Written by: Ollie Watts
Netflix is invariably a staple within many households – it has 151 million subscribers worldwide – through offering masses of film and serial content from as little as $12.99 (£8.99) per month. Since its launch in 1998, the streaming service has developed from a pay-per-rent online DVD store into a flat-fee monthly subscription service in 1999. With growth came dominance; Netflix was operating in over 190 countries as of 2016. But dominance does not stay unchallenged for long – alas new players now loom on the horizon. Apple launched Apple TV+ on 1st November 2019, with fellow newcomer Disney+ following suit on 12th November. Will Netflix become complacent or will it successfully adapt to these competitor challenges? We do not know – yet. What we do know, and will subsequently explore, is how this myriad of players aim to become the streaming service of choice. Only then can we cast judgement on Netflix’s readiness.
Netflix’s strategy: one of high-risk
The phrase ‘don’t judge a book by its cover’ is typically used in the context of an underdog, but it is equally applicable to a frontrunner. Netflix may account for 26.6% of video streaming traffic, it may be worth around $82 billion, and it may have a library of over 15,000 titles, but these are superficial statistics. In reality, Netflix is in a precarious position. It is running a high-risk strategy dependant, in part, on a particular consumer perception: positive endorsement of ‘original content’. Whilst it has licencing rights to major serials such as ‘Friends’ and ‘Suits’ – the former of which it pays $100 a year million to stream and will lose to HBO in 2020 – it is not the company’s direction of choice. The company spent $13 billion on content in 2018, with 85% set aside for original content – that which it has co-produced or has exclusive streaming rights to. Successful ones include ‘The Crown’ and ‘Sex Education’, with both being recommissioned after their first series. They received 8.7 and 8.3 IMDb ratings respectively. Therein lies the problem: overtly expensive productions and high ratings automatically equate to commercial success for Netflix. A breeding ground for complacency which asks a pertinent question: how is Netflix financing this endeavour? Moreover, is it sustainable? Step forward the second part of Netflix’s high-risk strategy: financial reliance on ‘junk bonds’.
In essence, when investors buy bonds they loan money to the company issuing them. In return, this company promises to repay the investors by a certain date, known as ‘maturity’. Bonds have coupon rates – its rate of annual return – which are typically set at 5%. Therefore, a bond worth £2000 (the invested principal) with a 5% coupon rate will see the issuing company repay the investor 5% of £2000 per year – £100 – until it is repaid. A junk bond operates on the same premise, but carries a higher risk that the invested principal will not be repaid to the investor. This is because the issuing company is typically one with poor finances and a poor credit rating. To counteract this, junk bond coupons are set at higher rates – 8% upwards – and so the investor can expect high-yield returns. Yet Netflix is no low-level company, it generated $15.79 billion in revenue for 2018, so why junk bonds? It generates a lot of money, and fast – $2.2 billion in October 2019 alone. To counteract the sheer amount of money it needs for its original content agenda, Netflix is attracting investors to their bonds through offering both euro and dollar denominations at reasonable rates. The dollar and euro coupon rates were 5.125% and 3.875% respectively, with the most active at 5.875% and a maturity of November 2028. (Market Watch)
This may be generating money quickly, but is saddling the company with enormous debts of $12-14 billion. Subscriber and revenue growth are essential catalysts the company should focus on to reduce dependency on long-term junk bond use. Unfortunately, new competitors are likely to affect these catalysts.
Apple & Disney: new players seeking an upset?
If there is a standout reason why Apple and Disney’s emergence in the streaming sphere, it is they are adapting through diversifying. Traditionally a technology and media company respectively, they have used their existing capabilities to tap into a lucrative market. Where there is dominance there is ample space for undercutting and disruption. But to what extent is this Apple and Disney’s core objective?
Despite some fluctuating iPhone demand – now increasing again after the iPhone 11 launch – Apple already operates a very successful business. It made $265.6 billion in revenue in 2018, with $218 billion coming from iPhone sales alone. With so many product offerings from tablets to laptops and phones, its TV+ venture is unlikely to seek dominance in the streaming market. It is almost axiomatic that it simply seeks optimum usage of Apple-owned services on Apple products. A free yearly subscription is redeemable by those who by a new Apple device, and even if you subscribe on an existing device, it is merely $4.99 per month. The aforementioned strategy analysis is affirmed by Dan Rayburn of consulting firm Frost & Sullivan: “Apple’s not competing with Netflix, Hulu, and everyone else. It’s competing with the limited amount of time that we all have in the day to consume content”. (Fortune)
Rather, it is more of a competition for time than a ‘content arms race’; Apple TV+ will have a small range of original content, not popular series or movies that we are accustomed to on Netflix. Though Apple’s cheap subscription appears focussed on undercutting Netflix, the scale of offering is incomparable to the latter. It will, however, likely hit Netflix’s subscription growth – already an area of concern for Netflix – notwithstanding that many consumers subscribe to more than one streamer. Currently it is unclear how Apple will fund its TV+ venture in the long-term, but with such a profitable core business it is unlikely to reach desperate measures.
The Disney+ service will also likely undercut Netflix on pricing, costing $6.99 a month. Perhaps its most pertinent advantage is Disney’s position and status as a production company. Unlike Apple’s TV+, it is not entering an entirely unknown area. Alongside plans for original content production, there will be an increasing back catalogue of Disney classics such as ‘Mary Poppins’ and ‘The Sound of Music’. Disney+ is the more likely to prove a real threat to Netflix regarding content production and subscription growth. Consumers ultimately like choice, and with a range of providers now being available, they will either branch out or maintain the status quo they currently inhabit. Like Apple it already has a profitable core business, so funding should prove no issue – for now.
Whenever a dominant player is challenged by newcomers, hype about the consequences and market changes always ensues. The best thing we can do as consumers at this stage is sit back and watch. Every industry faces change multiple times throughout its lifetime, so what we are witnessing as the ‘streaming wars’ begin is not entirely new. What is unprecedented is the rate of new players now entering the market in such a short period of time to provide competition. Apple TV+ and Disney will be joined in 2020 by HBO Max and Peacock. Perhaps even more are currently being envisaged and developed. The streaming wars are about to begin, and being first choice for viewers is the prize. As for Netflix’s readiness – stable, but not necessarily secure in the long term. Junk bond financing and a focus on original content may be reliable for now, but the market shakeup may render them untenable a year from now. We just do not know – and impatiently await early results.