Streaming services: the new magic money tree for investors

Video Streaming Services — (Image credit: Jaque Silva/NurPhoto via Getty Images)

Streaming television and music has started to turn into a seriously profitable industry. Recently, Disney reported a 7% rise in overall profits. It made decent returns from its films and theme parks, but it was the figures from its Disney-Plus service, with hits including Rivals and Andor, that stood out, with the unit reporting that it had signed up an extra 1.4 million subscribers. Its rival Netflix has been doing even better. Earlier this year, it punched through 300 million paid subscribers globally, a 15% year-on-year rise, and, even better, it is getting them all to pay more as well.

Netflix had successfully clamped down on “password sharing” – allowing lots of people to use the same account – and it has pushed up prices, with the standard plan in the UK now costing £12.99 a month, a £2 increase year-on-year. In the US, the standard advertising-free plan is now $17.99, and there have been similar price increases in all its major markets.

Over in the music industry, Spotify is doing just as well. In the UK, it increased the cost of its standard plan last May from £10.99 per month to £11.99, with similar price rises across the board for shared plans. In the US, it added a dollar a month to its plans. It is now reported to be planning a new premium tier, with better sounds and exclusive content and access to tickets, for another $6 a month. One point is already clear. Its 263 million global subscribers will accept price rises without cancelling.

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It seems as if a handful of streaming giants have discovered a magic money tree. They lock in hundreds of millions of subscribers, getting them used to daily streams of high-quality television and music. And then, once they are hooked on it, they keep raising their prices. Given that costs only rise very marginally as the price rises, the extra cash is pure profit. It drops straight down to the bottom line, generating huge sums for the owners.

We can see the impact of that on share prices. Spotify’s are up by 114% over the last year as investors work out that it is sitting on a digital gold mine. Netflix’s are up by 25% over the last 12 months, even after starting from a high level and getting caught up in the crash in tech stocks. Disney’s shares are up by 4% over the same period, although, of course, it is a far more diverse company, with streaming being only one part of its portfolio. Investors can see the amount of money streamers are making and want a slice of it.

Can streaming services remain profitable?

Here’s the snag, however. This can’t last forever. There are two big problems.

First, at some point, the streaming services are going to hit resistance from customers. Streaming prices were subsidised for almost a decade by the venture-capital industry and the stock market, with investors throwing billions of dollars at companies that were mainly interested in building market share. That allowed them to offer a fantastic product at a very low price.

Most subscriptions were so low that people barely noticed the monthly fees coming out of their bank accounts.

But now they are starting to add up. With a couple of premium television subscriptions and a music streaming service, people can easily be spending £50 or £60 a month on digital content.

At a time when living standards have been squeezed, that can be a lot, and it is an easy cost to cut when money is tight. So far, the streaming giants have been very good at raising prices without losing customers. At a certain point, however, that will change, and there could be a huge wave of cancellations.

Next, the talent will demand more money. If the streamers are making huge profits, then the music artists will soon demand a larger pay-out, and the film stars and directors will want a bigger cut. After all, the streamers need the content, and in the end, they will have no choice but to pay up.

A little like football clubs, they will find that, although there is lots of cash swilling through the industry, much of it has to be spent on a limited pool of exceptional talent. That eats into profits. Right now, streaming is a license to print money. But it won’t for long remain anything like as profitable as it looks right now.

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Matthew Lynn is a columnist for Bloomberg and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.