Monday saw the rise of discontent among consumers due to the increasing prices of streaming services, with further price hikes anticipated. Amazon (NASDAQ: NASDAQ:AMZN) recently raised the price of its Prime Instant Video service, adding ad breaks while offering users the option to pay more for an ad-free experience. Other media companies, including Netflix (NASDAQ: NASDAQ:NFLX), are expected to follow this trend.
The Writers Guild of America secured an agreement earlier this week with studios to address concerns around compensation from streaming and the impact of artificial intelligence on their jobs. This significant victory for the writers signifies an impending increase in costs for studios and streaming services.
Simultaneously, sports rights fees, a key differentiator for many media companies' streaming services, are projected to rise from $19.8 billion in 2022 to $31.6 billion in 2030, according to Morgan Stanley analysts. As pay-TV distributors seem less willing to pay for sports networks, the cost of content continues to climb, putting pressure on media companies caught in a Catch-22 situation as consumers demand more high-quality content.
To keep pricing low, streaming services have introduced ad-supported tiers. While ad-free tier prices have increased, ad-supported tiers have largely remained the same. These tiers offer high long-term potential as they allow management to stabilize prices while increasing revenue per user by adjusting ad prices, user streaming minutes, or ads per minute of content.
However, ad prices dipped in 2023, with Netflix agreeing to lower prices with some advertisers in July and ad-supported streamers reducing their ad prices by 5% to 10% at this summer's Upfronts according to a Digiday report. These lower ad prices are exerting additional pressure on streamers' profits.
Investors have been urging media companies since last year to curb the losses incurred by their streaming services. With breakeven projections set for next year, price increases are seen as the quickest way to boost revenue without escalating costs. However, this may lead to customer cancellations and difficulties in acquiring new customers in a market already grappling with significant subscriber churn.
Streaming services such as Amazon and Netflix, which offer differentiated services, are expected to thrive despite these challenges. Amazon benefits from its Prime ecosystem, including its fast shipping service, while Netflix's wide-ranging content and superior technology appeal to a broad global audience.
However, smaller streaming companies might struggle and will need to find better ways to retain customers, possibly through bundling or reverting to more licensing revenue over direct-to-consumer approaches. For investors interested in streaming, the pricing power of a media company's streaming service is a crucial factor in their investment decision. Despite the challenges, Netflix remains one of the most appealing streaming service stocks as it manages costs and capitalizes on scale.
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