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[Robert]

When streaming first took off a decade ago, it was led by people like me, Millennial cord-cutters who saw the high monthly price of cable TV and opted to save what little money we had (this was the unending aftermath of the 2008 Financial Crisis, after all) and just watch the best Netflix shows.

Now, streaming services have done away with that, which is fair enough, but they're also raising their prices and running ads on their basic plans. Which, again, is fair enough. With the end of the strike by the Writer's Guild of America, streaming services are going to have to pay the writers of the shows on their platforms more for their work, so that cost is going to get passed onto the customer (full disclosure: I am a member of the Writer's Guild of America, East, though digital media members were not on strike and are not covered by the contract negotiated by the studios and the guild).

And it's not just Netflix. Disney Plus is raising its prices, Discovery Plus is raising its prices, Max is raising its prices, and all three services have ad-supported tiers. That doesn't include Hulu, Peacock, and all the other services that are doing the same or soon will. Add it all together and we're talking about serious money, which makes me wonder what the hell was it all for?

The things that drove me away from cable TV in the 2010s still exist. Cable TV plans are still expensive, customer service is generally awful, and the we-can't-call-it-a-cartel carve-ups of US states, cities, and even neighborhoods by cable providers who get exclusivity agreements from landlords means that what cable company you get in the US is entirely dictated by your street address. Your cable company sucks? Too bad, you get what you get.

This way of doing things is a huge part of why I left cable TV behind a decade ago and switched to streaming services to begin with. You know, back when Netflix cost you $9.99 and you could form your own cartel with your friends and pool your streaming services together like we were all still in Zuccotti Park.

But with the end of password sharing and the inability of most streaming services to land on a reasonable price point for their products, I can't help but feel like we are right back to where we were when this all started, and it's frankly exhausting. I just want to watch TV when I come home from a long day, maybe catch a Yankee game or a NYCFC match (it's been a tough year on both counts, sadly), and the last thing I really want at this point is any more choice.

I shouldn't have to think this hard about what I'm going to watch, which service I'm going to browse through, and what my password was for this service or that because I keep getting logged out when I sign in on another device.

I have a life now, full of long hours, family commitments, relationships, and friendships, and in the end, I couldn't even tell you how much I'm paying for all the different streaming services I'm signed up for and only use maybe once or twice a week.

Unfortunately, the answer is right there in front of me. I'm going to go crawling back to whatever cable provider services my pre-war apartment building in Brooklyn supports and sign up for a TV package that has a mix of sports, movies, and premium-ish TV (nothing prestige, but whatever).

Following the Great Recession, the US government's response was to let companies borrow money with a negative interest rate so that companies actually made money just by borrowing. This fueled rapid expansion in the tech industry as companies that struggled to make profits off their core business model were able to stay afloat because of this government-backed debt. In itself, it's controversial, but it's not a bad thing categorically, since it helps companies create a bridge to profitability that might not otherwise exist in the free market.

Now that interest rates are going up to combat inflation, however, every company has to scramble to actually have to make a profit on its actual business, and the only way to do that in media of any kind is to run ads and charge higher subscription fees. Like cable companies have been doing for decades. They do it because it's the only way it works in practice.

So in the end, streaming services will have to become just like cable companies. Higher fees, more ads, and lower production-quality content. The days of Andor and high-production TV shows that run for a season or two before getting canceled regardless of how many subscribers they bring in aren't long for this world, and many popular shows are already getting axed even now. It will only get worse now that streaming services have to actually make sure each show makes its money back.

Named by the CTA as a CES 2020 Media Trailblazer for his science and technology reporting, John specializes in all areas of computer science, including industry news, hardware reviews, PC gaming, as well as general science writing and the social impact of the tech industry.

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Sadly, this is unlikely. Rather, the price of your Netflix subscription is probably going to carry on rising. Three arguments point in this direction, with varying degrees of formal economic underpinning.

The first reason is that this was always the plan. The basic economics of a subscription business, reflecting the fact of consumer inertia, are to start with a low price, build the base, and raise price later. The bad news is that later is now.

To be clear, a plateau in subscriber numbers, or even a modest fall, does not mean they should hold back on price increases. If you raise price by 10% and lose 1% of volume, you are still well ahead.

The second harbinger of pricing doom is the imminent introduction of a new Netflix tier with ads, which I think is less about ads per se, and more like a cover for introducing a degree of price discrimination to bring higher prices for the majority of subscribers.

There has been much speculation about what level of ad load Netflix will adopt, what prices it will be able to command for its ads and ultimately what level of ad revenue it can generate. Most predictions have leaned towards a modest revenue boost from a light ad load, which have led some to ask why they are bothering. But this misses the point, and the main revenue gain from this initiative will come from charging higher prices to those who, today, have untapped willingness to pay.

But how to do this? It seems impossible because why would the 75 accept paying $13 if there is a $10 price in the market? This is the classic price discrimination challenge, and the rewards are great for those who can find a way to solve the puzzle.

The standard approach is to create two versions of the service, one standard, one premium, and look for a device to prompt the population to sort themselves out between the two options. If it works well, those with the higher willingness to pay opt for the premium version and those who are more cash constrained opt for the standard offering. Sometimes this can work with quite small differences between the two options, involving very little cost, some subtle tactic that nudges the better off into choosing to pay more, while offering a discount to others.

But why would people choose to pay more? Think about the example of economy versus business class flights, where the differences between the two offerings are modest. In both cases the service gets you from A to B and does so in the same elapsed time. And yet people are willing to pay double the economy fare, or even more, for a bit more space, a seat near the front (which gets you off the flight a minute or two faster) and slightly better food (but sometimes still with plastic forks). Most would agree that the price uplift for business class far exceeds the costs of the extra service being provided to business class customers, and yet people fly business class. They think they deserve it, and they like to be seen to be able to afford the better service. They voluntarily opt in to paying more.

Is it going to work? A recent survey reports that half of respondents claim they will spin down to an ad-supported tier if there is a price gap. I have bad news for the people who answered this survey in this way; Netflix does not believe you. Netflix thinks that most will opt for the higher priced tier and that is where they will generate most of their revenue uplift.

To help secure this outcome, when the ad-supported tier is introduced, Netflix will play the tried and trusted customer inertia game. They will increase the price for all (from $10 to $13 in the example above) and wait for the most price sensitive to spin down to the $10 ad-supported tier. Some will do so, but even among those who should spin down, because $13 is too much, many will not quite get around to it.

For completeness, Netflix is already practising a degree of price discrimination with its standard and premium services, priced at 10.99 and 15.99 respectively. Both offer access to the same pool of content, but the premium service allows four devices, so is suited to a larger household, which is likely to be correlated with greater aggregate household willingness to pay. So it is clear Netflix understands the economics of price discrimination, and now they look like they want to take it a step further.

The third reason to fear ongoing price increases is if Netflix believes it should be using price to put the squeeze on some of their weaker SVOD rivals, by crowding out the SVOD wallet. Bear with me on this one, because it sometimes seems a bit counter-intuitive.

Many assume that, faced with new competition in the SVOD space, Netflix will be under pressure to keep price competitive, perhaps even to lower price. But I think the opposite could be true and the right strategic move for Netflix might be to meet the competition by raising price. Indeed, the fact that they raised price in March in the UK suggests they might share this view.

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