There is more demand for the better-quality content on offer from subscription-based services. Of Americans that watch video online, 27% enjoy free content compared to the 31% that pay a subscription. These services have also outdone downloads, which are used by just 16% of Americans. Around 11% pay a subscription but still download videos, according to Statista.
UK video streaming market: what you need to know
The UK is the most mature video streaming market in Europe, where there is still has plenty of room for expansion. US cable, internet and phone giant Comcast bought Sky following Disney’s acquisition of 21st Century Fox’s entertainment assets earlier this year and its streaming service Now TV is the biggest rival to what remains a growing duopoly between Netflix and Amazon.
Read more: Disney works its magic on Fox
The UK reached a pivotal moment earlier this year when the amount of people subscribing to those three services alone outstripped the amount paying for TV subscriptions for the first time, with over 15 million people subscribing to either Netflix, Amazon Prime Video or Now TV.
Now TV is notable because, like AT&T across the pond, Sky is having to battle the decline in its core pay-TV business as people switch to streaming services. Consumers are spending 38 minutes a day less watching TV now than they were in 2012 and viewing figures are continuing to follow that five-year trend, while time spent on sites like YouTube, social media and video content platforms are rising, particularly on tablets and phones rather than the TV. UK pay-TV providers saw their total revenue fall 2.7% last year to £6.4 billion and the amount being spent advertising on their networks dropped 7% to £3.9 billion, according to UK regulator Ofcom. This has seen investment by public broadcasters – the BBC, ITV, Channel 4 and Channel 5 – drop to its lowest-ever level last year at just £2.5 billion.
Netflix vs Amazon Prime: the market leaders of video streaming
Making direct comparisons between the two market leaders is not straight forward because of the way Amazon bundles its video streaming service into its wider Prime offering that also gives subscribers free delivery and access to other services.
While Amazon has a million-and-one-things to worry about as it continues to dive into new markets Netflix has been solely concentrated on video streaming, which has given it the edge over the e-commerce giant both at home and abroad.
Read more: Amazon Q3 results warns of slower growth
The worldwide subscriber numbers from Statista imply Netflix’s 137 million customers give it over 48% global market share and Amazon, with 100 million subscribers to its wider Prime bundle, would hold about 35%. Netflix has over 58 million customers in the core US market, more than double the reported 26 million-or-so boasted by Amazon.
As evident by the chart from earlier, 77% of US video-on-demand services have a Netflix account compared to 56% that hold an Amazon account – revealing a clear overlap. This is because consumers are enjoying multiple services rather than just one. In fact, one in three video-on-demand users enjoy content from over five different services (including all the services listed). The fact that some may have subscribed to Amazon Prime for other reasons than the video streaming service goes some way to explaining this but it’s still clear there are people using both. Extrapolating the data, Netflix’s market share in the US compared to Amazon’s suggest that 43% of US users subscribe to both, suggesting fierce competition. But, it also shows that while at least 34% only have a Netflix account just 13% only subscribe to Amazon, suggesting Netflix’s offering is far more appealing.
Can Netflix keep up the momentum?
As Netflix continues to burn through cash and fund its heavy investment in content using debt there seems to be only one number that matters to investors: subscriber numbers. Just like music streaming service Spotify and social media sites like Twitter and Snap that still have a long way to go in monetising their businesses Netflix is under constant pressure to keep growing its user base and maintain high rates of growth.
Read more: Spotify has modest Q3 earnings report
After missing expectations in the second quarter of 2018 Netflix shares dived 5% and when it went on to beat forecasts in the third quarter its share price jumped 8% higher. It is, rightly or wrongly, the key metric by which Netflix is judged.
The company’s international expansion has been nothing short of astounding. Netflix is available in 190 countries – virtually every market it could be in with a few exceptions – and international subscribers overtook that in its home market last year. While growth in the US has slowed Netflix has managed to offset that overseas.
AT&T buys Time Warner to build new streaming service
The situation at AT&T epitomises the most fundamental shift happening among the communications and media industries: convergence. This is when companies sell multiple products and services in bundles to not only lower the cost of acquiring each customer – something that will become crucial for video streaming companies going forward – but to lower the risk of customers leaving by providing them with numerous services.
