Cast your mind back 20 years or so, and it becomes apparent that the ways in which we consume electronic media have changed – if not beyond recognition, then certainly enough to alter the underlying commercial models. Terrestrial mainstays such as Australian soap opera Neighbours were a daily feature of my 1990s childhood, while Friday and Saturday brought more variety, in the form of Top of the Pops and sports game show Gladiators.
Fast-forward to 2019, and such a viewing schedule sounds positively Dickensian. No longer are we limited by serialisation – forced to wait, agonisingly, for a new episode of a favourite programme to be released. No longer are there hard boundaries between the realms of the big screen and the small. Television and film have undergone a major technological revolution – one that has ushered in a new epoch of content consumption. To paraphrase Norma Desmond in Sunset Boulevard, 'they're still big, it's just the pictures that got small'. All hail the age of streaming.
To be more specific, we’re talking about paid-for video streaming – whereby shows are transmitted directly from the internet to a smart TV or other connected devices. For a long time, Netflix (US:NFLX) was at the forefront of this movement. It introduced streaming services in 2007, having started out as an online movie rental business two decades earlier.
No time to press ‘pause’
However, being the incumbent hasn’t given Netflix licence to press ‘pause’. Other companies – colossal companies with vast resources – have entered the fray, with competition intensifying significantly in the past month alone.
On 1 November, Apple (US:AAPL) debuted its Apple TV+ streaming service. IC buy tip Walt Disney (US:DIS) began the roll-out of a rival offering, Disney+, just 11 days later. Meanwhile, on this side of the pond, ITV (ITV) and the BBC launched their streaming joint-venture ‘Britbox’ on 7 November – having already taken this to America in 2017. And the story doesn’t end there. Next spring will bring two additional platforms: HBO Max, controlled by US telecoms and media group AT&T (US:T), and ‘Peacock’, headed by NBCUniversal – part of Comcast (US:CMCSA).
It’s little wonder that the term ‘streaming wars’ has caught on. But is this truly a war, where only one side can win? Or can multiple contenders co-exist in this arena, without begetting each other’s downfall? What are the criteria that make a streaming company more likely to succeed in the long term – and is the paid subscription model sustainable, now that consumers are faced with so much choice?
These are questions that resonate not only with the streaming players, but also with their current and would-be shareholders. And the accelerated proliferation of content has knock-on implications for corporations in the audio-visual supply chain – from broadband providers to those selling filming equipment. It follows that the fast-emerging streaming mini-sector throws up opportunities, and challenges, for investors on both sides of the Atlantic.
Full stream ahead
Video streaming is more than just a trend or a phase. It is a medium that has brought about a sea change in consumer behaviour. In the UK alone, 42 per cent of adults consider online video services to be their primary method of watching TV and film. That’s according to the August 2019 ‘Media Nations' report from communications regulator Ofcom, which also found that 38 per cent of subscription video-on-demand (SVoD) users can imagine not watching any broadcast TV in five years’ time. There are already far more SVoD subscriptions than pay-TV subscriptions (with the latter pertaining to the likes of Sky and Virgin Media).
Diversified competition
The market backdrop is, evidently, promising – but whether Netflix can maintain its lead is up for debate, with so many others now vying for a piece of the pie. Its rivals boast enviable advantages – including the fact that they, unlike Netflix, do not have all of their eggs in the streaming basket.
Amazon (US:AMZN) – whose Prime Video offering is incorporated into its popular Prime membership package – operates across a broad range of industries, from cloud computing to groceries. The risk of its streaming bet is, thus, somewhat diversified. Likewise, AppleTV+ forms just another offshoot of its enormous parent company – giving users of Apple hardware and services yet another reason to stay within the family. Indeed, the platform costs consumers $4.99 a month – but is free for a year with any iPhone, iPad, or other device purchase.
Disney – which is arguably Netflix’s main competitor – has stuck to the media space. But it has expanded and diversified its content and talent resources through acquisitions, such as that of 21st Century Fox. And its streaming venture – which costs $6.99 a month, or $69.99 a year – has already enjoyed immediate popularity. Just one day post-launch, we learnt that Disney+ had achieved 10m sign-ups.
Such take-up is, perhaps, unsurprising, given that Disney+ – in its own words – is the “dedicated streaming home for movies and shows from Disney, Pixar, Marvel, Star Wars, National Geographic, and more, together, for the first time”.
