Why Netflix won’t be toppled by new streaming services (NETFLIX IS NOT A BUBBLE, PART 2)
The public is in thrall to a persistent narrative that Netflix will be toppled by competition from other streaming services. The term “Netflix Killer” has become a hot buzz term among pundits to describe those new services. But they’re in for a disappointment: “Netflix Killers” are a myth, and Netflix’s competitive advantages are here to stay.
In this article, we will:
- Go over the fundamental reasons for Netflix’s success from the past decade to the present
- Understand why it’s so difficult for new streaming services to pose a threat to those fundamental reasons
- Clarify how those new streaming services have business models and goals that are different from those of Netflix (which are crucial distinctions that are poorly understood by the public)
- Dispel the prevailing narrative that the subscription streaming market is a “zero sum” game, and examine how economic truths suggest there’s enough powder to support a (not in)significant number of at-scale streaming services
The ultimate goal of this article is to help you understand why Netflix will continue to succeed in growing towards the sky, despite the launch or expansion of other streaming services, and why those other streaming services can also succeed alongside Netflix.
Let’s start off by going over the fundamental reasons behind Netflix’s extraordinary success since it kicked off subscription streaming in 2011…
Reason #1: Netflix was the first to identify a large-scale problem facing consumers. TV, the largest audience platform in the world, was (and still is) an inefficient experience for consumers. It abides by a fixed programming schedule, which gives the viewer has no control on when to watch something — the TV simply plays whatever is on schedule. And because a day only has 24 hours (with substantial viewership occurring against only a few of those hours), programming space is severely limited. As a result, an episode can’t be immediately followed by the next one. Instead, consumers have to wait another week for it (which is just offensive in the digital age). TV is also cumbersome. It relies on 3rd party carriers (cable, satellite, terrestrial broadcast) to reach consumers, which wreaks onto consumers all the infrastructural headaches of cable cords, satellite dishes, and antennas. And because 3rd party carriers achieve the basic Pay-TV package by bundling together close to 200 channels from various TV networks, they’re able to charge the average consumer $60 — $70 per month, even though the average consumer only watches 10–12 of those channels. Finally, it’s saturated with disruptive ads.
Reason #2: Netflix provided a powerful and compelling solution to consumers facing that problem. That solution was a video experience that was on-demand, over-the-top, immense, individualised, and ad-free. The significance of those strengths can’t be overstated.
On-demand: By allowing consumers to watch premium video content via on-demand streaming, Netflix freed them from the constraints of fixed linear programming that have plagued television audiences since time immemorial. With Netflix, consumers didn’t need to show up in front of their screens at X hour to watch Y show. On-demand meant they could watch anything at any time they wanted. On-demand also unlocked infinite programming space, which meant entire episodic catalogues could be available all at once, which led to a new phenomenon: binge watching.
Over-the-top: Usually known by its shorthand “OTT”, the term is industry lingo to describe the delivery of content to consumers through the internet, rather than 3rd party carriers. In reaching consumers via OTT, Netflix freed them from the cumbersome infrastructure of cable cords and satellite dishes, and allowed them to access its content on any internet-enabled device. This meant a premium video experience that transcended across device types, living rooms, and computer screens.
Immense and individualised: Netflix offered consumers a massive array of content. And that array became even richer and deeper over time, as Netflix spent billions across the entire acquisition spectrum (licensing classic hits like The Office, licensing first-run exclusives like House of Cards, producing its own originals like Stranger Things) and the entire genre spectrum (drama series, comedy specials, horror, international movies, etc.). The sheer variety of Netflix’s content array was part of a deliberate strategy: while TV networks aim to appeal to specific tastes or consumer segments, Netflix aimed to capture all of them, with the goal of swallowing as much of TV’s viewing time as possible. And the consumer value that comes from Netflix’s enormous content variety was further enhanced by its edge in personalization technology. In an age where consumers are saturated with more video content than at any other time in history, personalized curation allows Netflix to be whatever version of itself that a consumer wants it to be. And all for it for only $8 to $15 a month, a fraction of the cost of Pay-TV.
