Episode #0107 - Paying more to not see ads on streaming services

Pricing College Podcast

In today's episode, we want to cover I suppose it's a concept, but it's also a new story that we saw recently this week, whereby Disney plus up-and-coming young whippersnapper on the streaming market that's eating Netflix's. I suppose they haven't announced it, but they're suggesting that they will introduce two-tiered pricing whereby you pay less, maybe about $8 US a month, but you might have to watch advertisements, or you can pay more and avoid advertisements. And I suppose this is a little bit like I think it's called "Red" on YouTube, where you can subscribe, you pay a fee per month, and you get to avoid those annoying ads that pop up during your videos. So yeah, what do we think of this?

We thought it was an unusual article for a news story. Firstly, it just seems kind of a confusing sort of pricing strategy. Is it a pricing strategy to introduce new price tiers based on things that customers don't like? So you increase the price to avoid something you don't want to see like ads. So obviously they've done their research. I just think it's kind of on customers and found out that they don't like seeing ads. They must not like seeing ads, but it seems counterintuitive in a way to price based on that. It sort of sidesteps the value of the Disney plus proposition. I mean, are they suggesting through that that there is very limited value in their offer compared to Netflix and are resorting to going to paying for not seeing the ads? This seems strange because there's value in that Disney plus the selection of movies. Are they suggesting that that is not enough to maintain customers? But if you backtrack a little bit on that, well, it must have been enough because that's what drove customers to the platform. And that's what customers thought, “ oh Disney plus movies are worth migrating from something like Netflix or a Stan or one of those platforms”. So I just think it's kind of an odd price structure to create and really what I'm thinking is, Is it a price strategy? Or, are they thinking about it, Is it more like a covert price increase price rise strategy? And if you're going to do that's more of a tactical sort of pricing move. And it's something that you really shouldn't integrate into your fundamental price architecture, which is that price structure. So to me, those are my thoughts what do you think?

I suppose I have a couple of thoughts. Generally when we're talking about value-based pricing and charging for value, usually we're discussing giving additional value, and charging for that additional value we're giving. It's more of a carat than a stick this more seems to be a stick. This almost seems to be pay or we will self-sabotage what we're giving you. Pay or we will make this product we're providing to you worse, which seems a bit odd to me. Admittedly, they haven't said they're going to do this yet but I've seen and imagined it in a couple of different places. What would that do? Would it drag these services back down to being television? Not very different to actual regular TV, which I suppose was what drove people to stream in the first place. Theoretically, what difference does it make if you're showing adverts on whether it's a streaming service versus whether it's a pair TV system? So I think that was a bit confusing, and I'm not sure that I can see it clearly on YouTube. I would watch a fair amount of YouTube but I can see that the adverts are annoying. The people who tend to advertise on YouTube also tend to be larger corporates; banks, and building societies. These are even term issues anymore. Insurance companies stuff like that big supermarket chains. The adverts tend to be mind-numbing and they're a little bit too long. I think even television adverts some people used to enjoy them, some of them used to be entertaining. There'll be comical aspects to them. I think maybe that's decreased in recent times, potentially with the costs of TV advertising increasing. But I would argue that YouTube ads are more boring unless you also have the ability to counsel them or go straight to the video after a couple of seconds, which is a bit old. It's an old system. It's an interactive system that goes against what TV is. So I don't know if it's well thought through. I don't know if it's a good idea. The other thought about it was it sort of insinuated cost plus mechanism in Disney or whoever will implement this. Are we saying we want to make this much profit from this show over an hour's viewing per person, and we'll either get that money from the paying public or the advertisers? It may be that may not be what they're doing but it sort of suggest that and it also remains with the old saying that, “ if you're not paying for something theoretically you are the product”. If you're not paying theoretically, Disney or whoever it is will be just showing advertisements to you and the paying advertisers will see you as the product and that's how it works. So it's a weird one on it, it leads to something on the one platform, if it stays neat, it would lead to a mixed message I would say from a premium movie enjoyable system to do that. What are the questions I would ask is it clear how the implementation of adverts will make a big difference? Is it going to be adverts during the movie, which will be exceedingly annoying? Or is it going to be an advert before you watch a movie, that is less annoying?

The adverts gonna be customised. So having it customised to what you like as a viewer, are they on to that? Yeah, I mean, Are they using data to customise their ads and all that sort of thing? But I do agree with you. I don't think the pricing strategy is particularly value-based. I don't know it just smacks of a very reactive price increase price hike strategy. And somebody just thought okay, if we introduced this new price to migrate customers, existing customers over to this ad-supported version, even though they were on a no ad version, then essentially get a price increase and increase our profitability there quickly. But my thought here, well.. Is that very customer focus? How do customers feel about that? Well, it'd be highly annoying if you've signed up for something with no ads and it was a good service and you're quite enjoying it to then having an inferior service. So I don't think just easily migrating on on on a spreadsheet. It looks kind of attractive, but in real life, I am assuming there's going to be some kind of churn from that kind of dissatisfaction from customers. Not necessarily to Netflix, but maybe somewhere else or who knows. But I also think, here that, as I was saying it's a reactive strategy, looking at the economics of platform-based businesses where it was very egalitarian in their pricing, meaning it was artificially low price, to begin with. And there was always that mission statement around bringing entertainment to the masses. All that broken model such high costs cinemas, and all that sort of thing, bringing the entertainment to your home, having the access to huge amounts of movies and entertainment law at a low, low cost. Now, as we see, Netflix has been challenged by new entrants to the market. This egalitarian pricing model is also being challenged and different platform businesses are competing, we're now seeing price wars, and it's unsustainable. But now we're hearing like, every other business is those slow, dumb, moving, slow-moving corporations that we often talk about that are in that commoditisation, price war trap, the same things now happening with the smart agile entrepreneurial platform businesses. So is this the end of the sort of platform revolution? And is this the beginning of massive increases in price and mass entertainment through platforms? Maybe it's the rise and fall, a very quick rise and fall of Disney plus that that we're seeing in Netflix and I suppose an indication to customers that we're not going to get those nice low prices anymore. Things are going to go up considerably. Looking at the Disney plus price increase in this particular instance, prices for no ads have gone up 37% if they're going to take this new model and new price structure into the market. So that's a quite considerable price hike for something you don't want to see. So let's see how that pans out for Disney plus.

