Over the summer I developed a thesis about Netflix (NASDAQ:NFLX), which I used to formulate a highly successful trading strategy earlier this year. Increasingly, the headline prices per account do not matter. Rather, it is the price per simultaneous stream that governs consumer perception of the value an SVOD provides. In fact, while Netflix raised prices earlier this year, as I explained the net effect was probably actually to drive the cost per stream down for more customers than up.
Competition in the streaming space also is far higher than in traditional pay-TV, where an oligopolistic market structure tends to produce high incumbency profits. Ever-increasing numbers of companies are competing in the streaming sphere. Has Netflix, or any streaming company for that matter, achieved sufficient brand power to succeed with a premium pricing strategy, or is the streaming space entering a price war not dissimilar from the one gripping the US wireless space?
The State Of Streaming
To answer that question, I have compiled a review of all the major current players in the streaming field to compare their stream-pricing as well as their account pricing. This includes Amazon (NASDAQ:AMZN) Prime Video, Netflix, Hulu, CBS (NYSE:CBS) All Access, Showtime, Starz, HBO Now (NYSE:TWX) and Crackle.
I have excluded DISH's (NASDAQ:DISH) Sling TV and Sony (NYSE:SNE) Vue TV because they are more online pay-TV services than true subscription streaming services. Their pricing and utility are both very different. I have also excluded Epix, the only premium pay-TV channel that didn't make the cut, because it is also the only premium channel that still won't let you subscribe without a pay-TV subscription.
The chart lays out how much each account pays per month and how many streams they are entitled to for each subscription, as well as whether they require the viewer to sit through ads. Using this data I calculate a per-stream charge for each service.
The only wrinkle here is that some video services are now beginning to allow offline viewing. The reason that matters is that it turns out downloads don't count against the concurrent stream limit. This means that a service like Amazon Prime, which allows up to 25 titles to be downloaded at a time, can effectively have its stream limits rendered all but meaningless by a sufficiently large group willing to share an account. Meanwhile Starz doesn't even seem to have a download limit, making its already high four-stream limit almost completely irrelevant.
It is hard to imagine 27 people sharing an account, of course. And then there's also the fact that some people are actually going to want to use the download feature for its intended purpose, namely to watch content when an internet connection is not available. To do that they will probably download multiple titles each.
Nevertheless, since it only takes one download to effectively add an extra stream, ignoring the download feature doesn't seem prudent, either. What I have done is added one extra stream for two services that currently offer downloads, Amazon Prime and Starz, delineated by a "+" sign. Essentially, this represents one subscriber who, upon getting a "concurrent stream limit reached" error message, simply flips over to the download button and starts a download, resuming watching their program maybe thirty seconds later. All the other downloads I assume are being used for their "regular" purpose. I believe this is, if anything, a conservative approach.
What About Netflix Downloads?
This article was literally two minutes from publishing Wednesday when Netflix threw a monkey wrench into the works. As of November 30th, they are offering downloads as well. I wrote a bit about Netflix's downloads already, but just to recap my key points: it is undoubtedly a positive for Netflix that they are offering downloads, especially in the developing world where broadband access is less common.
However, Netflix downloads do come with a few caveats that Amazon's and Starz don't. Most importantly, at the moment they are not available on Amazon's Fire tablets, the fastest growing tablet brand in the world. In fact, they are almost the only growing tablet brand, with iPad and Samsung Galaxy and most other Android manufacturers continuing to show declines. I observed this myself last night, and it has since been confirmed by others as well. There also are unanswered questions about how Netflix accounts for downloads, that is, do they reduce the number of streams available to subscribers and what, if any, is the cap on downloaded titles?
Another point to consider is that while Starz and Amazon have little overlap in title selection - almost everything Starz offers is exclusive fare - the same cannot be said for Amazon and Netflix. A lot of titles that Netflix is offering downloads on are already available for download on Amazon - and Amazon will let you use whatever device you want.
Between the catalogue overlap and the lack of clarity, I am going to do something I know will not please everyone and leave Netflix's numbers alone, without a download adjustment. Obviously, Netflix offers downloads, but if they don't offer them on Fire tablets and Amazon will offer downloads on a lot of the same content, its not clear how much additional value the consumer considers that to bring.
I know some will criticize this as a critical omission, but the objective here is to get to the bottom of consumer behavior, and that means identifying what the consumer perceives as offering value. This is actually just a variation of a point I have already made earlier this summer. When two companies offer the same content, and one company offers downloads - or any other perk or feature - that the other does not, consumers tend to credit only the first company for the value the content provides. If anything they get angry at the second company for making them pay twice for content they already have access to, and with more features to boot. So I believe this method accurately reflects how consumers perceive the question, even if an accountant would not approve of the disparate treatment.
Obviously, if the Fire restrictions are lifted and as more clarity emerges on download rules, this conclusion may have to be revisited. I accept that, but for now I'm doing it this way.
So here, without further ado, is the chart.
|CBS All Access||2||$5.99||Y||$3|
Pricing Stabilizing, Mostly
As you can see, while pricing does vary, there seems to be a clear trend. A lot of prices are settling in the $3 range, including Netflix's four-stream plan. Showtime goes a little higher, but stays below $4. However, HBO Now and Netflix's newly repriced two-stream plan are both a little higher at $5 per stream. They are widely considered the two leaders in cutting-edge content today, so it is not so surprising that they are the first to show signs of some real pricing power. The ad-supported services usually offer an option to remove ads, and that price has settled at around an additional $4 per month across services as well. The only one that doesn't is Crackle, the only pure ad-supported streaming service left.
There are two outliers. First, Starz has taken its pricing, counting its extra download "stream," all the way down to $1.80 per month, per stream. This may be a reflection of the fact that Starz is slowly to lose its Disney (NYSE:DIS) first-run window deal to Netflix, which in turn has priced itself higher at almost exactly the moment that the Disney content is arriving. This may suggest that both Starz and Netflix share a similar opinion of consumer willingness to pay a premium for access to Disney content, which of course include Marvel, Lucasfilm and Pixar in addition to its own animated fare and live-action movies. If so, that would certainly be a positive for Disney stock.
The other outlier is Hulu, which charges $8 (with ads) to $12 (uninterrupted) for access to a single stream of content. This averages to roughly three times what most of its streaming competitors charge. Hulu's pricing should be understood in the context of its unique position in the market as a home for in-season TV content, unlike Netflix or Amazon Prime. While the premium channels also release episodes in-season, this pertains only to access to their own relatively narrow catalogues. Meanwhile, Hulu's owners Disney, Comcast (NASDAQ:CMCSA) and 20th Century Fox (NASDAQ:FOX) provide Hulu with their entire in-season prime time catalogues. Hulu is thus really more of a poor man's cable than a rich man's streaming service. It's pricing is more akin to Sling TV's service, but it's cheaper since it doesn't offer live feeds. The apples-to-oranges comparison makes it difficult to really say Hulu has demonstrated superior pricing power to anyone.
There seems to be an increasing market stabilization at around $3 per stream, although HBO and Netflix can apparently still get away with charging a higher price. Also, the presence of Disney content does seem to have an impact - the company which just acquired it is raising prices and the company which lost it is the lowest-cost provider on the list, apart from Crackle's free ad-based service. Apart from the three content kings of Disney, Netflix and Time Warner's HBO, however, no one else has really established any kind of market brand power. They seem to be competing almost solely on price.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.