What prevents new Netflix-es to emerge
Introduction
Since Netflix emerged as a giant the SVoD market went through different phases: people didn't believe it would succeed (some still do!), then existing actors were unable to understand and move appropriately, then startups tried to plagiarize Netflix, then Netflix has started to create some original content, then content-owners started to build their own platforms and remove their content from Netflix, then the GAFAM are going to enter the dance... But despite market warnings, none of them really threaten Netflix. Why?
What we see
Our company (Motion Spell, also operating under the "GPAC Licensing" brand) has provided technical guidance, prototypes, and core software components to many companies for 7 years. Our team includes engineers with 20+ years of experience (that is to say the whole "streaming over the Internet" era).
Motion Spell customers includes all the big names of the industry both on the content side (Fox, Sony Pictures, Movie Labs, ...) and the technical side (Elemental, Time Warner Cable, Akamai, Viaccess-Orca, ...). It also includes startups who try to build their own platform (Molotov, ...). This allows us to sometimes be in a position to understand where things are the hardest.
We are not business analysts in any way. In this document we post-analyzed the patterns why our customers and their partners would succeed in their businesses.
Market perspective
The broadcasting value chain hasn't changed for at least 15 years (post dotcom bubble burst). Broadcasters have earned money from advertisements, derived merchandising, original content (sometimes behind a paywall), and public subsides (especially for free-to-air television).
Despite some limited competition (especially due to high license acquisition costs), consumers kept on getting access to more and more contents and channels. At first the arrival of User-Generated Content (UGC) platforms such as Youtube wasn't even perceived as a possible threat due to the lack of high-quality content, the cost of OTT delivery, the impossibility to do live.
With the arrival of 3G/high-speed Internet and mobile devices with enhanced media capabilities such as the iPhone (2007), Apple, Microsoft and Adobe launched HTTP-based streaming that would allow cached streaming, including for live. Broadcasters revenues were starting to stall but they didn't feel threatened because most valuable contents (e.g. original content and live sports) were not available on OTT.
Then people started to change the way they consumed video. At the beginning the television average view-time stalled with mobile usage eating people's free time, and then started to decrease. People also started to delinearize the way they watched content. Broadcasters decided to go into delinearization too without any viable business model. The superposition of both offers has been possible because the first OTT services are niche-complements to the traditional broadcast. Also since everybody watched broadcasted TV, the audience was there and advertisers too.
The competition with broadcasters occurred when high-quality content became exclusively available on OTT services. Piracy thrived on the ground of content right divisions. Netflix took off thanks to its enormous catalog and its recommendation algorithm. It doesn't seem off to say that Netflix wouldn't have succeeded if people wouldn't have been forced to pirate in the first place. Youtube increased the quantity but also the quality of the content. The battle for contents was open.
Consumer perspective
So now more people want to produce high-quality content. This had two visible consequences.
First some contents have traditionally been available only in movie theaters and on broadcasters network. Note that once premium content was easily available viewers started to focus on the quality of experience (QoE) and the providers on metrics including quality, rebuffering, or latency (QoS) where broadcast offered a better service. Now that sport leagues can address their viewers directly, why wouldn't they do so? Note that a platform like Netflix doesn't try to aggregate all the content of the world as some other actors (Apple, Amazon, Google, ...) could be tempted to do.
Secondly the content production costs continued to decrease and the distribution model got read of many intermediates. This threatens directly the Hollywood business model:
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The production of video has been rationalized. A movie or a series is not a piece of art anymore. It is something more professional and less creative. The competition on contents and the retail industry innovation cycles (4K, 8K, flat screens, object-based audio, VR, etc.) led to better quality at reasonable costs.
For the consumer, the effect are that we have more platforms, less expensive, fighting for exclusive contents. People want the best and coolest shows. This will eventually lead to a fragmentation of the market that is bad for consumers. The dream of cord cutting is largely unfulfilled.
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"If cord cutters thought there was some way they were going to evade the tyranny of annual price increases, they were deluding themselves," said industry analyst Craig Moffett of MoffettNathanson in the Washington Post. “Every economist in the world tried to warn that the outcome of that system would be higher prices and less choice. And lo and behold, that’s where we landed.”
Beyond 2020
Video is eating the world. This movement was slower than expected due to the demand for high bandwidth and comparisons with the existing broadcast technology. Even entertainment such as video games are moving to streaming. People live parts of their lives by proxy. We think interactive TV, Social VR, 3D video will have their place in the future of high-quality content.
More importantly the focus moves from SVoD to integrated platforms i.e. from content to free time. We predict that prices of the new offers will go very low until probably zero euros for the GAFAM to capture your free time. There is no way for traditional SVoD companies as we know them in 2019 to survive in this economical environment.
Tech: what sets Netflix aside
The first assets of these companies are talent. Having worked with most of the video tech companies on the market, they have recruited a set talents with an agile mindset.
Netflix is a software company. Some developers work on video software but most of the developers just improve what the user experience. At the same time everything is carefully tested with A/B testing, resilience testing, and metrics. As any successful company Netflix focuses on its customers.
People know that Netflix get new subscribers from their exclusive content. Few people say Netflix retention comes from its quality of service.
In this perspective the biggest competitor of Netflix is Apple with a qualified audience and the control of their devices that allow a high quality at a lower price. As of the writing of this article Netflix is not part of Apple new streaming platform. Disney has still to prove it can deliver with a high quality of service.
Competiting with sucessful platforms
National broadcasters in Europe, such as Sky in the UK, or even a group of broadcasters want to believe they can succeed. If they can compete locally they will be eaten by the GAFAM which provides an ecosystem that goes beyond media. People who want to compete need to understand they are fighting for some free time of their viewers.
The Youtube parallel
There are so many similarities between what happens with Youtube and Netflix. There are many startups trying to make thematic Youtube-likes. However the production cost of the content is close to zero for UGC, and the distribution pattern is also different as there are much more contents with limited audiences. This is similar to our customer building in-house transcoders using Motion Spell's Signals technology for channel with a low number of viewers.
Content acquisition costs for existing channels
Content acquisition cost of existing channels with an audience have leaked. Prices are very high:
Key facts
As of 2019 SVoD offers come from companies in the media industry. Their revenues come from subscriptions. Netflix is a tech company, but tech is only a small part of its expenses. Let's have a look at Netflix:
- Netflix offer is deceptively simple.
- Netflix is not a mature company trying to optimize profits. It is a winner-takes-all company that pivoted, hires the best talents, and has faced the fiercest competition. Therefore Netflix could expand to all types of content, or sell to any company trying to build a restricted Web and control your free time (e.g. Facebook, Amazon, Google). At the moment Netflix is an opportunist company leveraging one of the preferred way of people to chill. Netflix claimed Fortnite is their biggest competitor.
- The retention of Netflix customers is low (compared to say - Apple). Retention is based on the quality of service only but Netflix operates on OTT and can't control finely the delivery while keeping its costs low (although they tried to get some leverage on CDNs and circumvent some net neutrality possible issues). As for retention Netflix compares more to Hollywood giants (Fox, Sony Pictures, ...) that people have to deal with. It is key for Netflix to disrupt these industries and take their sits.
- Netflix's behaviour with creators is closer to the book industry: trusting creators from all other the world, let them go until the end with no distribution constraints, releases series in a batch (like having all the chapters of a book at once).
- As more competitors try to address DTC (Direct To Consumer), the churn rate will explode and the entry barrier for startups will be higher.
- As stated above Netflix is a barrier against piracy where rebundling makes sense. This is a successful approach as long as prices are keep low enough.
Here is what the 2020 horizon hides - GPAC Licensing - December 16, 2019