Is Scale Everything?

On the August 6^th Investor Call, Bob Iger, Disney’s CEO, conveyed that the firm is in discussions with distribution partners such as Apple, Amazon, and Google to supplement its direct-to-consumer streaming offerings “to achieve scale relatively quickly.”  Without a doubt, Disney will ramp up quickly and present a formidable competitive threat to the market leader, Netflix. 

For Netflix, scale is also important.  With high fixed costs for content licensing and creation, Netflix “needs” more subscribers to spread out those costs.  For five of the past eight years (2011-2018), the annual growth in Netflix’s global subscriber count outpaced the increase in content expenditure lowering the per unit (subscriber) cost of content.

Period Ending	Streaming Content Obligations (000)	Global Paid Subscribers (000)	Content Cost/Sub ($)
12/31/2018	$     19,285,875	139,259	$ 138.49
12/31/2017	$     17,694,642	110,644	$ 159.92
12/31/2016	$     14,479,487	89,090	$ 162.53
12/31/2015	$     10,902,231	70,839	$ 153.90
12/31/2014	$       9,451,112	54,476	$ 173.49
12/31/2013	$       7,252,161	44,350	$ 163.52
12/31/2012	$       5,633,685	33,267	$ 169.35
12/31/2011	$       3,907,198	21,600	$ 180.89

SSoSource: Netflix's 10K reports.

But, Netflix has some exposure to “new” competitors like Disney, NBC Universal, WarnerMedia and ViacomCBS that release content across multiple distribution channels like the box office.  The cost savings these firms get from economies of scope, that is creating, acquiring, and marketing content and distributing it over multiple platforms will add to Netflix’s vulnerability to competitive threats and may slow its growth.  Let’s see how Netflix responds.

https://www.thewaltdisneycompany.com/wp-content/uploads/2019/07/q3-fy19-earnings-transcript.pdf

Churn baby churn!

Two hours.  That is how long it took to “chat” with a Verizon representative and have some minor changes made to my account.  (In fact, the issue is not completely resolved.  But, I decided to de-couple a second issue and make it tomorrow’s headache.)

It made me wonder how long it would take if I wanted to cancel my account and establish one with another provider (of wireless, internet, and/or pay-tv/streaming).  Verizon and its competitors pride themselves in their low “churn rates”.  I truly believe that more customers don’t switch providers because it is too hard to do so and not because they are happy campers.  In essence, these firms hook us with attractive offers and then make it very difficult to wiggle off that hook. 

What if, however, we are determined to make the switch.  A crucial step is deciding what to switch to.  While wireless and broadband choices are few, the number of plans offered by each is daunting.  Then, if you want to add on entertainment services, you can become overwhelmed quickly and feel great uncertainty (and unhappiness) in making the “right” choice. 

One alternative to Verizon in every market is AT&T (DirecTV).  For that one firm, here is what you see when you go to the website:

Package Name	Channel (minimum)	Mo. Price ($)	Broadcast Channels	Notes
Streaming (internet)- AT&T TV Now
Plus	45	50	Y	HBO incl.; Starz, Cinemax, Showtime = $11/mo
Max	60	70	Y	HBO & Cinemax incl.; Starz Showtime = $11/mo
Entertainment	65	93	Y
Choice	85	110	Y
Xtra	105	124	Y
Ultimate	125	135	Y	Starz included
Pay-TV - Price good for first 12-months, 24-month agreement (early termination fees apply)
Select	155	60	Y	HBO, Cinemax, Showtime, Starz incl. for 1st 3-mo only
Entertainment	160	65	Y	HBO, Cinemax, Showtime, Starz incl. for 1st 3-mo only
Choice	185	70	Y	HBO, Cinemax, Showtime, Starz incl. for 1st 3-mo only
Xtra	235	80	Y	HBO, Cinemax, Showtime, Starz incl. for 1st 3-mo only
Ultimate	250	85	Y	HBO, Cinemax, Showtime, Starz incl. for 1st 3-mo only
Premier	330	135	Y	HBO, Cinemax, Showtime, Starz incl. for 1st 3-mo only
where AT&T available, $10 off per month inf bundle TV package with internet

So, what do “we” do?  We stay with our current provider.  Who wins?  “They” do.

When it is not enough!

About a week ago, the long-awaited, least-anticipated merger of CBS and Viacom was announced.  One of the primary business reasons for the merger was to have a “library of content with incredible breadth and depth, and a reinforced capability to produce premium and popular content at scale” (Bob Bakish, CEO of Viacom).  But, will it be enough.  

As a broadcast network CBS has consistently been ranked #1.  (The exception was 2018 when NBC took over the top spot as a result of airing Super Bowl 52 and the Winter Olympics.)

MEDIA FIRM	2018 VIEWERS	2017 VIEWERS
Comcast	7,876,000	7,224,000
ViacomCBS	7,385,000	7,975,000
Disney	5,423,000	5,595,000
FOX	4,401,000	4,701,000

As a distributor of content on Pay-TV channels, ViacomCBS content doesn’t fair as well.  According the Nielsen ratings for 2018, The CW and Nickelodeon were the only two ViacomCBS channels in the top 20.  (Note: Nick at Nite was #25, MTV was #28, and Comedy Central was #49.)

