Streaming Wars

Author's Note: This was written before Netflix came out with its most recent earnings, which is pretty big news; right now netflix has built a platform as well as acquired a load of contents AND creating its own shows. so these are all fixed costs that theyre going to spend regardless. if they can show they can grow subscribers (retention of course is important as well) then whatever they make from new subscribers will have very high margin. it's pretty well leveraged and thus i think the run up in its price.

I definitely think this is good news for the digital media industry in general. the real game is to see what the big companies do.

I’ve always been fascinated by Netflix, a company that looks to revolutionize an old-guarded as well as heavily regulated industry. However, the road has not been exactly smooth (being called an Albanian army is about as funny of a description of a company as I’ve ever come across). I personally would not declare Netflix a winner just yet; this is merely the beginning of a long battle. A related post by Yuriy A about the current state of cable is a good read to give some background. In the next several posts I hope to give people an idea of who the players are in the streaming space as well as what’s been happening. But instead of some just some equity research reports you can pull from Bloomberg/Thomson I’m going to give it a bit of a different spin. From the perspective of the streaming companies:

Major Houses: Vying for the Iron Throne
Streamers: Netflix, Hulu Plus, Amazon Video on Demand (VOD), iTunes, Vudu, Redbox Instant

Minor Houses/Kingmakers: Gaining their allegiance can/will determine who sits on the Iron Throne
Studios - content producers: these are the guys that provide these companies content to stream.

Whitewalkers: The real enemies
Cable Providers - Comcast/DirecTV/Dish/Time Warner Cable/Cox/Charter/AT&T/FiOs. With their own on-demand program.

Floaters: HBO = Syrio?
Premium networks - HBO, Showtime, Starz, Epic. With their own on-demand program as well.

(Author’s Note: this is mostly about domestic competition; it’s an entirely different world internationally, just as life is across the Narrow Sea)

What are they fighting for, exactly? Well, the civilian’s money, that’s what. There are two ways the streamers make money: subscription and advertising. On one end, Netflix has avoided advertising on its site like a plague, reminiscent of what Facebook was doing in its early stage of aggressive expansion. On the other end, quick back of the envelope shows Hulu has roughly a 60/40 split of advertising vs subscription, with the intent to increase the advertising portion more in 2013.

Here’s a quick breakdown of the # of subscribers for each service from various sources:
Netflix: 25 million (10-Q)
Amazon: 3~4 million Prime members have used Amazon VOD (Huffington)
Hulu: 3 million (Hulu blog)
Redbox Instant: ?

Next up in this Stream Wars trilogy is the quest to gain allegiances from the minor houses. Content acquisition is key in this environment, but it is a very very dangerous game to play. Actual prices negotiated with studios, although unpublished, usually can be seen on the COGS side and in this case the content producers definitely have the leverage in the room. Last but certainly not least, a closer look at the role the MSOs play and how it will shape the direction of the industry.

Author’s Note:
This is my first blog post. If you are interested in anything media/entertainment business related please feel free to comment on what you want to see! I have some ideas about what’s interesting but more importantly I want to know what you readers fancy.