Content Crash — Part 1
From streaming boom to streaming bust?
2020 has been declared the year of the streaming wars but so far, there have not been too many casualties on the battlefield. On the contrary, on-demand video services are experiencing a streaming boom. As the world fell silent and groaned under lockdowns and social distance measures, both new and established OTT services have seen the number of new subscribers and viewing time skyrocket as we were collectively forced to stay at home and in front of our screens.
- Online analytics firm Conviva’s recorded the biggest lift ever, up nearly 79%, for on-demand viewing during the first months of 2020.
- Netflix wowed Wall Street with its biggest quarter ever and a record number of new paid subscribers, nearly 16 million.
- Disney+ continued its global expansion, launching in seven European countries and announced 50 million paying subscribers just five months after the launch of the service.
- In Europe PSM reported enormous growth in audience numbers on their owned and operated video platforms.
So far so good? Well, you don’t exactly have to be Joseph Schumpeter, the man who introduced the concept of booms and busts, to wonder if the current arms race can end well for all. Something has to give. The breakneck growth of streaming services and the inflation of premium content at ever-rising prices is simply not sustainable in the long run. Sooner or later ‘the era of peak streaming’ will end up crushing those who cannot keep up or crash into the simple rules of supply and demand. And while it might not wipe away all it could have a profound effect on the media ecosystem impacting legacy media more than deep-pocketed US platforms.
Cracks in the wall.
Before the crash, our world seems almost stationary, deceptively so, balanced, at a set point. So that when the crash finally hits — as inevitably it will — everyone seems surprised. And our brains keep telling us it’s not time for a crash. Niall Ferguson.
Some of the indicators that are flashing red are in plain sights. Others are harder to perceive, like subtle hairline cracks on a wall that was finished with too many different layers of paint. But put together they stand out as early seismic warning signs of ground shaking to come.
Burning money
The streaming wars have heated up to a point that media companies are hurting themselves to invest in premium content, talent, and technology. Spend now and earn dominance in the market goes the thinking. But the piles of debt are eating into the revenues and profit. Netflix finished 2019 with $14.8 billion in debt and has officially reached a peak cash burn with a negative free cash flow of $3.3 billion in 2019. Since Netflix doesn’t generate enough cash from its operations to pay all of its bills it has to resorts to borrowing to meet its investment needs. And still, the company is planning to spend 17 billion on content in 2020.
Of course, Netflix is playing the long game and the last year it has been able to convince investors that it is starting to focus more on margins but the company’s unbalanced and inflated spending pushes other media companies to dig deep in their pockets for their on-demand services and sacrifice revenue in the name of corporate rivalry. For European production houses and broadcasters, in particular PSM, these enormous content budgets make it hard to nearly impossible to compete in the premium content segment.
- The Crown cost about 10–12 million € an episode
- Stranger Things costs about 7 million € an episode
- Game of Thrones final season cost about 13 million € an episode
For comparison, a median budget for a European fiction film amounts to 3.3 million euros in the big markets according to the European Audiovisual Observatory.
Asymmetric competition
Not all players in the streaming landscape are ‘pure players’. Giants like Amazon and Apple can easily treat their content investments as a loss leader for their broader portfolio of products and services. Apple offers consumers a year’s worth of access if they buy a new iPhone or iPad as it wants to bring consumers in their family of services and products. Amazon uses video primarily as a way to build Prime subscriptions and ultimately hopes to blend content and commerce in the race to control our home. Other than regular media companies these companies can afford to take the long view. Moreover, they control important parts of the value chain like the Apple app store or the AWS cloud services that power many other streaming services. In combination with their superior ability to collect data, they are increasingly owning the relationship with the audience. Competition with them is like a game of soccer on a slanted plain against a team of referees that have the power to change the rules whenever they want and can predict every move you make in advance.
A finite amount of time, money, and attention.
In the math game of adding ever more content and services, we tend to forget the obvious elephant in the room. The more content and services people have the less time they can spend on each of them.
Take for example a typical US adult: He/she spends 10 hours and 30 minutes per day connected to media across TV, radio, computer, smartphones, and tablets. 5 hours and 46 minutes of that time were spent on video in 2019. Even if acknowledging that some simultaneous usage occurs this is a mindboggling amount of time and there is little room to grow. There is a reason Reed Hastings, CEO of Netflix once said that sleep was his biggest competition.
Aside from the fact that we cannot stretch the limits of time broadcasters and content platforms face also an attention conundrum. That same Reed Hastings wrote in a recent letter to shareholders that he doesn’t worry as much about the streaming competition as he does about time consumers spend playing online games like Fortnite. And then there are the countless advertise-based video-sharing platforms and social networks, that bring in a myriad of new low-cost productions capturing the attention of younger audiences. While not playing in the same league as expensive high-end drama they do compete for attention and ultimately money since it is offered for free.
This brings me to the last but maybe most important consumer perspective: money! Currently in Europe consumers are still happy to stack one or two SVODS on top of their cable subscription but there is a breaking point of how much the average consumer is willing to spend every month for entertainment. That amount surely will be revised downwards now the Corona crisis is putting additional pressure on many households. Already in 2019, GWI reported that 41% of current SVOD subscribers in the US/UK indicated that it’s getting too expensive to pay for multiple services, while 35% said they wouldn’t pay for another entertainment subscription service. And that was before the launch of Apple+, Peacock, HBO Max, Quibi,…
In short: the trinity of inflated spending, asymmetric competition, and a finite amount of time, money, and attention in the market make the current situation highly volatile. It’s not a question of why but rather when and how things will play out.
In my next post, Content Crash, Part 2, I will consider some of the strategic actions and secondary effects of the streaming war, and Part 3 looks at how the ripples they might cause will separate the winners from the losers. Part 4 concludes with some essential survival skills for Public Service Media.
Credits & Disclaimer:
- In 2014 well-known blogger Mark Schaefer coined the term “content shock” to describe an inevitable reality in the digital marketing world: too much content and not enough time to consume all of it.
- I found a lot of data and insights in articles from esteemed colleagues and specialists. Where-ever possible I have entered the link to the original source material. Please let me know if you feel I forgot something. One of the best resources around is the Yearbook 2019/2020 from the European Audiovisual Observatory and of course our own EBU Media Intelligence Service.
- This article is a way for me to digest the many signals I perceive every day. It’s not a scientific study and might, therefore, miss certain elements or overemphasize some dynamics. SVOD services account for 80% of all VOD returns in Europe and are the main growth driver of the EU audiovisual market but are still a very small part of the overall revenue. However, the big US platforms have a disproportionate impact on the European market and they fuel a dynamic of rapid migration of video consumption from linear television to a-la-carte on-demand consumption. In the end, this battle is about conquering and preserving audiences regardless of how they connect with you.
