The following is an excerpt taken from the second article in my series NETFLIX IS NOT A BUBBLE.
The “Streaming Wars” will dramatically escalate in late 2019 and early 2020, with the launch of Disney+, HBO Max, and Apple TV+ into the competition for consumer eyeballs and wallets.
But there’s a narrative that needs to be challenged. It goes something like this: SVOD is a zero-sum game, where a subscription to one SVOD service represents a subscription lost to 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.
Let’s address this narrative below with the following 4 points.
Point #1: This narrative betrays a lack of appreciation of something that’s unique about the premium video economy: consumer value is greatly differentiated and dispersed.
When consumer value is differentiated, it means that a business can offer goods or services that are unique and not offered by its competitors. When consumer value is dispersed, it means that those highly differentiated goods or services are fragmented across 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. …
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. …
News coverage today of Netflix’s financials isn’t complete without a great deal of fearful fascination over the billions in cash losses that the company endures each year, which CEO Reed Hastings stated will continue for many more years to come. Quite predictably, a legion of doom-and-gloom commentators has grown over the years, asserting that Netflix is speeding on an unsustainable path to a ruinous ending.
In this article, we will:
- Go over how Netflix’s enormous spend on content is the driver behind its cash losses
- Understand why Netflix spends so much on content (a level that’s unprecedented in video entertainment)
- Examine the profound advantages that the Netflix platform has over Legacy Media in leveraging content to acquire subscribers and engage them
- Finally, tie all of the above together to see how the “sky’s the limit” for Netflix when it comes to content spend and growth in subscribers and revenue
- The ultimate goal here is to help us see how Netflix is playing to win a game that the general public doesn’t fully understand, and which offers incredible…
IN-DEPTH
In an industry where “nobody knows anything” when predicting hits or flops, is it better to make a few giant bets, like focusing on a handful of mega-franchises, or a lot of smaller bets, like producing hundreds of low-to-medium budget originals? With the record-shattering performance of Disney’s Avengers: Endgame, everyone seems to want to emulate the mega-franchise business model of the Mouse House.
In this article, I’ll go over:
- How Disney is leading the charge with the strategy of making a few giant bets
- Why it’s so difficult for other large studios to replicate Disney’s success with this strategy
- How success with this strategy depends on the rare concurrence of several unlikely factors, all of them Disney is fortunate to…
TV once dominated video consumption. Then came the internet. Traditional pay-TV subscriptions continued to climb in the 2000s. But disruption, however belated its entrance might be, eventually comes.
The number of U.S households without pay-TV increased from 14 million (13% of U.S) in 2010 to 26 million (21% of U.S) in 2018. Even more worrying, the average hours that consumers spend on pay-TV each day has fallen dramatically from 2013 to 2018, as shown on the chart below. The fall is particularly severe for the younger demographics (decreases of 59% and 56% for ages 12–17 and 18–24 respectively), who represent the future of video consumption. The conclusion here is as sobering as it is inescapable: traditional pay-TV is steadily losing its relevance in people’s lives.
Here are some basic truths about traditional…
Just because the accelerated method makes sense for Netflix doesn’t mean it’s right for soon-to-be launched services from Disney, Apple, AT&T, Walmart, etc.
Background: At Netflix, over 90% of the cost of a piece of content is usually amortized within 4 years of its launch date, in order to reflect how viewership is heavily concentrated in the period immediately after release, followed by a steep drop-off as the months go on.
What is amortization? Simply put, it’s how the cost of a piece of content is spread out across its lifespan. I’ll use an example — let’s say Apple, which is set to launch its own streaming service, spends $10 million with a studio to produce an original series that’ll rest exclusively on its service for 24 months. One way to amortize the content is to simply spread out the $10 million evenly across the 24 months, which means a Cost of Revenue of $417K per month on the income statement, against whatever is the Gross Revenue in those same months. This is called “straight-line” amortization. …
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