Reason #3: After being the first player in the subscription streaming space, Netflix remained largely undisturbed and unchallenged for nearly a decade. Only 2 other SVOD services managed to scale their subscriber bases into the double digit millions: Hulu and Prime Video. But because they only spent a fraction of what Netflix did on content and product/technology, and were late to expanding internationally (Netflix began its international push in 2010, Amazon didn’t start until late 2016, and Hulu still having no firm date), their active subscriber bases remain a fraction of what Netflix has.
The other “niche” SVOD services (CBS All Access, HBO Now, Showtime) offered content libraries that were a fraction of the size of what Netflix offers, for roughly the same subscription price as Netflix. Although that doesn’t stop them from getting subscribers (after all, there will always be some consumers out there who are willing to drop $9.99 per month for CBS All Access because they’re Star Trek fans, or $10.99 for Showtime because they’re Homeland fans), their “niche” focus in content means they can never achieve massive market penetration and scale subscriber count beyond the single digit millions.
But it wasn’t just the absence of any serious SVOD challengers that allowed Netflix to accumulate an unprecedented scale in subscribers during its first streaming decade — Legacy Media houses (NBCUniversal, TimeWarner, Disney, Fox, Sony, etc.) played an indispensable role in Netflix’s growth by supplying it with a seemingly bottomless arsenal of content. Netflix kept writing big paychecks to Legacy Media houses, and in return, they gave Netflix the rights to stream their enormous content catalogues, which included hits like The Office, Friends, Grey’s Anatomy, and NCIS.
As a company that began its life delivering DVDs in the mail with no experience in content production or talent management, Netflix was utterly dependant on Legacy Media’s content to be able to offer consumers a viable SVOD service. After all, an SVOD service without content offers no value to anyone. And even after Netflix began rolling out original content in 2013 (with House of Cards), it continued to be dependant on Legacy Media’s content for the vast majority of its new subscribers and viewership for many more years. And Legacy Media just kept up the supply…
But in late 2019, Legacy Media will finally launch its own SVOD services with seriousness. Major Legacy Media houses will also stop giving its content to other players (hint: Netflix), and instead keep them in-house to bolster their SVOD services. This is coming 12 years after Netflix kicked off the D2C era in video entertainment…
The question “What the hell took so long?” isn’t just belaboring the obvious — it challenges us to consider the inherent difficulties that Legacy Media companies face in transitioning into D2C era.
Those difficulties not only delayed Legacy Media from moving into D2C years ago, but will also handicap and clutter their efforts to do so now. These challenges are organisational, operational, and infrastructural. Here are some of them:
Handicap #1: Stuck with a timid investment mindset. At least two-thirds of Legacy Media’s revenue comes from traditional TV, a platform that achieves content scale (needed to sustain sufficient viewership) simply by bundling together hundreds of channels from rival networks.
This “bundled oligopoly” not only means that individual TV networks need not invest heavily in content, but also that doing so would be unlikely to translate into a significant increase in their share of overall viewership within the bundle. After all, a 100% increase in a channel’s content spend won’t translate to a 100% decrease in viewers flipping to a different channel the second their attention spans wane. The competition will always be one click away.
This is why even HBO, the most profitable TV network in the world and the pioneer who first brought premium cinematic-like storytelling into television shows, has until recently been fairly conservative in its annual content spend, which grew from $2.04 billion in 2015 to $2.26 billion in 2017, or in other words, seen a growth of only 3.3% a year. Now compare that with what Netflix spent in that same time period: $4.6 billion in 2015, $6.9 billion in 2016, and $8.9 billion in 2017. In each of those years, the incremental increase in Netflix’s spend over the previous year was by itself greater than HBO’s total spend.
As cord-cutting further pushes Legacy Media houses away from the protective bubble of “bundled oligopoly”, they’ll need to massively ramp up content spend (and cue years of cash burn) in order to achieve enough content scale that can stand up their own SVOD services. Whether they have the financial and organizational wherewithal to stay this course in the face of anxious shareholders remains to be seen in the long run…
Handicap #2: Lack of international presence. In the explosion of SVOD services to come, the biggest market for subscribers will be outside the U.S, where 95% of the world’s population resides. And Netflix has been riding the international market for years. So far in 2019, close to 90% of its new subscribers came from the international market. It’s where Netflix sees its future. It’s where it invests heavily. And it’s where Legacy Media should as well.
