• Legacy media companies including Disney, Warner Bros. Discovery, Paramount Global and Comcast entered the streaming market with a focus on gaining subscribers but are now looking for a return on their investments.
• Their strategies include cheaper, ad-supported models, platform bundles and a crackdown on password sharing, though price hikes have shown more immediate results toward profitability.
• That means consumers are facing higher subscription costs with increasingly frequent price hikes.

Streaming is finally starting to pay off for media companies, but there's a catch — to get there, consumers are facing higher subscription costs and increasingly frequent price hikes.

Legacy media companies entered the streaming market with a focus on gaining subscribers and competing with category leader Netflix as traditional cable TV bundles lose customers. Now, looking for a return on their content investments, Disney, Warner Bros. Discovery and others are aiming for streaming profits.

Their strategies include rolling out cheaper, ad-supported models; launching platform bundles; and cracking down on password sharing, but price hikes have shown more immediate results toward profitability.

"The years of prioritizing user growth with low prices are over," said Mike Proulx, vice president and research director at Forrester.

Disney said last week that its combined streaming services — Disney+, Hulu and ESPN+ — were profitable for the first time during its fiscal third quarter. Although the company added new subscribers, that milestone was largely due to price increases.

CEO Bob Iger said during an earnings call that Disney has "earned" its pricing in the marketplace due to the company's creative contributions and product improvements. He noted that with past price increases, the company hasn't seen a "significant" number of customer departures.

"When we look across our portfolio … we're seeing growth in consumption and the popularity of our offerings, which gives us the pricing leverage that we believe we have," Iger said.

Climbing prices

The major streaming services have gone through a number of price hikes and changes throughout the past few years.

In just the past five months, four streamers have announced price increases: Warner Bros. Discovery's Max, Comcast's Peacock, Disney and Paramount.

Ahead of earnings, Disney announced it's raising streaming prices by $1 to $2 a month for Hulu, Disney+ and ESPN+.

Similar to Disney, Paramount Global said last week in its quarterly earnings conference call that its streaming business, centered on flagship service Paramount+, reached profitability.

Paramount noted on the call that global average revenue per user grew 26% for Paramount+, which reflected a price increase during the third quarter of 2023. Meanwhile, additional price increases for Paramount+ go into effect this month, and the company expects to see a financial impact for that during the fourth quarter.

Though Comcast's Peacock offered a limited-time annual subscription for $19.99 ahead of the Olympics, the company raised the monthly cost of the service's ad-supported tier by $2 this summer, marking its second price hike of the year. Warner Bros. Discovery also increased the cost of Max without ads by $1 per month in June.

"For a decade in streaming, an enormously valuable amount of quality content has been given away well below fair market value. And I think that's in the process of being corrected," Warner Bros. Discovery finance chief Gunnar Wiedenfels said during an industry conference last year. "We've seen price increases across essentially the entire competitive set."

When Disney reported a revenue increase in its most recent quarter, it was primarily driven by higher subscription prices, said Forrester's Proulx, since user growth and ad revenue alone won't sustain profitability.

That puts the burden of revenue growth somewhat on consumers' shoulders, he said. And users are feeling the strain.

In a survey of 3,000 consumers, 90% agreed that streaming video subscriptions are raising their prices more often than they were in the past, according to Hub Entertainment Research.

Ad support

Meanwhile, companies are pushing consumers toward ad-supported tiers — which are often cheaper than commercial-free streaming — in a bid to attract more advertisers, Proulx said.

And many of those consumers are taking the option.

"We expect meaningful growth ahead as more subscribers opt for the ad-lite tier, which represented over 40% of global gross adds last quarter," Warner Bros. Discovery's Wiedenfels said during last week's earnings call. Ad lite references Max's cheapest subscription tier

Media companies have noted that advertising has grown for streaming. Warner Bros. Discovery said during its second-quarter earnings conference call that streaming ad revenue doubled year over year.

Similarly, revenue from advertising grew 16% in Paramount's second quarter, driven by Paramount+ and Pluto TV, according to the company.

At Peacock, 75% of subscribers were on the ad-supported tier as of February of last year, according to research from Antenna. At the time it was the largest share of any of the major streamers, followed by Hulu at 57% and Paramount+ at 43%. The streaming companies don't typically disclose the breakdown of subscriptions by tier.

"The advertising tier for all these companies is appealing because they can make as much off of ad revenues as they make off of the subscription fee on the ad tier," said Tim Nollen, senior media tech analyst at Macquarie.

Netflix executives chafed against advertising for some time but pivoted in 2022 following a slowdown in subscriber growth. The company also recently nixed its cheapest, ad-free basic plan — leaving consumers with the choice of a $6.99 ad-supported option, or two ad-free plans that cost $15.49 or $22.99.

Netflix co-CEO Ted Sarandos said in the company's second-quarter earnings call that the ad tier makes Netflix more accessible to users due to the low entry price. For both tiers, when it comes to raising prices, Sarandos said Netflix aims to increase value and engagement before having subscribers pay more.

Generally, price-pinched streaming consumers are willing to tolerate ads in order to pay lower subscription fees, according to Forrester's research. Still, ad tiers aren't immune to price increases. Disney+ is now raising prices of its ad-supported plan, for example.

Disney took a unique approach to launching its ad tier in December 2022, giving existing subscribers the option to either pay an additional $3 per month or accept ads. Nearly 95% of Disney+ premium plan subscribers paid to maintain ad-free streaming, according to Antenna.

Warner Bros. Discovery said in an earnings conference call that it suffered fewer customer losses than expected in July, following its $1 price increase on ad-free streaming.

"Until there's a mass exodus of users, Disney (and others) will continue to increase prices," Proulx said.

Keeping subscribers

There's one key thing that's working to streamers' advantage: Across platforms, users aren't often willing to sacrifice their desired content even when costs go up, said Hub Entertainment Research founder Jon Giegengack.

However, the total cost of streaming can sometimes exceed that of cable for certain consumers because the content they're consuming is broken up across the different platforms, according to Proulx.

In response, companies including Disney, Paramount and Warner Bros. Discovery have turned to bundling their services into a single, discounted offering. In cases where streaming is no longer cheaper than traditional television, bundles allow consumers to save money while accessing TV content across different services, according to Proulx.

For providers, bundles are an opportunity to increase revenue because they expect fewer people to cancel their bundled subscriptions than stand-alone ones, according to Nollen.

"The new world of streaming is not as lucrative as the old world of pay TV was," Nollen said. "Everybody has woken up to that, and they are coming up with ways to try to at least improve its fortunes, and bundling is one." 

Streamers are also growing their total users by cracking down on password sharing. Last year, Netflix alerted members that accounts can only be shared within a single household, and Disney made a similar announcement earlier this year. Warner Bros. Discovery will soon follow suit.

Nonetheless, as consumers continue to face rising subscription costs, Giegengack points to a broader streaming competition. While low subscription prices initially helped other streamers grow subscribers, he said they can't afford to keep doing that.

"The amount that people have been able to pay for, the volume of content they get up until now, is just an absurdly good deal, and I don't think it's sustainable," Giegengack said.

Disclosure: Comcast owns NBCUniversal, the parent company of CNBC, and is a co-owner of Hulu. NBCUniversal also owns NBC Sports and NBC Olympics, which is the U.S. broadcast rights holder to all Summer and Winter Games through 2032.