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WarnerMedia May Price Its Streaming Service Higher Than Netflix. Why?

Stephen Lovely, The Motley Fool

With so many new streaming services poised to launch in 2019 and 2020, there are bound to be different approaches. Netflix (NASDAQ: NFLX) has drafted the blueprint, but there is still plenty of room for renovations. Given the sudden influx of competition, it makes sense that Disney (NYSE: DIS) chose to innovate on the price front: the company recently announced that its upcoming "Netflix killer," Disney+, will run consumers just $6.99 per month -- a far cry from the $12.99 that Netflix asks for its most popular plan.

AT&T's (NYSE: T) WarnerMedia is among the companies that will release a streaming service soon. But WarnerMedia is going a decidedly different direction on price. According to The Wall Street Journal, the new WarnerMedia service will cost "$16- to $17-a-month." That's a change from earlier reports of a three-tiered price structure. What's going on here?

Coins fall through a businessman's hands.

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An unusual price point

WarnerMedia's price point is north of Netflix's (Netflix's most expensive plan is $15.99 per month). That's particularly unusual in the context of this newly competitive streaming space. As mentioned above, some other streaming services are deliberately moving in the opposite direction in order to get an edge. In addition to the aforementioned $6.99-per-month Disney+ price point, we recently saw Hulu drop the price of its on-demand service. (Hulu did raise the price of its live-TV streaming service at the same time, but WarnerMedia's new service will be an on-demand service.)

Stranger still is the fact that this price point seems to position WarnerMedia's new service as a competitor to another WarnerMedia streaming property: HBO. HBO's popular original content is said to be a centerpiece of the streaming selection that will be on offer in the new WarnerMedia streaming app, but HBO itself generally costs $15 per month (since HBO is offered in various forms, including OTT subscriptions and pay-TV add-ons, the price can vary a bit).

This leads to differentiation questions like "What makes WarnerMedia's new service worth $1 to $2 more than HBO?" and, conversely, "What makes HBO worthwhile when some of its core content, plus more, is available at a similar price?" WarnerMedia may eventually share answers to those questions, but it's going to be tough to dodge an overarching one: "What about these two $15-ish services makes them anything other than clear competitors with each other?"

Reasons to wait and see

If the price point is baffling, that might say more about WarnerMedia's overall strategy than it does about the pricing itself. Upon closer inspection, the price itself isn't that strange.

After all, as we just established, many people already pay a similar price for HBO. And Netflix's most popular plan may be $12.99 per month, but only the $15.99-per-month top-tier plan offers 4K streaming -- something that, as I've written before, could create a "hidden price hike" as consumers shift over to the 4K plan. 4K is certainly much more of an industry standard now than it was just a few years ago, so this shift seems inevitable.

And Disney+'s low price comes in exchange for a library that is going to be dramatically smaller than Netflix's. We don't yet know how big WarnerMedia's library will be, but perhaps it will be closer in size to Netflix's -- making this price point more reasonable, if still a little bit high. Finally, we have to consider that WarnerMedia's streaming service isn't even out yet and won't be for quite some time -- it is set to debut at some point in 2020. By then, perhaps Netflix will cost more, or perhaps that aforementioned "hidden price hike" will kick in.

Maybe, then, this price isn't so crazy. But what is crazy is that this streaming deal is positioned squarely in HBO's market, even as HBO makes efforts to shore up its streaming efforts (HBO still reaches the vast majority of its customers through pay-TV plans).

WarnerMedia's challenge

There's one last reason to stay calm, and that's that we have seen companies overcome seemingly contradictory streaming portfolios before -- or at least we've begun to. Disney's Hulu and Disney+ services once seemed hopelessly cannibalistic, but recent moves by Disney have inspired hope that the two can live in harmony. Perhaps HBO and its younger brother can get along, too. Of course, there's one key detail to remember: Disney priced its two streaming services cheaply enough to encourage consumers to buy both. WarnerMedia's challenge will be to unify its strategy with two services that are priced much higher than Disney's pair.

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Stephen Lovely owns shares of AT&T and Netflix. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.