I suppose a lot of this comes down to these platforms, I’m calling them platforms not sure that the right term is streaming services, they try to segment their market. I think they've been quite a purge segmentation up to now. I think the only real segmentation that I noticed is how many users can be watching the show at one time, which to me is a bit strange. Like is this saying that four people watching Netflix on the same thing in the same house at one point in time is a bit odd as a big house or maybe people should watch movies together more? It almost suggests isolation is a good thing for these people whose company's market share and share price. So that's odd. I suppose they haven't been very good at segmentation. You know, even if you look back at the old Foxtel, Sky Television, HBO, the sort of companies satellite TV, cable TV, they were quite good at segmentation. You could select the package you wanted, sports, all that sort of stuff. I think with these platforms, to some extent, they haven't moved to that yet. Look even at Disney there are cartoons there are movies, and there are TV shows. How many people watch even a small percentage of them? So I'd argue there's room for segmentation a bit more in that category. Disney's catalogue is so big that they control production a lot better than Netflix does, which is generally redistributed for the vast majority of their product, whether it's the content. So I would argue that segmentation certainly will be increasing because these companies don't want to lose people at the lower end of the pay of eight or nine bucks. They want to keep them but push up their profitability on the higher end. I would forecast that go somewhere in the line. I say Google Play, I used to rent quite a few movies. If there was a movie I wanted to watch, and I only watched one or two a month but I pay $5, $6, or $7 to watch that movie on Google Play. And maybe our forecast that that that would be something that will come back a bit more that we'll move away from the view everything at a certain fixed price to more of you view fewer stuff and you pay a bit more per movie. But potentially it ends up with the same money in the pocket of Disney and whoever else. So I think my forecasts are more segmentation will happen. There's going to be more churned. I can't see Netflix surviving in its current form for more than a couple of years. I think the distributor and the actual production house are Paramount, Disney etc whoever the other ones are, I don't know if MGM is still a big one or not, but they will be producing more they will be growing and it'll be more direct to the viewers with segmentation taking away certain aspects that don't require potentially more pay per view movies. I guess that's my forecast.

Sounds like sky and Foxtel to me. So it seems like they're going down the business Yeah, back to the future that's right Foxtel and Sky. I've been through the rocky road and I've recovered through segmentation. But it's funny like with someone like Disney plus there's an element of segmentation in Disney plus in terms of product segmentation because it's all their movies. So as Aodhan was saying Netflix is a distributor of many different types of movies and producers and directors and all of that, but Disney has only got their movies. So there's a bit of segmentation. How niche can they go with their product segmentation? So really what I think they need to work on is customer segmentation. Looking at their pricing model, this new pricing model, they haven't done it except for ads. I like ads. I don't like ads. It is a bit simplistic and dangerous for customer segmentation to go out down because it's highly emotive. It's destroying the very experience they're supposed to be producing well. What does that do that ruins the reputation? So yeah, I'd be interested to see how that goes. And the irony is quite clear. Again, another instance of the egalitarian pricing models through platforms and online comes to piece under pressure when there are more entrants and more competition. So yeah, interesting. We’ll be tracking that one.

Just my final point is that there could be an element of bait and switch to this old, these disruptors came in, you had a Foxtel and speaking in Australia here, you had a Foxtel subscription. Maybe in the US, it's showtime or HBO and Sky TV in Britain. You have that subscription. Some people were paying 100 bucks a month. And then you had Netflix come in and promised the world 15 bucks a month. But now those prices are ramping up. People now find themselves having four or five six subscriptions plus sports subscriptions. In Australia, you've got several Foxtel subscriptions, and cable subscriptions so many that it's almost hard to keep track of them. So in some regard, we're back at the start. We're back where we began. And is it a part of the delivery system and more of a watch on demand? Is it that different to the old-fashioned Sky TV or Foxtel subscription it is a bit back to the future? And maybe this system needs a disruption. Who knows? Maybe we should just go back to the cinema again once or twice a week. Okay, I think that's it for me today. I'm not sure if Joanna has some more.

I'm just thinking, where's the value in all of this and what I'm seeing through this is faster destruction of value than I've seen in the traditional brick-and-mortar entertainment model business models. So yeah, I suppose that's my last thing so I appreciate you listening.

I also don't know if Disney's catalogue was very valuable. Clearly, those movies are shown on videos and in cinemas. Reruns clearly they will show the video shops, Blockbuster Video, etc. I wonder are they making more money now? Is this improving their perception of their brand? Who knows? But I guess it’s enough for the day. So yeah, have a great weekend.