But it’s hard for Legacy Media houses to transition to an internationally-focused mindset when domestic Pay-TV carriers (AT&T’s DirectTV, Cox’s Contour, Charter’s Spectrum, etc.), whose distribution reach is almost entirely limited to the U.S, have always been effective in delivering audience reach, engagement, and revenue at scale. Legacy Media houses only had to give secondary attention to the international market, often limited to a faint footprint in English-speaking markets like the UK. At the corporate level, they’re satisfied with using the international market to simply boost domestic bottom lines by 10–15%, instead of the other way around.
Handicap #3: Lack of experience in being consumer-focused. Within the protective and oligopolistic bubble that was Pay-TV, Legacy Media could focus on maximizing revenue extraction from that oligopoly through bundling and rebundling, instead of maximizing value creation for the consumer. Examples of how they maximized revenue extraction include demanding higher “affiliate fees” from Pay-TV distributors (Comcast, Charter, AT&T), and spinning new channels (FX splitting into FX and FXX in 2013) in order to charge consumers more for their Pay-TV package, even though the new channels added zero value for consumers.
On the other hand, maximizing value for the consumer encapsulates just about everything that tech companies obsessively experiment and tinker with: Facebook’s massive investments in new consumer apps, Netflix’s obsession with reducing viewer friction with personalization algorithms and autoplay, Instagram’s foray into allowing users to view and share videos through new formats, etc.
There’s an obvious pattern here: maximizing value for the consumer is usually brought about by transforming consumer-facing experiences and the technologies behind them. But the problem for Legacy Media is that they’ve never seen themselves as product or technology companies before. Richard Pleppler, the former head of HBO, had a favorite saying: HBO is a media company, not a technology company.
Handicap #4: Constrained by long content deal cycles. In the video entertainment landscape, content licensing deals are negotiated 3 to 4 years in advance and last for at least as many years. One of the reasons it took Legacy Media so long to launch its own SVOD services is because even after their leadership had made the decision in 2016 to seriously shift towards direct-to-consumer space (in which SVOD services serve as the centerpiece), it would still be years before outstanding licensing deals could expire and the licensed catalogue (everything from big-hit sitcoms like The Office to Disney’s Marvel slate) to finally return home to their Legacy Media owners and live on their own SVOD services.
This helps explain why Netflix was able to fuel its growth using the content slate of Legacy Media houses for so long.
We can consider Disney+ as a case study on the detrimental impact of long deal cycles in content licensing on SVOD launches: when it launches in November 2019, Disney+ will lack many of the high-profile tentpoles consumers would normally expect to be on the service. Most of the Marvel films that preceded Captain Marvel (2019),a long list that includes Avengers I, Avengers II, and Black Panther, will have to stay on Netflix until at least early 2021. And every single Star Wars film, with the exception of The Last Jedi, will likely remain with WarnerMedia until 2024. And all this because of licensing agreements made years ago. The story is similar at other Legacy Media houses: WarnerMedia won’t have Friends back from Netflix until early 2020, Comcast won’t have The Office back from Netflix until early 2021, and 20th Century Fox (and by extension, Disney) won’t have its Pay-1 theatrical outputs back from HBO until the end of 2022.
If deal cycles are so long (to give you a sense of “long”, Fox’s current output deal with HBO was signed in 2015 and lasts through 2022), why does Legacy Media sign them in the first place? Why hamper business flexibility for years on end when the internet landscape changes so fast?
The answer boils down to the obvious culprit: money. Content licensing is a business that generates tens of billions of dollars a year. It’s also COGS-free and goes directly to EBITDA. For the CBS Corporation, licensing content to other companies brings in over 20% of its EBITDA.
