A Blog by Jonathan Low

 

Feb 3, 2019

The Race Is On To Build the Next Netflix

Everyone wants a piece of the action. But fragmentation will lead to demand for bundling to meet the two criteria that have inexorably driven the internet to where it is today: lower prices and greater convenience.

The question is who the surviving bundlers will be. JL

 
Elizabeth Winkler reports in the Wall Street Journal:

The streaming craze has made high-speed internet more valuable. But consumers will shell out only so much to be entertained. What better way to create price competition than launching a free streaming service? For Netflix, the best strategy to withstand the challengers is to double-down on original, exclusive programming and pursue international markets. 5G will drive down the price of internet service, giving content providers more pricing power. People already have multiple streaming subscriptions. It may be the norm to pay for a bundle of platforms. A new group of media companies may find themselves fighting the last war.
This media battle will be binge-worthy.
Netflix, the platform inspiring fear and mega deal-making among legacy media companies, is the dominant player with 60 million domestic subscribers and 84 million international. But deep-pocketed new rivals, some armed with unmissable content, are coming for it.
The tactics being deployed in today’s increasingly crowded playing field won’t just affect how and what we binge in our living rooms or how much we might have to pay for the privilege. They can tell investors a lot about how each player defines victory in this multibillion-dollar battle royale.
Netflix just raised its U.S. prices a fourth time. Hulu has simultaneously raised the price for its live TV service and cut the price for its basic plan. Amazon and Apple are spending billions to develop original programming. Disney is planning to launch a streaming service later this year. Comcast , CMCSA 0.60% which lost the battle for Fox assets to Disney, is punching back with a free, ad-supported streaming service, set to debut in 2020. Meanwhile, CBS’s Showtime and WarnerMedia’s HBO, which is now under the umbrella of AT&T , also are ramping up their streaming investments.
Walmart wisely announced last month that it wouldn’t launch a streaming service after all. By the time this multibillion-dollar fight is over, others might throw in the towel, too.
Disney is the best-positioned to challenge Netflix. Its content, from “Frozen” to “Avengers” and “Star Wars,” is must-have viewing for many households around the globe. Family programming may not win accolades like drama or comedy, but the dirty secret is that it drives a huge percentage of viewing.
Hulu, 60% of which will be owned by Disney once the Fox-Disney deal closes, is in a tricky spot. Because Comcast owns the other 30% (AT&T’s WarnerMedia has the remaining 10%), Disney is unlikely to invest in it wholeheartedly. Yet Hulu’s 25 million subscribers would be the envy of newer entrants. It has lowered the price for streaming shows with ads, probably in the hope of driving more subscribers to opt for that more profitable plan.
Comcast’s recent announcement that it will be throwing its hat in the ring with a free, ad-supported service is likely inspired by what it has seen at Hulu. It realized it will be better off selling ads than competing in price battles. If it succeeds in bringing viewers onto the platform, the cable giant could consider introducing a premium model later down the road.
For Comcast, however, the game isn’t only about trying to grab a slice of the streaming pie. Though Comcast is losing pay-TV customers, its internet business is booming. The streaming craze has made high-speed internet all the more valuable. But as Netflix and others raise prices, they put pressure on Comcast’s ability to raise prices in its broadband business, says Barry Nalebuff, professor of management at Yale University. Consumers will shell out only so much to be entertained. What better way to create price competition than launching a free streaming service?
To that end, broadband providers should welcome the new streaming platform coming later this year from WarnerMedia (formerly TimeWarner), too. Its centerpiece will be HBO, which has fallen behind Netflix in subscribers, programming investments and even Emmy nominations. Yet, with the benefit of being part of the AT&T behemoth, it is rapidly adding more shows. The new streaming service also could draw on content from its other assets, including Warner Bros. shows, like “Friends,” and Turner Classic films.
CBS’s Showtime platform, meanwhile, has done well, but not as well as it could if CBS wasn’t divided from Viacom . If they pooled their content onto a single platform, they could provide a more serious threat, but their exploration of a merger last year ended in a nasty legal battle.
For Netflix, the best strategy to withstand the challengers is to double-down on original, exclusive programming—as it has been doing—and to pursue international markets. The main concern for investors is that it could be running out of new markets.
The winners over the next few years might not be able to celebrate for long. Mr. Nalebuff points out that when 5G technology comes along it will drive down the price of internet service, giving content providers more pricing power. People already have multiple streaming subscriptions. Eventually it may be the norm to pay for a bundle of platforms like today’s fading cable TV packages, clicking back and forth in search of the latest, greatest show.
When the smoke clears, a new group of media companies may find themselves fighting the last war.

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