After Disney rolled out its digital streaming package, called Disney+, many investors started sounding the alarm bells for Netflix, the streaming pioneer and still reigning king of the hill.
Once Disney announced the particulars for its new service, Netflix shares were off approximately 5% while Disney stock increased more than 10%.
Netflix enjoyed a period of unrivalled dominance in the digital streaming direct-to-consumer market. Now several companies have entered the fray in a quest to take away some of Netflix’s dominant market share.
Among Netflix’s principal competitors are Apple, Disney and AT&T/Time Warner.
Should Netflix be worried? The company had a long head start over the new entrants in the original contents streaming market. In order to assess the threat, the new players pose to the company, a review of its competitors’ offerings will prove instructive.
Apple
Presently, Apple has very few arrows in its quiver to compete with Netflix. Apple will offer its original content service, called TV+ through its existing Apple TV app beginning next fall.
The company plans to expand its market share by making its Apple TV app compatible with non-Apple hardware. But Apple has little to show investors and consumers alike in terms of actual original content available, how it intends to compete with Netflix, and what its digital video service will cost consumers — all key omissions, given the already competitive direct-to-consumer streaming services market.
Given the company’s pretense at being a major player in the streaming business, sufficient to clash with digital streaming giant Netflix, it is simply astonishing that Apple has spent only a paltry $1 billion towards producing original content.
Netflix, by comparison, committed $12 billion for new content offerings in 2018, efforts immediately apparent to any Netflix subscriber trying to scroll through dozens of screens of “Netflix Original” offerings online.
Apple CEO, Tim Cook, seems to believe that the company can play off its brand as a pioneer in innovative hardware design and transfer that trademark to the direct-to-consumer entertainment industry.
However, Apple’s brand has never been connected with the production of entertainment or movies. Rather, it is associated with manufacturing groundbreaking devices that have upended entire industries.
The two markets are incomparable. With its present video streaming package and limited outlays for original content, Apple at present remains unserious challenger.
AT&T/Time Warner
AT&T had hoped to leverage its purchase of DirecTV as a springboard for entry into the streaming video marketplace. The $49 billion acquisition cost hasn’t paid off.
The rate of customers exiting the platform far exceeded AT&T’s projections. Its business model assumed that it could convert some non-renewals as customers for its new streaming service called DirecTV Now.
The company’s strategy for entry into the entertainment/media business has been a patchwork of diverse and unrelated moving parts. A separate AT&T initiative for entering the streaming business to compete against Netflix is even more confusing.
In addition to its DirecTV Now complement of offerings, AT&T is offering a different streaming service to compete with Google’s YouTube TV, as well as Amazon’s Prime package and Hulu.
AT&T thus presents its potential customer base with a diverse array of services with different video/channel offerings at different prices. Compare this to the simplicity of the company who is its principal competitor. Netflix is one company with a simple pricing structure.
For consumers, Netflix offers convenient one-stop shopping. AT&T’s offerings are guaranteed to confuse potential customers. This isn’t a smooth way to enter the market.
DirecTV problems
AT&T says that approximately 2 million two-year DirectTV contracts will expire in 2019, an opportunity the company plans to use to discontinue discounts for its Direct TV service.
“As those customers come due, we’ll get closer to market pricing,” said John Donovan, chief of the telecom business, at an investor conference in November. “We’ll be respectful of our customers, but that will move up.”
This projection is rather sanguine. Given the entry of multiple players in the streaming market, the company may not have the pricing flexibility to maintain existing customers should it increase the monthly subscription fee. AT&T simply lacks the depth of programming that will attract new subscribers while retaining its existing DirecTV viewers.
As the cord-cutting customer exodus continues, why AT&T believed it could help defray the loss of revenue from the departures by offering combined cell phone services with some video/channel offerings with a DirecTV connection is mystifying.
AT&T’s best bet for competing against Netflix is to use its recently acquired Time Warner studio assets for producing original content. Yet the company seems to be stuck in a DirecTV mindset.
Disney
Disney’s streaming offering, called Disney+, is slated to launch in November. It will be offered to consumers for $6.99 per month — half of Netflix’s current $14 premium package.
Disney+ will offer subscribers its family friendly inventory of films and series as well as diverse offerings from its own library and productions, such as its lucrative Marvel properties. The package will also include selected films from the vast and rich library of content available through its acquisition of Fox Studios.
In addition, Disney said that nine original content programs would be available upon the services November launch date. At first blush, this, by any measure, is an impressive package. Yet, even in light of this ostensibly highly competitive low-cost streaming package, Netflix has little to worry about in terms of Disney eroding its subscriber base.
Disney’s popular franchises will always appeal to a slice of the overall potential streaming market that is up for grabs. The challenge for Disney, is growing and expanding its existing viewer base to capture new subscribers.
Currently, the company is not well positioned to meet these goals. Disney relies heavily on the appeal of its old line staple of family-friendly productions. Will that be enough to make Disney a player in today’s marketplace of cutting-edge appointment TV drama and action?
The Netflix production “Roma” recently was nominated for an Academy Award for best picture — a scenario that would have induced side-splitting laughter just two years ago.
Some of the company’s other original content productions grabbed the attention of millions of households. Netflix’s occult thriller “Bird Box” was viewed by more than 80 million households. These are heady numbers and indicative of Netflix’ ability to retain and grow its subscriber base. Will Disney be able to capture a comparable audience?
Original content spend
As Paramount CEO Sumner Redstone once said, “Content is king.” Redstone was correct, so it is illuminating to compare Netflix with Disney using the crucial original content metric.
Netflix spent a phenomenal $12 billion on original content in 2018, In a note to clients in January, BMO Capital Markets analyst Daniel Salmon estimated Netflix’s annual spending for original content will hit $17.8 billion by 2020.
The difference in spending between the two companies is stark. Disney, told investors recently, that it was planning on spending $1 billion a year on original content for Disney+, with expenditures to reach the “mid-$2 billion” mark annually by 2024. Disney estimates its streaming service won’t become profitable until 2014.
Netflix’s competitors currently lack the resources or strategic planning savvy to knock the company off its lofty perch. In order to get within striking distance, new players will need to devote substantially more resources for original content.