The implications are ominous for Legacy Media houses that plan to keep their content in-house for the sake of their own SVOD services: in the long run, each will lose out on hundreds of millions to billions in licensing revenue, amounts that won’t be offset by SVOD revenue in the medium-term, and possibly not even in the long-term. It remains to be seen whether they can withstand capital constraints and the unhappiness of shareholders in the long-term pursuit of D2C success.
Handicap #5: Facing organisational deadlock. Legacy Media companies are composed of complex organisational layouts involving tens of thousands of people, all of which develop around multiple business segments, in which the largest and most revenue-generating remains the television network (although size and revenue doesn’t mean it holds a promising future).
And when traditional TV networks (with their thousands of staff spanning linear ad sales, programming operations, deal makers, etc.) comprise the most profitable vertical within the company, leadership will naturally be reluctant to pass it over for something else that’s new and unproven, be it a new tech-stack or business model. This was how Viacom was able to miss how the rise of internet-based consumption (Youtube, TMZ, Vevo) would steal away its core Pay-TV audience of teenagers and pop-culture lovers, and why HBO spent years putting off any serious push to reach consumers directly through internet streaming instead of simply through Pay-TV. The predominance of Pay-TV distracted leaders in both companies from truly grasping the enormously disruptive potential of internet-based platforms that were brewing right under their noses.
And at the same time, it’s hard to blame leadership: maintaining stable earnings each quarter is tantamount, after all, shareholders need to be satisfied. Capital is limited. And risk is always a difficult thing. Which brings us to our next point…
Handicap #6: Lacking cultural affinity to risk-taking. How Netflix, a mail-delivery company with no prior history in content production, talent management, or streaming video, went on to disrupt global entertainment and swallow away audiences whole from Legacy Media, is a triumph of the scientific and methodical approach that Silicon Valley’s management class takes in building products and businesses.
When Reed Hastings and his team committed to delivering video content via OTT streaming, they didn’t just commit to developing a product that didn’t yet exist (and cue years spent tinkering towards a viable tech stack, at times in a garage or back office room, which branched into numerous development paths, most of which became dead ends, and one even spinning into a line of console-connected devices we know today as “Roku” players), they also committed to closing the curtains on their profitable mail-order business (read: mail-order was profitable, and also their entire business).
The significant of a company that’s willing to disrupt a happy present for the sake of a not-yet-tangible future can’t be overstated — it’s the state of mind that defines tech companies, whether they’re at-scale organizations or start ups.
But at legacy companies, the governing state of mind is focused on preserving what has been carried from the past to the present. And that doesn’t leave much room for taking risks (at least not at scale), which is problematic because launching and scaling SVOD services is the embodiment of risk on an enormous scale. SVOD involves years of enormous cash burn (in order to buy/build up content libraries that are large enough to justify subscription fees), long development times (original content and talent take years to nurture, and subscriber growth needs to be sustained for years in order to reach a significant revenue base), with no guaranteed chances of success (competition is stiff, consumers today have more entertainment options than ever, and lagging subscriber growth will probably spell disaster on a P&L’s bottom line).
And that’s why it shouldn’t come as a surprise that out of the 3 SVOD services that have achieved massive scale (“massive” defined as having a subscriber count in the tens of millions), 2 are the spawn of tech companies — Netflix and Amazon. And both companies used their existing and already-scaled business segments to jumpstart their SVOD service and then to subsidize its growth for years afterwards. For Netflix, it was the mail-order business. For Amazon, it was the e-commerce platform.
And Hulu, the only one of the 3 massive SVOD services to be spawned by Legacy Media, was spawn as a joint venture between 4 Legacy Media houses in order to limit upfront investments and reduce risks among them.
The point is — SVOD is a long, expensive, and risky game. It’s a game in which Legacy Media stands at a competitive disadvantage to Big Tech, where enormous cash burn, rapid product lifecycles, and large appetites for risky ventures from senior leadership are operating (and cultural) norms.
Netflix’s competitive edge is protected not just by the enormous challenges that face Legacy Media houses trying to launch new SVOD services in a D2C era they’re unfamiliar with, but also by the simple fact that Netflix will continue to face almost no direct competition at all.
