As Wall Street takes a magnifying glass to Hollywood’s streaming businesses — beyond scale and subscriber growth — one metric is gaining popularity: average revenue per user (ARPU).
Netflix records more revenue per subscriber than rivals such as Disney and Warner Bros. Discovery, with a worldwide monthly ARPU of nearly $12, or nearly $16 in North America, where consumers traditionally pay higher streaming subscription fees than in international markets.
One key reason: Its prices have been higher than its competitors, and the streaming titan (with 221 million subscribers worldwide) has repeatedly raised them over the years. Overall, the Reed Hastings and Ted Sarandos-led streamer posted net income of $5.1 billion in 2021, with management expecting its $159 million free cash flow loss for the past year to continue. will turn into a profit of around $1 billion this year, demonstrating its ability to finance its operations without outside funding.
“Netflix is at a different stage of growth than its rivals,” said Paolo Pescatore, analyst at PP Foresight. “It’s by far a more mature company in the subscription video space. That’s why it puts more emphasis on ARPU growth.”
Netflix has also driven ARPU through measures such as cracking down on password sharing. “If Netflix can capture a meaningful percentage of the 100 million global households that share today, that can really improve ARPU growth,” Morgan Stanley’s Benjamin Swinburne pointed out in a report. “Every 10 million members with a $3 monthly increase potentially represents a 6% increase in operating profit in 23,” although the company hasn’t set a price yet and remains in a testing phase.
Swinburne also sees potential ARPU growth for the streaming giant thanks to its expected level of low-cost ads in markets, such as the United States, where ad-supported services can attract significant ad revenue. . “Netflix can probably introduce low-cost tiers to drive incremental net adds without sacrificing or even improving ARPU,” he said. “Leveraging this to boost ARPU [and] incomes, less dependent on increases in consumer prices, is a positive strategic step in our view.
Competitors are now talking about increased prices and ARPU. “Our current ARPU is nearly $8 globally, with nearly $11 domestically and nearly $4 internationally,” said JB Perrette, global head of streaming at Warner Bros. Discovery, during a conference call on August 4. The executive said the newly merged company would move away from “heavily reduced promotions” for its streaming services, increase prices, “especially in certain international regions where we are well below the market”, and plans to raise prices in a search for profits in 2024.
At Disney, management expects Disney+ to reach profitability in fiscal 2024 as well. But its services face a daunting challenge. For example, Disney+ Hotstar, which operates in India and other markets, accounts for 58.4 million of Disney+’s 152.1 million subscribers. But the ARPU for Disney+ Hotstar sits at $1.20, while the Disney+ figure excluding Hotstar is $6.29.
“A key surprise is that Disney isn’t launching its ad-supported tier at a lower price,” Goldman Sachs analyst Brett Feldman pointed out in a report, referring to Disney+’s $7.99 per month cost. , with advertisements, starting in December. “As such, there is no risk of ARPU dilution in the event of subscriber downgrades.”
Helping the Mouse House become profitable will be “several catalysts ahead, including reaching a steady state of tentpole original content releases, delivering premium general entertainment and international local originals, and the upcoming launch of our funded tier by advertising, alongside the new pricing structure,” CFO Christine McCarthy boasted. (McCarthy also noted that “reported ARPU for Disney+ International was impacted by unfavorable foreign exchange rates during the quarter.” )
Part of the increased focus on ARPU is that subscriber growth has also slowed. Over the past quarter, domestic subscriber additions for Netflix, Walt Disney, Warner Bros. Discovery, Paramount, NBCUniversal and AMC Networks reached a total of just 2.7 million, according to a report by MoffettNathanson. “This represents the lowest quarterly increase in the post-2020 period and a clear sign that the streaming wars have given way to the reality of financial markets,” said analyst Michael Nathanson.
“ARPU is essential for revenue and cash flow growth,” said Hal Vogel, CEO of Vogel Capital Management. “The problem is that consumers in rich countries are already exhausted,” he says, noting that “the cardinal economic rule is not to raise prices in a recession.”
Vogel, a former Wall Street analyst, adds that higher prices tend to ‘encourage’ subscriber churn: than retaining an existing subscriber.”
Pescatore sees churn as part of the streaming business amid various competing services and consumers are watching their wallets. “In the future, more people will switch and cancel services,” he predicts. “Boosting engagement will help increase loyalty, which is another key element to boost ARPU in the long run.
This story appeared in the August 17 issue of The Hollywood Reporter magazine. Click here to subscribe.