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David Poland

By David Poland poland@moviecitynews.com

State of The Industry: Feb 2019

(NOTE: I wrote this back in February and didn’t publish it. Some of it has shown itself to be true already. Some still coming. Some has already become iffy. But here it is…)

The media and Wall Street obsession with “Netflix vs X” is a fallacy.

Netflix is the clear leader in the new paradigm of streaming. However, as more major players enter the streaming space with deep libraries, they will barely be in competition with Netflix, so much as the existing cable and television structure, as that is where the big money is.

In fact, the competitive situation for Netflix will only change significantly when they are dragged into the gravitational force of the new variation of the streaming paradigm that they created.

Netflix landed in the middle of the film and television industry, the industry did not land on Netflix.

Netflix did change the game. But it does not control the game because it just isn’t big enough to do so. And it likely never will be.

Given the most extreme predictions for the happy future of Netflix, the company, as currently designed, maxes out at about $16 billion in annual domestic revenue and about $25 billion overseas with 300 million worldwide subscribers. $41 billion in worldwide revenues is tremendous.

However, Disney has $24 billion annually in a mostly domestic television business today. And even if it can’t make a go of more than one stream channel for the international audience, it can surely match Netflix internationally with a massive advantage in its established brand.

And then, Disney has its film side, which has a symbiotic relationship with the TV and future streaming businesses. And its parks. And a huge merchandising business that can only be enhanced by being in the streaming business in the many nations where the dominant use of the Disney brand consists is illegal knockoffs.

Netflix is already, smartly, angling for differentiation by investing in local production in many languages in many countries, not just relying on American content dubbed or subtitled for other nations. But the details of the battle for The World between all of the streamers is a discussion better held for another article.

My point is, Disney can’t afford to just compete with Netflix. Their ambitions and their current business are significantly bigger than that.

Likewise, AT&T and Comcast, which have even more complicated issues than Disney. They both have existing content delivery businesses that generation roughly $25 billion a year for each corporation. So, as they create streaming platforms that give more reason for consumers to cut the cord, they are cannibalizing their own businesses.

But like Disney, the draw of international – again, trailblazed by Netflix – is so great, they are willing to walk this tightrope for the next decade or so… and to bleed the red ink that will inevitably come with it for a time.

Domestically, the easier play would be to fight exclusively for the territory they already occupy. This is one major reason why these legacy companies have dragged their feet for at least 5 years of the Netflix streaming success, allowing Netflix to establish itself while clearing the path others will now walk. The companies with major studios could just shut Netflix out on the content front, refocus on improving cable and satellite with some streaming access, and not take a dangerous chance.

But the international opportunity gives these legacy companies a chance to double or triple their overall home content operations.

The playing field here is, currently, about $150 billion annually. This is just on content and delivery into homes, not including internet access. Netflix owns about $17 billion of that.

Neither Comcast nor AT&T are anxious to release their $50 billion of that $150 billion. Nor are the smaller cable/satellite MVPDs that total up to a nearly equal amount of the overall revenue. But the industry is now past the point of return. And adjustments for the new paradigm will have to be made.

My personal prediction is that by the end of 2020, AT&T’s DirecTV and Comcast cable and every other MVPD in short order, will offer packages with a cost between $40 and $70 a month via their non-internet infrastructures, seeking to keep their customer bases intact and ready to spend $40 – $70 a month on unique streaming channels (like Netflix, Hulu, Comcast-to-be-named, WarnerMedia streaming, Disney+. etc.)

That $40 – $70 a month is where the OTT battle will rage. And I have every expectation that Netflix will continue to thrive in that environment. But I don’t see them having a lot of room to raise their monthly rates once heavy competition moves (which is likely why they moved to raise prices recently, before the wave).

Disney seems to be angling for a $20+ monthly spend for their 3 streaming networks or at least $15 for any 2. Comcast and WarnerMedia each adds another $11 a month to the bill. So those 4 must-have streamers (inc Netflix) represent $40 – $45 a month. Add another $60 a month or so for a “broadcast” package, either streaming or via MVPD. About $100 a month. Where America lives , on average, with the home entertainment today.

Obviously, the details will vary, as they do now. But consumers want new content, including live programming, as well as the deep wells of the content libraries. There has to be a way to accommodate this. Any expectation that the average family in America will raise their home entertainment spend by 50% or more in the face of new options is foolhardy, at best.

Apple and Amazon probably should be mentioned at this point.

I don’t believe that either company will ever be a major content player. Why? Because it’s not a great business. It’s not their business. And the extended streaming universe will not turn it into a great business.

There are 4 major English-language libraries left to buy. Sony, Paramount/CBS, Lionsgate, and MGM, which is suddenly resurrecting itself yet again. Any one of them or all of them could be purchased by Amazon or Apple as the foundation of a streaming service. Netflix could also be a buyer, giving them a stronger foundation when they start to slow the pace of original production. Or someone with a lot of cash could bring them all together as the 5th major streaming player.