And that’s because the new SVOD services have fundamentally different business models and objectives than Netflix. None of them play the exact same game. Below, we’ll outline what they are:
The game for Netflix: Out of all the SVOD services, Netflix is playing the most interesting and the least interesting one.
Netflix remains the only SVOD model with only 1 source of revenue: subscription fees. Unlike Hulu, It doesn’t run ads. Unlike Prime Video or Apple, it’s not interested in bundling on other video services. And as a company, Netflix has no other major business segment (e-commerce, toys, theatrical tickets, theme parks and resorts, etc.) to upsell using SVOD.
Hence, Netflix is playing an uninteresting game because its so narrow in its focus: just maximize subscription revenue from SVOD. And that can be accomplished by maximizing the number of subscribers.
And this in turn gives a narrow game an extraordinarily ambitious scope: maximizing the number of subscribers means Netflix must aim to swallow up as much of the world’s disposable leisure time, whether it’s spent on TV, video games, family outings, and even sleep.
So that’s why it will spend $15B on content in 2019, and similar amounts in future years. More content will fuel the growth tear in subscribers who will bring in billions more in subscription revenue.
The game for Disney: The Walt Disney Company is a behemoth that’s in the business of leveraging well-known and time-tested stories (big-franchise IP like Frozen, Pixar, Lion King, Star Wars) to catalyze massive consumer spend across various business segments like toys and merchandise, TV, video games, parks and resorts, etc. The theatrical release of a big-franchise movie is only the “first step” in that revenue journey.
For Disney, the purpose of SVOD services (Disney+, Hulu, ESPN+) is to extract even more consumer spend across that vast consumer ecosystem. The significance of Disney+ isn’t so much that it’s an SVOD service populated with Disney-owned content (and cue pundits erroneously labelling it as “Disney’s equivalent of Netflix”), but rather that it will be a “catch-all” D2C touch-point offering consumers everything Disney-related: not just Disney movies for streaming, but also movie theater tickets on pre-order, delivery of toys and Disney merchandise, and even bookings for Disneyworld/Disneyland and Disney cruises. If the average cost of a Disney Cruise booking is $5,000 for a family of four, the incremental gains from upselling Disney Cruise bookings by, say 25–30%, would make the $6.99 in monthly subscription revenue per Disney+ subscriber seem smaller in the grand scheme of things. And there’s still more non-SVOD revenue upsides from Disney+ to consider: allowing consumers to purchase theater tickets, toys, and merchandise directly from Disney means the Magic Kingdom gets to claw back billions in revenue in the long-term that they otherwise would be forced to share with 3rd party vendors and retailers like Fandango and Walmart.
All this is great for Disney. But how is this relevant to our thesis that Disney+ does not pose a direct competitive threat to Netflix?
For starters, if Disney+ can achieve massive incremental revenue for the Magic Kingdom without the need to achieve a massive volume in subscription revenue, it means that it also doesn’t need to achieve a massive volume in subscribers either (at least, not as big a volume as Netflix’s current ~150M subscribers). For Disney+, achieving a subscriber base of 40M households in which the average household uses the service to spend heavily on Disney-as-a-family-lifestyle (cruises, trips to Disneyland, Disney toys for the holidays) is better than achieving a subscriber base of 150M households who are unable or unwilling to embrace Disney-as-a-family-lifestyle.
And serving the ultimate goal of upselling Disney applies to the other 2 SVOD services in the Magic Kingdom’s arsenal: Hulu and ESPN+. If Disney+ directly upsells Disney, then business logic proscribes that Hulu, ESPN+, and Disney+ should be bundled together in order to upsell Disney+, which in turn helps Disney+ upsell Disney. And Disney is doing exactly that: in August 2019, it announced that all 3 SVOD services would be bundled together for a total monthly subscription price of $12.99, a substantial discount from the $18 sum of their stand-alone prices. Bob Iger probably wasn’t joking when he said it was simply a coincidence that the Disney+/Hulu/ESPN Bundle settled on a monthly price of $12.99, the same as Netflix’s most popular Standard Plan — after all, how Disney bundled and priced its 3 SVOD services was informed by the ultimate goal of upselling Disney services/goods to consumers, rather than stealing eyeballs and time away from Netflix.
