The Retired Investor: Video Streaming Services Hit Brick Wall

The proliferation of streaming services over the past few years appears to have reversed course. Price increases, the introduction of advertising, and fewer hit shows have consumers finally looking at the number of streaming services they are paying for.

 

Wall Street has also lost its love affair with streaming companies, except for Netflix. That company continues to benefit from its competitors' woes. During COVID, when Americans were trapped at home, they spent hours watching television. Streaming services could do no wrong.

 

However, times change, and the couch potato behavior is disappearing. As it does, the willingness to pay higher prices for something few are watching is also declining. Throw in the fact that due to the writers and actors strikes last year, there will be fewer streaming products available, and you have a ready-made excuse to pare back on streaming services.

 

From Wall Street's perspective, there are simply too many services competing for your dollars. The major players led by Netflix include Disney+, Hulu, Paramount+, Max, Starz, Peacock, Discovery+ and Apple TV+ are facing lower profitability or no profits at all. Few of these streamers have developed the scale necessary to achieve profitability.

 

There are two main options to turn around profitability — increase prices, add advertising, or merge with other streamers. Over the past several months, most of these services announced price increases. In addition, levels of pricing were offered, if you want to put up with advertising. Those who do can pay a lower price.

 

Starting at the end of this month, for example, Amazon Prime Video will be charging viewers another $2.99 per month. If you don't pay the extra fee, you will be forced to watch advertising interspersed within all your shows. Disney, Netflix, Max, Apple+, and others have raised prices, and some have introduced advertising as well.

 

These moves have had a predictable knee-jerk reaction from their audience. Consumers who didn't care suddenly became interested in discovering exactly how much they were paying and for what services.

 

Back in June 2022, I pointed out in a column "Streaming Come of Age," that almost a third of U.S. consumers underestimated how much they spend on subscriptions by $100 to $199 per month, according to a study by market research firm, C+R Research. It was also true that many people (42 percent) have forgotten that they are paying for a streaming service that they no longer use. That appears to be changing. In the past two years according to Antenna, which studies subscription services, about 25 percent of consumers who had subscribed to the major streaming services have dropped three or more of these services.

 

Some consumers, like my brother-in-law, who is an avid sports fan, are debating whether cutting cable or cutting streamers is the cheapest way to go. This is surprising since streaming services have been the beneficiary of the recent trend of cutting cable services. By the end of 2023, over half of U.S. consumers (54.4 percent) have dropped cable TV and traditional Pay-TV services, according to Insider Intelligence.

 

For some streamers that lack the scale needed to achieve profitability, the only course that makes sense is merger or acquisition. Paramount, for example, is in discussions with Warner Brothers Discovery to combine forces. Rumors abound that other streamers are going down the same path. Disney+ is acquiring the remaining 33 percent stake in Hulu it does not already own from Comcast.

 

Merging two unprofitable streaming services into a single service might improve scale, but probably not enough to guarantee profitability. Subscribers of both services could save money, but beyond that, I can't see how the costs of producing content would change. 

 

It may be that we are on the verge of a "back to the future" moment where bundles of streaming services are offered at a discounted price as they were on cable. What bothers me more is that the trend toward reinstating advertising in streaming services takes us back to a time when audiences were forced to watch hours of mindless drivel on cable. I was saved with the advent of DVR which allowed fast-forwarding through ads. It is not available on streaming. That puts most of us between a rock and a hard place. Who knows, it may make cable a better option for many once again.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.