Showtime, CBS Corp.'s (NYSE:CBS) premium cable channel, is tired of watching Netflix (NASDAQ:NFLX), Hulu, and Amazon.com (NASDAQ:AMZN) undermining its business model with online streaming alternatives. Just like Time Warner's (NYSE:TWX) HBO division, Showtime is launching its own online service in an attempt to embrace modern broadcasting strategies.
You could call this an outright assault on Amazon Prime and Netflix. The sleeping giants are stirring, and the newfangled upstarts had best watch out. This is what Time Warner and CBS are aiming for. Playtime is over, let's get serious about the streaming market!
Or you could argue HBO and Showtime just put up a nice price umbrella over the streaming business model. Under this shield, today's low-cost streaming services could find lots of room to raise their own prices without upsetting their customers.
But first, the basics
Showtime's eponymous streaming service is scheduled to launch on July 12, which just happens to be when two popular series on the network launch into their new seasons. Pairing these debuts together certainly helps Showtime simplify its marketing message, and reminds consumers why they might want this streaming service in the first place.
The Showtime service will contain anything and everything you might find in the channel's regular monthly schedule or on-demand catalog. This includes "every season of award-winning Showtime original series, and hundreds of hours of movies, documentary and sports programming, as well as the live broadcast of the east and west coast feeds of Showtime," according to a Showtime press release.
Viewers will need a broadband connection, but Showtime's content won't be tied to a cable TV subscription. Instead, this is a completely stand-alone alternative.
At first, only Apple (NASDAQ:AAPL) devices will have a Showtime app available, but CBS promises to introduce "additional platforms and providers" in short order. "iPhone, iPad, iPod touch and Apple TV customers will now be able to subscribe to SHOWTIME directly and instantly start viewing their favorite programming with the same simplicity as buying an app," said Eddy Cue, Apple's senior vice president of Internet software and services, in a prepared statement.
So the entire Showtime catalog becomes available to anyone in the U.S. with a decent broadband service and an Apple device, all for the humble price of $11 per month. And, of course, everyone gets a free one-month trial.
HBO carved out a path for Showtime to follow in March, when the premium service teamed up with Apple to announce a streaming service named HBO Now.
The two services have much in common. Both are coupled with only Apple's hardware for now, are available nationwide without a matching cable subscription, and provide full access to their namesake cable network's content at all times.
There is a price difference, though. At $15 per month, HBO Now commands a 36% price premium over its Showtime counterpart.
And the winner is...
And now we're back to the pricing discussion.
Showtime's streaming service might be cheaper than HBO's, but it's still pricier than Netflix or Amazon Prime. The standard Netflix service, which lets you view two streams at once in high-def quality, stops at just $9 per month (for new customers -- longtime Netflix users like yours truly still enjoy a slightly lower fee). Amazon Prime runs $99 a year, which works out to $8.25 a month.
Of course, these are not apples-to-apples comparisons. Showtime and HBO argue that their high-quality content catalogs are worth more than those of the unproven newcomers.
There is some truth to that. After all, HBO took home four major Emmy awards out of 36 nominations last year. Netflix failed to take home a single major trophy out of 11 nominations, and Amazon didn't get a single nomination last season. Then again, Showtime only got 10 nomination nods and also walked home empty-handed.
Granted, awards don't always rain over the best shows from the top networks. But Amazon and Netflix don't publish viewership numbers (which also don't always translate into content quality grades), so I'll settle for Emmy statuettes as a proxy for production value.
So HBO can probably support its higher price on the back of an unmatched content catalog. But Showtime is playing a dangerous game by expecting a higher monthly fee than Netflix's price tag, in spite of a lackluster awards collection.
Homeland and Episodes might hold their own against House of Cards and Orange Is the New Black -- but which bench is deeper? And which production pipeline looks stronger? It's not at all crazy to call Netflix a winner in those comparisons.
The road ahead
In a way, Netflix is already trying to break out of its low-cost price range. The $9 plan holds back on the picture quality for a handful of shows, including many of the Netflix originals. That quality is comparable to the original format for Showtime's and HBO's top-shelf shows, from Homeland to Game of Thrones, all shot in "standard HD" or 1080i video formats.
But you can also pay up $12 per month instead, and enjoy Netflix's finest shows in what the company calls Ultra HD 4K resolution. If none of that makes any sense, you're not in the target market for that upgrade. But some video enthusiasts actually care about these picture quality metrics, have the home entertainment equipment to match, and willingly pay extra for stretching the legs of that expensive home theater.
Here's how Netflix CEO Reed Hastings described the Ultra HD plan in the company's January earnings call:
Today there are very few televisions that are Ultra HD, and we only have a few titles. We have more than anybody else, but we only have a few titles. But if you look ahead two years, four years from now, many of the TVs sold at Best Buy will be Ultra HD, and lots of our content will be Ultra HD. And it's a natural match.
Chief Content Officer Ted Sarandos added his two cents:
I think what's exciting about this move is, unlike other format changes, this one is led by a thin layer of content, but the front-end of the content. So we're shooting all our original series, with very few exceptions, in Ultra HD. It's not a show-off of weird, quirky things that look good. It's actually the programming that people are watching.
Three months later, Hastings explained how the Ultra HD stuff becomes a road map toward higher prices in general:
For those that get a new 4K television and are excited about 4K content, we're the leading service in the world for 4K, and that plan is a little more expensive at $11.99. As more 4K TVs are sold, we'll get people to upgrade to the $11.99 plan. In terms of the total pricing structure, we couldn't be happier with the way it creates an incredible value for the consumers, feels fair to them, and it's propelling our growth.
The goal is to talk customers into using the higher-priced plan because it's a better viewing experience. Pay more, get something more. That way, Netflix can avoid a customer exodus like the one sparked by the poorly handled and ultimately canceled Qwikster launch.
This will take time, of course. The entire TV market won't move to 4K video overnight. Shucks, I still have an old cathode-ray tube with standard definition in my bedroom. When that one breaks, it will probably be replaced by a 4K screen. But that old trouper just won't quit on me.
The big takeaway
All right, enough with the anecdotal evidence of reactionary late adopters of new technology. The point is, you probably point and laugh at these old-school TV sets nowadays. On day, 4K video will become as widely adopted as regular HD screens are today, and Netflix is using that trend to lift its service prices without upsetting anyone.
Sure, HBO and Showtime are heading in the same direction. In two to four years, where Hastings painted the finish line for 4K video going mainstream, every major network will have so-called ultra HD services available. Several of them might even follow Netflix's example to extract higher fees in return for better picture quality.
In the meantime, Netflix isn't as locked to the current pricing level as you might have thought. HBO Now already started opening a price umbrella under which Netflix, Amazon, and others can find shade for higher monthly fees. But Showtime's pairing of higher cost with a not-totally amazing content catalog provides far more shelter for the online specialists.
Showtime isn't single-handedly giving Netflix permission to raise its basic service prices, but the CBS unit sure lends a helping hand here.
Anders Bylund owns shares of Netflix. Anders Bylund has the following options on Amazon.com: short January 2016 $320 puts and long January 2016 $320 calls. The Motley Fool recommends Amazon.com, Apple, and Netflix. The Motley Fool also owns shares of Amazon.com, Apple, and Netflix. Try any of our Foolish newsletter services free for 30 days.
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