The game for Apple: As a tech behemoth and the world’s leading hardware/device provider (with between 70% and 80% of U.S homes owning at least 1 Apple device, and that’s not even considering the international market), Apple’s upcoming SVOD service (to be launched in Fall 2019 as Apple TV+) is predictably being gushed over by pundits as a “Netflix Killer”.
But there’s a glaring problem: the amount of content on Apple’s SVOD service is tiny. With only 20 to 30 original titles (at least in its first year of launch), and zero licensed library content (at least none in the foreseeable future), Apple TV+ will be the tiniest of all SVOD services in terms of content library size (except for Youtube Premium, which offers an even tinier library also comprised only of originals, and is failing because its so tiny, but that’s for another article…).
In SVOD, it’s conventional wisdom that large and deep content libraries are needed to sustain significant-enough engagement from users in order to justify charging them a subscription fee. The 20 to 30 titles on Apple TV+ is too small a slate to justify charging a subscription fee, or at least one that isn’t very low (something like $3.99). Consider that Netflix has a content library of between 4,000 to 6,000 titles (depending on the country), which makes Apple’s library between 0.5% and 1% of its size.
Of course, Apple TV+, with a tiny content library and low subscription price (which means low SVOD revenue, and much less SVOD profits) makes sense when we consider that Apple’s real goal with SVOD is to upsell its other products, platforms, and services, rather than having SVOD being profitable by itself. In other words, Apple is pursuing the same “bundled” model as Disney, except rather than upselling branded services like merchandise or family bookings, it will upsell transactional video (for purchase or rental), third-party video channel subscriptions (HBO Now, Showtime Anywhere, etc.), and other services within the massive video ecosystem that is Apple TV.
To rephrase the above in competitive terms: Apple’s real target is actually Amazon, not Netflix. Apple wants to replicate what Amazon did with Prime Video, where original video content (Man in the High Castle, Marvelous Miss Daisy, etc.) served to upsell Amazon’s digital services (e-commerce, e-books, music, Kindle app downloads, movie purchase/rentals, subscriptions to HBO NOW and Starz, etc) and hardware devices (Fire TV consoles, Echo/Alexa smart speakers, Kindles, etc). It’s hard to understate the success of Amazon’s strategy: in 2012, Apple (via iTunes) dominated digital purchases/rentals of movies/TV with a ~50% global market share, but saw that share decline by 2017 to ~25% with Amazon occupying the other ~25% (and the remainder gobbled by Comcast and other big vendors). From 2015 onwards, Amazon also established itself as the leading platform for consumers to subscribe to 3rd party SVOD channels (HBO NOW, Starz, etc).
Apple is trying to catch up. Like Amazon, it has a massive ecosystem of digital services (Apple TV, Apple Music, Apple Arcade, Apple Books, Apple Pay, etc) and devices (iPhones, iPads, Macs, TV consoles, etc) that it can upsell with the lure of original video content.
So Apple is fixated on better monetizing its ecosystem of services and devices, and taking hard lessons from Amazon, and not on building up an SVOD subscriber base so massive that it displaces attention spans and dollars away from Netflix. It simply wouldn’t make sense for such a broad ecosystem company (Apple) to compete against a narrow-focused company (Netflix) on such a narrow front (pure SVOD).
The game for AT&T (and HBO): The case of HBO is a peculiar one. In 2013, having just jumped into streaming video, Netflix publicly announced that its goal was to “become HBO before HBO can become us.” But somehow, HBO never attempted to become Netflix…
Fast forward to 2019, with HBO under new management (AT&T), the telco giant must now undo years of bad decisions from HBO in resisting the shift to streaming.
With its intent to significantly expand HBO’s content output, and to shift it away from linear TV and towards streaming OTT, AT&T appears to be on track to challenge Netflix directly. Logic posits that an HBO NOW that’s available on D2C OTT streaming and offering a massive content output would pose a direct challenge to Netflix. After all, Netflix’s 2 competitive advantages (or at least, competitive differentiator) are its ability to reach consumers through D2C OTT streaming and its massive content output.
