The declining average revenue per user (ARPU) for subscription video on demand (SVOD) services like Disney+ and Netflix reflect the intense competition for subscribers amongst streaming service providers. And they also exacerbate the continuing imbalance of income provided by current tariff structures set against the high cost of creating new, unique and exclusive content to keep viewers on board.
The Walt Disney Company’s latest earnings report calculates that Disney+ added 22m subscribers in the first fiscal quarter of the current financial year (ending 2nd January 2021), taking the total to almost 95m. Yet its Q121 ARPU per paid subscription dropped 28% year on year from US$5.56 to US$4.03 compared to Q120. The shortfall may be a result of the most growth coming from markets like India. The Disney+ Hotstar service in India – starts at around US$4 per month or US$20.40 per year. That compares favourably to service fees for US customers following recent price increases in March[i], with monthly subscriptions now costing US$8 a month or US$80 for the year. Those in the UK, Canada and Australia will continue to pay slightly lower rates until the new price structure kicks next August.
Nor is the challenge exclusive to Disney+ – Netflix faces precisely the same issue. Research from Statista shows the differences between its quarterly ARPU in four regions of the world for the fourth quarter of 2020 – US and Canada (US$13.5), Europe, the Middle East and Africa (EMEA – US$11.05), Latin America (US$7.12) and Asia Pacific (US$9.32).
Higher fees to cover unique content production
Like Disney+, Netflix also bumped up subscription rates for its standard service from US$13 to US$14 a month[i], with the premium plan climbing from US$16 to US$18 (the cost of the basic legal definition plan remains unchanged at US$9). At the time of the announcement, Netflix said the price rises were necessary to underwrite its expansion of original movie and TV show production. That pressure has been growing for some time – the latest round represents the third time that Netflix has raised its prices in three years.
The availability of original shows and movies is crucial to SVOD subscriber growth in an increasingly competitive market landscape. Still, it also comes with high costs, and Netflix has had to borrow heavily to keep up its production. Reports suggest the company borrowed over US$16bn in less than ten years to expand its content library, with debts still estimated at US$10-15bn.[ii]
SVOD providers also face high customer acquisition costs, partly down to their tried and tested preference for offering free, limited-time trial subscriptions, which pull in new consumers. In its October 2020 Digital media trends pulse survey of US consumers, Deloitte calculated that providers could spend up to US$200 a year to acquire a single SVOD customer. This investment can take up to 15 months of a paid subscription to recoup. Subscribers have also shown themselves more than willing to switch providers to watch newly released films and TV shows as and when they are released, meaning OTT video services have to work even harder at retaining existing customers.
Budgets under pressure
A spate of new service launches over the last year has raised the stakes further. The fight for SVOD viewers in the US, for example, ramped up considerably when traditional pay-tv providers ViacomCBS and NBC introduced rival platforms last autumn (read more detail from my recent blog here).
Recent market expansion suggests there may be enough customers for everyone. Still, the figures could have been skewed by coronavirus-induced lockdown restrictions and stay at home orders which created what may turn out to be a temporary surge in demand for home entertainment. Netflix, for example, added almost 37m new members in 2020, up 31% over 2019, its most significant every annual boost.
Forecasts suggest that sort of performance is unlikely to be repeated in 2021. In that case, the key to continued growth for the likes of Disney+ and Netflix may rest on them attracting subscribers outside of their core markets in North America, particularly countries in Asia, Africa and Latin America.
To do that, however, they will need to create more unique, local language content, which subscribers are willing to pay for. This strategy puts further pressure on the production budget given the lower levels of ARPU in those regions. That leaves scale as the better option, reaching out to higher numbers of potential customers and making it easy for them to pay for content.
It is also interesting to note that to spur growth in emerging markets, Netflix has introduced weekly bundles and free weekend-only limited-period trials as a way to entice new consumer segments to sign-up. Large numbers of people in emerging economies remain unbanked without access to cards, taken for granted in North America and Europe. In many countries, those with smartphones vastly outnumber those with bank accounts. The ability to let consumers add fees for monthly or yearly service subscriptions or one-off content downloads to their mobile phone accounts through direct carrier billing partnerships with local operators could prove to be SVOD providers’ single most important asset going forward.
[i] Disney Plus price increase – here’s everything you need to know, GamesRadar+, 26th March 2021
[ii] Netflix Price Rises Are Just About To Bite, Forbes, 5th January 2021
[iii] Netflix Will No Longer Borrow, Ending Its Run of Debt, NY Times, 19th January 2021