How to think about Netflix's Eurozone pricing

There's a 20% variance in pricing for its ad-supported tier in the four countries in the EU that get it first. Why?

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Netflix announced its budget ad-supported tier this week, and while most of the media commentary is focused on the US market, there’s an interesting anomaly in its eurozone pricing. Only four countries get the ad-free tier in the first wave, but the pricing varies by 20% among them.

France: €5.99

Italy €5.49

Spain: €5.49

Germany: €4.99

Why such variance? Thanks for asking, Stephen Keenan, CEO of Filter.

There could be a number of answers to this question. Firstly, let’s be clear: While the eurozone shares a currency, prices and taxes are not harmonized across the eurozone. A bottle of Coke costs €1.39 in Portugal, but €2.63 in France, for example (data here). Multiple factors affect that.

But even leaving those aside - what factors might a streamer consider when localizing its pricing?

EXPERIMENTATION

Firstly, this could be a first-wave experiment. Netflix might want to roll out a harmonized eurozone price eventually, but they’re testing the waters with some variety. Why would they want to harmonize prices? Managing multiple pricepoints adds cost and complexity in terms of managing the platform, the payments structures, etc. BUT, for a subscription service like Netflix, they’re going to have to adhere to local online sales tax structures anyway, and manage local rights variants for those audiences too, so there’s the argument that as they’re already managing degrees of localization, adding a price variant is just adding one more variable into a table somewhere. THEN AGAIN, Germany is not France is not Italy, so this wouldn’t really be a valid or useful apples-to-apples experiment, so I’d discount it.

DEPTH OF LIBRARY & INTERNATIONAL RIGHTS

The big goal with this ad-free tier is adding revenue, and catering for users who are squeezed by the cost of living. For the user, sticking with a platform comes down to a simple cost-benefit analysis: Do I use it enough to justify the cost? And when it comes to justifying that on streaming, it’s a matter of how well the library of content meets my needs.

There are two challenges with this internationally - language/localization and rights. Netflix is a market leader in localized content - they’ve been working aggressively on it since 2011 and scored a huge win with the Korean-language smash Squid Game. They offer myriad dubbing and subtitling options.

But yet, challenges exist because some things won’t work outside of the culture in which they’re created. So the library that works well for American users might be totally different to the subset of the library consumed by French users. Which country has the most content available to them on Netflix? Nope, not the US (It ranks close to the bottom). Slovakia. Is all of that content intrinsically Slovak-friendly? ¯\_(ツ)_/¯

Also: rights. What Netflix has the rights to show varies a lot from country to country, and changes month-by-month. Netflix produces a lot of its own content now, more so than ever as it is starting to lose more content in perpetuity to other media companies which are reclaiming their rights to their own content to deploy on their own platforms (Sky Showtime, PlutoTV, etc). Some shows also have detailed territorial carve-outs, because that’s how rights for distribution and monetization are sold. So there is no truly global catalogue for Netflix, just a complex, overlapping Venn diagram of rights bundles on a territory-by-territory basis. Some rights agreements are also likely to have covenants that restrict the use of some content to SVOD-only, not AVOD.

Via The Guardian:

Netflix’s COO, Greg Peters, has previously said that a “limited number of movies and TV shows won’t be available due to licensing restrictions”. Netflix estimates between 5% and 10% of titles won’t be available on Basic With Ads to start with depending on what country you are in, and they will work to reduce that over time. Basic With Ads won’t allow users to download titles for offline viewing. Users will also only be able stream Netflix on one screen at a time, like the existing Basic plan.

Library is correlated to engagement, engagement to retention and price sensitivity, so the value of what’s available in each country to the user will dictate the lifetime value of a user, their likelihood to churn, and hence what you can charge.

ARPU/Price Sensitivity

Netflix likely has a wealth of data on price sensitivity, and/or consultants helping them on it, having raised prices gradually over time. Here’s a chart from a good Hollywood Reporter piece on their pricing and the ARPU they get - in the US/Canada.

