Digital markets today are defined by a few dominating presences. Google. Amazon. Facebook. Apple. Netflix.
But one of these is not like the other.
On the surface, things sounded rosy in Netflix’s just-released earnings report, headlined by international growth and higher-than-expected earnings-per-share. But a deeper look at the numbers paints a different picture. Revenue was essentially as expected. In the US, Netflix added only 517,000 new subscribers in the quarter -- just over half of the 802,000 Wall Street was expecting. And they backtracked from their previous forecast of year-over-year growth in the key metric of “paid net adds,” citing “minor elevated churn in response to some price changes, and new forthcoming competition.” They warned that the launch of these competitors will be “noisy” and could generate “modest headwinds” in the near -term.
Netflix: Decelerating Momentum
That’s all stated very artfully, but our data paints a more stark portrait about the future of Netflix. They have already lost significant ground in the US. Relative to its top competitors – Hulu, Amazon Prime and HBO Go – Netflix started 2019 with 71% share of streamed content. By spring they had dropped to 62% ("Game of Thrones," like winter, was coming). Since then, they’ve rebounded to 67%, but their longer-term downward trend is clear.
Netflix loses The Office and Friends at the end of 2020 (which sounds so far into the future that it’s natural to think that we’ll have flying cars by then, but in fact, 2020 is next year). Losing those two shows will be a massive hit. At one point, 7% of all views on Netflix were "The Office." Together "The Office" and "Friends" account for…
Almost as many views as the top 10 shows on Hulu combined
Ten times more views than all the shows in the top 10 for Amazon Prime or HBO Go
It’s hard to understate the impact of these two Gen X mainstays. Netflix is trying to preemptively staunch the bleeding by buying the rights to "Seinfeld," reportedly for more than $500 million (causing my inner Seinfeld to ask: “Half a billion? For a show about nothing? What’s the DEAL with that?”). But "Seinfeld" currently ranks #15 on Hulu, with one-fourth the viewership of the more Millennial-skewing "Bob’s Burgers" and "Brooklyn Nine-Nine." As Jerry once said to George, that’s a pretty big matzah ball hanging out there.
The Office (U.S.)
Game of Thrones
Game of Thrones
The Grand Tour
Parks and Recreation
The Marvelous Mrs. Maisel
US data; views are in millions; Jan-Aug 2019; based on desktop and Android mobile web data.
Even worse for Netflix – losing "The Office" and "Friends" is just the start of the content exodus. Netflix doesn’t outright own any of the shows in their top five – it’s not hard to imagine what will happen to "Parks and Recreation" (NBC), "Grey’s Anatomy" (Disney-owned ABC) or "Lucifer" (originally aired on Fox, although Netflix picked up the final two seasons). "Stranger Things" (#7) is only top 10 Netflix program that is entirely their original content.
The Increasingly Crowded Battlefield of the Streaming Wars
"The Office" and "Friends" are going “home” to NBC’s streaming mothership, Peacock. Slated to launch in April 2020, it will include popular content from NBC, Dreamworks, and the venerable Universal Studios (hence the appeal to heritage in its tagline, “Established In 1910”). They are planning to further leverage the hunger for refreshed familiarity with reboots of shows running the emotional gamut from "Punky Brewster" and "Saved by the Bell" to "Queer as Folk" and "Battlestar Galactica."
Netflix’s losses this year have largely been Hulu’s gains – their share of streaming views has risen from 18% to 24% since January 2019. Hulu has been aggressive in positioning itself as a conduit to live TV and a replacement for a traditional cable/satellite subscription. Today, Hulu has the same underlying vulnerability as Netflix – a reliance on licensed content owned by others (their most popular original content – The "Handmaid’s Tale" – ranks behind 13 non-original titles). But longer-term, Hulu is in a fundamentally different position because it is majority-owned by content-rich Disney. The Disney+ streaming service is poised to launch in November, with extensive content from Disney, Pixar, Marvel, Lucasfilm, National Geographic and 20th Century Fox. Low-cost streaming mega-bundles of Hulu, Disney+ and ESPN+ are already in the works.
In the near-term, Disney has some limits on what it can do because it owns 67% of Hulu, while the other 33% is owned by Comcast, which in turn owns NBCUniversal. But Disney has the right to buy Comcast’s portion in five years, and the long-term outlook seems clear: the combination of Hulu’s growing customer base with Disney’s deep library of owned content makes them the favorite in the streaming wars ahead. Content owners have been searching for ways to monetize beyond advertising -- Disney will be the first to figure this out.
While Netflix, Hulu and Peacock are strategically zigging toward mass appeal, Amazon Prime and HBO are zagging toward niche strategies. "Game of Thrones" was a huge boon for both, and both have been clear about their pursuit of similar buzz-worthy mega-hits. (What’s the streaming equivalent of “appointment television” or “Must See TV” or “water cooler conversation”? “Watch-nearly-live-before-spoilers-are-everywhere”?). Apple TV Plus is pursuing a similar niche strategy, going for a small quantity of high-impact content; in a radical departure from any Apple offering ever, they are going the low-price route, starting at just $5 a month.
The Take-Away: Content Rules Amid the Chaos
So what does the future hold for the streaming wars? Consumers will be getting two things historically absent from their media experiences: choice and falling prices. When cable companies were essentially monopolies, prices were high and kept rising, as they pushed large inflexible bundles of channels and fought a la carte menus. Similarly, when Netflix was the only streaming game in town, they were able to keep growing despite price increases (and even the rare marketing misstep -- remember Qwikster?).
And for the industry? The future holds complexity, and, well, chaos. New services will come, and go, and merge, and offer co-marketed bundles, etc. Services will experiment with new pricing structures, from today’s no-commitment all-you-can-eat, to discounts for multi-year commitments (a la wireless services), to tiered pricing based on usage (as Netflix was during their DVD-based era). Many consumers will have multiple services, and will struggle to keep up with which of their favorite shows is on which service. With little or no cost to switch, some consumers will bargain hunt and switch often (remember the days of switching long-distance carriers?). And get ready for a new wave of nostalgia for how simple and comforting things were before there were so many options.
Tech giants have fallen before – Yahoo and AOL most immediately come to mind – largely because they were aggregators (“portals”) that didn’t own much content. Media giants have fallen as well. The share of the major broadcast networks has fallen consistently since the advent of cable; today, the cable companies thrive only to the extent that they own content, and not by virtue of their distribution of other people’s content. Go a couple of decades further back, and Hollywood’s once-powerful studio system evolved in a similar way.
But the decline of these tech and media giants were relatively gradual affairs. That’s nothing compared to the chaos to come. Disney+ and Apple TV+ launch next month, Peacock launches in April, with "The Office" and "Friends" moving at the end of next year. Price wars are already heating up. Netflix is losing ground in the US, and their first-mover advantage in many international markets won’t last. The bottom line: Netflix is poised to fall at a pace the tech/media world hasn’t seen before.
The one point of stability in the chaos? The old adage that content is king remains more true than ever.
I agree, Deren. Some of us have been pointing this out for some time but there is a large block of folks who think that Netflix actually "disrupted" TV and are rooting for it largely on emotional grounds. Yes, Netflix has cut fairly deeply into the ratings of primetime braodcast network shows but these represent a mere 8-10% of the average person's total TV consumption---not all of it. Now,TV and the movie studios are counterattacking by invading Netflix's turf, with a host of diverse and appealing content. It may well be Netflix's turn to be "disrupted".