Netflix will announce its Q1 ’19 earnings on Tuesday – when we’ll know for sure if its subscription price hike was a good business move in the short term. Meanwhile, Disney announced Disney+, its new streaming service platform, will only cost $6.99/month and its stock shot up over 11 percent overnight.
This further complicates the pricing model debate for streaming services as Disney overshadows Apple, who had dominated the tech news cycle for weeks after announcing its competing OTT streaming services to Netflix, Amazon and Hulu, called AppleTV+. With big names like Steven Speilberg and Oprah in attendance helping to buttress Apple’s credibility in the increasingly crowded OTT market, Apple sent a clear message that they, in the words of one executive, would “define the commitment to storytelling, on every screen in your life.” While it may have been tempting to be distracted by the cavalcade of celebrities that took to the stage inside Steve Jobs Theatre, Apple’s silence on one topic became deafening on the Twittersphere as everyone began to ask the core underlying question left unanswered: How much will this cost? Disney shared, why can’t you?
CNBC media reporter Alex Sherman, who attended the unveiling in person, tweeted “we got a half hour of actors talking about their shows without clips and zero details on Apple original content pricing or if channels services will be bundled for a discount. The general mood here is shock and mild annoyance among the people sitting around me.” Vox’s critic at large Todd VanDerWerff opined “Apple’s new streaming service is still mostly defined by what we don’t know.”
He’s right. The company chose to avoid addressing any specifics around pricing or the potential savings users could capture by bundling with other Apple services. What we do know is that Apple TV+ will be a subscription service free of advertising. This announcement kicked off an interesting debate about which revenue model – ad-supported or subscription – is most likely to attract large scale consumer audiences.
Apple and now Disney’s decision to forgo ads stands in stark contrast to recent reports from Google-owned YouTube, who instead is purported to be looking into expanding its ad-supported content while potentially deemphasizing subscription-based models as well as Viacom owned PlutoTV which is doubling down on its completely free ad-supported model. Google denies it will abandon its subscription model entirely as others later reported, but it is clear that the world’s largest advertising company sees significant opportunity in offering premium content for free in an ad-supported environment.
As the debate unfolds over ad-supported models vs. subscription-based revenue streams, the real question marketers and content platforms need to be asking is: “What do consumers want?” The answer is both.
To start, it’s important to level set by clarifying that OTT is now mainstream, and this is not a niche consumer audience. In partnership with the Harris Poll, OpenX conducted a nationwide study of OTT users released this week which found that the majority of US consumers now stream at least one OTT service, with most streamers subscribing to an average of three platforms. Within this growing group of streamers, there are very diverse opinions about preferred billing models that signal a broad opportunity for platforms to be creative with how they monetize their content.
The study found a nearly even split among those who want to pay a subscription fee in exchange for zero ads with a slight majority opting for some form of advertising to reduce or eliminate subscription fees. Forty-six percent of consumers prefer a service that costs $10/month with no ads. Interestingly, the survey also found that consumers would be willing to pay as much as $24/month for one primary subscription – nearly twice Netflix’s adjusted monthly rate of its most popular plan now $13/month (up from $12/month), showing there is clear upward pricing mobility for an ultra-premium provider in the subscription market. I expect the earnings call on Tuesday to report no significant hurt in sales because of this increase.
That said, there is a potentially missed opportunity by streaming providers, including Netflix and Apple, to be releasing a tiered pricing model that includes ad-supported, discounted and free subscription models.
Ofthe 2,002 U.S. consumers who answered The Harris Poll survey OpenX commissioned, 54 percent would opt for an ad-supported model; 29 percent of which prefer a service that costs around $5/month with 2-3 minutes of ads per hour, while the other 25 percent prefer a free service with up to 10 minutes of ads per hour. The clear message here is that there is room for multiple models, and a “one-size-fits-all approach” (or singular billing models) will likely be replaced by a menu of options tailored to consumer preferences. One guide to follow comes again from the nationwide survey of OTT users that uncovered the sweet spot of content and cost — what I would call the 15/100 rule of video. Consumers watch around 15 channels of cable TV today and if price weren’t an issue, they would be open to watching 15 different OTT services. For cost, whether it is OTT or cable/satellite, viewers are comfortable spending about $100/month to have access to the content they want to watch.
Consumers don’t want an unlimited number of choices and they don’t want to pay for channels they don’t watch. Just as demand for a variety of OTT providers increases, so too will the diversity of revenue models. Less than five percent of all television advertising dollars flow to OTT channels today. As the eyeballs continue to migrate to streaming platforms, OTT advertising dollars will quickly follow – and they are projected to outstrip the overall growth of all advertising by five times in 2019. Investments in content alone will not determine the winners from the losers in the OTT race. Whichever platforms get the pricing formula, content portfolio and user experience right will ultimately establish market leadership in the rapidly growing OTT market.
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