Fear and Greed in the Streaming Industry

Thematic Investing

Disney+ launched hot on November 12, 2019 for USD 6.99/month, less than the cost of a DVD. The three letter acronym may sound like an ancient relic to millennials who are turning to streaming platforms, yet all generations are progressively dumping cable TV for online video on-demand. Netflix, the American firm which started as a mailed DVD rental business, has pioneered a new buoyant business model that has sucked in contenders. There are now 30 rival services battling for viewers’ attention, but some endings will be happier than others. Disney’s debut numbers in this field are good omen for the company as 10mn people had signed up by the end of the first day in the US.

Video streaming is a Stranger Things

There are three ways to make streaming pay off: winning over new subscribers; raising prices; or slashing programming costs. Even though streaming is not a zero-sum game, bulking up volumes is tricky. As streaming platforms are now competing with sleep and debt burden widens, the consumer friendly boom will eventually reach a saturation point where consolidation is the only way out.

Why not raising prices then? Again, Netflix serves as a cautionary tale. By increasing its standard plan by USD 2 in spring, the streaming giant saw its number decline in its homeland for the first time in 12 years. Costs will surely be a barrier for some consumers as the bills for multiple services mount, creating subscription saturation.

The last lever of profit is thus slashing programming costs, but binge watching does not rhyme with cost cutting. Streaming is all about intellectual property and creative destruction. It requires a steady stream of high-quality content to please customers who crave for novelty. This means platforms hope to move the subscriber needle by nabbing established TV writers and high-profile showrunners including.

Cumulative content spending ($bn)

Sources: UBS, The Economist, 2019.

Cash is chasing eyeballs

A few figures to put the splurge on content into perspective: the average cost of a scripted drama is USD 6mn, HBO Max paid USD 425mn to broadcast “Friends” and Netflix paid USD 300mn to engage Ryan Murphy’s services, the screenwriter of Glee. In total, the entertainment business has spent at least USD 650bn on acquisitions and programming in the past five years. Last year only, over USD 100bn has been invested in content – as much as in the American oil industry.

US-based streaming services are stepping hard on the content gas pedal and may invest up to USD 50bn next year. Netflix will continue to be the largest contributor with USD 18.5bn in cash content costs, a large portion of which will be on exclusive original shows and movies as the company loses access to licensed content like “The Office”.

A goofy business?

Netflix is burning USD 3bn a year to chase eyeballs and would need to raise prices by 15% to break even. Disney expects its streaming service to break even by 2024, once it reaches 60-90mn subscribers and it does not even account for cannibalising effect. There are 700mn streaming viewers in the world and a much greater total addressable market. These investments will take a heavy toll on the bottom line. So the question is not whether there are opportunities, but which player will emerge unscathed from the battle for viewers’ attention?

US Streaming subscriber in 2024 (mn)

Source: Bloomberg, 2019.

The most probable scenario is not a “Winner takes all”, but rather an oligopoly like the Telecommunication industry. Of all the new services, Disney+ looks like the top contender with a compelling USD 6.99 monthly price or a USD 12.99 bundle including Hulu and ESPN+. The mouse’s offer will directly challenge Netflix's USD 13 standard plan, yet we do not expect the combo to be a substitute, given the Netflix's breadth of content. The company of Reed Hastings will be hard to dislodge with 47,000 TV episodes and 4,000 films, compared to 7,500 episodes and 500 films for Disney+. Nevertheless, HBO max, the broadcaster of Game of Thrones, may also help popcorn sellers as it can tap its parent company’s – AT&T – 170mn customer relationships.

Season final, no spoiler

As developed markets turn mature, growth gets scarcer, so media giants will have to opt for emerging markets. Netflix forecasts that 90% of its subscriber growth will come from outside the US. In the United States and Europe, streaming services will probably have to claw viewers away from each other as available free time is shrinking. Besides, switching costs are low. People might sign up for Disney+ to see “The Mandolarian”, the new Star Wars series, leave and then come back a year later for the new Marvel Film. However, the global quarantine due to the current Covid19 outbreak will surely top up streaming platforms' income as citizens are stuck in their couch.

As a conclusion, over time, firms that can aggregate the various streaming services in bundles with simple interfaces are certainly those who will reap most rewards. For a better feel of where the entertainment industry is heading, turn on your screen and press play.

The above references an opinion and is for information purposes only.  It is not intended to be investment advice.  Seek a duly licensed professional for investment advice.

Several sources have been used in this article, but key facts and figures can be found in The Economist.

MT Finance - Mathias Talmant.