The basis thesis from the analysts quoted in that piece is that Netflix bumps prices when churn is low/retention is high, which makes sense. Still, they lose a chunk of users each time they bump prices - also to be expected.

Adding a cheaper, ad-supported tier is likely to generate some churn from their higher-cost tiers to the cheaper tier. Netflix are, we assume, OK with that, because times are hard, money is tight, and it’s better to keep €4.99 coming in from a cost-constrained German user (plus ad revenue - we’ll get to that) than lose them altogether and have their account zero out.

Retaining a user is a lot cheaper than acquiring or re-acquiring one, where you’ll need to spend on marketing, discounting and time spent onboarding, troubleshooting and building up a user profile from scratch until the algorithm knows them well enough to serves them content that keeps them coming back.

So the likelihood is high that they’ve looked at propensity to churn on a per-country basis is, based on their data around sensitivity to price increases. Where people churn out at a higher rate when they raise prices, they know there’s greater price sensitivity. And they’ll have factored in the macro environment into that.

This is an interesting point in the pricing conversation. What do you really want to stimulate with a move like this? If the delta between your cheapest no-ads tier and the nearest ad-supported tier is small (It’s just £‎2 in the UK), are people are more likely to stick with the no-ads option? If there’s a bigger saving, there’s a bigger draw to change, because you’re balancing the irritation of ads with the money you’ll save.

Are Netflix signaling that their super-cheap ad-supported tier is great value and encouraging people to jump into that safety net rather than off the boat entirely? Or are they really signaling that the cheapest premium add-free option is ACTUALLY the best value, and pushing to retain them there? It’s a win-win either way, because Netflix will inevitably pick up some new customers with the ad-supported tier. And remember, this is overall a retention play. You want to stop as many accounts as possible going to zero.

And remember, this strategy was rolled out after Netflix announced that it had not merely seen slowing growth, but LOST subscribers for two quarters in a row. If you lose 1 million subscribers paying at least $9.99 a month, that’s a big hole in your accounts. But if you catch them in a cheaper, $4.99 subscription, the hole is only half as big.

THE VOLUME/VALUE EQUATION

An ad-supported user doesn’t just give Netflix €4.99 a month, or whatever they end up paying. It gives Netflix €4.99 a month plus whatever ad revenue the users generate for Netflix based on the volume of video they consume, and thus the volume of pre-roll ads served against it. This introduces a few variables for Netflix to factor into pricing. What volume is the average ad-supported user likely to consume per month? Is that likely to change negatively because they now have to get through 4-5 minutes of ads per hour?

The ad loads vary a lot from platform to platform. Peacock went to market with a guarantee of 5 minutes of ads per hour, which signals to the user ‘Hey we’re not overloading you’ and to the advertiser ‘We’re not overloading the user so they’re more likely to sit through the ads’. Netflix appears to have followed suit.

Complicating the ad equation is CPM - Cost per Mille, or the advertising rate per thousand impressions of any given ad. What you can charge the advertiser varies based on the value of the audience the ad is served to. If you’ve looked into YouTube ad revenue you’ll know this. A pre-roll ad seen by a user in a highly developed nation like Norway can earn a CPM north of $40. A user in Bahrain might generate around 35 cents. A factor in determining CPM is device type. In developing countries, mobile viewership tends to dominate video, and outnumber OTT/CTV views, which are globally the most lucrative. And there has to be ad/content/audience fit for the CPM to be high, too.

So, Netflix would have rolled in regional advertising data into this part of the equation. Sure, those Slovaks have access to a lot of content, but what are they actually watching, and what’s a Slovak view worth, anyway? 67 cents 😬.

So in high-volume areas, Netflix might be OK with more people on the ad-supported tier because they know the volumes will serve up additional revenue per user. The challenge in the model comes where a high volume audience intersects with a low CPM territory/behavior set.

Lastly, there is of course an opportunity to onboard new audiences at a lower price-point, and convert them to higher value as their economics, or their relationship with the platform changes.

But if you’re in France, wondering why you’re paying more than your German friend across the border, the above is part of what likely goes into that call.

Ain’t streaming economics fun?