The ‘streaming wars’ could penalise viewers

In 2017, when Netflix was 20 years old, the ad-free on-demand-video or streaming service achieved three milestones. One was that Netflix hit 100 million subscribers worldwide. Another was the streamer earned its first Oscar when White Helmets won Best Documentary Short Subject. The third was the company premiered its first blockbuster movie; namely, Bright featuring Will Smith.

In that giddy year when legacy free-to-air and balkanised cable TV rivals appeared passé and Prime Video and the like looked limp competition, Netflix co-founder and CEO Reed Hastings declared the creator of ‘binge watching’ had even beaten an unobvious competitor. “We actually compete with sleep,” Hastings said. “And we are winning.”

But succeeding might get harder for Netflix now. Even though Netflix has intensified content creation, boosted global subscriptions to 152 million and still dominates the subscription video-on-demand market globally, the company risks losing its dominance in streaming for two reasons.

The first is that Big Hollywood and another Big Tech company are entering the streaming landscape that in the US already includes Amazon’s Prime Video.

Coming soon to streaming are Hollywood icons AT&T’s WarnerMedia, Comcast’s NBCUniversal and Disney, recently bolstered by its purchase of 21st Century Fox. This trio will arrive with competitively priced packages, marketing budgets to promote their arrival, libraries of premium content, plans to create compelling programs exclusive to the new services, and intentions to reclaim the popular content they have licensed to Netflix. They enter streaming with an aim to arrest sharply declining viewership of their linear channels (where video content is delivered to a schedule), build direct customer relationships and protect their position as global media giants.

Apple is arriving with US$6 billion to spend on content for its upcoming TV+ service, which is about what Amazon is thought to devote to content on Prime Video that was founded in 2006. While Big Tech lacks content archives, they are wealthy, have huge customer networks and might be willing to loss-lead on streaming to attract and retain more people on their platforms that they monetise in different ways.

The other problem for Netflix and streamers such as Australia’s Stan relates to content. Four areas of concern stand out. The first is that the new entrants are claiming back marquee content such as Friends and The Office. The second is that heightened competition has boosted the value of licensed content, which hampers newer streamers with smaller back catalogues compared with Hollywood rivals. The third is that binge watching hastens the need for fresh content. The last (and a less urgent problem) is that countries are setting local-content rules requiring streamers to invest in local content. These reasons are pushing the streaming industry to boost content spending. Netflix, for instance, is expected to spend almost US$15 billion in cash on content this year, more than 60% higher than only two years ago.

The heightened competition and rising content costs are bound to transform the streaming TV industry. Smaller stand-alone streaming platforms could struggle as the giants fight to become one of the small number of services to which most households subscribe. Before too long, market share is likely to be more evenly spread across the vertically integrated giants.

But given the way TV viewing works, that scattering of market share is likely to prove a situation where competition leaves consumers worse off. The future facing viewers is likely to be one where many households will need to subscribe to multiple streaming services (on top of traditional pay-TV packages) to see the mix of shows they want – which means paying more all up. They might see ads where none exist now (a de facto price rise). Or they might spend more time planning an app churn that brings them the content they prefer (another hidden cost even if it might be small for the tech savvy).

In short, the period in which viewers could access the right mix of enough programs, including all their favourite shows, at an affordable price on one or two ad-free streaming platforms is ending. 

Consumers face a fragmented and costlier world of streaming that could remind people of the disjointed and frustrating pre-Netflix era.

For all its streaming stranglehold, Netflix, to be clear, has only about 10% of total viewer screen time in the US. Netflix will hold a healthy, even if shrinking, grip on this fast-growing viewing segment for the foreseeable future because the company owns a rapidly growing stash of content and has the industry’s most-honed algorithms to promote content. There is nothing remarkable in the likely trajectory of streaming; a company comes to dominate a new niche and others enter to share the profits. But it is likely to be notable for how market forces can act against the interest of consumers and for how tech can transform industries without fulfilling its initial promise.

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Magellan was formed in 2006 by Hamish Douglass and Chris Mackay, two of Australia’s leading investment professionals. The company specialises in global equity and listed infrastructure assets.

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