The streaming industry has completely disrupted cable television and changed entertainment as we know it, but what is the real cost behind it?
Netflix (NASDAQ: NFLX) revolutionized the TV industry through its online streaming services launched in 2007. By 2017, more than 60% of U.S. adults (18-29 years of age) preferred to watch TV through a streaming service, compared to just 31% who watched cable. While Netflix has been leading the industry, competing with Amazon (NASDAQ: AMZN) Prime and Hulu, it now faces severe competition from new launches like Disney+ (NYSE: DIS), HBO Max, and Apple TV+ (NASDAQ: AAPL).
Netflix is currently valued at roughly $130 billion and has grown from 21 million subscribers in 2011 to 158 million in 2019. It holds an enormous market share (70%) in the industry and has been one of the best-performing stocks over the past few years. Although it has improved both its net profit and operating margin in that time, It has still accumulated a huge amount of long and short term debt because it has been heavily investing in content.
Equity analysts following the sector have mentioned how the competition now is about both content and price. That’s one of the reasons we see streaming companies heavily investing in content to gain more viewers and retain them for the long term. The chart above shows how aggressive Netflix is for content, followed by media companies like Disney, Comcast (NASDAQ: CMCSA) and Viacom (NASDAQ: VIA) etc. who are also getting into the streaming war by investing in their own non-sport content. Disney and HBO, who own a lot of famous shows, have started to grab their original content back from others like Netflix which were previously licensed to them.
Money.com uses this calculator to estimate what is called the lifetime value of a streaming service, after adjusting for inflation. Disney+, which is $6.99 per month, will cost you around $7,095. Similarly, if you opt for a basic Netflix version, it will cost you a hefty $9,124 over the next five decades. It is fair to say that since content plays a big role in a consumer’s decision, most of them would buy multiple subscriptions instead of sticking to just one as all will have their own unique content. The Hollywood Reporter/Morning Console poll found that the average American only wants to pay $21 for all their streaming services combined at a lifetime cost of $21,314. This is a big opportunity for an aggregator like Roku (NASDAQ: ROKU), which conveniently bundles all of these streaming services, including Roku TV, through its digital media player.
Bloomberg Intelligence stated approximately 154 million subscribers in the market for 2018 are set to grow to 275 million in 2024. This means it is not a zero-sum game and there is ample room for multiple streaming players to grow. Companies like Tubi, Pluto & Zumo have built a fairly decent subscriber base in a very short period of time with their ad-supported video on demand (AVOD) platforms. These services do not charge a monthly subscription on their AVOD model and instead earn revenue through ads. The concept is quite similar to YouTube and has been gaining traction. Analysts are projecting a fairly high number of overall subscribers for AVOD market projecting that it will catch up with the subscription-based model.
Watching Netflix spending 70 cents of $1 of revenue on content, everyone’s wondering when will it get off of this treadmill. This brings us to the question, will the new streaming players continue to follow the same path?
The answer might be yes considering the recent new show launches by Apple TV+ and Disney. This is more like a customer acquisition cost for these players now, putting pressure on their net margins. Streaming services are priced much lower ($4-$30) than the traditional linear TV packages, which cost somewhere from $50-$100 for a month. This means there won’t be much pricing power with one or a few players as the industry will be crowded now. The only way they can grow is by expanding their subscriber base and retaining the existing ones.
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