Why Are Streaming Companies Raising Prices?

Streaming services are being squeezed by increasing costs, slowing subscriber growth and creeping inflation, as labor strikes in Hollywood threaten their content pipelines going forward—and are passing the costs to consumers.

Many of the most popular streaming services have announced price increases in the last several months.

In August 2023, The Walt Disney Co. (DIS) became one of the latest streaming providers to announce a price hike, saying it will increase the cost of the commercial-free version of Disney+ by 27% to $13.99 per month and ad-free Hulu by 20% to $17.99 per month. Disney boosted the price of its ESPN+ subscription service last year and will bump costs up by another 10% this fall. Netflix Inc. (NFLX) also raised its prices in 2022, as did Apple Inc. (AAPL) for its Apple TV+ and Apple Music services. Paramount+, Peacock, and other services have also recently announced hikes.

Costs Rise, Revenue Per Customer Declines

The rapidly-growing streaming industry has a glut of providers competing both for content and for subscribers. Lower-priced ad-supported subscription tiers draw revenue from two sources—the customer and the advertiser—while the more costly ad-free plans rely exclusively on subscription fees to generate revenue.

Some providers, including Disney, plan to increase the cost of ad-free plans while keeping ad-supported options at the same cost for the time being. By boosting only ad-free plan costs, the company may push some subscribers to give up the costlier plan for a lower-priced ad-supported option, thereby potentially increasing Disney's advertiser revenue.

Costs for streaming platform providers have grown along with interest rate hikes and inflation in recent quarters. Disney is expected to spend "in the low $30 billion range" for content in fiscal year 2023, Warner Bros. Discovery Inc. (WBD) about $20 billion, and Netflix about $17 billion, according to company officials and analysis by IndieWire.

At the same time, revenue per customer has not grown consistently and in some cases has declined.

In the most recent quarter, for instance, Netflix noted just a $0.05 improvement in average revenue per membership for its U.S. and Canada region, while all other regions saw declining average revenue per membership. Disney had a 2% increase on a quarter-to-quarter basis in average monthly revenue per paid domestic Disney+ subscriber in the last quarter, but a 3% decline over the same period when considering ESPN+.

Maturing Industry Slows Subscriber Growth

A crowded market of streaming providers and high levels of customer engagement—some 85% of U.S. households were subscribed to at least one streaming platform as of Dec. 21—has slowed subscriber growth or caused numbers to slip for even the most popular services.

As an example, Netflix posted its first-ever quarterly loss of subscribers in April 2022 and lost millions more in the months to follow. Disney's latest financial report revealed that it lost close to 12 million Disney+ subscribers and $512 million from streaming operations last quarter, mostly due to a shift in its cricket coverage in India.

One way Netflix responded to falling subscription rates was to initiate a global crackdown on password sharing, the idea being that eliminating the possibility of multiple users accessing the same account would stimulate more new subscribers than the number of frustrated customers to cancel their accounts.

The company has boosted its subscriber numbers following the crackdown, surpassing Wall Street estimates for subscription growth. But revenue growth for the last quarter came in below expectations, calling into question the effectiveness of a password-sharing crackdown in boosting financials, at least in the short term.

Disney announced in August it would follow Netflix's lead and initiate its own efforts to limit password sharing, a strategy CEO Bob Iger said was a "real priority" for the company.

Notably, as prices for streaming platforms increase and ad-supported options proliferate, customers that bundle multiple services together may face an experience that more closely resembles traditional cable—a model that many streamers rejected early in the industry.