Hit by 'streamflation'? Here's why media companies are hiking prices

Media companies across the board are jacking up the price of their streaming services in what some have dubbed “streamflation” as they look to turn a profit on streaming after years of losses.

Disney announced last week that it plans to increase prices for the ad-free versions of Disney+ and Hulu by at least 20 percent in October, following a “pretty significant” jump in prices just last year.

Netflix also recently axed its cheapest ad-free option, making the $15.49 a month Standard plan the most economical choice for subscribers who want to avoid commercials. Paramount Plus similarly ditched its mid-range, ad-free option in June.

Warner Bros. Discovery’s Max, formerly known as HBO Max, increased its monthly rate by $1 in January, while NBCUniversal increased its plans on Peacock by $1 to $2 per month on Thursday.

Overall, the average monthly cost of a major streaming service has increased by nearly 25 percent in a year, according to a recent Wall Street Journal analysis. 

The Financial Times also reported that the total cost of maintaining the top streaming services will increase to $87 a month this fall, making it more expensive than the average $83 a month cable TV package.

“We’re witnessing a contemporary iteration of cable systems, now in digital format - and a normalization of pricing for streaming channels,” Dan Goman, the CEO of Ateliere Creative Technologies, said in a statement to The Hill.

“Unfortunately, for the consumer, this means that the free ride is over,” he added. “The days of a la carte, content-rich, low-cost streaming channels are coming to an end.”

The price hikes come amid a push to turn a profit on streaming services, most of which have resulted in billions of dollars in losses for media companies as they have prioritized rapid growth in lieu of profits. 

These companies have reported combined losses of $20 billion on their streaming services since early 2020, with only Netflix consistently turning a profit, according to the Journal.

“Streaming services operators are under considerable pressure to deliver results and try everything possible to turn a profit,” Goman said. “The fundamental truth is that content and operating a streaming service are very expensive.”

However, streamers appear confident that subscribers will either swallow the added cost or switch to newer ad-supported versions of their services, which are often significantly cheaper than their ad-free alternatives.

Disney CEO Bob Iger said on an earnings call last week that the company did not see a significant loss of subscribers in response to its price increase last year, which they found “heartening.”

According to the subscription analytics firm Antenna, 94 percent of Disney+ subscribers accepted the price increase rather than cancelling or switching to the cheaper ad-supported plan.

While 40 percent of new Disney+ subscribers have opted for plans with ads since they launched in December, Iger’s company and several others have said that their ad-supported plans have brought in more revenue per user than their ad-free alternatives in recent months. 

“We’re very optimistic about the long-term advertising potential of this business, even amid a challenging ad market,” Iger said on last week’s call, adding, “We’re obviously trying with our pricing strategy to migrate more subs to the advertiser-supported tier.”

The Disney CEO noted that the company has kept the cost of its ad-sponsored plan flat, even as it plans to raise the price of its ad-free subscriptions.

Andrey Simonov, a professor with Columbia Business School, said there will likely be some cancellations from rising costs, both due to a typical drop in demand in response to the price increase and the likelihood that people will cancel previously forgotten subscriptions.

“A lot of these subscriptions are something that people paid for a while ago and forgot,” Simonov told The Hill. “There is a lot of good evidence and research that people sign up, and then for a while, they forget to cancel.” 

“At some point, when they start to recalibrate how much they spend, they'll tend to cancel these in bulk at the same time,” he added. “So, these price increases can easily be a moment when consumers will start to reconsider their choices. And so, in some ways, they will stop this consuming by inertia or subscribing … by inertia and make an active decision.”

However, Simonov said that media companies will likely not take a major hit over the price hikes in the short term. 

“From what we know from research, people are often not very elastic in subscription price points,” he said, adding, "When they subscribe, they pay every month this amount of money and this extra $3 a month wouldn't seem like a lot to a lot of people. So, compared to what these guys are getting in terms of margin, I don't think volume will go down so much that they will be actually worse off in the short run.”

Amid a pair of strikes in Hollywood, the amount of content that media companies have in store will also be a “key piece of the puzzle” to the subscriber response to rising costs, Simonov added.

“A lot of subscriptions are coming from some super star shows,” he said, pointing to a popular show like “Succession” as an example. 

“I'll sign up and then there'll be attention spillover to other content they have. And so, I’ll consume another show and then by inertia I'll keep paying for a while even though I don't consume so much,” he added.

However, without those popular shows, he noted, “those events will go away.”