June 3, 2019
As global viewers “cut the cord” from cable TV in growing numbers, the video streaming sector is mushrooming: There are over 100 existing or upcoming services to choose from, with market leaders such as Netflix and Amazon facing off against a spate of high-profile new offerings.
In a crowded marketplace, J.P. Morgan Research looks at the battle for growth and survival among media companies providing over-the-top (OTT) content via the internet.
More than 10 new streaming services are launching in the next year, including products from heavyweights such as Disney, Apple and NBC Universal. Against this backdrop, J.P. Morgan believes the current number of OTT services will prove unsustainable as the market approaches saturation and some will not survive.
In some ways, streaming giants Netflix, Amazon and Hulu already resemble the ‘Big 3’ broadcast networks in the United States, offering general entertainment to mass audiences. Meanwhile a number of niche players are operating as cable networks of the internet age, with specialized content such as British dramas or horror movies.
Data shows more than a third of consumers are open to subscribing to at least two services, but this number drops to 15% for more than three. 1 Given this, J.P. Morgan believes the market can sustain several general entertainment services and a myriad of niche services.
While video on demand (VOD) will be a key component, live TV such as 24 hour news or sports will endure. However we also see a shift in packaging: Conventional cable deals often offered bundled pre-determined channels; future “skinny TV’ is likely to be more flexible, allowing consumers to pick packages focused on entertainment or sports.
"While the conventional logic is that OTT platforms need scale and a large library to appeal to mass audiences, we do believe some niche services can survive if they have a loyal following and can keep their content investment relatively low," said Alexia Quadrani, senior analyst, J.P. Morgan U.S. Media Equity Research.
One of the most closely-watched services launching this year in November is Disney+, which will contain five key brands: Disney, Pixar, Marvel, Star Wars and National Geographic. Disney has already moved to position itself against Netflix, pulling content from the site once its contract expires at the end of calendar 2018 film slate and ending the rights to Netflix’s Marvel superhero shows. With this decision to forgo short-term revenues of an estimated $550 million per year, J.P. Morgan believes Disney will continue to prioritize its streaming business with investment. While some players in the sector will not survive, Disney+ remains on the short list of products that should prevail longer-term.
The company announced it will create more than 25 new original series and 10 original movies in the first year, with a vast catalogue of recent and older content. While some services have struggled to create a defining “watercooler” show, Disney’s library of intellectual property means it is better positioned than most to rapidly capture public imagination. The service price point starting at $6.99 per month is also compelling, offering a cheaper alternative to Netflix which has raised fees.
"Our confidence in the resilient success of Disney+ comes from the company’s unmatched brand recognition, extensive premium content and unparalleled ecosystem to market the service," said Quadrani.
Another source of strength for Disney is its ecosystem of businesses. It has the option to bundle Disney+ with Hulu or ESPN+, the latter of which reached two million subscribers within 10 months of its launch. At the same time, the streaming service can integrate with the theme parks, cruise lines and consumer products to ensure all businesses benefit: Subscribers could receive loyalty points and discounts for other parts of the franchise while the parks offer a unique opportunity to promote the streaming service.
As the current industry standard bearer, Netflix is being presented with perhaps the most competitive streaming offering in Disney+. But J.P. Morgan believes the quality and quantity of Netflix content will ensure its continued dominance in a landscape in which both services can co-exist – rather than a “winner takes all” scenario.
Netflix released around 1000 originals in 2018, which dwarfs Disney’s target of 50 original shows and 10 films by 2024. Disney is projecting a total content budget of more than $4 billion by that year; J.P. Morgan expect Netflix to spend around $22 billion.
Consequently Netflix will continue to grow subscribers, with an expected focus on creating localized content in international markets as well improving personalization of the user experience. The company may also boost its reach through partnerships with set top box providers, reducing friction between the platforms.
J.P. Morgan projects Netflix’s global users to increase from 139 million currently to 250 million in 2023, with U.S. subscribers accounting for around a third. By comparison, Disney expects between 60-90 million users by the end of 2024, presenting “niche” content rather than general entertainment.
"We still do not view Disney+ as a major threat to Netflix subscriber numbers given Netflix’s quality and quantity of content, along with the global secular shift toward streaming," said Doug Anmuth, head of J.P. Morgan, U.S. Internet team.
Apple announced plans to create original content earlier this year, including productions featuring Oprah Winfrey, Steven Spielberg and Jennifer Aniston. With 900 million iPhones and 1.4 billion devices in use globally, the tech giant has an easy path to scale content but J.P. Morgan believes Apple TV+ will be limited in the short term.
With a modest production schedule of some 20 new shows, Apple is far behind the major players and original content is unlikely to be a significant differentiator or driver of subscription in the first few years. This will make it hard to monetarize its own content.
Ahead of the announcement, there was speculation that the company could announce a major move into aggregation by bundling several services together on a single subscription model – something J.P. Morgan sees as an area of growth. Instead, Apple unveiled an app that brings together existing individual subscriptions in one portal, offering little of value to customers beyond convenience.
" Apple’s widely-anticipated video launch largely disappointed relative to expectations that Apple could potentially position itself as a strong competitor in video streaming by acting as an aggregator of numerous stand-alone and small digital content providers, " said Samik Chatterjee, head of J.P. Morgan Telecom & Networking Equipment/IT Hardware.
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