In the UK, for example, both BT Group and Sky package their respective broadband, TV and mobile offerings. BT has been losing TV customers this year and only managed to partly offset that with a rise in broadband customers and a strong performance from BT Sport. Sky has also been losing TV customers throughout 2017, but is reported to have 8.5 million UK customers compared to BT’s confirmed 1.7 million.
Read more: BT Group, the ‘complex and overweight’ telecoms giant
The story is much the same at AT&T, the largest pay-TV distributor in the US with market-leading mobile and broadband networks. While its most recent quarterly results showed surprised growth in its communications business the company continued to haemorrhage TV customers after losing almost 300,000 in the latest three-month period alone.
This year AT&T, fully aware of the transition being made to platforms like Netflix, unveiled its long-tinkered plan to launch a new video streaming service following its $85 billion acquisition of Time Warner earlier this year (worth $108 billion including debt). The acquisition was made with its new streaming service in mind, soaking in the rich content coming out from the likes of Warner Bros Studios, the largest film studio in the world and owner of franchises including Harry Potter and DC Comics.
The aim of the combination, in a nutshell, is to leverage Time Warner’s library and studios to create a new streaming service that can be delivered by AT&T’s vast customer network. It already has over 300 million mobile customers in the US, and the pair already have a good base to build upon through existing streaming services HBO Now, HBO Go, DirectTV Now and Cinemax. The two HBO platforms have over 5 million US subscribers and DirectTV Now has over 1.5 million. Plus, HBO’s premium cable and satellite service is used by over 140 million people worldwide, all of which it can target with its new service that is expected to launch late next year.
One of the most prized assets of Time Warner is HBO, famed for global phenomenon ‘Game of Thrones’, which AT&T plans to use as the cornerstone of the streaming service. It has recognised that this will mean HBO will have to become bigger, a certainty considering the volume of customers AT&T can plug into by bundling it into its existing packages.
The combination of AT&T and Time Warner is a good one. Although it blurs the line between content and distribution the hope is that AT&T can create new advertising opportunities using customer viewing data that will allow it to target specific customers, while leveraging Time Warner’s relatively less-intensive need for capital expenditure to help fund the rest of the business. For AT&T, the aim is to create a two-sided business model based on advertising and subscriptions that can help generate the sums needed to create new content to keep the flywheel going.
AT&T’s foothold in broadband and mobile will also prove invaluable in the years to come, especially as networks upgrade to 5G from the current 4G. IT leader Cisco estimates 80% of all data used on the Internet in 2020 will be consumed watching videos, and the volume of data being swallowed up on mobiles is growing both in general and to watch video content. And, while in decline, TV is far from becoming redundant with figures from eMarketer showing over 75% of Americans still have a pay-TV subscription with expectations for that to remain above 70% through 2020.
Disney+ streaming service underpinned by loyal fanbase
Disney – home to Mickey Mouse and friends, Pixar Studios, Marvel and Star Wars – has also been on the acquisition trail in preparation of launching its own streaming service, Disney+, late in 2019.
The company was the ultimate victor in a long-drawn out battle with Comcast over Fox’s entertainment assets that include brands like National Geographic and the Fox Film Studio. Fox’s assets are vital to Disney ensuring it has a wide enough appeal, with many concerned that most of its own franchises appeal to smaller, albeit fiercely loyal, fanbases.
Read more: UK takeovers and mergers, how they work and how to trade them
Disney+ will embrace the individual cultures that its five core brands (Star Wars, Marvel, Pixar, National Geographic and Disney) have created amongst their fans, with chief executive Bob Iger pledging to 'super serve the most ardent fans of those brands by creating experiences and environments that are more tailored to those brands.' The new service will be distributed in a bundle with two other platforms, Hulu (more on this later) and sports-focused ESPN.
Disney’s TV division, home to ESPN and other channels like ABC, is the largest of the business and like others it has been struggling, leaving its film studio to pick up the slack. In the year to the end of September Disney’s overall revenue grew 8%, solely driven by film and ultimately held back by TV, and in the first update since formally completing the takeover of Fox quarterly net income was up 23% year-on-year, although still missed analyst expectations.
