• by Karlene Lukovitz  @KLmarketdaily, March 14, 2023

Will NBCUniversal’s recently announced strategy of dropping Peacock’s free tier backfire? 

That’s a distinct possibility, asserts video industry researcher Aluma Insights, based on a new, broad-ranging survey of 2,000 decision-makers in U.S. households that pay for at least one subscriber-based video-ono-demand (SVOD) service.

One area probed was subscribers’ perceptions of how “essential” those services are. 

Asked “Which of your streaming video services do you consider essential to meet the needs of your household and which are just nice to have?,” two-thirds of the Netflix subscribers categorized that service as indispensable. 

In addition, half of Hulu and Disney+ users (53% and 52%, respectively) said they view them as essential. 

Those described as essential by the smallest percentages — that is, those at the “least essential” end of the spectrum — were Peacock (35%), Apple TV+ (28%) and Epix Now (7%). 

Essential/non-essential perceptions are “one way of comparing a service’s utility with that of its competitors,” says Aluma founder Michael Greeson. “It says to some owners, ‘You’ve a bit more latitude when it comes to revenue optimization measures, such as cracking down on freeloading or increasing retail prices.’ It says to others, ‘There is great risk in significantly altering prices or service terms.’”

Although NBCU reported that Peacock more than doubled its paid subscribers during 2022, to 20 million, that total is still far behind major rivals’, including Netflix, Disney+ and Amazon Prime Video. Its overall numbers will be considerably reduced by its elimination of Cox cable subscribers’ free packaged access to the Peacock premium tier, and NBCU is expected to do the same with Comcast’s own Xfinity subscribers — pegged at at least 13 million — sometime this year. (The 30 million total “monthly active accounts” NBCU reported for Peacock back in October 2022 likely included the free-tier users now being largely eliminated.) 

Comcast’s determination to transition all Peacock users to paid is borne of the industry’s new investor mandate to stress profits over subscriber growth: The streamer’s losses widened to $978 million in Q4 2022, but Comcast has promised the losses will peak this year and diminish steadily thereafter. (The supposed shift in emphasis didn’t stop investors from being encouraged by last year’s subscriber growth, of course.) 

For the present, NBCU is also looking to support its now all-paid strategy and appeal to subscribers and advertisers through even more investment -- adding live access to NBC local affiliates and beefing up content, which is paying off in the popularity of new shows like “Poker Face.” 

But Geeson isn’t convinced. “If 65% of Peacock subscribers consider the service dispensable, and Comcast is ending free service to 70% of Peacock’s [paid] subscribers, there is a real risk this strategy will backfire in 2023,” he contends. (LightShed analyst Richard Greenfield has also noted concerns about Peacock’s lackluster audience engagement stats, at least up to now.) 

The risk is exacerbated by another trend, according to Aluma: The survey found households spending $43.25 per month on SVODs, on average — significantly up from 2020, but flat with 2021. Between 2020 and 2022, the percentage of SVOD buyers open to spending more declined from 14% to 8%, while the percentage planning to reduce these expenses increased from 17% to 25%. 

“As buyers move closer to their SVOD spending limits, less essential services will have a difficult time optimizing revenue without enduring sizeable subscriber losses,” Greeson says.

Still, he admits that he was somewhat surprised to see Peacock — and even more surprised to see Apple TV+ — ranking so low on the essential question.

“Apple TV+ is recognized for high-quality original content that resonates well with its subscribers,” he points out. “Then again, it has little depth in terms of third-party content and lower value than most other services, which may have reduced its stickiness.”

As of last year, Apple TV+ had 25 million to 40 million paid subscribers at $6.99 per month for solo subscriptions (previously $4.99), and was pulling in a relatively modest $1 billion to $2 billion on subs, according to estimates by Bernstein analyst Toni Sacconaghi.

But bearish projections for Apple TV+ seem off track, given that Apple is now pumping up its investment in the streamer to significantly expand its advertising business, as well as its subscriber base. That includes building a demand-side platform to enable it to control ad buys across its portfolio of services and products, forming a team to sell ads and sponsorships for its deals to stream Major League Baseball and Major League Soccer, and, reportedly, building a live television ad network as part of its MLS deal (and possibly considering starting a free, ad-supported tier).

Plus (pun intended), Apple TV+ is part of a broader business model. One important part of its value is that it is one of a bunch of digital services being sold in automatically renewed bundles that, thanks to exceptionally high retention rates (often out of sheer inertia), are incredibly lucrative.

Apple announced that it reached 935 million paid subscriptions as of Q4 2022—and $20.8 billion in revenue as of Q1 2023 — across services including iCloud, Apple Music, Apple Arcade, Apple News+, Apple Fitness and others, in addition to Apple TV+.