The battle between Netflix, Hulu, Amazon Prime Video, and other players to compete for the new landscape of digital consumers continues to tighten as the cord-cutting phenomena spans to tens of millions of individuals and families. Now that prices between these services are pretty comparable, these streaming services must compete on content, and thus spend massive amounts of money in developing their own content to maintain and increase their subscription base.
Since the pricing for these services is so minimal, it’s often easy for subscribers to cancel their subscription to one service and go to another; therefore, these streaming services must provide unique content offerings to maintain and grow their subscription base.
Within the game of online streaming services, the four main battle fields are: pricing, content, branding, and innovation.
Netflix, as market leader within streaming services, increased from 23M global subscribers in Q4 2011 to an astounding 117M global subscribers by Q4 2017[1]. Given the rapid growth of Netflix, other players have been drawn to the prospect of online streaming. The main players are Hulu and Amazon Prime Video. Hulu’s 17M subscribers[2] and Amazon Prime Video’s 40M subscribers[3] pale in comparison to Netflix’s reach, but collectively, they command about half of Netflix’s subscription base. These competitors are unrelenting and will continue to drive challenges and innovations that Netflix must address within the streaming industry.
Let’s review the first battle field: pricing. Netflix ranges from $8 to $14 per month, depending on desired video quality. Hulu ranges from $8 to $12, depending on the consumer’s tolerance level to commercials. Amazon Prime Video offers either a $99 annual fee or $11 monthly fee[4]. All three of these services offer similar prices for one primary reason – their consumers have eclectic entertainment needs! If Netflix doesn’t offer a particular show that Hulu offers, then the Netflix subscriber will either totally transfer over to Hulu or simply subscribe to both streaming services. The combination of flexibility in subscription contracts, comparable prices, and differences in content offerings provides opportunities for streaming service providers to capture larger market share. Within the streaming services industry, the most effective way to both attract and retain subscribers is to differentiate based on content. The current industry focus is rooted in original content creation, since competitors within the industry can offer exclusive content to their audience base that other players cannot provide.
Speaking of original content creation, let’s move into our second battle field: content. Content is the single most significant point of comparison between streaming service providers. Netflix’s content library is larger than both Hulu and Amazon Prime Video’s libraries, particularly in the areas of original content and movies. Netflix spent $6B on original content in 2017, which outshines Hulu’s 2017 content budget of $2.5B and Amazon Prime Video’s 2017 content budget of $4.5B[5]. In 2018, Netflix will spend up to $8B in original content alone[6]. Its popular hits, such as “House of Cards,” “Stranger Things,” and “Orange is the New Black” attract the attention and business of current and new subscribers. Creating subsequent seasons of its hit shows allows Netflix to maintain its subscriber base and acquire new subscribers by establishing a loyal and vocal fan base that offers word-of-mouth marketing. Netflix’s variety of shows and genres appeals to different fan bases and provides the Company with ample opportunities to convert new subscribers and provide additional value in the array of hit shows and series that Netflix will continue to offer in the future (which compels subscribers to maintain their subscriptions, in anticipation of new episodes and season). The original content that streaming service providers produce directly impacts their brand and how they are perceived by subscribers.
Just like similarity in price compels industry players to differentiate on content (both acquired and original), the differentiation in content compels industry players to reassess and revisit their branding to the market. Netflix, as the first significant mover within the streaming services space, and as the largest content curator and original producer within the space, brands Netflix as the premier streaming service within the industry. Netflix’s brand has exponentially grown within the industry since 2011 and continues to command dominance amongst other industry players. The combination of a player’s original content and market awareness are two crucial components to a player’s branding. Amazon Prime Video commands a respectable market share within the streaming service space (40M subscribers) due to its significant spend on original content and Amazon’s overwhelming brand awareness. Of all three main competitors within the streaming services industry, Hulu spends the least on original content and does not maintain the same level of awareness as Netflix and Amazon, which result in Hulu’s relatively small market share of 17M subscribers. In an industry where content is king, the branding of the players is an integration of content curation/creation and awareness. The more people talk about “Stranger Things,” the more opportunities Netflix has to acquire new subscribers who either don’t want to miss out on a hot new show or may be dissatisfied with their current streaming service provider.
