A lot has been said about the “Streaming Wars”, referring to the non-stop deluge of streaming platforms becoming available.
However a recent retweet from a private account, about why Netflix ($NFLX:NASDAQ) recently raised (or as they put it: “updated”) its subscription prices, made me think: what is the endgame for these subscription services?
From 2014 until 2019, the company has doubled its prices even when inflation in the USA was below 2%.
Golden Age
Since Blockbuster filed for bankruptcy in 2010, Netflix went from making $2 billion dollars to $25 billion in 2020. Phenomenal growth that was boosted by the adoption of smartphones around the globe.
In the early years, Netflix was using other studio’s content for streaming. At first, the film giants and production houses ignored this new trend of video on demand (SVOD), considering simply a tiny addition to their revenue stream that was largely based on box office sales (and residual rights such as TV licensing and DVD).
It is only when Netflix started producing its own shows that other studios decided to jump on the streaming wagon and compete with Netflix. But what made Netflix quit their previous working model of just using other content and make their own? Content Obligations
As per the above tweet from 2017 and the latest quarterly result below, streaming content obligations are not shown in the balance sheet as liabilities (and if they were, it would wipe out the company’s equity):
Netflix found out that their streaming obligations to other studios was growing at a rate faster than their subscribers, so they decided to take out huge loans (despite having a low credit rating, the corporate lending environment with low rates and QE was to their favour) to finance new shows and movies. It was a big gamble.
Other studios started to notice and decided to pull their content from Netflix and create their own subscription services (Disney+, Hulu, Amazon Prime, Apple+, YouTube Premium/Patreon, Peacock, Starzplay, OSN, Bein, etc.)1
Even Manaseer tried to dip their toes in the arena.2
For Netflix, creating original content was a hit and miss: Squid Game being a perfect example of worldwide phenomenal success. But on the other end of the coin, you have unfinished shows and movies that should have never ever been made.
What this means for consumers is a plethora of series and contents everywhere: it is the Golden Age of Content. It was great for viewers, to have so many options, as well as lucrative for the talent creating such content.
However consumers also started noticing something else with the rise of entertainment subscription services (be it music, gaming or movie):
For example, if you subscribe to a music streaming service to gain access to unlimited amount of music, but at the end you just listen to the same 2 or 3 singers: wouldn’t it be cheaper to buy the physical/digital album once for the price of the monthly subscription?
Same goes for the streaming services: a person would sit an hour trying to find something to watch and ends up watching reruns of their favourite comedy series from the 1990s.3
Paying for a monthly subscription, just as with renting an apartment, has a downside: if you miss a payment, you will end up without access and owning nothing to show for it. Calling it the golden age of content can be considered a double edged sword.
On the other hand, what Netflix is sitting on is a golden treasure trove of data: what they own is not just the intellectual property (movies and shows produced). They have a great amount of data on all the viewers and their watching habits and preferences. But how to “Financialise” it into an asset is another question.
End Game
So what’s next for the streaming wars? (More streaming platforms competing? More content? More expensive subscriptions? A ban on owning a DVD or downloading digital films?)
2 likely scenarios :
More consolidation of the media giants (Netflix will have to acquired soon enough)
Companies that provide a 1 stop-shop for all subscriptions, similar to Cable or OSN, could be the winners: Roku is a good example (partly owned by Netflix)
https://www.ft.com/video/e9b62889-8869-4fae-83e3-b0fca9964535
https://intaj.net/لقاء-مع-مدير-عام-شركة-المناصير-لتكنولو/
https://www.forbes.com/sites/lisettevoytko/2020/12/31/friends-leaves-netflix-at-midnight-returns-in-may-on-hbo/?sh=4504416e3514