This is a first-look exclusive excerpt from CREATV Media Chairman Peter Csathy’s critically-acclaimed upcoming new book titled “Media 2.0 (18): An Insider’s Guide to Today’s Digital Media World & Where It’s Going” – available December 5, 2017 on Amazon in print and eBook.
Internet-delivered premium video services are the new normal. These are the disruptors – the so-called “over-the-top” (“OTT”) services that generally distribute movie and television content across existing network infrastructure. OTTs are not alone of course — traditional live broadcast TV, pay TV and on-demand download and rental services continue to be major players. But, given their increasing take-over of our viewing lives, leading OTT video players (including Netflix, Amazon and Google/YouTube) now audaciously anoint themselves as being the king-makers. In their own words – as expressed in a notorious summer 2017 letter to the White House – “we are the new faces of the American content industry.” Provocative, for sure. And very true. Also an implicit knock on the overall traditional media and entertainment industry.
OTT players come in three primary flavors and continue to grow share. Significantly. These include “all-you-can-eat” paid subscription video on demand services (“SVOD”), “all-you-can-eat” advertising-driven video on demand services (“AVOD”), and virtual multichannel video programming distributors (“MVPD”) that generally offer stripped down live pay TV-like packages called “skinny bundles” over the Internet (in contrast, actual, non-virtual traditional cable and satellite MVPDs deliver content across their own network infrastructure).
Just a couple years ago, most media and entertainment execs scoffed at the notion of “cord-cutting” – consumers ditching pricey pay TV packages for skinny bundles that give them more of the targeted programming they want for a lot less money. Well, even the most ardent doubters don’t doubt that anymore. How could they when leading industry trade publication Variety screamed “Cord-Cutting Explodes” in a September 2017 headline for a story that reported that 22.2 million U.S. adults would leave the traditional pay TV fold by year’s end (up 33% from the 16.7 million who ditched their cable and satellite packages in 2016). Or, when Verizon’s CFO Matt Ellis told analysts that “the traditional TV bundle is not long-term sustainable,” as he reported the news that Verizon’s Fios pay TV subscriber losses deepened in Q3 2017. Even traditional players like Turner’s CEO Kevin Reilly openly sounded the alarms. Reilly, a top content creator for traditional pay TV, pointed out the obvious for those who looked – that ratings for all but one of the top 20 returning shows on cable collapsed downward, many by double digits.
But, we are now well beyond cord-cutting. Now the industry is beginning to understand that we have raised an entire generation of “cord-nevers” – those refusing to enter the traditional pay TV world in the first place. Most are millennials (so-called “digital natives”) who can’t even comprehend a world with no broadband Internet and smart phone-driven premium video. That same Variety story mentioned above reported that the number of these cord-nevers would rise 5.8% to 34.4 million in 2017. And, get this – cord-nevers will equal cord-cutters in number by 2021, for a combined traditional pay TV-snubbing audience of 81 million U.S. adults.
And, just in case these realities needed to be hammered home any further, Morgan Stanley analysts now value Netflix’s Media 2.0 content assets at a whopping $11 billion — more than the content assets of traditionalists Time Warner ($10 billion) and the combined assets of Viacom ($4.9 billion), Discovery Communications ($2.4 billion), AMC Networks ($1.5 billion) and Scripps Networks Interactive ($1.1 billion). Sobering, yes. But motivating, hopefully, too.
A week doesn’t seem to go by without another major new premium SVOD, AVOD or virtual MVPD player entering the game. Disney made the biggest splash in 2017 when it announced in August its own pair of upcoming “Netflix-Killers” (much more on that later). Many compete head-on with Netflix, as Disney is expected to do when it launches. So, even mighty Netflix feels the heat from increasingly intense competition – a level of intensity that was turned up to a spine-tingling, Spinal Tap-ian “11” this past year. (Maybe that’s why Netflix – in a major 2017 head-scratching, yet highly effective, marketing campaign – self-deprecatingly pronounced to the world that “Netflix Is a Joke,” perhaps signaling that it too understands its vulnerabilities).
