Netflix price rise timed to impede new SVoD entrants

As the great migration to online delivery continues, it is not surprising that the OTT and SVoD markets are about to become even more competitive. At least three big new entrants will arrive over the next two years with offerings from Disney and AT&T-Warner in 2019, followed by NBC Universal in 2020. At the same time, more holders of premium sports rights are either experimenting with or considering going direct to consumers, bypassing traditional distributors.

It is on the SVoD front where the field will soon be a lot more congested and it was for that reason Netflix raised its prices sooner than it would normally have done in its home market, along with some other countries in Latin America, just 15 months after the last hike in October 2017. On that occasion, it raised the price of its standard package by $1 to $10.99 and its premium package by $2 to $13.99, leaving the basic package as it was on $7.99. This time it has put up the basic package by $1 and the other two by $2 a month, so over the last few years prices have been rising way ahead of US inflation, which has been running at around 2% annually.

Yet each rise has elicited only a muted response from consumers via social media and pushed up the share price, by around 3% last time and 6% now. This shows how Netflix has come a long way since the debacle of its 2011 price hike which prompted mass defections, since when the rises have been well aligned with content acquisition strategy. In 2011 Netflix had established a lead by being first but did not have a unique portfolio or any content of its own to back up the price rise. Its competitive position was based on successful marketing, price, convenience and brand.

Today though it looks good value compared with competitors because its portfolio, rooted now in original content, stands out, with its price rises being well judged to keep its revenue-to-cost deficit within just about acceptable margins while provoking very little churn. In fact, they have done little to stem the rise in subscriber numbers in overseas markets.

It is true that this time the price has been kept the same in many of those overseas markets where Netflix is still intent on gaining market share. In the US though the price rise is calculated to make life as difficult as possible for those big three competitors when they do come in.

Netflix believes the price rise will make it harder rather than easier for emerging players to come in and gain subscribers by offering lower priced packages. The thinking is that providing Netflix is still considered good value and does not lose many subs, consumers will have less money left over to try say Disney, which offers some unique content. There is some evidence for this, for example from consumer research firm Magid whose 2018 survey found that US consumers on average were willing to pay around $38 a month in total for SVoD services, so Netflix aims to leave less financial headroom for the others.

On the other hand, there are some consumers reluctant to pay much if at all for even one SVoD service given that there is a fair amount of free content around. Ad funding offers the best way to catch these customers with a service well-endowed enough financially to include some attractive premium content.

The problem is that most consumers loathe having too many ads, even those with tight pockets. For that reason, there is no chance Netflix will budge from its no-ads stance in the foreseeable future, especially after negative feedback from subscribers after experimenting with promotions just of its own content between episodes. Netflix figured that some broadcasters such as the BBC in the UK had got away with that, but then they have no commercial competition. Netflix tried out advertising its own content with a small group of subscribers, with very poor feedback. The feeling was that this polluted Netflix’s pure reputation for being a totally ad-free zone.

Nevertheless, many rivals, like it or not, are having to compete through ads to finance competitive offerings in terms of content and quality of experience. The challenge then is to make ads as unobtrusive as possible while still being effective and AT&T’s big idea is to show them only when users pause their service. The theory is that this will not annoy people because the ads do not consume viewing time and can be effective because they will be watched. Furthermore, there is the opportunity to tune them to activities people tend to indulge in during pauses, such as brewing tea, fetching a beer or visiting the toilet. As AT&T’s advertising division VP of product Matt Van Houten said recently, brands can capture 100% viewability when people pause and unpause.

There is of course the option of carrying both ad-supported and ad-free versions of the same service with the former being either cheaper or completely free. Hulu offers a higher price version of its service for customers who want to avoid commercials completely, while Google offers an ad-free paid version of YouTube for $11.99 a month.

There is also the elephant in the room of piracy, which is a growing factor in determining the optimum business model for OTT services. The key here is friction and in the early days of OTT service providers could rely on people being deterred by the hassle of obtaining pirated versions of content as well as by poor quality, on top of the legality factor. But now there are pirate services offering high quality content which is much easier to access and often with an aura of legitimacy so that friction is reduced. Such pirated content threatens not just the SVoD players but also live OTT services, especially with the rise of illicit ‘near-live’ sports content showing highlights, clips and analysis less than 24 hours after the event, often within minutes of the action.

Such content is sometimes effectively ad-supported, and the onus is on service providers to ensure they deliver a superior package with less friction, easy to access and affordable. Although content and service providers naturally want to defeat piracy, they must accept that technical and legal strategies will never be totally successful. They must therefore keep half an eye on what pirates are offering.