On Netflix and Video Streaming Services
I assume most of has have already seen Netflix’s Q2 earnings report the other week, maybe you’ve even read one or two articles on the situation. Here’s my two cents..
To give you some context, here is the premise that led to your social media feeds being flooded with news about Netflix’s imminent demise as of late. The main -and pretty much only- point was the less than expected subscribers growth in Q2 2019, 2.7 million instead of the expected 5 million and compared to the 5.5 million subscribers added in Q2 of 2018. As a result the stock price went down by 10.7% the next day.
The company attributed this under-performance to two things, the lack of new interesting shows added to its catalogue during this period and, having that much of the drop in subscribers had come from specific markets, the price increases applied in specific countries as of late.
One quote from the recent shareholder letter released by Netflix goes like this:
“Much of our domestic, and eventually global, Disney catalog, as well as Friends, The Office, and some other licensed content will wind down over the coming years, freeing up budget for more original content.”
While the company portrays that it looks forwards to moving away from its roots as an aggregator of video content towards a future where they create original content, not everyone is fooled by the smoke and mirrors. The statement above presents the fact that all this ‘more original content’ to be created with the money spilling over after removing those -very successful- shows from their library as just that, a fact. While it’s true that most recently poached showrunners -like Shonda Rhimes, creator of grey’s Anatomy or Ryan Murphy, creator of GLEE etc.- have yet to launch their shows on Netflix, there is absolutely no guarantee their shows will be the massive hits as those created by these individuals in the past. Admittedly, by bringing in top-notch talent you give yourself the best possible chance of making a good show, but in no way does it guarantee it. And in a hit-driven business, hits keep the boat afloat, and Triple Frontiers sink it.
In the same paragraph as the quote above we find another statement, this time contrasting with Netflix’s forward-looking attitude of the past:
“From what we’ve seen in the past when we drop strong catalog content (Starz and Epix with Sony, Disney, and Paramount films, or 2nd run series from Fox, for example) our members shift over to enjoying our other great content.”
While the statement might be true today, due to the ‘semi-captive’ nature of Netflix’s subscribers, it will be less true come Fall when Apple and Disney launch their respective streaming services, and even less so come Spring when HBO MAX is due to arrive. And these competitors are not lacking when it comes to the breath of their libraries or profitable IPs. We don’t yet know the quality of Apple’s content but Disney made five of the ten top grossing movies of 2019 before Frozen 2 and Star Wars: Ep9 were launched and WarnerMedia’s HBO has been the go-to place for the best in class TV series.
The current user behavior Netflix described above is valid today because the option for watching that ‘dropped content’ would mean backtracking to the network television experience, a process that involves some inconvenience, more so if you’re a cord-cutter. Considering the ease of canceling a membership to any given subscription service, super-fans will most likely follow their favorite show to another streaming platform, provided a good-enough user experience and a price point that’s the same or lower than for the service they leave behind.
Because Hulu, the next best video streaming service with 28 mil. subscribers, focuses more on TV content and develops much fewer original content Netflix finds itself in a very defensible position. This semi-monopolistic situation has given them the freedom to adopt a business strategy when creating original shows that can be summed up by the phrase ‘throw it at the wall and see if it sticks’. With the arrival of strong competition Netflix might find itself pressed to adopt a strategy that prioritizes quality instead of quantity, something more akin to the what HBO has been doing. The issue with this approach is that, given the lower amount of content needed to be stretched out over the entire year, Netflix will be forced to either have to change its release patter from its current season-at-a-time dump to one episode every X days -a model I personally enjoy more- or move towards integrating advertising, something its founder said will never happen.
When talking about the big media companies owning a lot of media propriety is that all of them are old companies, and, as the saying goes, an organization’s capabilities define its disabilities when the business environment changes. Without the willingness or ability to let go of their existing clients and change their business model to one that streaming service viewers appreciate, these antiquated media giants will fail in their search for building their proprietary platforms. After recognizing defeat, they will have no choice but to license their content to the competitor that has the largest user base. I wonder who that will be..
Netflix has proven many times over that the success of a video streaming platform is dependent on quality content and distribution. While Netflix’s struggle going forwards is to create more of their own hit shows as their licensed content decreases, the archaic media companies will have an equally high mountain to climb in building a distribution platform that’s at least as good as Netflix’s. If you want proof that none of them have come close yet, download the HBO GO app. Disney finds itself in a similar position with a lot products leveraging the IPs they own but little to show in the ways of distributing the content to its users in a convenient way.
One final area in which Netflix has a big head start compared to its attackers, one that is easy to underestimate, is the big data treasury they already gathered from users. Data collected from 150+ million subscribers allows the company to learn from their audience and adapt accordingly, giving them a big advantage in multiple areas of the business in the future. This is what powers the AI that is their unparalleled recommendation algorithm and, by using their analytical prowess to gather insights from this data, what enables them to purchase a new show for $100 million without seeing one episode. This data trove will undoubtedly play a big role in the future, helping the network to optimize for projects that are likely to become big hits and have a high return on investment when such a strategy will be needed.
One unwanted user behavior that will likely be on the rise in the aftermath of the upcoming abundance of streaming services is digital piracy. Video subscription services the likes of Netflix and Hulu made the activity of streaming a movie on your device became a lot easier than pirating it from a dodgy website. When content will be split between multiple services, the convenience level of consuming it will drop to a point where viewers will feel more comfortable pirating the content than going through the pain of managing and paying for multiple subscriptions. A good way to spot the moment when the value relationship between the convenience offered by streaming services and the piracy alternative will invert is to keep an eye on the number of downloads for apps like PopcornTime, uTorrent or, my personal favorite, Plex.
One other concern brought up by some media executives is subscription fatigue. While most individuals limit these services by absolute number of subscriptions I think this limit will be a financial one first and foremost. Most subscription services nowadays offer a set-and-forget user experience so there’s very low cognitive load when it comes to managing a subscription. There’s the small issue of keeping track of multiple monthly subscriptions but apps like Subscript or Trim do a good job aggregating these costs for you in an easy to understand interface. Instead, I anticipate most users will evaluate whether to subscribe to another service based on how much they already pay per month for all of their subscriptions and relative to what they used to pay in the pre-subscription world, i.e. now. If you’re paying $X for all your video entertainment right now, you will pay the same total amount of $X but for multiple services in the future, when most media companies have a subscription option.
It’s everyone’s game to win at this point and Netflix’s to loose, we’ll only be able to get some idea once the other services are launched and report some adoption numbers. If history has thought us one thing is that when competition is fierce the consistent winner is the consumer, and this video streaming war is no exception.
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