Streaming Diseconomies

The Tragedy of the Commons

Posted in News on April 04, 2019

By now everybody either has a Netflix account or is hogging off somebody else’s. The former DVD rental mailing service now turned multinational streaming giant, Netflix got our attention not so much for its digital platform itself but its provision of original quality content such as Orange is the New Black, House of Cards, etc.

I wrote back in 2017 how Netflix was changing the way we watched movies and TV, inducing us into a binge-watching culture which progressively hindered our appreciation of the content we watched.

However in this article I want to tackle the issue of Netflix from a different angle, specifically the business angle. For as much as you can bash Netflix for its price hikes or the geographic restrictions of its content, the truth is the Netflix formula is working, and competitors have noticed.

How does Netflix make money? 

Before jumping into the discussion of competition, it is important to understand how Netflix makes money to understand why competitors would be interested in joining such a market. After all the consumer is playing a flat monthly fee for access to thousands of movies and TV shows. On top of this Netflix is investing billions of dollars into creating original content. So how does Netflix make profits over our $7.99 a month? It does so through an aggressive data analytics algorithm which monitors what you watch, how long you watch it for, what do you do after you watch it for. Using this information it justifies what content stays on and what content gets the boot and while its investment into original content may seem sizeable, it becomes a matter of 'spend money to make money'. Netflix's approach is very much analogous to drug-dealing, the name of the game is to keep existing users hooked and getting new users hooked on their product. And like drug dealers, Netflix makes a lot of money from it, reportedly making $950 million on subscription payments per month. It is no wonder that competitors are jumping at the opportunity to get their piece of the profit cake. 

Who are the players and what do they offer?

Amazon, Disney, AT&T and most recently Apple have either launched their own streaming service or have announced doing so, pouring billions of dollars into the creation of quality original content. ($2bn by Apple, $5bn by Amazon, and $15bn by Netflix).

Normally such competition should be welcomed. After all, giving Netflix monopolistic free-reign over this market would render us merciful to the company’s pricing strategy and content decisions. The fact that powerhouses like Apple and Amazon are putting their hats in the ring will mean that they will pose significant challenges to Netflix and in the process of battling out in the market, the greatest content at the most attractive pricing would be produced. And I would agree with you ... to a certain point.

For one because it is difficult to benchmark all these competitors on the same playing field. For example, Amazon’s streaming service is given to consumers through their ‘Prime Membership’ which includes access to Free 1-Day Delivery and Music Streaming. Apple, while having no such scheme, has its network of 1.4 billion iDevices. Disney holds a monopoly of titles and franchises to launch on its streaming service. Thus my subscription to Amazon’s Prime service is not necessarily a reflection of my preference of the platform over competitors’, but rather a mere by-product of my subscription to one of their other services. Phone companies are doing this as well, bundling free subscriptions to services like HBO Go or Netflix along with their phone plans. All in the name of competition, but making the game harder to compare.

But on a more important note, such competition does not work because it operates to harm not benefit the consumer by pursuing strategies of fragmenting content. 

Fragmentation Nation

Content fragmentation is not a novel concept, the video game industry being a prime example. As a way to incentivize gamers to invest into their console, Sony and Microsoft invest in creating attractive exclusives unavailable on competitor consoles. The war between the Playstation, Xbox, and Nintendo lead to debates about which console has the best exclusives (e.g. Uncharted, Halo, Zelda), often prompting buyers to own all 3 consoles just to get their dosage.

However unlike video games, exclusives were created from scratch. Halo was never a multi-platform game nor was it ever a PS4 game. With streaming, a lot of what is going to be exclusive content used to be on Netflix. This is particularly true in the case of Disney’s content. Ahead of the launch of its own streaming service, Disney+, Disney progressively started to remove all of its properties from the Netflix streaming service, either outright or vaguely (e.g. cancellation of MCU TV shows). This creates the fragmentation of content at the detriment of the consumer.

