The coming blow is the loss of one platform that offers just about everything subscribers want.
In 2017, when Netflix was 20 years old, the ad-free on-demand-video or streaming service achieved three milestones. One was that Netflix hit 100 million subscribers worldwide. Another was the streamer earned its first Oscar when White Helmets won Best Documentary Short Subject. The third was the company premiered its first blockbuster movie; namely, Bright featuring Will Smith.
In that giddy year when legacy free-to-air and balkanised cable TV rivals appeared passé and Prime Video and the like looked limp competition, Netflix co-founder and CEO Reed Hastings declared the creator of ‘binge watching’ and the ‘sport’ of ‘binge racing’ – when people watch a series the day it’s released – had even beaten an unobvious competitor. “We actually compete with sleep,” Hastings said. “And we are winning.”
But succeeding might get harder for Netflix now. Even though Netflix has intensified content creation, boosted global subscriptions to 152 million and still dominates the subscription video-on-demand market globally, the company risks losing its dominance in streaming for two reasons.
The first is that Big Hollywood and another Big Tech company are entering the streaming landscape that in the US already includes Amazon’s Prime Video, Disney’s Hulu and online traditional pay-TV packages such as Dish Network’s Sling TV, Google’s YouTube and other niche services.
Coming soon to streaming are Hollywood icons AT&T’s WarnerMedia, Comcast’s NBCUniversal and Disney, recently bolstered by its purchase of 21st Century Fox. This trio will arrive with competitively priced packages, marketing budgets to promote their arrival, libraries of premium content, plans to create compelling programs exclusive to the new services, and intentions to reclaim the popular content they have licensed to Netflix. They enter streaming with an aim to arrest sharply declining viewership of their linear channels (where video content is delivered to a schedule), build direct customer relationships and protect their position as global media giants.
Apple is arriving with US$6 billion to spend on content for its upcoming TV+ service, which is about what Amazon is thought to devote to content on Prime Video that was founded in 2006. While Big Tech lacks content archives, they are wealthy, have huge customer networks and might be willing to loss-lead on streaming to attract and retain more people on their platforms that they monetise in different ways. For context, Apple has more than 900 million iPhone users and the amount of money Apple intends to spend on content represents a fraction of its cash hoard of about US$100 billion.
The other problem for Netflix and streamers such as Australia’s Stan relates to content. Four areas of concern stand out. The first is that the new entrants are claiming back marquee content such as Friends and The Office. The second is that heightened competition has boosted the value of licensed content, which hampers newer streamers with smaller back catalogues compared with Hollywood rivals. The third is that binge watching hastens the need for fresh content. The last (and a less urgent problem) is that countries concerned that streaming is damaging the local media industry and national culture are setting local-content rules requiring streamers to invest in local content. These reasons are pushing the streaming industry to boost content spending. Netflix, for instance, is expected to spend almost US$15 billion in cash on content this year, more than 60% higher than the US$9 billion it spent only two years ago.
The heightened competition and rising content costs are bound to transform the streaming TV industry. Smaller stand-alone streaming platforms could struggle as the giants fight to become one of the small number of services to which most households subscribe. Before too long, market share is likely to be more evenly spread across the vertically integrated giants.
But given the way TV viewing works, that scattering of market share is likely to prove a situation where competition leaves consumers worse off. The future facing viewers is likely to be one where many households will need to subscribe to multiple streaming services (on top of traditional pay-TV packages) to see the mix of shows they want – which means paying more all up. They might see ads where none exist now (a de facto price rise). Or they might spend more time planning an app churn that brings them the content they prefer (another hidden cost even if it might be small for the tech savvy).
In short, the period in which viewers could access the right mix of enough programs, including all their favourite shows, at an affordable price on one or two ad-free streaming platforms is ending. Consumers face a fragmented and costlier world of streaming that could remind people of the disjointed and frustrating pre-Netflix era.
