WarnerMedia is facing a pricing conundrum as it enters an already crowded streaming entertainment space.
The company is expected to launch its highly-awaited video service for between $16 and $17 a month, according to a report in the Wall Street Journal. The offering is expected to include HBO and Cinemax, as well as other franchise content including D.C. and Harry Potter TV shows and movies. It is slated for beta release later this year and should be fully operational by March 2020, the WSJ wrote.
The company is also reportedly mulling an ad-supported plan which would lower the cost of the service. It may be the smarter move.
While $16 to $17 is far less than most people pay for cable, the price point puts WarnerMedia’s service already ahead of the pack. Despite Netflix’s frequent increases, its most popular plan still is $13 a month. Disney+ will launch in November at a low monthly $7 rate. Hulu starts at just $6 a month.
The average American only subscribes to 2.25 streaming services, according to research from Ovum. Another study from Compare Cards found people were already spending $38 a month on online subscriptions. With more services coming to market, competition is getting fierce.
Investors are patient. Disney admitted people might have to wait until 2024 to see profits from its streaming services. But WarnerMedia would have to significantly lose revenue if it lowered the price point, particularly because of HBO. It would have to renegotiate contracts with cable companies, as well as lower the price for individuals signed up to HBO Go. Parent company AT&T ($T) also has the weight of the $85 billion Time Warner acquisition price on its books.
Allowing advertising would give WarnerMedia’s service another revenue stream, allowing it to drop its price to a competitive level. Americans can be receptive to advertising if it means cheaper ways to watch: About 70 percent of Hulu’s 82 million subscribers have its lower-priced, ad-supported plan. Companies like Walmart, Xumo, and Viacom’s Pluto TV are embracing advertising because they understand not all households have the disposable income to add every new service on the market.
On top of that, brands are clamoring for ways to get in front of streaming viewers. According to the Interactive Advertising Bureau, 247 million users streamed digital video in a typical month last year for a total of 192 billion minutes monthly. Digital video ad revenue reached $5.2 billion dollars just in the first half of 2018. The likes of Netflix, Amazon Prime Video, and Disney+ don’t allow commercials, so those services that are ad-friendly are reaping the benefits. Roku, for example, posted an ad revenue of $134 million during its last earnings report in May, up 79 percent year-over-year.
WarnerMedia has the ability to attract a lot of these of these ad dollars with its premium content. And, in the process, the lower costs should allow it to score big with viewers too.