When Disney and Apple undercut Netflix, pricing their new streaming services in the single-digit dollars per month, they shook up the market and reset consumer expectations.
HBO Max, which WarnerMedia will launch on May 27, is playing the opposite end of the market. It will retail for $15 a month ($12 for the first year for new customers). The company insists the hefty price point is a value given that it includes all of HBO’s existing offering (already $15 for most subscribers) plus 10,000 hours of other film and TV titles. Today, the company announced more bang for those bucks: a second wave of originals that will premiere in June and July and a feature film, An American Pickle with Seth Rogen, due in August.
No matter what you make of Max’s price, the spread from $5 to $15 for different versions of a similar concept is far wider than that in other consumer-facing parts of media empires. The variability of price reflects different game plans at different companies — some protecting legacy assets, others more purely focused on streaming or selling devices. But whatever the corporate logic, the price fog adds another element to the disorienting experience for many consumers forced to jump through new hoops to find what they want to watch and pay for it.
At a respective $7 and $5 a month (both cheaper through promotions), Disney+ and Apple TV+ came in last fall well below Netflix, whose most popular subscriber tier costs $13. NBCUniversal has landed on advertising as a way to limit subscriber fees, and plans to initially sell most subscriptions to its new service, Peacock, for free or $5. (See the price chart below and at bottom for an overview of major services, just some of the nearly 300 other subscription services in the market, including Quibi, CBS All Access and Starz.)
Basic economics determine price — lower ones can drive scale but erode profit margins. Metrics like ARPU (average revenue per user) and churn rate (how many customers cancel) are now the obsession of companies once fixated on box office and Nielsen ratings. Former Disney CEO Bob Iger said the price for Disney+ — a number that drew gasps at the company’s investor presentation — advances its main goal: “We want to reach as many people as possible.”
Reach doesn’t come cheap, however. Netflix is leading the field in terms of content spending, at $15 billion a year and rising, but newer streaming players are also opening their wallets. AT&T has estimated its investment in HBO Max at $4 billion. Disney is also committing billions and also foregoing billions more by taking back rights it would have previously sold off to third parties (a $500M hit to operating profit this fiscal year). Brian Wieser, global president of business intelligence at GroupM, estimates $20 billion in total streaming content spending through 2024, but only about $20 billion in new customer subscription money available. “Financial contributions from these new services will not be net positive anytime soon,” he wrote in a recent report.
Apple hasn’t released figures, and estimates from analysts vary from 10 million to 40 million device owners having tried out Apple TV+, since it initially comes free via Apple devices.
Disney used its price and strong brands to reach 54.5 million subscribers in less than six months, which is already near the low end of the company’s five-year target of 60 million. When high-profile titles hit the service, as in the case of Disney’s film of the Hamilton stage production now headed to Disney+, it moves the needle of consumer interest. Initially ticketed for movie theaters in 2021, the film shifted to a June streaming debut, as Deadline was first to report Tuesday.
The mass boom in streaming during COVID-19 has only intensified the move away from traditional TV viewing and moviegoing, giving the billion-dollar push into streaming even more urgency. New data issued Tuesday by Recurly, which makes subscription management systems, found a nearly 38% rise from March to April in new subscribers by streaming services offering original programming. At the same time, cord-cutting reached a new high in the first quarter, with pay-TV providers reporting nearly 2 million subscriber losses, dropping pay-TV penetration to 1995 levels.
Another headache for new streamers is the shift from the traditional pay-TV bundle, known for long-term contracts and reliable revenue, to a trigger-happy digital realm, where customers can bail with a flick of their finger. Rob Holmes, VP Programming at Roku, ballparks the number of high-end original programmers in streaming at 10, which together cost more than $90 a month — more than double the $30-$40 a typical customer wants to pay. “Many consumers come to streaming as a way to save money,” Holmes said at an NAB panel Wednesday. “No one wants to cut the cord on a $90 cable bill and then sign up for 90 bucks’ worth of streaming services.”
Competition will be fierce, but the prize for media companies is controlling more of their destiny than they do in a world where exhibitors and TV distributors take up to half their revenue.
For that reason, Needham analyst Laura Martin sees Disney sticking at $7 and not raising prices as Netflix has done. “For them, it’s about creating an on-ramp to the Disney ecosystem,” she told Deadline. “The more you get people to tap that button on Disney+, the more you’re embedding them in the whole range of what they company can offer.” Long-term loyalty, she adds, beats short-term profits that might come from price hikes.
Those working on HBO Max describe their goal as “bridging” the linear days of HBO — which still has more than 30 million consumers — and the digital era. Given that most current customers already pay $15 for HBO through their pay-TV provider, the company was never going to be able to get the price as low as $7.
John Stephens, CFO of AT&T, described HBO Max as a “real bargain” at a Wall Street conference Tuesday. Customers “know the quality of the entertainment and the content and for a long time have established a price for it that they’re willing to pay,” he argued.
Bringing to market a service like HBO Max, whose very name is partly a callback to the 20th century, will be a challenge and few on Wall Street or in the streaming game expect a Disney-esque blaze of glory initially. The company expects to have 50 million U.S. subscribers by 2025 and at least 75 million globally. Through AT&T, it has a head start of more than 10 million current HBO subscribers. A separate deal with Charter gives it several million more at the jump.
That’s if you know how to make the switch to Max, of course. The process of migrating existing HBO customers to Max is one that WarnerMedia has spent months trying to orchestrate, an effort involving engineers, affiliate and consumer marketing teams, distribution executives and a host of others. It will get even more interesting in 2021 when a cheaper, ad-supported tier of HBO Max is introduced — an inversion of the steps CBS All Access and Hulu took, with lower cost versions with ads supplemented by pricier, ad-free versions.
In the near term, HBO Max will exist alongside HBO Now (a stand-alone streaming version of the same linear programming on HBO launched in 2015) and HBO Go, another replica of linear requiring a pay-TV subscription.
At an investor event last fall in Burbank, executives were asked by Wall Street analysts about the risk of confusion among the three services, not to mention traditional HBO. Millions of subscribers to HBO have wondered if they can up-convert for free (short answer: some can, some can’t, for now). In one eyebrow-raising exchange, AT&T CEO John Stankey told one analyst that he considered it an “IQ test” for consumers tasked with choosing the best value.
Disney’s fast start has been followed by a reassessment of its product offering, which critics described as light even before the pandemic. Although it features a trove of Pixar, Marvel, National Geographic, Star Wars and Disney library titles, new breakouts like The Mandalorian have been few — a problem exacerbated by the production shutdown. At a recent investor conference, Stankey said Disney+ is well-designed but “not all that deep” compared with HBO Max, which includes dozens of originals, Friends, South Park and Warner Bros library films.
Martin views the HBO Max price as sensible, especially given the concerns about “most-favored nation” clauses in existing carriage deals that could have driven fees lower had they tried to sell the new package at $10 or lower. She reserves her criticism for Netflix, which has raised prices four times since 2010.
“These guys at Netflix are always saying how they do everything for the consumer, they’re so pro-consumer. I call ‘shenanigans’ on that,” Martin says. “They must introduce a lower price point that is in line with what Disney and CBS All Access and others are doing. That’s how we’ll know if they have the consumer in mind.”