Netflix standing its ground
Despite this rather intimidating hubbub, Netflix still reckons that it can plough on, not least because it has endured competition for years. “Many are focused on the 'streaming wars', but we’ve been competing with streamers… as well as linear TV for over a decade,” it noted in a letter to shareholders about its third-quarter results, released in October. In the same breath, the group highlighted the attributes that set it apart from peers. “While the new competitors have some great titles (especially catalogue titles), none have the variety, diversity and quality of new original programming that we are producing around the world.”
Netflix – which boasts a 158m-strong subscriber-base – said at the time that its long-term outlook hadn’t changed. But it conceded that other “noisy” launches could lead to a “modest headwind” for near-term growth. For the fourth quarter, it is forecasting 7.6m global paid net subscriber additions, versus 8.8m a year earlier – implying full-year “net adds” of 26.7m, down from 28.6m. This reflects competition as well as other factors including churn from some price changes.
Funding content
Given this anticipated dip in the number of new customers, some might baulk at Netflix’s huge content budget of around $15bn for 2019. Is such expenditure sustainable in an increasingly saturated market? Netflix says that such a sum “insulates” it from reliance on any one single title. And, in fairness, with media giants jumping aboard the streaming bandwagon – while removing their shows from rival platforms – new content is essential.
True, the group’s expectation of approximately $3.5bn in negative free cash flow this year is somewhat daunting. But it reckons that fast-growing revenues (which came in at $5.2bn for the third quarter, up 31 per cent) and rising operating margins should enable it to fund more content internally. It expects cash flow to improve in 2020 and beyond.
Algorithmic insights
Another factor in Netflix’s favour is its usage of artificial intelligence (AI) to identify user preferences. Walter Price, manager of the Allianz Technology Trust (ATT), notes that “we do think that they [Netflix] are going to be one of the eventual winners” – both because they’re spending the most money, and because “they’re using machine learning and AI to segment their customer base, and monitor what they’re watching, and make suggestions for what they might like”. “As long as they respect the feedback loop”, the group’s “algorithms should target that spending and make it more and more efficient over time”.
While the trust sold out of what was a “fairly large position” in Netflix, Mr Price’s team continues to look at the company. Its shares have slipped considerably since the summer, but have shown signs of recovery in recent weeks. The trust has positions in Apple and Amazon, but – as a tech fund – does not own Disney.
British content
In today’s streaming world, finding a niche could be key to survival. For ITV and the BBC, that niche is British content – shown via the Britbox platform, which comprises the largest collection of British boxsets, spanning multiple genres. The two broadcasters have entered into a venture whereby ITV holds 90 per cent of the equity, and the BBC holds 10 per cent. The latter has an option to acquire additional shares up to 25 per cent, and the former can bring additional investors on board.
Naturally, one might question whether consumers will sign up to yet another subscription TV service. But ITV cites evidence to suggest that there’s strong demand for British programming. Indeed, research house Differentology found that 44 per cent of the UK claimed they are likely to subscribe to a new SVoD service featuring British content. More than half of UK Netflix subscribers said they’d be likely to subscribe to the proposed service.
Reemah Sakaan, group director of ITV SVoD notes that the US streamers, though global brands, are largely dominated by US content. “We feel like it [Britbox] is doing something very different.” She adds that “there’s a huge wealth of both library programming and recent catalogue programming, as well as the fact that we’ll be making completely new series and commissioning new shows that will live only on Britbox”.
Subscription overload?
In all, consumers are the true victors here: they have their pick of a pool of high-quality streaming options. But there’s an argument that such choice could become overwhelming – and that this could, in turn, become a limiting factor for subscriber growth.
An October article from Deloitte noted that “consumers are increasingly experiencing 'subscription fatigue': frustration with the hassles and cost of managing multiple video subscriptions”. It said that the rising friction and fatigue tied to managing video subscription services has led to economic pressures for consumers, as well as the burden of managing different platform accounts. And to that point, the consultancy said that one way some consumers are cutting subscription costs is by choosing advertising-supported services.
In a reversion of sorts, it’s possible that, as streaming services burgeon, ad-driven models could look more appealing – in part because they enable consumers to access more platforms, at a lower cost. Allianz Tech Trust’s Mr Price believes that ad-supported services will be a “fall-back position” for streaming businesses.