But, like AT&T, Disney is not giving up on traditional TV after Iger revealed Fox’s entertainment assets would continue to create content for traditional TV and the new streaming service.
Disney is aware that its offer is niche compared to what is currently on offer (it has already been dubbed ‘Disneyflix’ by some in the market) and has said that, while considerable sums are being invested ramping-up the service and into new content, it plans to 'walk before we can run.'
Read more: Netflix vs Walt Disney and the pivotal battle for media supremacy
Disney takes full control of Hulu but its future remains uncertain
Hulu was originally established under a joint venture between three equal partners – Disney, Fox and Comcast – while Time Warner held a 10% stake. Hulu has now fallen under the control of Disney following the acquisition of Fox’s entertainment assets while AT&T has inherited Time Warner’s holding.
The creation of Hulu can be viewed as a joint effort by the major players that had noticed the early signs of the transition to streaming and the success being enjoyed at Netflix, and instead of original content it was a way of pooling together existing libraries from all the partners. While it has had some success with the likes of ‘The Handsmaid’s Tale’, much of Hulu’s content is still pulled-in from shareholders. And now, with them all getting their own houses in order, Hulu has fallen under one owner for the first time. Some argue investment and decisiveness have both lacked under joint management but being controlled by Disney does not mean the future of the brand is certain.
Firstly, the programming contributed from the likes of Comcast, such as NBC, could be pulled now that Hulu is a subsidiary of Disney rather than an equal partnership. Secondly, Disney could end up simply acquiring Hulu’s 12 million-plus subscribers and folding them into its new offering until it can simply let the Hulu brand fade into the background. The business, while valuable, is still sinking deeper into the red.
Is Apple launching a video streaming service?
Technically, the possibility of an Apple video streaming service has only been hinted at by the company and fuelled by media reports and rumours. Having said that, you can be pretty certain it is happening due to the amount of reports regarding content currently being filmed and the fact Apple made an appearance at the recent film festival in Toronto.
In August on a call following its quarterly earnings, CEO Tim Cook responded to a question about a partnership with Oprah Winfrey and other celebrities and actors and what the nature of work would be, replying they would be making 'great original content.'
As usual, Apple is tight-lipped when it comes to what it has in-store for customers but it is open that some form of video content offering is coming. On the same call, Cook said the firm had 'hired two highly respected television executives last year and they have been here now for several months and have been working on a project that we’re not really ready to share all the details of it yet.'
There are some reports surrounding what Apple may be looking to do and when it plans to do it. Reports suggest the service could be launched under a rebranding under the Apple Music brand, the music streaming service it had to set-up after its download platform iTunes started to become redundant as the likes of Spotify emerged. Others suggest the service could be launched under a revamp of Apple TV, a set-top box that has been available for years but gained little traction. Release dates vary but start as early as March 2019.
A report from the Telegraph in October favours the idea of Apple TV, stating Apple is in talks with BT about a possible partnership to use the telecoms firm’s vast reach in the UK. BT is the owner of EE – the largest mobile network in the country and a provider of broadband – and is thought to be considering distributing Apple TV set-top boxes to its own customers. Apple already has a deal like this in place in Switzerland.
Like the others gearing up for their entry into the market Apple has its own foundations to build from. It already has over 50 million Apple Music subscribers worldwide, having grown exponentially from 40 million in April 2018, 30 million in September 2017 and 20 million at the end of 2016.
Read more: Where next for Apple shares after earnings take bite out of valuation?
Is Apple going to buy Netflix or Disney?
Considering the amount of M&A at present it is unsurprising that Apple is at the centre of discussions about the next big deal. It has more cash than it knows what to do with and could afford to buy pretty much anyone it wanted and to invest more than its rivals. It has long been rumoured to be interested in buying Disney as a fast-track way of acquiring quality content, and, considered more realistic, snapping up Netflix as a way of combining formidable video and music streaming services. Execs at Apple have denied both and, with programming already being made and reports of discussions being had with distributors, it looks like the company is developing it all in-house. The more time that ticks by the less likely it is that Apple will buy one of the major players in the market.
