In 2019, The Streaming Wars Get Real

Netflix has had it easy.

Netflix has enjoyed explosive growth over the last few years, but with this growth has come a similarly exploding content budget. Meanwhile it has faced little in the way of real competition. Amazon’s streaming service is the closest competitor, but its spending on original content still pales in comparison to Netflix’s. The next closest competitors, Hulu and HBO, have been hamstrung by their ties to legacy business models.

So far, Netflix has operated in an environment much like the early years of TV – where there were only a couple major broadcast networks, and they had a virtual monopoly on viewership. This year, that will finally change.

New Streaming Wars Battlefield in 2019

2019 is the year that the streaming wars will take off as big media’s mergers and acquisitions finally come to fruition. Disney will soon launch its Disney+ service and AT&T will launch a streaming service using the assets from its Time Warner acquisition, including HBO. By the end of the year, Netflix will no longer be the only game in town. For the first time in its history, it will be going up against competitors who have an arsenal of original content to match its own.

To make matters worse, Disney has already indicated that it will pull much of its content from Netflix, and it will launch shows, such as those under the Marvel brand, that compete directly with Netflix’s own content. AT&T will likely follow suite as it invests heavily in its own streaming service.

How good is Netflix’s moat?

As we’ve written previously, the key to Netflix’s long-term success is defensibility. Economies of scale in content production are limited, so in order to make money, Netflix will eventually have to raise prices or decrease its spending on content. This year will finally put Netflix’s defensibility to the test.

As competition heats up, Netflix is unlikely to be able to shrink its content spend anytime soon. Despite spending billions on original content, Netflix Originals only make up about 8% of Netflix’s content library today, while content from Comcast, Disney, and WarnerMedia currently account for about 20%. In fact, some projections have shown Netflix’s content spend increasing past $20 billion over the next few years from 2018’s $12 to $13 billion. And more competition also means it’s unlikely that Netflix will be able to meaningfully raise prices.

The problem for Netflix is that it lacks the defensibility that network effects afford the other big tech companies. While Netflix is often lumped in with platforms like Facebook, Amazon, Apple and Google, all of those businesses are characterized by strong, defensible network effects.

Netflix, which is a linear content business, has no comparable moat. In fact, the value of its original content depreciates almost entirely within a few years, according to the company’s own financials. That means there’s no real way for Netflix to ever hop off the content spending treadmill.

Content platforms must experiment with more user generated content

Over the next few years, Netflix’s new-found competition will likely find itself in the same tough spot, especially as even more competition emerges from Apple, Google and others.

There is, however, one way out of Netflix’s content conundrum. Streaming companies need to copy the same recipe that’s worked for all of the other big tech companies: embracing user-generated content and external networks of content creators.

Creating linear content involves very high fixed costs. The only real way to generate significant economies of scale is to use those assets to build a broader network of user-generated content around it.

So far, none of the major content companies has embraced this model. Even Netflix has been too risk-averse to take on user-generated content. But eventually, these streaming companies will need to figure out how to turn a profit. Rather than looking to emulate Netflix, they should look to the proven platform model that’s worked for some of their biggest competitors.

Update – Jan 16, 2019: Since we published this, NBCUniversal has also announced plans to debut its own streaming platform in 2019. Another combatant in the streaming wars! NBCU’s approach features a defensive, economic-first mentality, instead of the more traditional growth-first models. Will this strategy win the war?

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