But that’s not the case. Even if AT&T succeeds in expanding HBO’s streaming footprint and content output, it would still wind up with a video product that’s fundamentally different from Netflix. And that video product will be called HBO Max.
For starters, HBO MAX will be fundamentally different from Netflix because it will almost certainly be bundled with AT&T’s voice and internet services. This would mean that its business rationale (like that of Disney+ and Apple TV+) is to upsell its parent company’s services, rather than to achieve SVOD profitability (through a massive subscriber base) by itself, which is Netflix’s goal.
By itself, AT&T’s rationale for bundling HBO with its core voice and internet services makes sense — it’s the most indebted company in the world, and it needs to upsell its core services to achieve greater profitability and market share.
But a closer examination also makes apparent two additional situational headaches that should further compel AT&T to introduce HBO MAX as a (massively) bunded product in the market, rather than as an SVOD-only service comparable to Netflix.
The first situational headache is HBO NOW’s price — at $14.99 a month, it’s the most expensive SVOD-only service in the market, more so than Netflix’s Standard Plan of $12.99 a month despite having a content library only X% as big. Since HBO MAX will be a further expansion of HBO NOW by adding on content from the rest of WarnerMedia (Turner, CN, DC Universe, etc.), it is only logical that HBO MAX be at a higher price point than HBO NOW (rumors are that it will land between $16 to $17 a month). But even with an expanded content library populated by the WarnerMedia vault, the result is a service that still has only a fraction of the amount of content as Netflix, a fraction of the popularity of the IP on Disney+, and probably at the most expensive price point of all the SVOD services.
These competitive disadvantages can only be offset (or at least obfuscated) by bundling on additional services like voice and internet. But if HBO MAX is simply one component inside a larger voice and internet bundle, then consumers will make the decision on whether to subscribe to HBO MAX during a household-moment (should I go with AT&T or Verizon for my voice and internet service?) rather than during an SVOD-specific moment (should I go with HBO MAX or Netflix when choosing my streaming entertainment option?).
The second situational headache is the AT&T’s limited reach: it’s only present in the U.S, and even within the U.S, it’s used by less than 40 percent of households. And this is problematic because the bundling of HBO MAX with AT&T’s core services means that the former’s addressable market may be limited to where the latter has a significant footprint, which spells grim prospects in making inroads in the international market. And the international market is where 95% of the population resides. It’s where Netflix has the majority of its subscribers, gains around 90 percent of new subscribers each month, and where it sees its future. Netflix will continue to jostle for screen time against a range of challengers in the international market, from Hotstar in India to Oksusu in Korea. But AT&T isn’t likely to be one of them.
We’ve covered how the competitive threat to Netflix from new SVOD services is softened by the latter’s enormous handicaps and their widely divergent business objectives from Netflix.
But there’s another narrative that needs to be addressed, which goes something like this: SVOD is a zero-sum game, where a subscription to one SVOD service represents a subscription stolen from another.
In this narrative, a Disney+ that scales up significantly in subscribers and viewing hours means a significant displacement of subscribers and viewing hours from Netflix.
Although there’s some measure of truth in this narrative, it’s also greatly exaggerated and betrays a lack of appreciation of how consumer value is greatly differentiated and dispersed in the premium video economy.
When consumer value is differentiated, it means that a business can offer goods or services that are unique and not offered by its competitors. And when consumer value is dispersed, it means that those highly differentiated goods or services are fragmented between various businesses. This is the reality of premium video, where content and IP are long-term assets (not commodities), and no two video services will offer the same slate of content and IP. CBS is the default for Star Trek fans, HBO is where you go for Game of Thrones, and Netflix will be your destination for Stranger Things.
This reality different from other verticals within the digital economy. For example, in ride sharing, someone who regularly uses Uber most likely won’t regularly use Lyft. After all, there’s little to no difference in what Uber and Lyft offer consumers. It’s the same with a whole litany of other verticals: grocery delivery (Instacart vs. Amazon Fresh), food delivery (Postmates vs. Uber Eats), cloud storage (Google Cloud vs. Microsoft Azure). etc.
