Millennial Musings — The future of streaming
There exist similarities between streaming in the video industry and the music industry. Both are dominated by one technology company which is the go-to millennials subscription service of choice namely Netflix (NASDAQ: NFLX) and Spotify (NYSE: SPOT). However, the people who create the vast majority of the content and are in contract with the biggest stars are starting to want to leverage their back catalogues and current stars to keep more of the pie for themselves. In this “musing” I aim to highlight from a millennial’s point of view what is possibly going to happen soon and which companies are best placed to challenge these established names.
Netflix, A cigar butt?
Netflix since its pivot into online streaming from DVD rentals has been crushing it. Realising that the content that they could buy-in from content houses was vastly undervalued for the number of subscriptions that it would drive and maintain. This coupled with the limited competition at the time they were able to buy in a lot of content very cheap with the content providers happy that they could make money off of shows that have had their run on TV finished with and didn’t have enough of an audience to make a DVD viable. This made the backbone of the service for a long time from my personal viewing habits I have watched a lot of CW and ABC content in the UK that was only available via Netflix.
In addition to this to create a streaming service to compete with Netflix had extremely high barriers to entry either from a tech entrant that has servers but no content due to Netflix exclusive deals and from a content producer having the content but not the server infrastructure to make their own service. This lead to Netflix being able to dominate the market in the past.
However, now we have services such as AWS the barriers to entry for content producers in the west have been destroyed and so new we see companies with vast libraries of past content such as HBO (NYSE: T) or Disney (NYSE: DIS) making their own streaming service and in effect cutting the middle man of Netflix out of the picture and getting the whole streaming market value for there content. They can even start to monetize really old niche content that would drive sign-ups for dedicated fans of a single show that they can not watch anywhere else, I would sign up for a Fox Subscription to watch Utopia. A show I happened to catch one episode of during a trip to the stated or even a BritBox subscription (LON: ITV) if they ever put the prisoner on it! The content is currently sitting dormant why don’t they monetize it and create more value for would-be subscribers.
On the other hand side of the competition, tech companies most prominently Amazon (NASDAQ: AMZN) has been buying up lots of old shows and independent movies creating more competition and thus higher prices. With more fragmentation of the old backbone of the Netflix service.
So Netflix is getting squeezed on all sides and the Covid pandemic came at the right time for them, More people at home consuming content and will happily pay for multiple services. On top of that as more retention (and new sign-ups) is likely occurring they have risen prices to build up a war chest for the next phase of the streaming battle. This new approach seems to be threefold, firstly expansion out east where they can still use there a traditional streaming business model of buying a backbone of K-Dramas and J-Dramas in tandem with a few exclusive productions such as “Alice in borderlands”. Secondly using the closed theatres to buy more independent movies (at cheaper prices due to the reduced demand) and bringing them straight to streaming. However, the traditional audience has come to expect a “viewing experiencing” of binging a season of a show and not to watch a movie! So this acts more of plaster while they can greenlight new shows that more target the expectations of their audience. Finally, they have shifted from big-spending one-off productions to more mass-produced content and way more renewals to counteract the loss of content they can buy-in. So fans of Netflix shows are finally getting season threes rather than being cancelled after just one season! The issue is, they do not get the economies of scale that the companies that have been doing it longer with more lessons learned so are vastly overpaying for both talent and IP. They are even starting to address this and reducing talent costs through hiring unknowns and building up their name via smaller shows into starring roles all on Netflix. One such example of this, Noah Centineo (as of writing with an IBDB ranking of 14) being the love interest in the first two of all the boy’s movies then breaking out as the leading role in The perfect date. Thus if fans of an actor know they can get the new show or movie on Netflix they will keep subscribed to Netflix rather than the competition.