A growing number of other kinds of premium OTT video players focus on specific content segments for underserved markets. Examples include AMC Network’s “Shudder” for horror-focused programming and “Acorn TV” for British comedies and drama, Turner’s “FilmStruck” for classic and indie films, and U.K.-based Channel 4’s “Walter Presents” for the best independent television programming from around the world. Still others focus on specific geographic territories rather than trying to blanket the world. Examples here include emerging market-focused iflix (backed by Sky and Liberty Global) and HOOQ (the Southeast Asia-focused SVOD joint venture of international telco Singtel, Sony Pictures Entertainment and Warner Bros.).
This is the backdrop to the frenetically paced, increasingly crowded and competitive premium OTT video world. Here are some of its key players, including their key strengths, weaknesses and recent strategic moves to enhance their positions.
I. THE PURE-PLAYS
NETFLIX – THE INVINCIBLE ONE (OR IS IT?)
Netflix, of course, dominates the premium SVOD market in the U.S. and increasingly overseas in 190 territories. We all subscribe to Netflix (nearly 116 million worldwide as of Q4 2017, up from 86 million one year earlier). In fact, as of early 2017, more U.S. television households use Netflix than DVRs. Pretty astounding, when you think about it. And, for the first time in Q2 2017, the number of Netflix’s international streaming subscribers surpassed U.S. subscribers.
We almost instinctively pay a monthly fee ranging from $8 to $12 for higher quality streaming across multiple screens (at least we did – Netflix announced across-the-board global $1 price hikes in Q4 2017). For this, we get unlimited ad-free on demand viewing that covers all programming bases — essentially all genres, everything for everybody — and with an increasing array of high-quality, expensively-produced, exclusively-available original programming (I call this content category “Originals” as a short-hand throughout this book). And, unlimited streaming, we do. Collectively, worldwide, we watched more than 125 million hours of movies and television daily on Netflix in 2017. Originals have become Netflix’s calling card, continuously winning many of the industry’s most prestigious awards (the SVOD giant won 20 Emmy Awards in 2017, second only to HBO’s 29).
Due to its sheer size, Netflix has earmarked massive dollars to fund development of its Originals. For 2017, that number ballooned to $6 billion to finance 50+ Originals and license premium content. But, why stop there? Chief Content Officer Ted Sarandos has commit to upping that number to $7-$8 billion in 2018 to develop 80 Originals — with an astounding $17 billion in content commitments already locked and loaded as of Q4 2017 (a number that certainly will continue to escalate, if not accelerate). Netflix’s ultimate goal is to feature a massive video library that is equally split between its own Originals (the costs for which it can control) and the licensed content of others (the costs for which it can’t).
Sarandos concedes that Netflix has no choice. The major studios, on which Netflix has historically depended for the majority of its movies and television, increasingly have Netflix in their sights. As a result, they have either significantly raised their licensing rates, pulled back on their licensing, or announced that they will withhold valuable programming completely (that would be you, Disney). In Sarandos’s words, “The more successful we get, the more anxious I get about the willingness of networks to license their stuff to us. That’s why original content is critical.” Originals. Plain and simple. That is Netflix’s fundamental long-term strategy.
Netflix owns a treasure trove of data about what we watch and how we watch it – and uses that data to inform its content decisions. How much? No one except for Netflix really knows, although Nielsen announced in October 2017 that it can now measure and report Netflix and other SVOD viewing in what it called an industry “game changer.” Netflix, in turn, dismissed Nielsen’s initial reporting as being “not even close” to reality and has no plans to release its own data, because why would it? Those traditional metrics hold little relevance to Netflix and its subscription model. Only subscriber numbers, customer acquisition, churn (customer retention), revenues and profits matter. Even Netflix’s A-list talent aren’t clamoring for that data, because they too are happy developing their passion projects and getting paid handsomely to do it. It’s kind of “Don’t ask, don’t tell” – Netflix edition.
