Updated: Jun 17
What are we talking about?
Market competition is taught as being inherently good for consumers in the long run, but does this lead to us receiving a frustratingly fragmented offering when it comes to the video streaming industry?
Somewhat conversely, the growing number of people staying inside, watching more and more content, will likely lead to a number of new experiences in the real world. Why?
Competition is good, right?
Study economics at school or university, and before you even finish Econ01 you’ll come out with the general belief that market competition is quintessentially good for consumers. Why? Because in a perfectly competitive market, prices are driven down, there is greater pressure for businesses to innovate, and the need to provide more value to consumers is increased. So, from there we all go on our merry little ways encouraging competitive markets and vehemently opposing any signs of anti-competitive behaviour. Take the aerospace and space technology industry for example. Where once innovation within this sector essentially stalled, new competition in this market (SpaceX, Virgin Galactic, Blue Origin etc…) is widely recognised as the force driving society to accomplish goals that were otherwise too expensive or deemed too difficult to achieve in a monopolistic or state-run market (certainly in the long run). Without a doubt the essence of a competitive market is a main reason that we can now believe, that what was once only possible in the realms of Sci-Fi movies and games (like going to Mars), is now becoming a distinct, if still distant possibility. So competition is great for the consumer right? Well, what about video streaming?
Over the course of the Covid pandemic, we've become even more accustomed to streaming services. We've seen new players enter the scene (e.g. Disney+), and we've seen other players build up their customer base. However, I have real concerns that seeing so many new players fighting over a piece of the video streaming pie, that we’ll end up in a situation where the market’s offering to consumers becomes super fragmented. Each service trying to outdo others by spending more on content, creating more to watch, purchasing more exclusive rights to high level sports events and leagues. Whilst this sounds great on the surface for customers, after all - more services = more choice. However, the reality may be rather frustrating. We predict that this will lead us to a situation where we become incredibly fickle with whom we subscribe to, after all - how many streaming services will people realistically want to be paying for per month? The answer is probably not many. The frustration will arrive when one streaming service offers best in class coverage of football, whilst another in another sport which a family member may like. Meanwhile, other streaming services will focus on big blockbusters films, whilst others on edgy documentaries and character driven TV shows, etc... This hypothesis isn't anything new, and you've most likely heard this point of view before. What we like to dive into, is - what opportunities will arise from these behavioural changes?
So what are the opportunities?
Okay, lets try the impossible task of envisioning a far future. Straight off the bat, lets assume that the way streaming companies will generate revenue's will be vastly different, and diversified, to the way we see things today. When looking at the competitive landscape some brands objectives as a wider company, are slightly more predictable than others. Let’s take Disney for starters. How do we expect their streaming offering to develop in the future? Well, as any historian will tell you, the answer to the future lies in the past. Disney, whilst having a stellar reputation at producing box office hits, does not stick out from its competition by its ability to produce good films. No, what makes the company stand out is its unwavering ability, and reliability, at finding ways to monetise its intellectual property. How? The answer is simple – consumer products and experiences. The cycle is simple. Create desirable content, generate box office revenue, push consumers to related products/merchandise, generate home entertainment revenue (VHS/DVD/Blu-Ray), push to more product/merchandise, and all the while connecting all these elements to drive consumers to an expensive offering around their parks/cruises (which represent huge portions of their bottom line). Now, the rise of streaming risks the long term health of two of those revenue streams, thus creating a greater need to focus on other areas of the business. Of course those who know Disney well, will know that there are many other ways the company brings in the green dollar. For one, selling usage rights to their IP (intellectual property) to other brands is an extremely profitable part of the business with very low marginal cost. There are many other ways the ‘house of mouse’ makes money, but make no mistake, the biggest revenue stream comes from their consumer products divisions, and when the future of theatrical box office and home entertainment revenues look uncertain, well, then it’s time to push consumer products to places where the eyeballs are – streaming services. That's where we see Disney+, more than a platform to stream great films and TV shows, but a membership to get the most of all things Disney. Don't be surprised if in a few years you start seeing Marvel products and Disneyland tickets shown at the end of the newest avengers movie.
