In today's newsletter we talk about the streaming wars and how its shaking up an entire industry


The Story

Streaming has been one of the hottest topics of late. Just last year, the number of streaming subscribers around the world (613 million) surpassed the number of cable subscribers for the first time in television history and with the launch of Apple TV+ And Disney’s own streaming service, the battle lines are being redrawn once again.

So how will the incumbents (including the likes of Netflix, Hulu, HBO Go, and Amazon Prime Video) fare? Who will succeed? Who will perish? What is the End Game?

Well, before we answer that, let’s look at the most important bit that's driving the industry forwards — Content. More specifically, the cost of content acquisition.

In 2018, Netflix agreed to pay a whopping $100 million to license the cult comedy show “Friends”. This was a sizeable jump from the $30 Million/year the company had paid to license the show back in 2015. So what changed?

Well, for one the growing popularity of Netflix did not go unnoticed. Netflix was adding millions of users world over and “Friends” continued to remain one of the top shows across the platform. WarnerMedia quickly figured they were leaving a lot of money on the table. So inevitably the licensing fee shot up.

And the unfortunate bit here (For Netflix) is that the licensing fee will continue to trend upwards. As more streaming services enter the fray, bargaining power here will diminish disproportionately. Imagine Apple, Netflix, and Disney all trying to license Friends. The competition will simply drive up prices to stratospheric levels.

In fact, Netflix only recently lost streaming rights to the famous Sitcom series “The Office” after NBC Universal’s streaming service offered a mammoth bid of $100 million per year (for 5 years). Woah!!! Can’t compete with that, can you?

So the next obvious recourse is Original Content. Instead of licensing old shows from traditional media houses you go out there and script your own stuff. Now I know what you’re thinking. Producing original content is risky and sometimes more expensive than buying digital rights from other content creators/distributors. So why venture down this dark uncertain path?

Currently streaming services, by and large, try and differentiate themselves based on the size of their content catalogue. However, as time progresses, most of these services will converge to a point where they will all have a similar offering and that’s when you need original IPs (shows) to propel you to the next level. So even if it’s an expensive alternative in the short term, it’s inevitable (like Thanos).

However as basic economic axioms dictate, eventually the competition between streaming services will increase to a point where the weaker players will be forced to quit or join hands with the larger incumbents. For instance, Apple might choose to walk away if they don’t see merit in pursuing this line of business. Disney might just steamroll competitors by leveraging all its original content and offering them at dirt-cheap levels. In fact, their subscription costs less than half of what Netflix costs and they only recently removed all their original content off of Netflix. So if things keep progressing this way, there will be casualties.

At this stage of the business cycle, you will have a market place, characterised by maybe 2–3 players and the bargaining power should eventually revert to the streaming services.

And this will be the End Game. How long will we have to wait for such an event to materialize? That, we don’t know. But what we do know is that the streaming wars have only just begun and it's going to get very exciting from here on in.

Until then.

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