Many have compared the shift of premium video towards subscription-based streaming with the same shift that’s occurring in the music industry. Since 2014, the rise of subscription-based streaming in the music industry has accelerated the decline in global consumer spend on recorded music outside of subscription streaming (falling from ~$11B in 2014 to an expected ~$7B in 2019), as consumers can now access virtually every single music track ever produced on any of the following subscription-based services: Spotify, Apple Music, Amazon Prime Music, Youtube Music Premium, etc. Commentators have remarked how the shrinkage of aggregate consumer spend in the music industry isn’t just because streaming music services (with their ability to license every single track ever produced, something that’s not possible in premium video) have rendered transactional spend (ex: pay per CD purchase, digital download, digital rent) unnecessary, but also because a subscription to any one of these universal-sized music libraries will render it unnecessary to subscribe to any of the other universal-sized music library. In other words, because Spotify and Apple Music offer the same exact thing, there’s no point in subscribing to both.
But the music industry is a poor benchmark for sizing up the long-term changes in the premium video industry. Although the proliferation of streaming services will definitely accelerate the decline in consumer spend on video categories outside of streaming (after all, how many Disney DVDs or Blu-Rays does a family need to buy if they have Disney+, which gives them a massive library of Disney movies to watch on-demand), just as it did in the music industry, the incremental revenue that can be mined from the growing streaming sector is several times bigger in the premium video industry than in the music industry. And that’s because while it’s rare for consumers to subscribe to more than 1 streaming music service a time, they’re likely to do exactly that when it comes to premium video SVOD services.
Once again, consumer value is greatly differentiated and dispersed in the premium video economy. No matter how much Disney spends on content for Disney+, it can never encompass the unique content that Netflix offers consumers. And the more Netflix spends on content (already $15B in 2019, and expected to be similar in subsequent years), the more content out there that’s exclusive to Netflix, and the greater the (already high) probability that a consumer will choose to have Netflix within his/her (already substantial and poised to grow) total spend on video entertainment options.
We still haven’t addressed one last persistent narrative: that the ballooning number of SVOD services, along with the likelihood that consumers will subscribe to multiple ones concurrently (due to the fragmentation of differentiated content between the services) will result in heavier costs on the consumer.
Just to paint out what this would look like: If a consumer can no longer rely only on Netflix to watch “Friends” and “Narcos”, he/she will have to subscribe to HBO MAX to watch the former while keeping Netflix to watch the latter, which increases his/her monthly SVOD spend from $14.99 to $31.99. And if he/she is also a Marvel fan, the eventual migration of MCU catalogue off Netflix and onto Disney+ means an additional subscription to the latter.
This narrative is true. But it’s also simplistic, obfuscates other truths, and most importantly, is ultimately irrelevant to the matter of Netflix’s promising growth trajectory.
Here’s one core truth that this narrative obfuscates: although consumer spend on SVOD services will undoubtedly increase substantially in the near and distant future, that trend has already been going on for 2 decades. The reasons for it are predictable and unremarkable: as the pace of cord-cutting accelerates, more households are no longer spending ~$65 a month on Pay-TV, which essentially means a $65 boost to their “size of wallet” for SVOD services. $65 can easily buy all of the following together: Netflix ($14.99), Disney+ ($6.99), Hulu ($5.99), HBO MAX ($16.99), and Apple TV+ ($9.99, unlikely to be that high…but let’s just imagine).
The point is, there will be enough powder to go around for multiple SVOD services to scale up significantly. And that powder isn’t just coming from the erosion of the Pay-TV ecosystem, which by itself frees up an ocean of attention spans and dollars to be gobbled by new media platforms (SVOD, AVOD, mobile gaming, social media, mobile sharing of UCG, etc), but also from all the major digital trends in the last decade (ride-sharing, grocery delivery, personal cloud storage, etc.) that have made life faster, more convenient, and given people back their time and wallets.