We can continue this exercise with other companies. Apple is in the business of selling hardware. For sure, there is a greater emphasis on their ‘services’ within the last few years, and there is a general consensus that this is where future growth will come from. But, make no mistake, a streaming service is intended to add another reason to ensure that you stay within the Apple eco-system and buy the next IPhone, Mac, wearable glasses or whatever the future may hold. Many would point out that Amazon's intention for Prime video is to drive more people to purchase more on commerce as a result of being Prime members. Becoming a prime member will mean more time on Amazon = greater likelihood you utilise other elements that Amazon has to offer, not least the E-commerce arm which is its bread and butter. Of course, I’m missing the current market leader… Netflix.
To me Netflix is the most interesting example because it’s so difficult to guess how they’re going to expand their revenue streams. Disney, Apple, Amazon (I haven’t even mentioned Facebook, WarnerMedia etc…) all have revenues streams that are additional to the subscription earnings alone. This isn’t the case for Netflix. Almost all of Netflix’s earnings come through subscription revenue, and that’s been great…until now. Netflix have been able to create tons of great content, which helps drive user acquisition, which drives up its market value. As long as they continue to grow the number of users quickly, their market value increases. As long as this happens, the market is happy to fund Netflix’s spending on developing new content. The problem is that with a market that looks to become saturated very quickly, user growth will inevitably slow down. Once this happens, unlike their competitors, they will have no other revenue stream to take the burden off. The result of which paints a very dim picture for the tech giant. That’s unless they find new ways to make money, something i’m sure shareholders are looking at closely.
So what ways can they make money?
To me, I think there are 4 game-changing revenues streams that these companies tap into: Consumer products, advertising, hardware, or events/experiences. For Alphabet (Google) and Facebook, you can bet they’ll be looking at advertising revenue as the way to go. I’ve mentioned Amazon, Disney, and Apple already. Netflix seems unpredictable at the moment. But where i see big opportunities in is in experiences. Why? It’s simple – consumers want more experiences, especially during a period of time where they've been bottled up at home bored out of their minds. The consumer is always the path forward. Those who ignore this, ignore opportunity.
The fact is culturally consumers hate advertising (at least 99% of it). They don’t feel like they need a whole load more consumer products. They are fed up with buying/being locked into expensive phone contracts every 12/24 months. What they want is more experiences. Now, most of the companies i’ve mentioned have largely ignored this when it comes to offering consumers experiences related to their content. Of course, you can argue Disney have their parks and the rest are very early on in their streaming life cycles to utilise 'experiences' into their offering. However, this isn’t an excuse for the future. Traditionally, experiences are unattractive for these big companies. Marginal cost is high for every new event/experience you put on, making it tricky to scale. It’s time intensive to make sure it matches the quality they demand for their brands, and then the profit margins aren’t always great. But this all changes now. Those brands that can meet consumers needs for more experiences are more likely to drive these consumers to subscribing to their services. As such, this relieves pressure to drive a return from the experiences individually. If brands can figure out a more relaxed approach to partnering with smaller companies to make experiences, without being too over-concerned with quality control, then there could be huge growth within this area. This is just one of the many reasons I see a bright future in brands like Disney, Amazon Video, WarnerMedia, Paramount, Netflix etc… creating more experiences. We can see these brands have already increased their use of experiences to appeal to consumers already (e.g. Disney and The Void, HBO and Game of Thrones Tours).
Experiences are, put simply, the white space. It is the most interesting opportunity area given the number of different ways it can come alive. Will we see more VR pop ups? What about more paid tours or immersive bars? Who knows. What I believe is that consumers want this the most. Ignore the consumer, ignore opportunity.