If I want to get my dosage of Star Wars, Orange is the New Black, and The Man in the High Castle (Amazon Exclusive), I have to get individual subscriptions. Sure it is arguable that the consumer benefits from 3x the amount of content they did before, but at the detriment of having to pay 45 GBP a month for the 3 TV shows that they want to watch.

In fact, a survey conducted by Deloitte demonstrated that 47% of U.S. consumers are already frustrated by this fragmentation, while 57% were angered by the fact that their favorite shows were taken off one platform only to be brought back by a competing one.

In fact this fragmentation has lead to the increase in online piracy according to a report published just last year. Instead of paying for multiple subscriptions to enjoy the 2-3 shows or movies I enjoy on each of them, I stand to benefit more running the risk of being caught pirating these shows and movies. It is truly ironic as streaming services were originally hailed as the killer of online piracy.

The Streaming War’s Effect on Traditional Media

When we talk of streaming services, it is important to contextualize this competition with what came before it : traditional media. That is cable television companies and film studios. Although traditional media still very much exists today, both its role in entertainment and relationship with streaming services is still in play.

In terms of cinema, streaming services were seen as the cheap studio sneaking their way into award circuits. Whatever ended up on Netflix would be considered to be ‘the trash that never made it into cinemas but not trashy enough to go direct to DVD’ (e.g. Annihalation and Mowgli). Netflix grew so aware of this perception that when Sony tried to sell their comedy “Holmes and Watson” to the streaming service as opposed to a regular theatrical release, Netflix refused in order to protect the integrity of the streaming service from being associated as a hub of films too trashy for the big screen. Indeed Netflix has fought very hard over the last years to dispute that perception, and with arguably great success given the Oscar triumph that was the Netflix produced movie Roma. Studios like Amazon have also had their chance of glamour in the awards circuit with movies like Beautiful Boy generating serious buzz. However, the streaming wars will not overhaul nor radically change cinema, rather it will increase the intensity of competition for traditional film studios and undercut revenue for movie chains.

However, Cable Television is another story. It might be thought of a foregone conclusion to consider cable TV companies like NBC, Fox, and others are rendered obsolete nowadays the same way Blockbuster was made obsolete. After all, with the rise of streaming services and their original content, nobody has the time for a scheduled by-the-numbers show with recycled plot lines starring actors we’ve seen in previously failed shows. However, one would be wrong to say that streaming companies have killed cable TV. In fact one could argue that they’ve repurposed it. I argue that Cable TV has become to streaming companies what medical start-ups have become to pharmaceutical companies. Instead of conducting their own R&D, companies like Netflix will be shopping around Cable TV networks to see what shows have potential but lack the cable viewership to be sustainable on the Network. These acquisitions can have huge pay-offs. The most recent of which is the romance-thriller show “YOU”, which was actually a show developed and produced by Lifetime before being acquired by Netflix, allowing the streaming service to capitalize on the fandom and success of the show for its own growth. Cable TV has become part of the streaming service’s supply chain, testing out TV shows for streaming giants to later acquire.

It’s interesting how rather than abolishing its predecessors or cohabiting with them, streaming services have repurposed traditional media to serve streaming services.

Is there a solution?

As the streaming war starts heating up with new players announcing their participation by the month, one questions whether there is any sort of creative and formidable solution to this issue aside from ‘might is right’. Senior Tech Reporter at Business Insider Shona Ghosh views streaming wars as a new form of an old problem. Cable television used to suffer the same issue and the solution Hollywood devised for that was bundling channels together into packages, charging consumers a flat fee and providing networks with a ‘carriage fee’, Vox explains, allowing all parties to win. That being said, given the announcement of all these different streaming services, we are still quite a long way away from any bundling opportunities as companies will want to first compete in the market before considering joining up forces. In terms of their chances, Ghosh says that "Companies are capable of pulling it off, but it's possible that not everyone will survive."

Till then, I’ll be pirating my content.