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The Peculiar Pricing Model Of The Live TV Services

A couple of weeks ago, I was chatting with a friend about YouTube TV, when she expressed her frustration about the high price of the service ($35/month at the launch, now bumped to $40). What I found interesting is that she herself learned about YouTube TV from someone who worked at Google, and when he heard about her grievances about the price, his response was that it didn't matter that much, as one could always find a group of friends to share this cost with (the subscription comes with 6 accounts per household, and allows to stream content to 3 different devices at the same time).

Now, if you look at the competition, its pricing is actually quite comparable to that of YouTube TV: e.g., Hulu Live TV would cost you the same $40/month. So the price point might be justified, although one might argue that the target demographics of YouTube TV, which includes millennials who've never subscribed to the cable, might naturally keep comparing it to the likes of Netflix, Hulu and HBO Now, all of which cost significantly less (albeit arguably providing a different kind of service altogether). However, the specific price is not the point here - instead, I wanted to focus on the potential issue of creating wrong incentives among the customers that might in turn threaten the long-term prospects of those services.

The vast majority of content subscription services (Netflix, Spotify, Apple Music, etc.) today offer some kind of family plan option. The exact way they choose to implement those options might vary, but the general pattern remains the same: you typically get an opportunity to get 3-5 separate accounts at the price point that is below the cost of 2 separate individual accounts, albeit it comes with some limitations (e.g. all users are technically required to live under the same address, the bill needs to be paid in a single transaction, etc.)

One might argue that such a structure already creates some incentives for foul play: for example, today a lot of students choose to become part of Spotify family plans with their classmates, even though this is technically a violation of Spotify's terms of service.

At the first glance, one way to avoid this situation becoming widespread would be to limit the discounts you get by becoming part of family plan, and create a tiered pricing, where the overall price will depend on the number of people on the plan (thus limiting the advantages of family plan for each individual user, while still providing them with some discounts).

If you do some digging, though, you'll discover that this is exactly what Spotify did when it first introduced the family plan option in 2014. Back then, the cheapest option was to pay $14.99/month for 2 users, and in order to get a plan for 5 users, you were required to pay $29.99/month. Since then, however, it got rid of the tiered pricing, and now offers the family plan for up to 5 users at a flat rate of $14.99/month.

Whether the decision to go with a flat rate was driven by the desire to try and capture larger market share (even if it meant accepting lower margins), or it actually made sense from the unit economics standpoint, remains unclear. Still, at least we know that the tiered pricing was tested in the marketplace before being discounted. Moreover, even at the flat rate, one can see how the convenience of having your own individual account can trump the hassles of setting up a family account with your friends. The last point, however, is predicated on the (relatively) low price of Spotify (and most of the other streaming services as well): saving a few dollars might not be worth it for a lot of people.

With YouTube TV and Hulu Live TV, however, the situation seems to be remarkably different. The significantly higher price point suggests that the incentives to share the plan (and thus, split the costs) with your friends are much stronger, and the lack of the cheaper individual plans further strengthens the case for doing so. Moreover, by making what is essentially a family plan a default option, both YouTube and Hulu are effectively making sharing the default behavior among their users.

Now, both YouTube and Hulu have some very smart people working for them, which means they might have some very sound reasons to set up the pricing the way they did. Maybe both companies believe that by setting up the pricing the way they did they would be able to get more people to use the service in the first place, and later on, some of them would choose to set up their own plans for the sake of convenience, instead of sharing those with their friends. That assumption would actually make a lot of sense, especially considering the fact that both companies seem to target millennials, a lot of whom might not have families of their own yet, but will undoubtedly start them in the future.

Alternatively, it might be the case that the data for existing subscription services shows that from the unit economics standpoint, it makes sense to allow the users to share plans. It's entirely possible that some users aren't that active, and thus don't end up costing the companies providing the service that much in licensing payments to content providers, while helping to alleviate the pain of committing to pay too much for the service for other users.

Still, the decision to use such pricing scheme seems peculiar, and I'd definitely would love an opportunity to take a peek into the reasons that were behind it, as well as to see whether it proves to be a success in the marketplace.