Streaming Sector Analysis - Who Will Win the Streaming War?
"Welcome to the Streaming Wars!" This Deep Dive delves into the fierce competition among major players in the Streaming Sector. Who will win the War and become the King of Streaming?
Streaming War Phase 1
The Value Proposition
Subscriber Growth at All Costs
Streaming War Phase 2
Bundles and M&A
The Key Players
Average Revenue by Membership
Net Additions (Losses) of Memberships
Membership Retention Rates
Introduction Prime Ecosystem
Prime Video Strategy
Role in the Streaming Market
Comparing Numbers and Strategy
Investing in Streaming Companies
The streaming sector is a unique and interesting sector that I wanted to write about for a long time. First, because I deal with it on a (more or less…) daily basis as a consumer, and second, because it has some really interesting business aspects.
Somewhere in the late 2010s, the streaming hype broke loose, and seemingly every production company, TV channel, and tech company introduced a streaming service.
Everyone felt like this was a market they needed to be a part of. Fast forward a couple of years, and there are some serious doubts about whether the market is actually a great place to be in.
The term “Streaming War” is now regularly used to describe the competitive nature of the industry.
Let’s start this Deep Dive with a breakdown of the industry overall, followed by an analysis of the key players in the industry.
After revolutionizing other entertainment industries like music or books, Silicon Valley has now also disrupted the movie industry. Almost 40% of US TV consumption is watched over streaming accounts.
And everything indicates that this trend will continue and even accelerate. Almost every household with a TV also owns devices to watch streaming services.
In fact, young people below 35 have more than halved their average minutes of TV per day over the last ten years. And the decline of Broadcast and Cable has accelerated quickly in recent years.
The video streaming market is currently valued between $100-$120 billion and is expected to grow at a compounded annual growth rate (CAGR) of 20-22% up until 2030. This could result in a value of roughly half a trillion dollars in 2030. However, estimates on this market are highly volatile, and as we will see throughout this article, not even the companies themselves really know what they can expect. Both in terms of subscriber growth and profitability.
It seems that no one in the industry expected the competition to be as fierce as it is today. Let’s dive deeper into the fight for subscribers and market share.
Streaming War Phase 1
While Broadcast and cable seem to be the big losers of the streaming revolution at first glance, the individual streaming services are not as happy with the development of the industry either.
Initially joining the sector to grab their share of a fast-growing and allegedly highly profitable market, the fierce competition that evolved made both of these things challenging for the entrants. Subscriber growth wasn’t as fast and long-lasting as expected, and profitability is still far away for most services.
In recent quarters, many streaming services experienced negative subscription growth for the first time—even the big players like Netflix or Disney+. Instead of adding new subscribers, Netflix experienced stagnation and even slight negative growth throughout 2022. Disney+ lost significantly in 2023, going from 164 million paying subscribers to less than 150 million.
There are many reasons for that. The most apparent one is competition. The more services joined the industry, the more challenging it has become to keep retention rates on subscribers high. Especially since prices kept increasing.
The Original Value Proposition
Initially, streaming services had a very straightforward value proposition. For $7.99 (Netflix’s starting price), you got the newest and best shows without the annoying advertisements of standard television and on-demand. This was a revolutionizing business model with essentially zero downside for the consumer.
But this value proposition only worked as long as Netflix was the only serious contender in the market. With new services coming in, Netflix, as well as the new contenders, had to fight for subscribers. Activating your microeconomics knowledge, the natural solution should’ve been that this new competition drives prices down. However, this wasn’t the case here. Everyone quickly realized that splitting up the customers leads to less revenue for every player, and lowering prices further would’ve resulted in many quick bankruptcies.
So, companies decided to go another way. They bet on delivering more value than other services through better content. More and more money was spent, but there wasn’t anyone who triumphed and overshadowed the others in the content game. Netflix had some big releases, but so did Disney+ or HBO. It balanced out more or less.
To fund the increasing spending on content, the streaming services collectively increased prices. With regularly growing prices, the first noticeable drawdown in subscribers took place.
By this time, the price factor of the original value proposition became mostly abundant. Customers needed to be subscribed to three or four different streaming services to capture 80% of the most viewed and talked about shows. Those subscriptions could quickly add up to $50 per month.
Subscribing to streaming services was not the no-brainer it used to be—especially staying subscribed. Instead of deciding to subscribe to a streaming service and then stick with it, subscribing for a month to watch the new show you were waiting for and unsubscribing as soon as you’ve watched it became a normal way to consume streaming. This can also be seen in the user retention statistics, which we will discuss later.
This became a huge problem for companies, especially for players like Disney+, who spend record sums on producing new content. It became increasingly clear that the sole goal of gaining subscribers would not be enough to make the service successful.
Streaming War Phase 2
This is a pattern that we have seen over and over again in the online industry. First in the late 90s and early 2000s and again when the big social media companies came along.
User and subscriber growth are more important than financial growth and profitability.
Two of Netflix’s biggest competitors, Disney+ and HBO Max (now Max), wanted to gain market share at every cost and prevent Netflix from becoming the undisputable market leader. They spent billions on new content to grow their subscriber base.
In some years, Disney has outspent Netflix by almost 200%. (we will debate this further when discussing Disney+ in particular).
After the first signs of slowing subscriber growth in recent quarters and years, however, the companies understood that growing at any cost is a strategy limited by time, especially since the market might be saturated faster than they initially thought.
The total addressable market for Netflix was estimated to be around 800-900 million people. After seeing significantly lower growth at a little more than a quarter of that, I’d at least question if 900 million is a realistic number any time soon.
As a consequence, streaming services stopped competing solely for subscriber growth. They shifted their focus to becoming more profitable.