As technology continues to advance, and Moore’s Law continues to hold, industry players must continue to adapt and innovate to increase their market share, serve their subscribers, and further differentiate themselves from competitors, especially if they’re lagging in content and awareness (branding, essentially). Players within the streaming services industry are definitely innovating and experimenting with new adaptations. For instance, Hulu offers a live-TV package that incorporates 50+ TV channels in addition to its content library[4]. YouTube TV is pursuing a similar offering, but only commands a subscriber base of 300k viewers, compared to Hulu’s 450k paying subscribers of the streaming provider’s TV services[7]. The potential for online streaming services to provide various live programming may disrupt traditional television viewing and expedite the cord-cutting phenomenon. Continued innovation and experimentation within the streaming services industry will create new competitive advantages and opportunities between players.
Now that we’ve covered the four main battle fields within the streaming services industry (pricing, content, branding, and innovation) let’s examine a couple key initiatives that streaming providers may leverage to intensify the game and continue to mold the game within the near future. These two initiatives regard partnership with traditional providers and more concentrated live-programming production. Given Netflix’s commanding market share and influence within the streaming services industry, we will examine these two initiatives by referencing Netflix as the default streaming service provider. Although Netflix is currently focused on adding more subscribers to its database and has no current plans to pursue network partnerships and live streaming (since Netflix views its service as “complementary to pay TV packages”), more intense competition may sway Netflix’s service offerings over time[8]. The following analysis can be applied equally to opportunities for Hulu and Amazon Prime Video, as well as the overarching back-and-forth responses that each player must consider in both the short-term and long-term future.
The first initiative, regarding partnership with traditional providers, specifically conveys the opportunity for Netflix to partner with cable providers and bundle Netflix subscriptions into current cable contracts. The streaming giant can gain additional revenue from the current cable-exclusive subscribers that it has yet to capture. Although revenue per customer will naturally be lower, as Netflix will need to remit a percentage of subscription fees to its cable partners, these cable-exclusive customers may not have yielded any revenue to Netflix in the short-to-medium term. In addition, the partnership strategy allows Netflix to ensure that every cable household is integrated into its ecosystem as the cable subscription model continues to give way to new forms of media consumption. This integration leaves Netflix in a prime position to capture larger revenues from the previously cable-exclusive subscribers after they cut the cord. Finally, Netflix can leverage its partnerships as an additional source of data for its complex algorithms that serve as one of Netflix’s competitive advantages. By gaining additional data on how Netflix subscribers consume traditional media content, and what the traditional/streaming mix looks like for each subscriber, Netflix can make even more informed decisions about investment in future licensing agreements and original content creation.
The second initiative, regarding live programming, can further disrupt traditional media consumption. New streaming competitors, such as SlingTV and PlayStation Vue, offer dozens of channels of live TV for $20-$50 a month. Earlier in this report, we reviewed Hulu and YouTube’s relatively recent entry into live TV as well. Netflix can prevent some of the attrition to these live/TV services by offering live programming of its own, based on segment growth and future competition. Currently, many cable subscribers continue their subscription almost exclusively for sports coverage. Netflix could produce a live sports news program that features highlights and commentary, similar to content offered by ESPN. Since this commentary, and the associated footage necessary to provide it, would be classified as “fair use,” this endeavor would not be capital-intensive.
Live news coverage during primetime viewing hours would also be key to providing a true cable alternative and a robust content environment. Additionally, as another consideration, the live streaming of special events, such as concerts, festivals, stage performances, and other non-sports related content could serve as a key differentiator for Netflix as it navigates the malleable and constantly-evolving future of the streaming services industry.
In consideration of the two initiatives, Netflix can reposition itself as an augmentation of cable services rather than solely as a replacement. This repositioning would allow Netflix to gain significant additional revenues from integration into traditional media provider ecosystems, while simultaneously exposing tens of millions more customers to its own ecosystem. This strategy will ensure market capture once these customers fully embrace the cord-cutting bandwagon. Further, Netflix can prove itself to be a full-featured media provider by offering live content, and most crucially, sports-related content, to a larger audience. Eliminating the live content barrier will propel Netflix’s service offerings and audience reach for the short-term and long-term future. These two initiatives can position Netflix as a competitor against the vertically integrated media conglomerates forming in today’s business environment.
