Someone begins to seriously think that Netflix it will do to the media industry what Amazon has done to retail. It will revolutionize it. The rise of Netflix is reminiscent of that of Donald Trump, and vice versa. Initially ignored, then mocked, then greatly underestimated, then considered a phenomenon by Circus Barnun and finally everyone has a fear that is about to become panic. The paradox is that while Trump is being openly fought by half the world (the British Parliament has declared him persona non grata north of the cliffs of Dover), the big media conglomerates cannot wage war on Netflix, boycott it, or ignore it. They can't do anything without harming themselves. Netflix makes a significant contribution to their revenues by purchasing rights to reproduce and retransmit television programs and films. With 70 million subscribers in 190 countries around the world, it has a paying audience nearly as large as cable TV in the US.
For the large traditional groups, Netflix is a "frenemy", half friend and half enemy; a guessed definition coined by the acrobatic head of WTT, sir Martin Sorell. Still no one knows how to deal with a frenemy. Murdoch would tend to openly fight it with robust boycott actions, others, like Time Warner's Jeffrey Bewkes, plan to counter it with directly competing services, still others are petrified by what is happening. One thing is certain: the times are gone when Bewkes compared Netflix to the Albanian army that wants to conquer the world, echoing Stalin's famous joke addressed to the allies who in Yalta asked for a role for the Vatican: "How many divisions does the Pope have" . Zero. How much content does Netflix have? Zero. Not anymore now.
The Battle of the Originals
Netflix will invest the beauty of 6 billion dollars in the production of original content. For this purpose, it has also taken out a loan of 1 billion dollars. Netflix's biggest competitor in this area, HBO, the flagship of cable TV in the US, responded by bringing its investment in 2016 to 1,8 billion dollars in content (this is a valuation by Morgan Stanley). Amazon is certainly not at the window. The Seattle giant, which has garnered unexpected critical and commercial success with its original series, said it spent $2015 billion on content for its music and video streaming service in 3 and plans to add a billion this investment every year. At Sundance 2016, Netflix and Amazon made a handful of films that will be immediately broadcast on the streaming service simultaneously with the viewing in theaters, so as to remove the annoying windowing phenomenon that makes the consumer pay multiple times for the same content. We are talking about figures never seen in the history of the cultural and entertainment industry. The future of this industry is at stake on streaming.
By now everyone is convinced that video streaming is no longer something for shotguns, but an industry that produces frightening numbers: there is talk of a turnover that will exceed 50 billion dollars in 2020. In this segment there is a "man" alone in command: it's Netflix with Amazon, Hulu and YouTube chasing after. The share of traditional media is little more than negligible. A recent survey conducted in the UK found that young people under 16 much prefer Netflix and YouTube to traditional television. On new media they spend more than 5 hours a day, while the time spent by an older audience is 3 hours. They search for their favorite content by themselves and consume it where it happens through a web connection. Simon Leggett, responsible for the survey conducted by Childwise, speaks of "epochal change". And an epochal change is just happening.
The market likes Netflix
Even the capital market has begun betting Netflix against the traditional media conglomerates. In 2015 Netflix was the fastest growing stock (+139%) in the S&P 500 stock market. In second place was Amazon with an astonishing +122% for a company that makes microscopic profits. The big media conglomerates were outwitted by investors in the second half of 2015. Indeed, since May of last year, $111,63 billion of capitalization of seven largest media conglomerates in the culture and entertainment industry (Walt Disney, Comcast, Time Warner, 21st Century Fox, Sony, CBS and Viacom). A no longer negligible portion of the cable TV subscribers provided by these conglomerates, and who are the goose that lays the golden egg for their budgets, are pulling the plug and migrating to streaming services. It is a real fire that terrifies the investors who start to evacuate the building.
Fox and Time Warner are racing for cover in an effort to offer more content and more services on cable. The idea is to negotiate, with the production companies, the rights to make entire seasons of TV series immediately available for viewing so as to counter Netflix on one of its strengths which is binge watching (i.e. the viewing marathons of entire TV series with all the episodes immediately viewable) which is one of the services most appreciated by viewers. Will binge watching stop the loss of subscribers? Perhaps unbundling (that is, the unbundling of subscriptions towards an à la carte service in choosing which channels to pay for) could be a more radical measure, but also an enormously riskier one for the cable TV structure.
Farhad Manjoo, the New York Times technology columnist, described very well the situation and the challenges facing the large media conglomerates in an article entitled Why Media Titans Would Be Wise Not to Overlook Netflix which appeared in the New York newspaper. Below we offer it to you in the Italian translation by Ilaria Amurri. Enjoy the reading!
Imagine…
Imagine yourself leading a global media group. Let's say you're Robert A. Iger, CEO of Disney, or Brian L. Roberts, of Comcast, or a few rungs down the ladder of giants, like the head of Twenty-First Century Fox or Time Warner. Either way, you'd have a lot of valuable stuff: movie studios, TV stations, maybe broadband infrastructure, or even a few theme parks complete with roller coasters and fairytale castles.