We all could exhaust ourselves speculating about the future of these companies. But it seems futile. They could be 10% of this discussion or as much as 25%. But they are not going to drive the forward motion.

(I believe, strongly, that theatrical revenues will not only continue, but thrive moving forward. The theatrical experience is already the best opportunity to sell individual access at the highest price per person in this industry, aside from the niche of cash-loose disc collectors. In the streaming subscription era, this will be even more pronounced. But this is best left for another article.)

My belief is that Amazon and Apple will both try to be the bundlers of the streaming paradigm. In other words, the creators of the products that make this massive wave of content that is thousands of times too big for anyone to consume but that we will all have access to for a reasonable price, manageable. Or, if you like, the companies that will keep you from having to ask, “Where the hell is Show X streaming, damn it!?”

Amazon and Apple will try out using original content as bait. But I don’t believe their hearts are really into making programming. If they control the new pipe, they can sell you all kinds of stuff within reason.

Meanwhile, the legacy companies heading into the streaming space have very complicated choices to make.

One example, broadly. The NFL. About $6 billion a year in TV revenues. Split between CBS, Fox, ESPN, NBC, DirecTV, and the Thursday Night franchise that includes the NFL Network and Amazon.

DirecTV is the single biggest annual spender, coughing up $1.5 billion for the right to exclusively distribute the CBS/Fox Sunday games out of market. They lose money on this, but it has been considered worth the losses as bait to bring in new customers and keep their legacy customers.

Paying the least per game are Fox and CBS, which serve as the backbone for the league, producing 10-13 games a week, every week. (about $2.1b combined)

ESPN pays almost $2 billion a year for Monday Night Football and NBC gets Sunday Night Football for just under $1 billion a season.

The idea of changing these arrangements is catnip for the whimsical. And the players will move around the board in any contract year. But in a discussion of the streaming future, this one piece of turf involves every player but Netflix & Apple. This is how the NFL likes it. And this works, mostly, for the corporations. Every company is competing aggressively with the others… and every company has its role to play.

That is where we are headed. Not kill the man with the ball. Not Netflix vs The World. There has been a lot of change in the process of consolidation, even before the new massive streamers launch. And everyone is still competing for their wins. But we are seeing the dawn of a new eco-system, not a bunch of punks fighting for a loose dollar that fell out of someone’s pant pocket on the playground. No one company defines it now. No one company will define it in the (near) future.

3 Responses to “State of The Industry: Feb 2019”

  1. G Spot 3000 says:

    Welcome back, David. You’ve been missed…

  2. Hcat says:

    Always good to hear from you David. We have never agreed with how Netflix was going to pan out over the years but now I think you are spot on. Netflix did an impressive job over the years paying top dollar for product which kept the buy in for any potential competitors too high. But now that the owners have started throwing their hats in the ring it will be intriguing where things fall particularly with the struggling majors. Sony and Paramount do not have the heft to go it alone, and don’t really have a stake in their cable home (Paramount no longer owns a share in Epix, and corporate sibling Showtime does not seem to miss them), so it will be interesting where they land. Does Prime toss off top dollar to keep the Nick brands on to keep the family eyeballs? Does Comcast contract with Sony (or Lionsgate) so they can put their prestige tv programs on to boost their somewhat anemic selection? I mean we have to be able to watch more than the Office and 30Rock right? ATeam and Battlestar Galactica will only get them so far.

    At what size does a studio realize its more cost efficient just to cash a big check rather than build the infrastructure and market your own service?

  3. Randy says:

    David,

    Good to hear from you here….. I agree with most of your analysis and as always very thorough. Yes, most of the play is in foreign right now, for all of the streamers including Netflix, there’s great article, I believe in HR that discussed the Streamers foreign markets in depth.

    In some respects we’ve been here before, this is reminiscent of the foreign markets in the late 70’s – 90’s that fueled the rise of the independent film rise during that period. The main difference being that the foreign market was hungry for American content in English. So, a producer could get a marketable package (Actor / Director, etc) and presell it to the foreign marketplace.

    But now the foreign markets are wanting content in (mostly) their language. Was does this mean for US (English speaking ) producers? I think it will be harder for them to capitalize on the foreign market streaming rise. It may, however, create a market for locally driven & produced content.

    What does this mean for the US market? While Netflix is pushing foreign content does that mean that they now have to create a development / production network in most of these foreign markets to oversee content? Will US market want to see this content? Yes, this content may increase their libraries, but how will those values be determined? What will drive those valuations? Also, with this extra layer of employees at local level but a drag (significant cost) on Netflix overhead?

    And, ultimately (at least for me) how do US based producers take advantage of the opportunity? Or, even, can they?

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