For all its streaming stranglehold, Netflix, to be clear, has only about 10% of total viewer screen time in the US. Netflix will hold a healthy, even if shrinking, grip on this fast-growing viewing segment for the foreseeable future because the company owns a rapidly growing stash of content and has the industry’s most-honed algorithms to promote content. Some of the newcomers arrive with legacy businesses that could limit their attacks on streaming. There is nothing remarkable in the likely trajectory of streaming; a company comes to dominate a new niche and others enter to share the profits. But it is likely to be notable for how market forces can act against the interest of consumers and for how tech can transform industries without fulfilling its initial promise.
The Friends warning
In the US this year, research firm eMarketer expects 183 million people to view an on-demand video, 55% of the population. Netflix, which is in competition with Disney’s Hulu and Amazon’s Prime Video, will attract 159 million of these viewers, an 87% market penetration of the subscription video-on-demand market.
But that’s down from Netflix’s market penetration of 90% in 2014 and it could slide more if households opt for other services. If one event heralded that Netflix faces a less comfortable future, it was the ‘infamous’ US$100 million Netflix is thought to have paid WarnerMedia to keep the popular Friends series for a fifth and final year, up from US$30 million in earlier years. The inflated price confirmed that the bargaining power has moved to the owners of premium content now the entertainment giants and others are coming.
Netflix’s problem isn’t just that WarnerMedia’s new HBO Max intends to attract viewers with Friends. Disney’s upcoming Disney+ streaming service wants back Marvel and Star Wars. NBCUniversal will reclaim The Office in time for its streaming launch in 2021. These are the three biggest examples of the popular content being stripped from Netflix and other independent platforms.
Signs have emerged that Netflix’s dominance is weakening even before the new competition lands. Netflix suffered its first loss of US subscribers in eight years in the second quarter of this year when about 130,000 subscribers ditched the service after prices for its popular ‘standard’ plan rose from US$11 to US$13 a month.
And it’s likely to get tougher for Netflix and others when the Hollywood household names arrive. While Disney will forgo more than US$1 billion in licensing rights when it launches Disney+ this year, the company founded in 1923 intends to offer packages cheaper than Netflix, owns a vast backlog of content that appeals to children and is filming likely blockbusters such as the upcoming Star Wars-universe-based science fiction series The Mandalorian. In the US, Disney is intending to charge US$6.99 a month for its ad-free service, to come in cheaper than Netflix’s ‘basic’ offering at US$8.99 a month. The company hopes to have up to 90 million subscribers within five years, some locked in on three-year contracts.
Apple TV+ will be even cheaper, though its content offering will be thinner. It will only charge US$4.99 a month in the US (A$7.99 in Australia) when it launches on November 1 – and the first year will be free for those who buy Apple devices. WarnerMedia is planning to bundle its premium channels HBO and Cinemax with Warner Bros library content for not much more than the US$15.00 a month that its existing video-on-demand service HBO Now charges.
As more streaming services appear, some viewers might pay for multiple services to ensure they see their favourite programs but at greater cost than before. But many others might only select a couple of subscriptions. Others will app hop to see content.
The global expansion plans of streamers might not prove so fruitful either because governments are resorting to local content rules to protect local film and TV industries. The EU last year approved a law to enforce 30% local content for video-on-demand services by 2021. Australia plans similar, but less-onerous, restrictions – which partly explains why Amazon, Apple and Netflix have announced they will make shows in Australia – as do New Zealand and the UK.
One notable consequence of the ‘streaming wars’ as some have dubbed them is that Big Tech is likely to bludgeon enough of a presence in streaming to fan the political blowback against the concentration of corporate power in a few tech companies.
Before that, however, there is likely to be a race to create content so that Big Hollywood and Big Tech can dent the Netflix hold on streamed TV. Production houses and actors can look forward to some stellar years. Viewers willing to pay are likely to be so overwhelmed by content that their biggest challenge might be to get enough sleep.
By Michael Collins, Investment Specialist, Magellan Group