Disney built segmented fences based on content alone—that’s it!
For the price of $13.99/mo, Disney+ allows access to Disney content, ESPN and Hulu while $7.99/mo offers only the Disney content. It’s as if they have curated the Disney portion with children as their target audience. To get more mature content, parents need to pay the premium to unlock the movies and shows that they’ll enjoy. This family-centric streaming strategy has seemed to pay off for Disney+.
Meanwhile, Netflix doesn’t create fences based on content, but rather features such as the number of available screens at one time, as well as the quality of the stream (HD and Ultra HD). These ambiguous factors seem harder to quantify for some potential customers. Do you know what the difference between HD and Ultra HD is?
Watch the Out-of-Pocket Price
The out-of-pocket price has been a staple concept in consumer goods and restaurants for a long time—consider the consistent popularity of the McDonald’s Dollar Menu. To align with this concept, the Disney+ price point of $13.99 is conveniently paired against the mid-tier or Standard Netflix offering, making it look relatively cheap when anchored to the $17.99 premium subscription.
It’s important to also notice that while it isn’t the cheapest offering on the market, Disney+ consistently gains new subscribers, thus signifying a high level of perceived quality. Comparing the easy-to-understand value proposition of Disney+ to the somewhat convoluted Amazon Prime membership, we see how important it is for the customer to be able to quantify and understand the benefits—which Amazon Prime has a multitude of, but with little clarity. For me, Amazon Prime Video seems to act as a free add-on to my already established Amazon shopping habits.
As we saw above, Disney+ doesn’t offer the best value for the dollar per piece of content, and yet Disney realizes it doesn’t matter all that much if the quality and value are easy to perceive. Price-conscious buyers won’t do the math, but will self-segment into the lower tier of subscription.
Figure Out How To Measure Value
As streaming services rise in their global revenue takeover, the value of content is perhaps the most critical thing to be aware of. Many people benchmark this metric by citing how much each company is spending on content annually:
- Netflix: $16 billion
- Amazon: $7 billion
- Apple: $6 billion
- Disney: $1.75 billion on Disney+ with an additional $3 billion on Hulu
As I look at these numbers, the value of Disney+ content investment becomes starkly apparent. What’s even more interesting to me is that Disney spent $1.75 billion to increase approximately 50 million subscribers, while Netflix and Amazon spent multiple times that amount for a fraction of the incremental subscribers.
While the fact that Disney+ is new and exciting must be taken into consideration, it remains true that they almost achieved their 2024 subscriber projections in the first year, which demonstrates that the executives at Disney didn’t even realize the full value of their content to begin with.
Even more frightening for the other streaming providers, is that Disney plans to spend $14-16 billion on content by 2024, expecting upwards of 250 million Disney+ subscribers.
This is the perfect example of why quality does supersede quantity in many cases. Disney understands the importance of excelling in quality when it comes to content.
Tea Leaves for the Streaming Industry
Given what we see, what is the future of the streaming industry and the rise of subscription pricing as a whole? Here are my predictions:
Quality Content is King
Streaming services have to keep pace with the development of quality content
Content Will Rise in Costs
More investment in content leading to increased costs
Streaming Services Will Continue to Hike Prices
Continued price increases will aim to recoup investments
Throwing it Back to the Era of Cable
Expect the price to be over $20/month soon—we are seeing the situation with cable TV all over again. In 1995, the average cable TV was $22.35/month and increased on average 5.8% annually. Meanwhile, Netflix has increased 12.5% and Disney+ 7.8%.
Back to my original question of “What is the best value for the dollar?” Well, that depends. Value is subjective. I am still unsure, but I wonder, is a $1.00 increase on Disney+ enough for the value it provides? The value proposition is clearer, they are still priced below competition and growth is explosive—would anyone notice or care?
Don’t tell Bob Chapek… But I would be willing to pay more.
ABOUT THE AUTHOR Michael Stanisz is a Partner at Revenue Management Labs. Revenue Management Labs help companies develop and execute practical solutions to maximize long-term revenue and profitability. Connect with Michael at [email protected]