Subscription Prices Are Going Up Again
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Is AI disruption coming for every corner of the market? Motley Fool Money starts now.
Welcome to Motley Fool Money. I'm Travis Hoy. I'm joined today by Lou Whiteman and Rachel Warren. We got to start with some of the big topics of the week. This is the heart of earnings season. There are dozens of companies reporting every single day. One of the big things that popped out to me this week was actually Spotify, a company we don't talk about a whole lot, but you may be listening to us on Spotify. But They are increasing their prices once again. They did that in January. I got my notice this week. And that's actually really helping their financials. So that's the good news. But my question for you, Lou, is this is something that we've seen with a lot of these companies. Netflix, you see constant price increases for Disney+.
I assume that's coming again for ESPN. Every single one of these subscription services, Is that the long-term play now for these companies is, hey, look, there's nowhere really else for you to go. So we're just going to keep slowly jacking up these prices and increasing our profits. And as investors, you're not getting the organic growth that you once got, but the bottom line might be getting better.
I think the answer is yes and no. I think some historical context is needed here. These original prices, the ones we're comparing it to, they were set artificially low at the beginning as loss leaders. That was funded by VC funds, which in turn were funded by basically zero rates. So there was free money. These businesses use that free money to try to gain share. And so now the price hikes look dramatic off of that. But I don't think that we can say necessarily that what has happened over the last few years is going to be repeatable indefinitely into the future. Spotify doesn't have unlimited pricing power.
What are the implications of rising subscription prices for companies like Spotify?
$22 a month for a family plan is not unreasonable. There's room to grow from there. Travis, you say there's no choice. There is choice. There's Google. There's Apple. There's a lot of other choices. As long as they're kind of all stepping up together, I think it's fine. But if Spotify said, you know, to heck with it, $50 a month, I don't think that would work out well for them.
Yeah, so the strategy has to be kind of like a boiling frog.
Yeah, and if so, I think it does make sense, because again, we started artificially low. I do think that there will be pullback at some point. I think it's interesting, because you can say that Netflix has specific things, and if you want to watch, I don't know, Squid Games or something, you need Netflix. Spotify, I know they're trying with podcasts and stuff, but basically everything that people actually want to hear on Spotify, they can get elsewhere. If anything, I'd say long-term, they have less pricing power, but certainly they can continue this trend for a while because it's not unreasonable and it is a product people want.
Rachel, is this kind of the trend that we're going to is you get into these ecosystems, even with something like Spotify. I have a family of five. My kids both have accounts on Spotify. Sure, I can switch, but there is switching costs that are involved, too. And so for investors, the good news here is these go from. know money losing companies they were growing quickly spot if i was growing quickly for a decade but it was losing money now we're going to hey they're printing cash flow and that ultimately is what you want to do as a business
These results also underline the fact that customers are willing to pay marginally more, right? Not maybe $25 more, but they're willing to pay marginally more for the quality content they're used to. And I think it also really suggests that music streaming has transitioned from maybe what was once seen as more of a luxury to really an essential utility for a lot of consumers. And I think this was really apparent in Spotify's results. There's really been this shift of focus from just pure subscriber growth to really intelligent monetization strategies and profitability.
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