Now let’s step outside the Netflix default and apply the above analysis and methodology to Hulu, Amazon Prime Video, and all other players (current and future) within the streaming services industry. Any player within the industry can pursue the two provided initiatives. Any player within the industry can battle on the two initiatives, as well as any other initiatives that develop within the industry. Any player within the industry can battle on pricing, content, branding, and innovation. The battles are vast, impactful, and constantly developing. As technology advances, and as players adapt to the industry and to other players’ decisions, the overarching streaming service industry will encounter internal disruption and externally disrupt other industries, such as television programming and media consumption. As the game changes, based on technological developments, other players’ moves, and new strategies, the game will continue to shape the streaming service industry, Netflix and its competitors, and the way in which the populace consumes media. Let the games begin, continue, and shape the field of play within streaming services.
But before I let you go, let me give you the past and current standing of the game. In the 1980’s, Blockbuster and Hollywood Video were founded. Both companies competed with one another in the rental services they provided for movies and video games. The companies scaled their brick-and-mortar operations over the years and grew in popularity. By the late 1990’s, Netflix entered the market and disrupted the traditional brick-and-mortar model by offering direct-to-consumer shipping services for movie and video game rentals. Netflix’s approach provided more convenience to the consumer by implementing a flat-fee subscription model that offered “unlimited rentals without due dates, late fees, and shipping and handling fees[9].” The brick-and-mortar stores were too slow in adopting technology and shipping services, primarily because they failed to realize the level of disruption Netflix posed to the market. During the early 2000’s, Redbox introduced rental kiosks that are still in existence to date. As Blockbuster and Hollywood Video both ceased their operations by the early 2010’s, Redbox expanded its number of kiosks and created a niche by scaling down the brick-and-mortar concept and enhancing consumer convenience, as evidenced by the location of the small kiosks (near convenience stores, pharmacies, etc. that are more likely to experience higher levels of foot traffic).
As Netflix introduced its online streaming service in 2007 and gained headway in this initiative, it began to experience competition from the likes of Hulu. Over the past decade, Netflix has reoriented its business to focus more on online streaming (as opposed to DVD shipping rentals), and has rapidly expanded into the international marketplace. Today, various competitors, such as Hulu and Amazon Prime Video, have observed Netflix’s success and are attempting to battle Netflix on pricing, content, branding, and innovation. Now, the prospects of partnership, live programming, and pay TV streaming service packages are impacting the industry, and will continue to drive changes and developments within the service streaming space (alongside other initiatives that are either already developing or are on the brink of development).
From brick-and-mortar, to DVD shipping services, to online streaming services, the current streaming services industry has transformed rapidly over the last several decades. Over the next few decades, I’m sure that Netflix and other players will reshape the nature of the industry by battling on differentiation points and embarking on new initiatives that will create ripple effects for years to come. Every move will be met with a countermove, and any new moves may materially impact the rules of the game. The interplay between competitors (Netflix, Hulu, Amazon Prime Video), government regulations (i.e. net neutrality overturn), and consumer behavior will provide a continuous game of action/reaction, adaptation, and innovation. The underpinnings of game theory certainly apply to the online streaming services industry, and will continue to apply as competitors battle on the four differentiators and on new initiatives in both the short-term and long-term. The development and use of continued technological advancement will undoubtedly influence the game, the players, and the rules in unforeseeable ways. The possibilities are limitless, and the number of variables involved in this particular game will continue to provide an exciting field of play for Netflix and competitors.
With this frame of reference and momentum in mind … let the games begin!
*Special thanks to my colleague, Jarrod van Baalen, for the insights and analysis he contributed to this piece.
Works Cited
[2] https://www.statista.com/statistics/258014/number-of-hulus-paying-subscribers/
[3] https://www.statista.com/statistics/693936/global-number-of-amazon-prime-video-subscribers-region/
[4] https://www.digitaltrends.com/home-theater/netflix-vs-hulu-plus-vs-amazon-instant-video/
[5] http://variety.com/2017/digital/news/hulu-2017-content-spending-2-5-billion-1202558912/
[6] https://www.nytimes.com/2017/10/16/business/media/netflix-earnings.html
[8] https://www.polygon.com/2017/4/17/15333206/netflix-live-tv-streaming
