Yet another voice refuses to believe that Netflix never plans to resort to advertising in order to make even more money than it does today, despite the company’s protestations. This one however comes from respected German research company GfK.
The methodology is simple enough, it interviewed over 2,300 US people to ask how much they were prepared to pay for SVoD services, concluded that it was the price that Netflix has just raised it to, and tried to show that Netflix will soon run on thin margins unless it begins taking advertising.
According to the research, subscribers to Netflix, Amazon Prime, and Hulu – the “Big Three” of streaming services – are already paying at or close to the maximum monthly fees they feel these services are worth. The results are in the table below alongside a comparison on how they felt when interviewed two years earlier.
| Maximum willing to pay per month in US $ | ||
| 2014 | 2016 | |
| Netflix | 10.38 | 10.82 |
| Amazon Instant Video | 7.83 | 9.1 |
| Hulu | 9.83 | 9.96 |
| Hulu Free | 5.06 | 5.01 |
| YouTube | 1.69 | 3.06 |
| TV Everywhere | 3.76 | 7.53 |
The trouble is that although these values have not changed much in two years, very few of them have had even one year’s worth of original content to view. The more original content they bring to market, the higher the value that will be associated with them, and so these numbers are highly volatile. A single hit series can make huge segments of a population take on a service for its duration, as has been seen with HBO’s Game of Thrones series and its effect on incumbents OTT services which carry it, around the world.
GfK then argues that as costs for original productions and exclusive content continue rise, commercial-free streaming brands like Netflix and Amazon will need to consider advertising. But of course we are in a land grab market. As Netflix spreads its brand over more and more of the world, it will have more and more locally produced original content to show the US customers, and its apparent value will rise. The same could well happen to Amazon. Hulu is another matter since it cannot get its hands on the same content outside of the US, so has to change its content dramatically before it can get the same benefit, and that effort is only just starting.
So this is good research, let down by poor interpretation and in no other area of life does anyone allow demand side research to set pricing. Content doesn’t have a fully in-elastic demand curve like booze or broadband, but 25 years of incessant cable TV price rises testifies that consumers will pay a lot more than they think it is worth. But then again, they watch pay TV complete with advertising, which is why so many constituents wish advertising upon brands like Netflix.
Netflix continues to differentiate itself from broadcast catch up and TV Everywhere, both of which can carry advertising, and we would argue that it cannot afford to take on the brand distain that these services have created, especially when Netflix is now part of the pay TV landscape and it is now installed on most non-US pay TV operators’ services. It would look like its advertising was competing with the cable network’s advertising, and that might be enough to get it ejected from the line-up.
Basically Americans invented advertising and they think it is un-American not to offer/view advertising and cannot understand the Netflix position.
The study claims that $10 to $11 is the most that subscribers would be willing to pay each month, on average, for Netflix or Amazon Prime, which compares to the current subscription prices of $9.99 per month for standard Netflix service and $10.99 for Amazon Prime’s month-by-month subscription plan.
The study also suggests that original and/or exclusive content only ranks 9th among the top reasons that people subscribe to streaming services, implying that it won’t drive subscriptions (they would get a really good argument from Netflix that they are wrong).
GfK says the proportion of Netflix users citing this as a reason jumped from 3% to 12% between 2014 and 2016, and for Amazon the percentage doubled, from 4% to 9%, which we would humbly suggest is rising in line with how much original content has started to arrive on the services, and it will continue to rise.
The most important attribute in choosing a streaming service in this study was cost, cited by 75%, with “Availability of specific programs” 2nd at 69% and “availability of new movies” 3rd at 68%. Except that all three of the major SVoD services were seen as underperforming on these top three attributes. (So remind us, why are they the top 3 then?).
David Tice, SVP of GfK’s Media and Entertainment team suggests that Huku has it right and the other two have it wrong and Netflix and Amazon Prime will need to introduce ‘ad-inclusive’ subscriptions. We think GfK and mister Tice are completely wrong.