The Streaming Video-on-Demand War Is Going to Get Bloody
Illustration: Scott Gelber for Bloomberg Businessweek

The Streaming Video-on-Demand War Is Going to Get Bloody

(Bloomberg Businessweek) -- Anyone who wants to watch a dramatic, treacherous race in the months ahead should check out the escalating competition in the world of streaming video-on-demand TV. It promises to be the media industry’s equivalent of the Badwater Ultramarathon, the annual spectacle in which a steely group of endurance athletes gather in the arid lowlands of California and race uphill on foot for 135 miles. In the summertime. In Death Valley.

By this time next year, AT&T’s WarnerMedia division, Comcast’s NBCUniversal, Walt Disney, and Apple will all have released sinewy new streaming video services, taking on the existing ones from Amazon.com, CBS, Hulu, and Netflix. It’s unlikely that any of these media and tech giants will escape this looming showdown unscathed. Even the ultimate winners are expected to limp into the future bloodied and battered. Next year “is shaping up to be The Hunger Games for the streaming services,” says Jamyn Edis, an adjunct associate professor at the New York University Stern School of Business.

The media conglomerates are trying to win on Netflix Inc.’s turf now because they don’t have much choice. The success of Netflix’s model—charging a monthly fee for a large amount of ad-free, on-demand programming that streams to any internet-connected device—has inspired millions of people to cancel their pay-TV service and get their home entertainment online. At the same time, the telecommunications and tech industries have watched Netflix and Amazon Prime Video harvest vast amounts of valuable consumer data from their viewers and decided that starting a successful streaming service might be a great way to sell more of their existing products (phones for Apple Inc., wireless contracts for AT&T Inc.). The trick will be to persevere through the short-term hazards.

Consider the myriad pitfalls of the course ahead.

The Streaming Video-on-Demand War Is Going to Get Bloody

For decades, Disney, NBC, Time Warner, and other entertainment behemoths enjoyed a lucrative, straightforward business model. They packaged TV programs into channels, then sold them to consumers through cable and satellite distributors such as Comcast Corp. or DirecTV, which pass along recurring subscription fees even if few people are watching a particular channel. The networks collected billions of dollars from the advertising they served up during commercial breaks.

The streaming world, on the other hand, has proved largely inhospitable to commercial interruptions. Netflix and Amazon Prime Video don’t have any. And both have toughed it out to dominate the market without needing advertising income. (Hulu LLC has a cheaper version of its service with limited commercials, but it’s started capping their length to avoid upsetting viewers.) The new entrants have to master the art of attracting and retaining loyal streaming subscribers to survive in the long run. It won’t be easy.

In the days before streaming, if a media conglomerate had a lull in one of its network’s lineups, it was insulated from the resulting viewer apathy by big bundles of adjacent options. For example, a subscriber to Dish couldn’t cancel the Food Network without also ditching CNN, ESPN, and TNT, among hundreds of others. Even the process of canceling was unappealing. It required the hassle of calling a customer service rep trained to bob and weave and wear down would-be turncoats with enticing counteroffers.

The dynamics of the new race are much less forgiving. The internet has made canceling streaming services easy. There are no calls, no resistant sales forces to overcome, no sacrificing of co-bundled products. To abandon one service in favor of another takes only a few clicks. As a result, a momentary dry spell in a streaming network’s lineup could trigger an outbreak of sudden departures.

Brett Sappington, an analyst with Parks Associates, a market research and consulting company, says that though annual cancellation rates among traditional cable and satellite distributors hover around 4%, surveys of consumers show that churn rates at streaming services tend to be significantly higher. Netflix, which has the lowest turnover rate of any streaming service, still loses about 7% of its existing subscribers each year, he says. It goes up from there. “The newest services are the ones that have the highest churn,” Sappington says.

Not bound by long-term contracts, streaming subscribers can easily be lured away. In surveys, Parks Associates found that 28% of consumers said they have subscribed to a streaming service to check out just a single title.

To retain subscribers and entice those of their rivals, the services will have to strive to stock both popular reruns and fresh batches of original programming, which will be hugely expensive. In preparation, the competitors are taking some drastic measures.

Recently, Walt Disney Co.—the company with arguably the deepest, richest library of beloved characters and shows on the planet—decided its programming stockpile still wasn’t robust enough and paid $71 billion for the bulk of 21st Century Fox. Earlier this year, Disney agreed to pay at least $5.8 billion to Comcast to take over full control of Hulu. CBS Corp. has introduced several original series exclusively for its online channel, CBS All Access. These include Star Trek: Discovery, which costs $8 million on average per episode, making it one of the most expensive shows in TV history, according to Variety.

In search of a universally irresistible attraction, Amazon.com Inc. acquired the rights to make a TV series based on The Lord of the Rings, paying some $250 million before a single script has been written, an actor hired, or a bucolic hamlet commandeered. WarnerMedia is developing a sumptuous Game of Thrones prequel for HBO. Apple has enlisted TV help from Steven Spielberg and Oprah. In April, Disney said it plans to spend more than $1 billion on original programming in fiscal 2020 for Disney+, which is scheduled to begin in November. The company doesn’t expect the service to turn a profit until 2024.

