Binge watching is about to get more expensive

Be prepared. 

Nearly every major film production company is vying for Netflix’s top spot in the streaming industry. This competition, surprisingly, is expensive for consumers.

Currently, the market sees Netflix, Amazon Prime, FX, CBS and Hulu as the main players. Next year, Disney and Warner Media, which emerged after the AT&T acquisition, will enter the fray with their own streaming platforms. Crucially, they will take their content with them.

Under licensing agreements, Netflix pays production companies, including Disney and Warner Media, to offer some of their best-selling movies and series on its platform. Yet, the entry of the two media conglomerates in the streaming industry will likely disrupt these distribution channels. Disney plans to pull blockbuster movies such as The Avengers and Star Wars out of Netflix when its contract ends next year. Warner Media will likely take movies such as Wonder Woman and Harry Potter away too. With increasing fragmentation, a standard viewing plan might soon look like this: $10.99 to watch Netflix’s originals, $15 for DC movies and Game of Thrones on HBO Go, and another fee (TBC by Disney) to watch Marvel/Disney classics on Disney Play.

The global video streaming market is expected to grow from US$ 138.99 Bn in 2018 to US$ 591.11 Bn by 2028, at an average growth rate per year of 15.6% in terms of revenue during the forecast period. Hollywood companies are no longer prepared to share profits arising from their content with distribution intermediaries like Netflix. In what some call a “Streaming Cold War”, each firm will use its own franchise as leverage for a standalone subscription bundle.

Competition will probably push down individually prices, but most consumers are not prepared to purchase multiple subscriptions to enjoy exclusive content on each platform.

The data shows an uptrend in consumers with multiple subscriptions, but the pace is not even close to the rate of growth of the market size. In 2016, only 16 percent of US viewers had signed up for more than one online streaming service.

Given the high fixed costs faced by companies for production and distribution, subscriptions spreading thinly amongst multiple firms will likely bring down the profitability of the sector.

Financial markets are reacting. The impressive rise of the stock price of Netflix has lost 25% after reaching its peak in June 2018.

The unsurprising initial effect of the market fragmentation has been a new rise in piracy. Regulation and enforcement have always proven weak in tackling piracy. Streaming services, however, have significantly reduced piracy because they give consumers what they want – quality movies and music at an affordable price.  In 2016, research from Australia’s government showed that streaming services reduced illegally downloaded content from 43 percent to 39 percent, while those who streamed content legally rose from 54 percent to 57 percent. But with higher prices, we might observe a reversion of this trend.

Because of its dominant market position, some argue that Netflix could simply offer to pay a higher price for licensing agreements. Yet, Netflix already spends more on content than any of the traditional players. It currently splurges as much as $18.6 billion on content every year, spending a whopping $188 million for the streaming rights of Friends. No matter how much Netflix offers to increase the price, it is simply not enough to deter competition, especially because licensing rights are not exclusive. The business model itself is outdated.

Already, in 2011, Netflix realised that this model would result in its dependency on content on its competitors. Managers at the company’s HQ in Scotts Valley, CA preemptively veered away from the outdated strategy.  The firm now invests heavily in its original content, spending $60 million per season for House of Cards. As its competitors race to establish their platforms, Netflix races to create content in order to retain viewers.

This streaming battle, though bad for consumers, is inevitable. Viewers will ultimately have to decide which plan is best for them.

Christopher Khai Min Lim

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