The end of the pandemic-fuelled home entertainment boom that has driven record breaking growth for Netflix and its rivals has revealed an uneasy truth – the streaming revolution has peaked.
The market is facing a perfect storm as, after a decade of making easy converts, streaming companies are seeing dramatically slower growth and increasing competition fuelling an unsustainable content war, just as stretched household budgets prompt consumers to start cutting back on entertainment services.
Rolling global lockdowns provided the perfect conditions for stratospheric growth. Netflix added a single-year record of 37 million subscribers in 2020, and newcomer Disney+ hit 100 million in 16 months, a feat its rival took a decade to achieve. Rapturous investors sent the market values of both companies to all-time highs late last year.
Netflix bumped back to earth last month, forecasting just 2.5 million new subscribers globally in the first quarter, its worst start to a year in over a decade, and confirming that last year it added the fewest subscribers since 2015. Rattled investors, focused on subscriber growth, have wiped almost $300bn (£220bn) off the combined market value of the two giants since last year’s highs.
Netflix has traditionally acted as a bellwether for the industry, and its worrying growth slowdown – on the heels of its self-proclaimed strongest content slate ever, with record setters Squid Game, Red Notice and Don’t Look Up – raises questions about the future for peak streaming. Analysts at MoffettNathanson, long-time Netflix sceptics, said the forecast was “worrying” for the rest of the industry.
Netflix’s once-revolutionary binge-watching model, the source of much head-scratching by traditional TV companies, is proving a balance-sheet nightmare. The company will increase content spending to an estimated $19bn this year, and there’s a further $23bn on its balance sheet for long-term content costs, plus $14.8bn in long-term debt.
Disney, which also owns sports operation ESPN and streaming service Hulu as well as its Marvel, Pixar, Star Wars and Disney film businesses, is spending an eye-watering $33bn on content this year.
Netflix has scrapped the 30-day free trials loved by binge-watchers, and is finding that even its huge spending is not enough to keep customers loyal, with many unsubscribing after watching big-budget hits.
“Squid Game? That’s so last quarter,” said analyst Michael Nathanson in a note to investors last month after shares in the streaming giant suffered their biggest fall in a decade. “The Witcher? Done on New Year’s Eve!”.
The new trend, used by Disney+ and Amazon’s Prime Video, is to release episodes of hit shows weekly, to extend the life of content and stop subscribers cancelling after bingeing a few must-see hits. Last year, Apple ditched its attractive offer of a year’s free access to its streaming service with purchases of an Apple device.
Netflix, and later Amazon, had almost a decade’s head start, but now traditional media giants are vying for a share of streaming spend, the market is severely overcrowded.
The biggest US media groups, from Disney and Sky-owned Comcast to WarnerMedia, ViacomCBS and Discovery, will spend about $140bn on content this year with a heavy focus on streaming services. Globally, content spending is set to pass $240bn, according to Ampere Analysis, all of which will add to the pressure to hold on to subscribers and win new ones.
“Everyone has started to feel the heat,” said Dominic Sunnebo of research group Kantar. “As well as a wave of new well-funded subscription services, there is also now an acceleration of advertising-funded low- or even no-cost. The Netflixes are suddenly not so cheap any more.”
However, with the wealthier populations of the US, Europe and Australia mostly picked clean of potential subscribers, providers are having to accept that not all customers are financially equal.
In markets with huge potential, such as India, consumers are not able or willing to pay much for services, which means price competition is fierce, and subscriber growth brings much smaller revenue increases.
Globally, monthly average revenue per Disney+ subscriber is just $4.12, because around 37% of its 118 million base is derived from its ownership of low-cost Indian service Hotstar. In December, Netflix had to cut its standard price in India by almost a quarter to $6.60, and its mobile-only offering to less than $2; in the US and UK its most-popular package costs $15.49 and £9.99 respectively.
Newer services such as HBO Max are, however, showing relatively strong early growth. And Disney+, which disappointed investors in November when its final-quarter results revealed the lowest number of new subscribers since its launch, staged a remarkable recovery last week, beating Wall Street expectations to surge to nearly 130 million subscribers at the end of last year.
“For now, Disney is defending its position but this isn’t the walk in the park one might expect from a company with a content cupboard already brimming with blockbusters,” said analyst Sophie Lund-Yates of Hargreaves Lansdown.
Disney’s stock surged nearly 10% as investors breathed a sigh of relief, hoping that the halcyon days of streaming growth are not over yet.
The new golden age of TV is in some ways proving too much of a good thing, with the overload of choice beginning to cause streaming fatigue among consumers. Analysis of the nine major streaming services available in the UK, including ITV Hub, All4 and BBC iPlayer, as well as the US subscription services, found 125,000 hours of content. Given that the typical Briton watches in the order of three hours of TV a day, it would take 86 years to see it all.
“The market has got an awful lot more crowded over the past few years and it is not going to support many more services at this stage,” said Richard Broughton, analyst at Ampere. “Consumers now have more services than they could possibly need.”
It’s an unlikely scenario, but a viewer who wanted to sign up to streaming services to cover all major entertainment and sports events – from Sky, BT and Virgin to Amazon, Disney and Netflix, with a bit of ad-free ITV Hub+ and specialist streamers such as reality TV service Hayu – and pay the BBC licence fee, would have to spend about £2,000 a year, excluding the cost of broadband.
There are signs that consumers are becomingly increasingly selective about how many services they want to manage and pay for. Kantar found that a fifth of German consumers who took out a new subscription video-on-demand service in the final three months last year cancelled one of their existing ones as a result.
“Planned cancellation goes up exponentially when people go above three services,” said Sunnebo. “Consumers are not going to keep spending forever: there is a ceiling and that ceiling is coming closer and closer. I don’t think we have reached peak streaming in viewing terms yet, but we are coming close in terms of what people are prepared to pay.”