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Wall Street has been overanalyzing and overreacting to quarterly fluctuations in Netflix Inc.’s subscriber count for years, and other streaming services are facing the same treatment as the industry matures, but recent changes could actually be good for consumers.
The Walt Disney Co.
DIS,
experienced the see-saw Wednesday, as a better-than-expected gain in streaming subscribers in its fiscal second quarter initially sent shares higher, but the explanation that a strong quarter could lead to weaker gains ahead turned the stock around. This is a similar (though more muted) scenario that Netflix
NFLX,
experienced in recent years, as subscriber growth surged during the pandemic but reached a plateau (and potentially a valley) in recent months.
This has made investors jittery about the streaming business and left viewers confused about what lies ahead, but it should just be a sign that it is time to view streaming services differently, both from a consumer and shareholder perspective. As this column has pointed out repeatedly, Netflix has matured, and the wave of rivals from the likes of Disney, Apple Inc.
AAPL,
Warner Bros. Discovery
WBD,
Amazon.com Inc.
AMZN,
and Comcast Corp.
CMCSA,
will face the same dynamics.
Eventually, these services will be judged on their ability to drive revenue at a variety of price points and command loyalty due to their intellectual property and cadence of their releases. Keeping that in mind, investors and streaming subscribers should avoid the noise and focus on the positives.
Right now, Disney appears to be the only streamer that can challenge Netflix in those regards, and Netflix is showing its maturity by following Disney’s path instead of denying it has competition and going its own way, as executives did for years. Some customers screamed in agony when Netflix suggested it will add an ad-supported tier to its service, but it was just following the lead of Hulu (owned by Disney), which showed that a lower-priced, ad-supported deal would be supported by a cost-conscious brand of consumer that may have been dropping off of Netflix of late as it has raised prices.
Netflix’s recent concession that it will have to offer a tier with ads was a “wake-up call for the streaming model,” said Mark Vena, CEO and principal analyst of SmartTech Research in San Jose, Calif.
“They have a very loyal customer base,” Vena said of Netflix. “The good part is the loyal customer base, but if they move forward with an ad-supported plan, they may get a significant rejection from their user base.”
Because of its head start, Netflix had the advantage for years with the most dedicated content for streaming, but Vena noted that as more competitors have joined in, consumers now have myriad options for streaming content — “When you look at the amount of content available, it is an embarrassment of riches.”
Disney can challenge Netflix on that front with all of its intellectual property, however.
“Disney has amazing IP that is almost 100 years old,” said Tricia Biggio, chief executive of Invisible Universe, an entertainment tech company that produces animated characters. “Now as new ones come up, you hear people say ‘What shows are on there? Is this worth my investment?’”
Well, it may depend on how much the consumer is willing to spend, and the ad-supported tier offers a new price point that Disney will add to Disney+ this year in the U.S. “I believe the entire streaming category is going to have to move to an ad-supported model,” Vena said.
However, Disney will also likely increase prices for its commercial-free tier, as Netflix has repeatedly done. The very first question posed to Disney executives in Wednesday’s conference call was, in fact, when they would increase prices for Disney+.
“We’ve been very comfortable with the price/value relationship that we’ve offered, and as you know, as we increase our content investment, we believe that that’s going to give us the ability to adjust our price and still at the same time maintain that strong value proposition,” Disney Chairman Robert Chapek told analysts on the call Wednesday. “You mentioned the Disney+ ad tier — I think this is going to give us the ability to reach an even more broad audience as we expand Disney+ across multiple price points, and using some of our other services we can see the additive nature of an ad-driven service that enables us to keep the price lower.”
That basically means you should expect higher prices for Disney+ by the time the ad-supported tier arrives. And higher still in the years to come.
That is not a horrible thing for consumers, though. They will still have the option to save money by subscribing to ad-supported tiers, and because streaming does not come with the onerous contracts of the cable bundles, they can “churn” though the different services on a monthly basis, as MarketWatch’s “What’s Worth Streaming” column recommends. Disney has also offered discounts to sign up for a year, which other streamers are likely to copy.
There will be pain for all streaming services as they go through the different phases of growth, but Disney and Netflix seem like the safest way to play it for the long-term as an investor. For consumers, greater choice in both content channels as well as price points can lead to a smarter way to stream, and now is the time to start taking advantage.