At the same time, Netflix has been expanding the scope of the race by investing heavily in video infrastructure, production, and talent in Africa, Asia, Latin America, and Europe. While amassing more than 150 million subscribers globally, the company has also been locking down Hollywood talent, signing proven performers and show creators to exorbitantly high-priced, multiyear deals ($300 million for showrunner Ryan Murphy), and daring competitors to keep up. Many maneuvers are double-edged. Netflix has paid Chris Rock $40 million for a pair of performances, simultaneously wooing comedy fans to subscribe while also sticking a knife in the tire of its rival HBO, where Rock was long the face of stand-up comedy.

“Netflix is very far ahead of the game with so much popular content and a brand name and a position in people’s lives,” says Tim Nollen, an analyst at Macquarie Group. “If there’s any one traditional media company that can compete with Netflix, it’s Disney. They have consumer awareness and content that people will pay for. That doesn’t mean Disney wins and Netflix loses. It means that Disney is one of the few that can successfully play that same game.”

The costs of entering the streaming race are no less daunting. For years the traditional media companies were able to lessen the blow of declining DVD sales and rentals, in part, by leasing their shows to Netflix and Amazon. Now the days of raking in this easy money are winding down, as media companies buy back the streaming rights to their classic shows and movies. For the exclusive rights to Friends, which will stream on the company’s HBO Max service, AT&T is paying $85 million a year. NBC has agreed to spend $100 million a year for the rights to The Office. The popular reruns of both shows have been streaming on Netflix.

Standing out from the pack of competitors won’t be easy. Last year, Netflix spent $2.4 billion on marketing—that’s roughly HBO’s entire programming budget for 2017. Over the years, Netflix has tried every kind of gimmick to get attention. It’s bought a pricey Super Bowl ad, paid for myriad billboards along the Sunset Strip in Hollywood, distributed stickers depicting rolled-up dollar bills and faux lines of cocaine in public bathrooms nationwide to promote the show Narcos, planned a print magazine, created “smart” socks designed to pause viewers’ TV if they fall asleep in the middle of a show, and deployed a bunch of Stranger Things-branded pedicabs to ride through New York blasting ’80s music.

Expect the din to grow louder. “If you’re Disney, you can put a flyer in every hotel room in every park at all of your properties and resorts,” Sappington says. “If you’re AT&T, you have all of your communication and wireless platforms. That’s going to be a big part of it. How are you going to make noise for yourself in a crowded market?”

The maintenance costs will also be hefty. Going direct-to-consumer will require the media giants to handle all sorts of messy tasks such as customer service and billing that they have long relegated to their distribution partners. They’ll also need to hire legions of technology experts, including data scientists, software engineers, and product designers, to build and maintain their streaming platforms. None of which is cheap. Just ask Disney, which has spent about $2.6 billion acquiring a majority ownership of BAMTech, a company specializing in streaming technology.

Some media companies have sized up the frightening terrain and decided to sit out this one. In 2018 an analyst at Goldman Sachs Group Inc.’s annual Communacopia Conference asked Bob Bakish, chief executive officer of Viacom Inc.—which owns a slate of youth-oriented TV networks including Comedy Central, MTV, and Nickelodeon—about his company’s plans to enter the direct-to-consumer space. Bakish was not bullish. “What we’re not doing is developing a mass-market, [subscription video-on-demand] service, like Netflix,” Bakish said. “And the reason for that is twofold. One is that that business is looking more and more crowded. And the second thing is it’s a very capital-intensive game.”

Translation: Have fun with your cannonball run. We’ll be happy to make deals with whomever eventually survives.

Others have been scared off as well. For years, executives at IAC/InterActive Corp., the New York-based media conglomerate, said its video platform Vimeo was going to introduce a subscription video-on-demand service offering a slate of original programming similar to Netflix. But then in 2017, after a prolonged reconnaissance mission, the company announced it was backing out. Recently, IAC Chairman Barry Diller described Netflix as essentially unbeatable. “No one’s going to compete with Netflix in terms of gross subscribers,” Diller told CNBC in July. “I believe they have won the game.”

In truth, the race is just getting started, and the treachery of the landscape is such that even Netflix is not safe from painful stumbles. Earlier this year the company raised its prices, in part, to help pay for its massive investments in programming, which reached $12 billion in 2018. The price hike did not go unpunished. In July, Netflix disclosed that during the second quarter it had suffered a net loss of U.S. subscribers for the first time in eight years. Shares plunged, erasing more than $24 billion from its market value over the next six days.

As peak TV ventures into the arid valley ahead, expect to see plenty more moments of distress. Bon voyage, streaming service executives. Please hydrate accordingly.

To contact the editor responsible for this story: Howard Chua-Eoan at hchuaeoan@bloomberg.net, Eric Gelman

©2019 Bloomberg L.P.

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