In the pursuit of becoming more profitable, almost all streaming services started to break down the password sharing that was going on between users across all platforms. While this move, naturally, was not well received by users, the companies were right, and it did the job. Some users might have stayed away from the streaming services without using a friend's password, but most created their own account, and it was a net positive for Netflix and co.
However, the two most prominent features of the second phase of the streaming wars are the bundling of services and the inclusion of ads.
Bundling of Services and M&A (Mergers and Acquisitions)
Instead of competing for customers, many streaming services now offer deals where you can access multiple services with only one subscription.
Some of these bundles are temporary; others turned into mergers and acquisitions. Especially Disney+ started buying competitors. Comcast’s Hulu was their latest and biggest acquisition. The deal valued Hulu at a total of $27.5 billion.
In April of 2023, HBO Max and Discovery+ merged and formed the new service Max. A couple of months later, in June, Paramount+ acquired Showtime.
The main reason for the mergers are larger content libraries that should increase the average subscription time by offering more shows, thus creating less reliability on the latest releases.
The ad-supported subscriptions were discussed for quite a while, and initially, the sentiment wasn’t positive. However, they turned out to be a great alternative, benefiting the companies and the consumer.
I personally prefer subscribing to the significantly cheaper ad-supported options.
And this seems true for many people since user growth came back strong after introducing these ad-free alternatives. Some of the initial criticism was that Netflix (who were the first to offer this alternative) would slowly become like old-school TV if they continued on this path.
But this isn’t true from both the customer and business perspective. For the consumer, nothing really changes. You still have the option to watch ad-free. There’s just an additional option.
For the streaming service, there are many advantages. First of all, they retain more customers. They have a higher degree of price discrimination. Meaning, they can further exploit the individual's willingness to pay and retain more customers.
They can also charge more money for advertisements than old-school TV because they have a lot more data and thus know the customers a lot better.
In television, they had little knowledge apart of what gender or age group prefers what show or time to watch TV. But not a lot more. They just competed for watch time, and the more viewers they had, the more they charged for advertisement. They came over numbers.
Netflix and other streaming services know a lot more about us. They can target ads better and, therefore, charge a lot more money for advertisements.
The three biggest players in the global video streaming market are Netflix, Disney+, and (Amazon) Prime Video. Followed by the two Chinese video streaming providers, Tencent Video, which is part of Tencent, and iQIYi, which belongs to the Chinese search engine Baidu.
Max, the merger of HBO Max and Discovery+, now sits at 95.1 million subscribers, and Paramount+ reported about 63 million subscribers. Apple TV+ remains a black box since Apple still doesn’t release the numbers for their streaming service, but they are quite far behind anyway, with an estimated 25 million paid users (45-50 million combined if you count users that have access via promotion).
The last place on the Top 10 list goes to the Indian streaming service Eros Now. Eros Now works a little differently. They have a premium paid subscription model that works similarly to the paid subscriptions of the big US services and a base paid subscription model that includes single downloads or subscriptions lasting a day or a week.
This article, however, will focus on the North American streaming services since they dominate the biggest markets outside of China.
Netflix is the pinnacle of streaming services. It’s the number one judged by subscriptions, it has the most global users/viewership, and the most noticeable brand. On the map below, you can see what video streaming services are preferred in what region of the world.
Netflix clearly dominates the Western world, being number one in Europe, North America, and South America. While North America looks to be dominated by Prime Video, this is only because, as we’ll discuss in more detail when we talk about Prime Video, Amazon doesn’t differentiate between Prime and Prime Video members.
If we adjust for that fact and only count the users of the streaming services, North America is also covered in red with a white Netflix logo.
Netflix entered the market and revolutionized the entire entertainment and video industry when it turned from an online “DVD‑by‑mail movie rental service” into a video-on-demand service in 2007.
Since then, it has kept its first-mover advantage and become the most subscribed to and watched streaming platform. You know your brand is strong if your brand name becomes the synonym for an activity. If you want to research something, you “google” it. If you want to calm down and relax, you “Netflix and chill.”
Real brand strength is showing up in the numbers, and Netflix’s numbers are proof of that. Netflix’s revenues have gone up almost ninefold since 2012. But more importantly, they’ve finally started to turn the business model profitable. Something that most competitors still struggle with.
To understand Netflix better and later draw comparisons with the competition, let’s take a look at the most important metrics for a streaming service. What are the financials broken down to the level of a single subscriber?
The first important metric is the Average Revenue per Membership. That is, how much does the average subscriber pay? In this case, I’ve broken down the revenue to the geographics of the subscribers. The numbers are from the quarters of 2021 to 2023. Throughout this article, we will compare these numbers to the competition whenever possible (some do not disclose these numbers).
The second metric is Net Additions or Losses of Paid Memberships. As you can see, there have been losses in the first two quarters of 2022. This led to a severe sell-off, as we will discuss later. However, one should keep in mind that those losses only amounted to about 2.5% of all paid memberships and thus had little impact on Netflix's overall financials.
Another statistic differentiating Netflix from most competitors is the Retention Rate of Subscribers. (Paying) Netflix subscribers are the most loyal, with an average subscription time of 58 months. This might be the statistic that shows Netflix's competitive advantage the best. Why Netflix succeeds at retaining subscribers longer than competitors will be discussed later.
We’ll discuss and compare these and other key statistics in the following introductions of the other competitors. Since Netflix is the market leader, I’ll use it as a benchmark for the other key players. In those comparisons, the statistics will give you more context and a better perspective on both Netflix and the company in question than when I list all of them here without comparison or context.
I’ll come back with a conclusion on Netflix at the end when you better understand the industry dynamics and players.
Let’s start with the first competitor.