The comments below are from Parks Associates research team: Paul Erickson, Research Director; Eric Sorensen, Sr. Contributing Analyst, and Jennifer Kent, VP of Research. Parks Associates extensively covers the video services market and all things technology. We welcome any feedback!
In light of Netflix's most recent earnings report, the gap between the Big Three and the Non-Big Three continues to narrow. Netflix's dominance in the over-the-top (OTT) streaming sector is finally being challenged by rising competition. Netflix has previously stated that companies such as Apple and Disney would not materially affect their growth. Netflix has now commented in its most recent earnings that one reason for the slowdown in subscriber growth was increased competition.
Disney Plus climbed into the top three of Parks Associates’ US subscription Top 10 OTT services ahead of Hulu, representing the first significant shift in the "Big Three" services since 2015. Netflix, Amazon Prime Video, and now Disney Plus, together known as the "Big 3 in OTT," account for a majority of OTT service subscriptions. In Q3 of 2021 subscription services continue to dominate viewing, with 51% of consumers in US broadband households watching video from a subscription OTT service in the past 30 days, compared with just 25% watching an ad-based service. Adoption of the conventional Big 3 services has slowed, and acceptance of newer service offerings continue to grow. More and more people are using free ad-supported streaming TV (FAST) services because of the allure of a vast content collection and no additional cost to the consumer. Additionally, more streamers are also realizing that having a traditional live/linear experience delivered through a vMVPD is beneficial to have in their video service portfolio.
Netflix’s report of slowing subscriber growth indicates we could be seeing the beginning of subscription overload with consumers, who want to lower their streaming bill with more free options.
Price Increases by Netflix
These price increases are in line with Netflix’s long-term strategy to increase their subscriber revenues over time, with gradual price increases. The question of what consumers consider reasonable is a factor of their perceived value of a service. Netflix’s price increase shows that they are confident in the belief that the content and experience they’re delivering to consumers, deliver enough value to consumers that they won’t mind paying slightly more for it. The next quarter’s subscriber results will give more insight into how reasonable consumers themselves consider this recent price increase. The company is aggressively investing in content to ensure they are delivering this value in consumers’ minds and utilizing that content to help drive new subscriptions and retain subscribers. Netflix had earmarked $17 Billion for content in 2021, and a similarly aggressive content budget is expected for 2022.
Consumers and Value
This comes down to consumers’ relative perceived value of Netflix, versus their perceived value of other services. Additionally, Netflix’s brand and position in the market are well entrenched. Netflix’s solidified leadership role in the OTT video market, as well as its aggressive content strategy, make it likely that consumers are going to be more accepting of incremental price hikes from Netflix than they would be of newer competitors.
Rising Prices
There will always be some limit to rising entertainment prices, where consumers will instead opt for necessities. However, with OTT services, that price sensitivity is instead of taking the form of streaming video consumers now being more discriminating in which services they retain in their monthly “stack” of subscriptions. Netflix’s entrenched position in the market currently makes it the service most likely to be retained in that “stack”, relative to its competitors, with any incremental price increase.
Near term, it is unlikely to see prices continue to increase by Netflix, but it is reasonable to expect that the company will continue to raise prices by gradual amounts over time. The cost of content continues to rise, and this is compounded in services such as Netflix where a considerable amount of content budget is dedicated not just to acquisition, but towards original content production. Combined with the company’s goal to continue paying down its debt, it is realistic to expect that there will be additional incremental price rises over the long term.
Netflix’s decision to broaden its entertainment offerings will also give additional rationale for future price increases. The company’s addition of gaming content is its next fundamental move to sustain revenue growth over the long term, capture consumers in new ways, and create new opportunities through the overlap of video and gaming services.
