The cost of streaming is going up, and for once Netflix (NFLX 2.22%) isn't to blame.
The competition is finally starting to focus on becoming profitable after several years of keeping pricing low to grow their subscriber bases. That means price hikes. Walt Disney (DIS 1.12%) and Apple (AAPL -1.54%) have already announced price hikes, while Paramount (PARA -3.85%) and Warner Bros. Discovery (WBD -2.63%) have clearly stated intentions to do so next year.
The competitors' price hikes come at a time when Netflix is making it more affordable than ever to subscribe to its streaming service. That could be great news for Netflix and its investors.
Your streaming bill is going up
It was only a matter of time before media companies started raising the prices of their direct-to-consumer offerings. The market for streaming content has become more competitive as there's been a land grab for new original series and films.
Disney saw its budget balloon last year. Warner Bros. Discovery is working to get a handle on HBO Max's budget. Apple's budget seemingly has no limits as it focuses on sports and prestige programming. And Paramount raised its long-term budget by 20% earlier this year. Meanwhile, Netflix has managed to keep its cash content costs steady, and plans to keep them at their current level for the time being.
Combined with inflation and other macroeconomic headwinds, there's a growing pressure to raise prices. Disney has already done so on its streaming services in the past, and it'll push the Disney+ price to $10.99 per month after it introduces its ad-supported tier next month. Apple raised the price of Apple TV+ by $2 to $6.99 per month in October.
And more price hikes are coming. The head of streaming at Warner Bros. Discovery, Jean-Briac Parrette, said raising pricing on HBO Max in 2023 is an opportunity for the company. He also sees growing revenue per user internationally. The plan to merge Discovery+ with HBO Max could be when the price hike comes.
Likewise, Paramount's CFO Naveen Chopra expressed confidence in the company's ability to raise prices for Paramount+ and Showtime ahead. He noted pricing is moving higher across the industry, which gives the company room to increase prices itself.
Higher competitor prices are great for Netflix
Netflix has consistently raised its pricing over the last eight years, but it's recently started bumping into some resistance from consumers.
The increased price sensitivity among consumers corresponds with the launch of all the newer streaming services that came to market over the last few years. Those services are all losing money, Netflix estimates, in an effort to grow their subscriber bases. Management was keen to point this out in its third-quarter letter to shareholders: "They are all losing money, with combined 2022 operating losses well over $10 billion, vs. Netflix's $5 to $6 billion annual operating profit."
As price hikes come to market, Netflix's pricing doesn't look nearly as expensive. In fact, Netflix's new Basic with Ads tier is priced below Disney+ and Hulu and could eventually become one of the least expensive options on the market if Netflix keeps the pricing steady. (Paramount+, Discovery+, and others are currently priced as low as $4.99 per month with ads.) Considering Netflix is in the early stages of selling advertisements, there's a lot of room to improve, and it could keep its pricing steady much longer than the competition.
Netflix's service is starting to look more and more like a value compared to other streaming services. And considering it's already very profitable and plans to keep its biggest expense -- content -- relatively stable, it has a lot of flexibility to keep its pricing stable. The price increases from its competitors could send more viewers back to Netflix, growing the subscriber base and bolstering revenue and free cash flow for investors.