Here's a question for you, dear media mogul friend. How scared are you of Netflix? Or to be more precise: have you had enough? Probably not. Well yes, you must have it. Netflix has grown dramatically in recent years and today can count on more than 70 million subscribers who pay between 8 and 10 dollars a month to access a large catalog of movies and TV series. Shares in the Los Gatos group topped the Standard & Poor's 500 index last year, up 140%, and things are getting better and better.
Last week Reed Hastings, the company's CEO, goatee man, announced that soon Netflix's movies and TV series will be available practically everywhere (except China, at least for the moment). The move has nearly doubled the potential market for the service, which currently reaches more than 540 million homes worldwide with broadband.
Yet Netflix is still a small boat in the global sea of content and certainly no longer poses a threat to the industry's most powerful fleets. Your castles are safe, right?
Well, there's a bigger problem you and your buddies will have to grapple with as you roast toffolette at the World Economic Forum in Davos next week: What if Netflix were the Amazon of entertainment? The architect of a slow, expensive and risky action aimed at wearing down your business?
The good news for the Davos crew is that there are many good reasons why Netflix's strategy might fail, the bad news is that it's working great for now.
Hastings plan
On paper, Hastings' plan to challenge traditional television has long seemed unworkable, just as Bezos' strategy to outrun retail with Amazon once seemed delusional. Netflix is daring, that's for sure, it's spending billions to create original content and obtain licenses, it's fighting against media forces from all over the world and it doesn't own any of the pipes that reach people's homes (among Netflix's main rivals there is Amazon itself, which provides him with the technical distribution service with AWS, and which has its own very aggressive and expanding production of original content).
Netflix's boldness is provoking strong reactions on Wall Street. The company, based in Los Gatos in Silicon Valley, is currently worth $50 billion and many analysts are simply thrilled, saying its effort to reinvent TV could be worth much more, while others feel almost physical revulsion.
“It's amazing how stupid the competition can be,” says Wedbush Securities' Michael Pachter, convinced that Netflix is vastly overrated, “everyone is after them like a flock of sheep”.
The general belief is that, like Amazon in the past, Netflix is daring so much that sooner or later it will make some missteps, but despite this it continues to amaze everyone. Experts and competitors expect it to take at least a couple of years to go global, but the rest of the industry always seems a step or two behind Hastings' ambitions.
The plus of Netflix: creativity built on data
The ability to surprise is the most obvious similarity between Netflix and Amazon, but there are many others. For example, as in the case of Jeff Bezos, with his huge retail machine, investors let Netflix invest large sums to create a video jukebox accessible to the whole world, only for Amazon to invest in objects, while at Netflix are interested in original content. At last week's International Consumer Electronics Show (CES), Netflix chief content officer Ted Sarandos said the company will produce 2016 hours of original programming in 600, about double from last year and on par with major broadcasters. .
Ned Schindler, an analyst at Bank of America Merrill Lynch, summarized all the new programs that Netflix will offer this year in a letter to investors:
31 TV series,
10 movies,
30 programs for children,
12 documentaries and 10 comedy shows.
“Basically you would have to watch Netflix continuously for 25 days in a row to consume all the new original content,” says Schindler. Netflix isn't just a television, though. Like Amazon, it is amassing insights into customer preferences and using it to create content that appeals to different demographics around the world. Again at CES, Sarandos stated that Netflix's business model and data allow it to produce programs that could not have existed in traditional TV: “To make a baseball analogy, linear TV only scores in the home run, while we also do singles, doubles and triples”.
Finally, Netflix and Amazon are also similar in that they resemble a kind of flywheel that keeps turning faster and faster: more subscribers, more data, more money to finance new content, which in turn brings new customers and so on, faster and faster. . Currently, Netflix sees barely a glimmer of profit, but experts say that as the wheel spins, it will start earning higher and higher sums.
The necessity and difficulty of raising prices
Also, it seems to be getting so powerful in content that it's in a position to raise its prices. Analysts expect it to start increasing the subscription fee, which is currently among the lowest. According to the company, in the last three months of 2015, customers watched 12 billion hours of streaming video, or they paid about 14 cents an hour, as estimated by Rob Sanderson, an analyst at MKM Partners. “Cable costs between 25 and 30 cents an hour, so Netflix costs about half that,” Sanderson explains.
What is certain is that Netflix continues to surprise everyone with its risky choices. Just as Amazon went from books to everything else, Netflix went from distributing DVDs to streaming old movies to movies and TV series. Some believe that he will continue to expand in the sector, for example by creating his own production studio, and it is not excluded that he could open his own theme park if this continues.
Of course, there are skeptics. According to Pachter, Netflix is likely to face difficulties in reducing production costs. When the media giants realize that Netflix is stealing the best customers from TV, they will start asking for more licensing agreements, and it will not be easy to raise the price of subscriptions due to competition from Amazon, which offers original included in the Prime package (which costs $99 a year, about $20 less than Netflix, with free shipping on all e-commerce goods).
Beyond these drawbacks, Pachter thinks that Netflix can create a rather profitable business, even if not entirely exceptional: "Nobody is going to get rid of them that easily, but I think the stock will go down to $70 or $75", compared to the $115 now (he later adjusted that to around $60). “Otherwise, nothing would make sense anymore, because if Netflix wins, everyone else automatically loses.” And that's impossible, right? Is the question mark a must?