Interestingly, as of early 2016, only about 10% of total Netflix viewing streamed on mobile devices. And, downright shockingly, it is reported that the overall total number of hours streamed by Netflix’s U.S. subscribers on mobile devices did not change year-over-year from June 2016 to June 2017, despite Netflix’s significant subscriber growth over that time. No surprise then that up to now, Netflix has focused only minimally on mobile-first and mobile-friendly programming that is typically more “bite sized” in length. So, mobile presents a significant opportunity, especially as Netflix expands internationally into emerging markets where mobile is essentially the only screen.
At the same time, mobile – and Netflix’s lack of focus on it – presents a significant risk, given Media 2.0’s ever-increasing mobile viewing realities. Undaunted, CFO David Wells doubled-down on Netflix’s mobile-light strategy in 2017, indicating that mobile at some point will become “more important, but right now it’s about the large screen.”
Here’s another major risk to Netflix. Unlike many newly aggressive competitors like Hulu, YouTube TV and DirecTV Now (all discussed below), Netflix has no plans — at least no publicly-revealed plans — to offer a virtual MVPD experience that offers live television channels. That’s significant. Very. After all, despite Netflix’s seeming omnipotence, Hub Entertainment Research reports that half of Americans still see live TV as being their go-to platform for viewing, whereas only one in five of us apparently go to Netflix first when we need our TV fix.
Netflix’s fundamental Achilles heel, however, is its one-dimensional business model. Netflix monetizes only its content. That’s very different than mega-competitors Amazon, YouTube TV, Apple, AT&T/DirecTV Now and others discussed below, all of which can use content purely as marketing due to their fundamentally different multi-faceted business models. So, Netflix’s long-term viability as an independent is dependent on both (1) extracting more from its existing customers via price hikes (like it announced in Q4 2017), and (2) expanding — and retaining — its customer base amidst an increasingly-crowded playing field where others hold more pricing freedom and consumer switching costs (i.e., the costs of terminating an existing service) are essentially zero. And, that means “feeding the beast” — our voracious demand and continuous expectation for new compelling premium A-list-driven Originals.
And, as we have already seen, that beast is expensive to feed. That’s why Netflix’s losses continue to mount and are expected to reach $2.5 billion in 2017 after losing $1.7 billion in 2016. Even more, CEO Reed Hastings conceded to Wall Street that Netflix expects “to be free cash-flow negative for many years,” as the company announced another $1.6 billion in debt offerings in Q4 2017 to add to its existing $4.9 billion in long-term debt. Ouch! And, the costs for Originals will only rise significantly over time. They already have amidst hyper-competition in the overall premium video space, in which HBO invests more than $15 million per episode for Game of Thrones.
Wait. There’s more. Netflix doesn’t own the rights to many of its most popular Originals. It licenses them. That goes for Orange Is the New Black, House of Cards, Iron Fist, and The Crown (which reportedly cost Netflix $10 million per episode). That means that Netflix can’t really control those costs. Second, the ever-expanding playing field of OTT video competitors aggressively fight for access to a limited supply of A-list marquee talent that they hope will attract new customers to their service (and keep them there). That means Netflix can’t control those costs either, which already have skyrocketed.
Meanwhile, that A-list talent will smile all the way to the bank as they get pulled in multiple directions. In the words of Jeff Wachtel, chief content officer for NBCUniversal Cable Entertainment, “Actors and writers and directors who used to compete for jobs are now having studios compete over them.”
Good time to be an artist or creator, indeed!
This was a first-look exclusive excerpt from CREATV Media Chairman Peter Csathy’s critically-acclaimed upcoming new book titled “Media 2.0 (18): An Insider’s Guide to Today’s Digital Media World & Where It’s Going” – available December 5, 2017 on Amazon in print and eBook.