Streaming Services Try to Navigate the New Normal in a Quest for Profitability
The global pandemic has upended our normal routines for the past few months, causing major changes in our daily lives. As most offices have transitioned to work-from-home and many indoor activities remain closed, consumers have found themselves spending more time in their homes, and particularly, in front of screens. With the vast majority leaning towards video streaming services in the absence of live programming, consumers are questioning the need for cable television subscriptions. As streaming services such as Netflix and Hulu started challenging traditional cable TV, other companies followed suit, introducing their own streaming services. The result? Content is now divided amongst over 300 such services, with each offering a ‘unique’ value proposition. This fragmentation of the video streaming industry, mirroring the cable TV’s division of content across paid channels, has presented streaming with a difficult decision to make – which services do they spend their streaming dollars on? As purse strings tighten with consumers facing a looming recession streaming services will have to up their offerings while finding a way to keep prices down.
Cord cutting was already a trend prior to the pandemic, which added fuel to the fire as 3.5 million pay-TV subscribers were lost in the first half of 2020. Most of these people were switching to live TV streaming services such as Hulu, YouTube TV, or on-demand streaming services including Netflix and Disney+. The major drivers behind these mass cancellations were the hefty price tag and ad time associated with cable TV. A 2018 consumers report showed that the average monthly cable TV bill was north of $217 whereas its live streaming counterpart only costed $50, with no additional fees. Furthermore, 70% of consumers believe 20 minutes of ads for a program one hour in length is too much, with 82% saying that they dislike seeing the same ad over and over again.
However, one area where cable TV still reigns supreme is live sports broadcasting. Live sports remain the one reason most cable TV subscribers keep renewing their subscriptions each year. The disruption of the live sports events for a few months and a bleak outlook have caused many of these consumers to re-think their subscription. Now, more and more U.S. colleges are announcing that they will not be participating in college sports, waning Walt Disney Co.-owned ESPN's future outlook, the national broadcaster of popular intercollegiate sports events. Also, the economic upheaval brought by COVID-19 has caused advertisers to be more frugal with their TV ad spending, an important revenue stream most broadcasters depend on. Tighter budgets could lead to less spending on new programming which would, in return, result in more cord-cutters – a death spiral for cable TV. If Fall sports, the lifeline of cable services, get cancelled, this might be the imminent nail in the coffin.
As with any trend, as streaming services gained more popularity, the natural response was for companies to jump on the bandwagon, seen in the mass consolidation of media companies in 2018. M&A activity saw a spike in the industry, evidenced by AT&T and Time Warner’s $85 billion mega-merger, where a major value proposition was to create the media giant’s own premium streaming service: HBO Max. This merger was shortly followed by Disney’s acquisition of 21st Century Fox for $71.3 billion, surpassing Comcast’s $65 billion offer. Comcast had outbid Fox in a $39 billion takeover of European cable TV giant Sky. In an effort to stand their ground, Viacom and CBS re-merged after 13 years in a $12 billion transaction.
As the size of the pie is growing, the competition for the slices are getting fierce. As of 2020, there are over 300 on-demand streaming services which have crowded the market, all competing for a limited number of subscribers. Netflix, which was the first on-demand streaming service, is competing with the likes of HBO Max, Disney+, Peacock, and Apple TV, to name a few. After losing its licensing rights for fan-favourite shows such as Friends and Big Bang Theory to other streaming services, it has doubled down on producing Netflix Original content, which has proved to be a big hit amongst viewers. The pandemic accelerated Netflix’s global growth as the streaming giant added an astronomic 26 million subscribers in the first two quarters of 2020. With over 182 million subscribers worldwide, its first mover advantage has allowed it to still lead the streaming market.
Despite Netflix’s dominance, newer entrants have also seen success. Disney+, which launched in late 2019, has upwards of 60 million subscribers, while undercutting Netflix with a standalone subscription price of $6.99 per month. Its main value proposition is providing customers access to classic Disney shows and Marvel movies, while also offering original content, on which they plan to spend $24 billion in 2020. Disney+’s success has helped Walt Disney Co. weather the storm as its bread and butter, theme parks, remained closed for a long period of time. HBO Max, which launched on May 27, has already signed up more than 4 million subscribers. While having a war chest of popular content such as Game of Thrones and Friends, the subscription price is twice that of Disney+. Apple TV on the other hand, has only 25 shows to offer at the moment, all of which are exclusive to its platform. It is most convenient for Apple users, as any new device comes with a free one-year subscription.
The newest entrant, Comcast-owned NBC’s streaming service Peacock, has amassed more than 10 million subscribers in less than a month, part of this number is existing Comcast customers who get access to the service through a bundle deal. This initial buzz came at a time when Comcast has seen its bottom-line take a hit from a hemorrhaging subscriber count in its cable-TV business and the shutdown of its movie theaters, Hollywood productions, and Universal theme parks. Peacock’s basic version is free for consumers with less than five minutes of advertising every hour. Its ad-free premium version comes with 20,000 hours of content and costs $10 per month. While Peacock is following a different, ad-supported business model than its peers, its profitability is dependent on wide availability as more eyeballs translate to more advertising dollars. However, the service is still not available on the two most popular streaming-TV platforms, Roku and Amazon Fire TV, as both parties have yet to reach an agreement between control over user data and advertisement inventory.
This streaming war has resulted in an outpouring of original content, as companies realized it was the only way to differentiate themselves to attract and retain subscribers. However, the lockdowns over the past few months meant none of the companies were able to produce the new TV shows or movies they heavily rely on. Although high-quality, platform-exclusive shows drive subscriptions, the commensurate need for multiple streaming subscriptions is also a major source of irritation. A recent Deloitte survey suggests that 47% of consumers are frustrated that they need multiple subscriptions to watch the shows they want. Shows disappearing from streaming platforms due to licensing deals was also an issue for 57% of respondents.
As streaming overtakes traditional cable TV, some of the streaming services are expanding their live TV offerings. The new normal for streaming services will be to offer or bundle the best of both worlds: having the convenience of an on-demand video library while mimicking the traditional TV channel-surfing feeling. Right now, YouTube TV seems like closest the consumer can get to a traditional cable package, in that it has lots of live-TV channels, including sports, and common add-on options of on-demand platforms such as HBO and Showtime. But with YouTube TV’s recent price hike to $65, the service doesn’t come cheap, which raises the question: if we want streaming to look like cable, do we have to pay cable prices?
The proliferation of new streaming services and the dispersion of content are overwhelming consumers with the obligation to weigh each option against the alternatives and choose which service or services to subscribe to. On their own, none of the streaming services are profitable, and the whole industry is facing a conundrum: a need to raise prices that are already too high from a consumer’s standpoint, yet not high enough for streaming companies to have any hope of turning a profit, and investors will not absorb these losses forever.
The streaming services had promised to disrupt the traditional cable TV industry by providing the customization consumers demand at an affordable price; however, at this point, the industry is starting to look not much more than a fragmented digital cable package. In addition to lengthy ads and hefty monthly fees, one of the main reasons for cord-cutting was the dispersion of content between channels. The fragmentation of content, exacerbated by the streaming wars, will likely get worse before it improves, casting doubt on whether the video streaming industry will be able to avoid the same fate of the cable TV industry.