Netflix, Spotify and Hulu's Latest Deals Could Be a Sign of Things to Come

As consumers see their monthly streaming expenses steadily grow, it makes sense for content providers to launch service bundles providing some kind of discount.

Author:: Eric Jhonsa
Publish date:: Sep 8, 2017 7:30 AM EDT

As the U.S. subscriber bases for Netflix, Amazon Prime, HBO Now, Spotify and Apple Music continue swelling and various other streaming services gain followings, many consumers -- cord-cutters especially -- are finding that the total cost of satisfying their online video and music fixes is now only moderately cheaper than the cost of many pay-TV packages. And between the price hikes certain streaming providers are likely to carry out and expected service launches from Walt Disney Co. (DIS) - Get Report and others, the situation is likely to get worse.

That provides some context to a pair of just-announced service bundling deals. As streaming providers both try to win over more cost-sensitive consumers and deal with growing numbers of customers seeing at least two or three streaming bills on their credit-card statements, teaming with other service providers on packages that yield real cost savings makes a lot of sense.

On Sept. 6, Netflix Inc. (NFLX) - Get Report and No. 3 U.S. mobile carrier T-Mobile US Inc. (TMUS) - Get Report announced those signed up for T-Mobile ONE family plans -- they provide unlimited voice, text and data, with a family of two charged $60 per line and a family of four charged $40 per line -- will get bundled subscriptions to Netflix's HD streaming plan, which supports two simultaneous streams and normally costs $10 per month. Those wanting Netflix's 4K plan, which normally costs $12 per month and supports four simultaneous streams, can get it for $2 per month.

Of note: Though many T-Mobile postpaid subs remain signed up for one, the "Un-Carrier" has largely stopped promoting postpaid plans featuring data buckets in favor of its ONE plans (prepaid subs are a different story). Thus it's likely that a large percentage of T-Mobile's postpaid subscriber base -- it currently stands at 36 million -- will be getting bundled Netflix in time.

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Netflix shares, still basking in the glow of a blowout Q2 report, rose 2.7% on the news. Though T-Mobile and Netflix haven't shared deal terms, there's naturally speculation that Netflix is providing some kind of per-subscriber discount in return for the volume T-Mobile will drive. Oppenheimer thinks there might be a $2-per-sub discount; something like that, of course, would ding Netflix's revenue in those cases where a T-Mobile ONE sub was already a Netflix sub.

Likely playing a role in Netflix's decision: The company's U.S. subscriber base (now around 52 million) skews some toward higher-income households, and -- though postpaid bases do have higher average incomes than prepaid bases -- T-Mobile's subscriber base skews more toward lower-income households than Verizon Communications Inc. (VZ) - Get Report or AT&T Inc.'s (T) - Get Report . Thus after running the numbers, Netflix may have decided customer overlap would be low enough for a bundling deal featuring a discount to be a net positive.

A day after the Netflix/T-Mobile announcement, Spotify and Hulu announced U.S. college students will be eligible for a subscription plan that provides both companies' services for just $5 per month. Spotify and Hulu also said they plan to provide other bundles targeting consumers in general, but didn't share details.

The deal could be a boon for Hulu, which had just 12 million subs (largely in the U.S.) as of May 2016. There's certainly a logic to aggressively targeting college students, many of whom are on a budget, aren't signed up for a pay-TV service and are signed up for Netflix, with the goal of keeping them hooked after they graduate. But with Spotify claiming over 60 million global subs -- a decent percentage are in the U.S., although Europe is also a big market -- there's a large opportunity to go after older Americans as well.

As is the case for moves being made in so many other industries, Amazon.com Inc. (AMZN) - Get Report is an elephant in the drawing room here. Amazon Prime, which pairs rapid-shipping services with video, music, e-book, audiobook, game-streaming and cloud storage services (among other things), provides quite the one-stop bundle at a $99-per-year price for standard subscribers and lower prices for students and those on government assistance programs. If a consumer or family is reviewing its streaming and pay-TV bills with an eye towards cancelling one or more services, odds are that Prime will survive the cut.

Moreover, Apple Inc. (AAPL) - Get Report and Alphabet Inc./Google (GOOGL) - Get Report are creating de facto bundles of their own, albeit on a smaller scale. Apple has reportedly set a $1 billion 2018 original video content budget, and Apple Music's 27 million-plus subscribers will be the most likely beneficiaries. Google's YouTube service, meanwhile pairs ad-free YouTube with a music service and a growing assortment of original content. Also: AT&T is providing free HBO -- courtesy of soon-to-be-acquired Time Warner Inc. (TWX) -- to subscribers of its unlimited wireless plans.

Also: Odds are that it's only a matter of time before Netflix and Amazon Prime see price hikes, which in turn could make consumers extend more scrutiny to their monthly content expenses. Netflix's $79 billion valuation clearly assumes its HD plan won't remain at $10 per month forever; Amazon is more than three years removed from hiking Prime's standard price by $20, to $99.

There's also Disney to keep in mind. The media giant announced last month it plans to launch a streaming service by decade's end that will be the exclusive home of Disney and Pixar films, and this week it will also be the only streaming service to show Star Wars and Marvel films. Assuming Disney's service is priced reasonably, many families with kids are bound to sign up for it ... and (though Netflix should be spared major damage) some might cut another service along the way.

In a nutshell: With each passing quarter, the number of consumers looking at their online and pay-TV content expenses and asking "Do I need to be signed up for all of this stuff?" is bound to grow. And when it comes to the online services, they'll generally be less likely to cancel if a service they use are part of some kind of appealing bundle.

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