How Wall Street forced Netflix to raise streaming prices

Slow subscriber growth and high rates of interest push the sector into a new era frugality

Netflix’s price increases are not always a good thing. Reed Hastings, the founder of Netflix, increased the price of a monthly subscription by 60% in 2011. This sparked an outcry that nearly destroyed the fledgling streaming services.

Price increases are once again in style, more than a decade after they were first introduced. Both Both Netflix and Disney have increased their prices and introduced ad funded tiers. They have also begun crackingdown on password sharing.

Subscribing monthly to the lowest tiers – ad free – of Netflix, Disney Prime, Amazon Prime Apple, Now TV, and TNT Sports costs UK customers just under £77.

Netflix’s streaming service costs around £20 compared to the Sky basic package, which cost about £20 in 2007.

As subscription growth slows, and interest rates rise, Wall Street is changing its strategy.

After years of spending virtually unrestrained by low-cost money, the industry is now adapting to a new era of frugal living.

Mike Proulx is the research director for Forrester.

He calls the shift to profitability over growth a “reality-check” for a sector that, as recently as 2021, had pledged to spend more than 100bn on TV and films in an effort to gain attention.

Netflix and Disney, once scrappy competitors, have now established their dominant position on the market. Subscriber growth is also slowing.

Investors are now seeking returns on the billions they have invested in these companies over years to fund their growth.

Fiona Orford Williams, Edison Group’s director of media, says that it’s inevitable you won’t be the newest kid in town forever. Once you’ve reached a certain level in your market it will get more difficult.

Bob Iger’s top priority has been to bring Disney’s streaming division, which includes Hulu, ESPN+ and Hulu, under control. Bob Chapek’s predecessor was brought down by investor concerns over the escalating losses.

The House of Mouse’s streaming operations have lost $387m, compared to $1.47bn during the same quarter last year. To appease investors, Iger has cut costs.

Investors wait for signs of a sustained turnaround as shares are not much different from a year ago.

Netflix, the only major streaming company to make a profit, faces pressure to improve their bottom line. The stock has recovered from its lows in summer 2022, but it is still more than 30% below the peak reached in 2021.

Netflix increased its monthly subscription prices by £2 for its most expensive plan, and by £1 for its basic plan.

Disney increased its prices this month by £3 from £9.99 to £10.99. It also introduced two cheaper plans including one with ad support.

Orford-Williams claims that rising interest rates “changed tone of conversation” about streaming.

Platforms benefited from a period of low-cost borrowing to finance their rapid expansion and programming. The recent increase in interest rates has caused the cost to service this debt to skyrocket.

She says, “For so many years money was not an issue on the set. It was free.” “Now they have to be much more aware of the budget, potential audiences, and how much money these audiences will bring.”

Along with crackdowns on password-sharing, price increases are the obvious levers for increasing revenue. Ad-funded subscription tiers at lower prices have also been a key factor in preventing subscriber loss.

Subscriber numbers are holding steady. Netflix’s third-quarter growth was its highest in years, with 8.8 million new customers.

Disney+, which will soon launch its own crackdown against password sharing, has gained 7 million new customers in its most recent quarter.

But bosses are aware that there is a limit on how much they can rely upon this strategy before the consumers become dissatisfied.

Forrester conducted a survey last month that found 50pc of US subscribers feel they already pay too much for streaming services. 43pc also consider downgrading their subscription to an ad supported tier in order to save money.

Proulx: “It is ironic that Netflix, a company which has long avoided advertising, now promotes it. They’ve realized that the tried-and-true ad model works.

Companies are not only reducing spending, but also lowering prices to improve their bottom line.

The number of TV episodes and films produced by streaming platforms is decreasing. They are also shifting their focus towards cheaper genres, such as reality.

Scott Stuber is the head of Netflix’s film division. He said that there has been a change from quantity to high quality.

He told Deadline that “Right Now, we’re trying to reach a certain number of film release,” It’s all about “Let’s do what we believe.” Disney’s Iger has also admitted that the company needs to improve its output after a recent string of box-office flops.

Many industry observers find it easier to say than do that they will improve the quality of their products.

Subscribers will continue to be driven by “tentpole” productions, such as Stranger Things and the Star Wars franchise.

To keep their subscribers interested, bosses must also ensure that there are always new programs.

Orford-Williams says that you need content to keep subscribers. If you get boring, your churn rate will increase.

The Hollywood writers’ and actors’ strikes have complicated the strategy shifts. Productions were halted over the summer due to the Hollywood writers’ and actors’ strike .

The walkouts may have reduced the content spending in the short-term, but they could create a dearth of new TV and film shows for next year.

Platforms are forced to be more creative because of the content shortage. Netflix wants to reduce its content expenditure in part by licensing shows from third-parties.

Iger said that Disney would license some of its content, such as movies and TV shows, to Netflix in order to create new revenue streams.

A move to the sport genre is another tactic being considered. This genre has historically been more popular with subscribers.

Netflix has not entered the live sports market despite its success with sports-related series like Drive to Survive or Break Point. There are signs that this may be changing. The company launched this week the Netflix Cup Golf Tournament in Las Vegas.

Will it be enough to keep up? Enders analysts argue that mergers and restructuring in the industry will be inevitable as streaming’s golden age gives way to cold realities.

There are a number of smaller subscription platforms available that you can take advantage of.

Wall Street has changed its attitude, forcing the industry’s to prove that it can earn a dollar rather than spend it.

Proulx says that streaming services must solve the value equation. They need to figure out how to provide consistently compelling content at an affordable price and still make a profit. “Outside Netflix, every major streaming service is grappling with this exact dilemma right now,” says Proulx.