Investors alarmed as streaming services lose their magic touch | netflix
The end of the pandemic-fueled home entertainment boom that drove record growth for Netflix and its rivals has revealed a disturbing truth: the streaming revolution has peaked.
The market faces a perfect storm as, after a decade of easy conversions, streaming companies experience dramatically slower growth and growing competition fueling an unsustainable content war, just as stretched household budgets entice consumers to start to reduce entertainment services.
Continued global lockdowns have provided the ideal conditions for stratospheric growth. Netflix added a single-year record of 37 million subscribers in 2020, and newcomer Disney+ hit 100 million in 16 months, a feat its rival took a decade to achieve. Excited investors sent the market values of both companies to all-time highs late last year.
Netflix came down to earth last month, forecasting just 2.5 million new subscribers worldwide in the first quarter, its worst start to the year in more than a decade, and confirming that last year it added the fewer subscribers since 2015. Growth, has wiped out almost $300bn (£220bn) from the two giants’ combined market value since last year’s highs.
Netflix has traditionally acted as a bellwether for the industry and its worrying slowdown in growth – on the heels of its self-proclaimed strongest content slate ever, with records squid game, red notice and Do not look At the top – raises questions about the future of cutting-edge streaming. MoffettNathanson analysts, longtime Netflix skeptics, said the predictions were “worrying” for the rest of the industry.
Netflix’s once-revolutionary binge-watching model, the source of a lot of headaches for traditional TV companies, is proving to be a nightmare for the bottom line. The company will increase its content spending to around $19 billion this year, and there’s an additional $23 billion on its balance sheet for long-term content costs, plus $14.8 billion in long-term debt.
Disney, which also owns sports operation ESPN and streaming service Hulu as well as its Marvel, Pixar, Star Wars and Disney film businesses, is spending $33 billion on content this year.
Netflix has ditched the 30-day free trials popular with binge-watchers, and finds that even its huge spend isn’t enough to keep customers coming back, with many unsubscribing after watching big-budget hits.
“squid game? It’s been so last quarter,” analyst Michael Nathanson said in a note to investors last month after the streaming giant’s shares suffered their biggest drop in a decade. “the witcher? Done on New Year’s Eve!”.
The new trend, used by Disney+ and Amazon’s Prime Video, is to release episodes of hit shows every week, to extend the life of content and prevent subscribers from canceling after consuming a few must-watch hits. Last year, Apple dropped its attractive offer of free one-year access to its streaming service with the purchase of an Apple device.
Netflix, and later Amazon, were nearly a decade ahead, but now that traditional media giants are vying for a share of streaming spending, the market is severely overcrowded.
America’s biggest media groups, from Disney-owned Comcast and Sky, to WarnerMedia, ViacomCBS and Discovery, will spend about $140 billion on content this year, with a focus on streaming services. Globally, content spending is expected to exceed $240 billion, according to Ampere Analysis, which will add pressure to retain subscribers and gain new ones.
“Everyone started to feel the heat,” said Dominic Sunnebo of the Kantar research group. “In addition to a wave of new, well-funded subscription services, there’s also now an acceleration of low-cost or even free ad-supported services. Netflix suddenly isn’t so cheap anymore.
However, with the wealthier populations of the United States, Europe, and Australia mostly devoid of potential subscribers, providers must accept that not all customers are financially equal.
In high-potential markets, such as India, consumers are unable or unwilling to pay high prices for services, which means price competition is fierce and subscriber growth leads to much larger revenue increases. weak.
Globally, Disney+’s average monthly revenue per subscriber is just $4.12, as around 37% of its 118 million base comes from its ownership of the low-cost Indian service Hotstar. In December, Netflix had to cut its standard price in India by nearly a quarter to $6.60, and its mobile-only offering to less than $2; in the US and UK, its most popular plan costs $15.49 and £9.99 respectively.
Newer services such as HBO Max are showing relatively strong initial growth, however. And Disney+, which disappointed investors in November when its last quarter results showed the lowest number of new subscribers since its launch, staged a remarkable recovery last week, beating Wall Street expectations to nearly 130. million subscribers at the end of last year.
“For now, Disney is defending its position, but it’s not the walkover you might expect from a company with a content cabinet already full of blockbusters,” said analyst Sophie Lund. -Yates of Hargreaves Lansdown.
Shares of Disney jumped nearly 10% as investors breathed a sigh of relief, hoping the golden days of streaming growth aren’t over yet.
The new golden age of TV is proving too positive in some ways, with the overload of choice starting to cause streaming fatigue among consumers. Analysis of the nine major streaming services available in the UK, including ITV Hub, All4 and BBC iPlayer, as well as US subscription services, found 125,000 hours of content. Given that the typical Brit watches around three hours of television a day, it would take 86 years to see it all.
“The market has become a lot more crowded in recent years and it’s not going to support many more services at this point,” said Richard Broughton, analyst at Ampere. “Consumers now have more services than they could possibly need.”
It’s an unlikely scenario, but a viewer who wanted to sign up for streaming services to cover all the major entertainment and sporting events – from Sky, BT and Virgin to Amazon, Disney and Netflix, with a little ‘Ad-free ITV Hub+ and specialist streamers like reality TV service Hayu – and pay the BBC license fee, would need to spend around £2,000 a year, excluding the cost of broadband.
There are signs that consumers are becoming more selective about the number of services they want to manage and pay for. Kantar found that a fifth of German consumers who signed up for a new subscription video-on-demand service in the last three months of last year canceled one of their existing services.
“Planned cancellation increases exponentially when people exceed three services,” Sunnebo said. “Consumers are not going to continue to spend indefinitely: there is a ceiling and this ceiling is getting closer and closer. I don’t think we’ve peaked in terms of viewing yet, but we’re getting closer in terms of what people are willing to pay. »