MEDIA FIRM	PAY-TV CHANNEL	2018 VIEWERS
FOX	Fox News	2,481,000
NBCU	MSNBC	1,789,000
Disney	ESPN	1,764,000
Comcast	USA Network	1,518,000
Discovery	HGTV	1,461,000
Univision	Univision	1,448,000
ViacomCBS	The CW	1,418,000
AT&T WarnerMedia	TBS	1,393,000
Ion Media	Ion	1,350,000
AT&T WarnerMedia	TNT	1,323,000
A&E Networks	History	1,239,000
Comcast	Telemundo	1,216,000
Crown Media	Hallmark Channel	1,190,000
Discovery	Discovery	1,178,000
Discovery	Investigation Discovery	1,102,000
Discovery	TLC	1,066,000
A&E Networks	A&E	1,013,000
AT&T WarnerMedia	CNN	986,000
Discovery	Food Network	984,000
ViacomCBS	Nickelodeon	932,000

https://www.indiewire.com/2018/12/network-ratings-top-channels-espn-cnn-fox-news-cbs-nbc-abc-1202030597/

As a movie producer (Viacom’s Paramount), the firm is consistently in the middle-of-the-pack with increasing market share separation from Disney at #1.

MEDIA FIRM	STUDIO	2018 Domestic Box Office Share (%)
Disney	Buena Vista	26
AT&T Warner Media	Warner Brothers	16.3
Comcast	Universal	14.9
Sony	Sony Entertainment	11.3
News Corp	20th Century Fox*	10.3
ViacomCBS	Paramount	6.4
Lionsgate	Lionsgate	3.3
STX Entertainment	STX Entertainment	2.3

https://www.boxofficemojo.com/studio/?view=company&view2=yearly&yr=2018&p=.htm

ViacomCBS does have millions of subscribers on Showtime and CBS Access offered as stand-alone direct-to-consumer services and add-ons through third-party apps/distributors.

The question is can ViacomCBS scale, bundle, and leverage relationships for cost synergies and revenue generation to compete in the increasingly consolidated entertainment industry with well-financed competitors with valuable content of their own?  It’s hard to say, but it would be less questionable if the newly combined firm scooped up some additional content from the likes of Discovery, Lionsgate, and/or Sony Entertainment.  All it takes is more money!

Content is EXPENSIVE

In a matter of nine years, Netflix’s obligations for streaming content ballooned to $19.3 billion in 2018 (from $1.3 billion in 2010).  And, by no means will 2018 be the peak.  With increased competition coming from the likes of Disney (with Hulu), ViacomCBS, NBCUniversal, WarnerMedia (with HBO), and now Apple TV, Netflix is expected to spend close to $15 billion in original content in 2019.  

Going forward, though, it may be less about Netflix’s ability to stay on top of the streaming world and more about how the likes of ViacomCBS will be able to make headway in an increasingly crowded, fragmented market that costs a lot of money (scale) to participate in.

Period Ending	Streaming Content Obligations (000)
12/31/2018	$     19,285,875
12/31/2017	$     17,694,642
12/31/2016	$     14,479,487
12/31/2015	$     10,902,231
12/31/2014	$       9,451,112
12/31/2013	$       7,252,161
12/31/2012	$       5,633,685
12/31/2011	$       3,907,198
12/31/2010	$       1,299,176

Source: Netflix’s 10K reports

Netflix's Challenges Lie Ahead

According to a 2018/2019 survey of approximately 2,000 consumers by Deloitte’s Technology, Media, and Telecommunications practice, 69 percent of households subscribed to a streaming service in 2018 and the average number of streaming subscriptions per households was three.  But, while consumers enjoyed customizing their entertainment experiences, 47 percent expressed frustration of the growing number of subscriptions and services required to watch what they want.

 

With the launch of several high-profile direct-to-consumer streaming services (like Disney+, HBO Max, Apple TV, NBC Universal) in late 2019-early 2020, the market will be getting even more crowded.  What will that do to consumers’ willingness to pay (utility) and the pricing power of legacy streamer, Netflix?  We may be getting a glimpse of that now. 

In the past, Netflix could increase the price of its domestic monthly subscription services and not experience any slowdown in subscriber growth.  For example, Netflix increased the prices of its standard and premium services in 4Q2015 and 4Q2017.  During those quarters, the net subscription additions were 1.56 million and 1.47 million, respectively.  Netflix’s latest price increases in 2Q2019, however, resulted in its FIRST negative change in U.S. subscriptions (a decline of 123,000).  With highly-valued original and licensed content, Netflix was a must-have, an add-on to Pay-Tv or other streaming services like Hulu and Amazon Prime.  With the announced introduction of new services by legacy content owners, households may see Netflix less as a complement, and more as a substitute.  At higher price points, Netflix’s demand becomes more elastic and puts domestic revenue growth a bit more at risk.

https://www2.deloitte.com/insights/us/en/industry/technology/digital-media-trends-consumption-habits-survey/summary.html