Could ‘billions in losses’ bring consolidation in the streaming market?
In 2022 consumers have more content and more choice than ever before with just about everything that has ever been committed to tape or film available to stream somewhere at the touch of a screen or a button. What is more, as new streaming services seem to launch almost every week, many are also ploughing vast amounts of cash into original content that makes them stand out in the TV and movie market.
But, as we all know, making TV and film isn’t a cheap business, not least when the bar has been raised so high in production values in recent times that consumers expect cinematic style and big-name actors in every show, even if they’re watching it on their phone on a bus.
This week, Netflix, who you could argue is the godparent of modern streaming released their quarterly shareholders’ report, in which they revealed that after a difficult period they appear to be bouncing back on subscribers.
“After a challenging first half, we believe we’re on a path to reaccelerate growth” the shareholders’ letter reads.
Netflix cites some of its most popular content in the last period to include Monster: The Jeffrey Dahmer Story, Stranger Things S4, Extraordinary Attorney Woo,
The Gray Man, and Purple Hearts. It also says that “In the UK, Netflix accounts for 8.2% of video viewing, 2.3x Amazon and 2.7x Disney,” with similar figures in its most established market of the US.”
However, in the same letter, Netflix comment on the state of the current streaming market and estimate that their competitors are ploughing vast resources into new services and could be racking up significant losses.
“Our best estimate is that all of these competitors are losing money on streaming, with aggregate annual direct operating losses this year alone that could be
well in excess of $10 billion, compared with our +$5-$6 billion of annual operating profit. For incumbent entertainment companies, this high level of investment is understandable given the accelerating decline of linear TV, which currently generates the bulk of their profit.”
Now, these are numbers estimated by Netflix in a shareholders letter, so its hardly unbiased research – but it’s interesting to see it said out loud just how expensive this new war for eyeballs in the digital TV space has become.
As Netflix recognise “it’s hard to build a large and profitable streaming business” and therefore it’s to be expected that companies are ploughing vast amounts of cash into the launch and first few years of their services as they battle for recognition and market share. But the question is, how sustainable is all this spending, and when will it start paying off – especially as we see a cost of living crisis engulfing the globe and rampant inflation making it more expensive to produce content?
The current situation feels like it can’t keep ramping up forever even though many of the players have very deep pockets indeed, and you can’t help but think many of the services will at some point be looking to turn to produce more (or some) profit in the next period of their development. But that doesn’t seem like an easy path with limited consumer cash to spend and a precedent set for almost constant big-money releases on every service.
Just putting up prices isn’t going to work as consumers will surely walk away, or -whisper it- perhaps turn back to video piracy that appeared to plague the industry in the earlier days of the internet before cheaper streaming made it simpler to pay.
Of course, we are seeing hybrid ad and subscription models emerging across the market and it feels like they may form the backbone of the next stage in streaming (well, certainly for the most price sensitive of consumers), but even controlling the cost doesn’t solve the practical problem of the bewildering array of choice across multiple services and platforms for consumers.
Netflix notes that amongst their competitors they see a profit focus starting to emerge with “some raising prices for their streaming services, some reigning in content spending, and some retrenching around traditional operating models.”
But is there really room in the market for so many streaming services? At some point isn’t there going to have to be some form of consolidation in the market where services combine in some form to offer consumers a variety of choices and packages under one or two simple monthly bills or through ad funding… or both?
That is starting to sound quite a lot like a cable provider without the cable which is of course unthinkable in age where everyone wants to monetise content direct to the consumer on their own platforms.
And although that’s clearly what all the corporations want as middlemen take a slice of the profit, is that what consumers want?
I guess we’ll have to wait and see…
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