My issue is when Asia content producers start to make there own services (they might already be doing so I don’t know) Netflix will have to start making content in a similar way to what they now do in the west. This really starts to make them a content production business not a technology one, with the peaks and troughs based on how their shows perform with a smaller back catalogue. This also would change the market multiplier and so a much lower valuation unless they can perform another pivot into a similar but not identical business like they did leave DVD rentals. But there doesn’t feel like there will be another frontier after streaming yet, especially when they shift into the east has a limited timescale until they will need to go from content buyers to content producers. Could they go into VR maybe but the audience is still limited and they already have an app that’s not as popular as “Big Screen”? Could they go into streaming games, unlikely as the developers have already launched there own services al la EA Play (NASDAQ: EA) or Xbox Ultimate (NASDAQ: MSFT)? Could they go full circle and expand their offerings to show movies in actual cinemas Like Cineworld Ultimate (LON: CINE) or Movie Pass, dare I say it after taking over AMC Theatres (NYSE: AMC)even at a meme stock valuation? Or maybe even try a live sport like amazon is currently trying in the UK. Until there more certainty on the next big phase for Netflix it really feels like it will be a cigar butt business that you’re paying a high price for, good while it’s expanding into Asia but after that, I would rather be in Disney for video streaming exposure.
Spotify, More room to pivot?
On the music side of things, Spotify feels like it will have similar challenges on the horizon but in an industry that traditionally cuts ties with technology outsiders and leaves them to go to nothing when they are no longer convenient to them. Some examples of this being Triller having all Universal music getting pulled from there service, All ISP selling music in the early 00 to now literally none do or even Napster and Rio “sharing music” in a legal grey area at the time. So why hasn’t the music industry put Spotify to the scrapheap of failed music industry disruptors? I assume that similar to the Netflix example the per-stream rate that they earn from Spotify was enough not to bother with building their own site, particularly when old contracts (particularly songwriters) do not include streaming kickback so more money is being kept by the label? But we are starting to see the music industry dabble in streaming, but not yet in the song streaming business (In fact UMG (EPA: VIV) have just renewed terms with Spotify). Instead, they are first looking to collaborate on streaming live shows which have during the pandemic shown the appetite is there with Black Pink (one of YG (KOSDAQ: 122870) K-Pop artists) making around 10.5 million for one show without the travel costs, venue hire and Ticketmaster cut. So I foresee that the labels with the stars drive the use of Spotify wanting more of the pie going forwards. At the forefront of the push back is likely to be “Big Hit” (KRX: 352820) not only have they got a top streaming band on their books (BTS), They are part of the new live streaming collaboration, have a new music tv show (Think finding the next one direction)and even looking at ways that AI can be used to make more content from stars. The AI thing is really cool as we have seen V-Tubers being accepted on twitch and YouTube so my generation will really buy into them. In this regard, I would be tempted to use Big Hit as a way to cover music streaming in your portfolio (if your broker allows it after all its Korean) or Vivendi (later the Universal IPO if it ever happens) if you want to stick to Europe.
Spotify on the other hand while lagging behind Netflix in terms of content produces taking back control can allow them to shift into a more YouTube model, where the stars are made by the algorithm. They have enough new content being uploaded daily and the time to make the shift. So I think they have a much better chance of remaining a big name going forwards.
The big wild card to all of this is what happens if the artists want to take control. We are already seeing Twitch streamers in the music category making bank, either from donations or from record sales on sites like band camp. We have even seen Taylor Swift rerecord her back catalogue just as she doesn’t like who owns it which may limit the value of future back catalogues going forward, the main asset of the record labels. Whereas for Disney’s back catalogue there is no-one who can remake Beauty and the Beast or any other Classic.
I am probably oversimplifying things and just talking from my point of view. Let me know where I am wrong and where you disagree in the comments!
Update: Since writing this and looking on K-Pop SubReddit over the weekend (Posts Here and Here in particular) and it seems one of the big distributors of K-Pop Kakao (KRX: 035720) have removed their library from Spotify. It couldn’t have come at a worse time for Spotify as they have just launched their Korean store. It seems that my initial analysis that Spotify would be a few years after Netflix is coming to a lot sooner as the Publishers exert their power. Be interesting to see what happens going forwards!
