Wolk’s Week in Review: Streaming prices rise, Xumo joins the OS Wars

Wolk's Week In Review

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1. Streaming Prices Rise

Netflix is allegedly looking to raise prices on its main ad-free tier. The exact amount has not been leaked, but suffice to say that the bump will likely be small enough so as not to scare users off.

Similarly, WBD is raising the price of the ad-free Discovery+ app (yes, it still exists) by $2/month to $8.99.

And most of the other subscription services are no doubt not far behind.

Part of this is Netflix using the writer’s strike as cover—they will need to pay more money to writers, producers and (likely) actors as part of the settlement.

It’s the same reason everyone else will use, too. 

But that is not the real reason they’re raising prices.

The real reason is that all of the streaming services are severely underpriced. Something that will become even more apparent over the next few years.

Why it matters

Netflix and other streaming companies simply took a page from Silicon Valley—make your product very cheap to encourage as many people as possible to use it, and then, once you have them hooked, gradually increase your prices. 

This was a very smart move, especially given that traditional pay TV packages often ran north of $100/month and (more importantly) premium cable add-ons like HBO and Showtime would then cost an additional $15 or more. 

So getting something similar to HBO but with even better functionality for less money seemed like an incredible win.

The second part of that playbook is what is known as “boil the frog” — gradually raising the prices so that subscribers don’t really realize that prices are going up and thus don’t jump out of the proverbial pot.

The vMVPDs—Hulu Live TV, for example, have been particularly adept at this. I can attest that when I first began subscribing to the service about five or six years ago, the price was under $50/month. With the most recent increase it will be over $90.

So that’s the basic economics, but there’s more to it than that.

For what they have on offer, and, especially, for what they are soon planning to offer, the bigger SVOD services are still way underpriced and will need to start charging a lot more each month to keep their accountants happy.

Take Max, for example.

Right now, subscribers are getting a mash-up of HBO and Discovery/HGTV, with some random Turner shows thrown in.

But soon, Max will be adding on a full-on version of CNN. Plus the ability to watch live pro and college sports via their Bleacher Report add-on.

I would be very surprised if they didn’t add in linear channels for their library content as well, given that Discovery+ already has them, and that so much of the Discovery content is eminently bingeable, a huge win on an ad-supported tier.

So you take all that and it’s pretty close to a replacement for a full-on pay TV bundle—premium channels included. Which means it’s pretty delusional to think that you’re going to continue to be getting all that—without ads—for just $26/month (the price of ad-free Max + the $10 sports add-on.)

A good chunk of the pricing decision, or at least the speed at which it increases, will be tied to how well each service’s ad-supported tier is doing. 

As I’d noted last week, the downside to having a lot of Really Good Shows is that people don’t want to watch Really Good Shows with ads and will gladly pay an extra $5/month not to do so.

Since the ARPU (average revenue per user) for ad-supported users is higher than it is for ad-free users, the fewer ad-supported subs there are, the more likely it is that prices will keep rising.

I suspect the way that will play out is that the gap between the ad-supported and ad-free tiers will continue to widen as a way of making the ad-supported tiers seem more attractive and that any promotional deals will only involve the ad-supported tiers too.

A final prediction: one other reason the SVOD services will be able to raise their prices is there will be fewer of them. Every industry eventually contracts and so look for there to only be three or four mega services once everything shakes out.

That should make those $50/month ad-free fees go down a little easier, unless, of course, you feel the need for all four of them.

What you need to do about it

If you are a streaming service, you need to make sure consumers understand why you are raising your prices and what’s in it for them.

You also need to make the ad-supported tier a real bargain compared to the ad-free one, as it is all too easy for people to decide they are happy to pay an extra five dollars every month not to see ads.

If you are a consumer, get ready for higher prices. Understand that there is no way that $15/month is sustainable and that it’s not all just about CEO greed—without carriage and retrans fees, streaming is always going to be a much less profitable business than old school linear, and so higher subscription prices can help to narrow that gap.

So bear with them while they figure it all out.

2. Xumo Joins The OS Wars

Comcast and Charter unveiled the fruits of their Xumo joint venture this week: a Xumo-branded streaming device (Xumo Stream Box) that looks more like a slimmed down set top box than a dongle, and, more importantly, a freshly designed streaming interface that they plan to license out to other companies.

The box is expressly designed to allow viewers who currently subscribe to Charter or Comcast pay TV bundles to get access to streaming apps from the same device and same interface.

But the operating system—which is called the “Entertainment OS”— seems devised to give the company—which also owns Sky— a way to participate in the ongoing global streaming wars by offering an alternative to the operating systems already out there. And to do that, they’ve designed an operating system that can function for both cord cutters and for those who already have an existing pay TV package, one they are not particularly keen to give up.

Why it matters

There is a good 30% or so of the US population who will only give up cable when someone pries the set top box remote from their hands. Some just love their cable, others are tech-phobic and the notion of going to Best Buy to buy a Roku stick fills them with dread. Ditto interacting with the streaming-based interface on their new LG, Samsung or VIZIO smart TV. 

So the Xumo box is there to help them enter the 21st century and the Wonderful World of Streaming Television, while still providing access to a familiar grid-style EPG and all their favorite networks.

I saw a demo this week and the Entertainment OS (EOS) does a very good job of integrating Spectrum’s linear feed with streaming options, both SVOD and FAST. What’s more, it does a very good job of identifying which streaming service all of the recommended options are coming from, meaning there is, for instance, a very visible Disney+ logo on the Disney+ shows. 

That is notable in that part of the deal between Disney and Charter was that Charter would be able to offer Disney’s streaming services at wholesale prices. So clearly identifying that a show a viewer might want to watch is available on Disney+ (or Max or Netflix or Peacock) can only help edge viewers closer to taking advantage of those deals.

So there’s that, and then there’s Comcast’s global ambitions, fueled by Sky.

The global war for control of the TV operating system is the real battle of the “streaming wars”, and, not uncoincidentally, the subject of our next TVREV Special Report. 

And the truth is that the market is so big and there’s so much up for grabs (especially outside the US) that even getting a couple of percentage points of market share will be worth billions.

Meaning I’d be surprised if that was not the real play with Xumo and Entertainment OS, and given the size of Sky’s existing footprint, I’d say the OS Wars have a solid new participant.

What you need to do about it

If you are Comcast, keep evolving your OS. I am sure you have thought of all of this, but getting it as the OS in a lower-priced brand to televisions will be key, as will getting the Xumo box down to a price where it competes with the $25 Roku and Amazon devices.

I’d even give it away for free if someone signs up for a certain level of service.

If you are a Comcast or Charter subscriber, or, more likely, the adult child of a Charter or Comcast subscriber, Xumo is definitely worth checking into for the technophobe in your life, the one who still doesn’t fully “trust” flat screen TVs.

If you are a manufacturer of low-priced television sets and you are getting a bit irked about Roku rolling out its own line of TV sets, here’s a possible replacement.

If you are a player in the global streaming wars, or if you’d just like to be one, hit us up here about a potential sponsorship.

Alan Wolk is co-founder and lead analyst at the consulting firm TV[R]EV. He is the author of the best-selling industry primer, Over The Top: How The Internet Is (Slowly But Surely) Changing The Television Industry. Wolk frequently speaks about changes in the television industry, both at conferences and to anyone who’ll listen.