Original content to dominate as licensing falls out of favour
As these new entrants begin filming and gear up for what will be the start of a fascinating rivalry next year there will be one long-running debate over content and quality over quantity. Brands like HBO have long looked-down at Netflix even as it surpassed it in subscribers, and AT&T CEO Randall Stephenson has maintained that view after declaring HBO as the Tiffany’s to Netflix’s Walmart.
This view, whether held honestly out of jealously, is justified. Netflix made over 300 original titles last year compared to just 56 titles from Amazon and is by-far investing more money in its own productions than its rivals. Under Time Warner, HBO’s programming budget had stagnated at around $2.7 billion, equal to what Netflix has been growing its budget annually with up to $8 billion to be sunk in 2018. While funded by debt it has paid-off: Netflix outbid HBO by $100 million for TV series ‘House of Cards’, which went on to become one of its biggest hits to date.
Investment in HBO’s programming will grow under AT&T but the company is not looking to rival the sums being deployed by Netflix. Both HBO and Disney+ are aiming to produce a lower volume of content than Netflix but, using their powerful franchises, aim for better quality. ‘Premium’ is the word of choice for the new services coming online as they know they can’t afford to compete with the hundreds of titles being released by Netflix. AT&T has openly stated that 'premium content always wins. It has been true on the big screen, the TV screen and now it’s proving true on the mobile screen.'
Disney’s total costs in the recently-ended financial year rose by $3.3 billion and by $1 billion alone in the latest quarter, both of which were put down to ramping-up its new service, and Apple is reported to have budgeted $1 billion for content in 2018 with Variety reporting it could be spending as much as $4.2 billion on original programming by 2022.
As the line between content producers and distributors blurs those fortunate enough to have a rich library of content are looking to wield it in favour of their own services rather than license it out to others, which has been the traditional way of doing things. For example, Time Warner leased much of its content out to Netflix and others but is being brought in-house under AT&T, and Disney could of simply licensed-out its swathe of brands but has decided to take the market head-on and has already pulled most of its content from Netflix. From this perspective, Netflix could argue that while quality is growing in importance there is, amid licensed material becoming scarcer, still a need to produce hundreds of original titles each year.
Video streaming platforms see expansion outside of US
Netflix currently boasts unrivalled market access as it looks to capitalise on the same first-mover advantage that has served it will in the US. The company has previously stated that 77% of future subscriber growth to 2025 will come from outside of the US with areas like Europe, India and Latin America all offering promise. Netflix has spent time and money producing content for individual nations and in different languages to broaden its appeal, and then translated them to try to attract its core English-speaking audience.
Disney’s overseas expansion, particularly in Europe, will be slower than it had originally hoped. As part of the Fox deal it also acquired a significant stake in Sky, but subsequently sold that to Comcast which is now planning on expanding Sky’s Now TV across Europe, where Sky already has over 26 million customers in the UK, Ireland, Germany, Italy and Austria. While Comcast has a great base to capture the 60% of European households that don’t have a pay-TV subscription (like Sky) using Now TV, Disney has admitted the loss will mean it will take longer to penetrate Europe, although it’s not been deterred altogether. In Europe, the offer for OTT premium TV is more enticing where cabling or satellites are unsuitable and securing pay-TV services has not been possible.
Netflix: will rising debt, costs and competition cause it to tune-out?
Subscriber numbers may still be the main metric at Netflix but the focus at the company and its new competitors will increasingly switch to how much they are all having to spend on acquiring new customers. With domestic growth slowing, margins under pressure, new competition entering and debt continuing to build so it can produce new content, Netflix is in for a tough few years: its cash outflow will be $3 billion in 2018, tightened from previous guidance of $4 billion.
Where video streaming will ultimately end up is unknown. Companies like Netflix may have quiet ambitions to replace traditional TV that has dominated for so long but, for the foreseeable future, streaming and broadcast TV will go together. Quality, original programming will become key and the days of licensing it out to others is fading as content producers and distributors merge together.
There is plenty of room for expansion and more developments to come – artificial intelligence, blockchain technology, virtual and augmented reality are introducing further change into the market and merger and aqcuisition (M&A) activity will heighten to bring better content and technology together. For now, its worth staying tuned.
