Competition under the capitalist system, in theory, works something like this:
- An entrepreneur has a bright idea.
- That leads to a business making, or promising to make, excess profits on the capital invested.
- Others see the riches to be made.
- They set up rival companies.
- The extra competition reduces the prices consumers pay.
- Profits decline, even for the pioneering business.
- The loss-makers fold while the industry survivors eke out their cost of capital.
Let’s see how the theory applies to the on-demand video or streaming industry. The pioneer for watching TV shows and movies over the internet in a personalised way is Netflix. In 1997, Reed Hastings and Marc Randolf founded the company in the US as a movie-rental service, where people ordered DVDs via the Netflix website that were then posted out. The company listed in 2002 and successfully saw off a challenge from Blockbuster. Recognising that streaming was the future of video distribution, in early 2007 Netflix introduced its Watch Now product as part of its DVD subscription that allowed people to choose from about 1,000 movies they could watch instantly on their PCs.
What a great idea. By 2012, Netflix had expanded its catalogue of streamed content significantly and amassed sufficient viewership to begin its inevitable transition towards original content. Netflix’s first original series, House of Cards, was a huge hit. By 2016, Netflix’s streaming service was available globally (ex-China) as Hastings moved rapidly to take advantage of a “competitive window that will be open only temporarily”.
One year later, Netflix cracked 100 million subscribers of whom more than 50% came from outside the US, won its first Oscar (for a documentary) and released its first feature film.
There was always competition in a broader sense for the streaming services of Netflix (which still operates the legacy DVD and Blue-ray-disc hiring business). The company was always competing with linear free-to-air and cable TV for people’s viewing time and early on Amazon, Walmart-owned Vudu, and Hulu, owned by a consortium of media companies, offered rival streaming products. More recently, however, the Hollywood studios arrived. Long concerned with cannibalising existing revenue streams, they responded belatedly by launching streaming services.
WarnerMedia, NBCUniversal, ViacomCBS and Disney arrived with immense backlogs of content, the money to create more, and huge marketing budgets to try to convince households to add their service to the emerging streaming bundle. A critical early move of Hollywood was to reclaim their most popular content such as the Friends series. In just over a year, Disney’s iconic content has seen it attract more than 90 million Disney+ subscribers worldwide, complementing its nearly 40 million Hulu subscribers in the US over which it has control following its 2019 acquisition of 21st Century Fox. WarnerMedia’s HBOMax has over 40 million subscribers. Although Netflix’s 204 million subscribers worldwide as at the end of 2020 still provides it with ‘scale’ advantage, the competitive set in streaming is broadening.
With this increase in competition, is Netflix destined to be a business grafting out its cost of capital? We don’t think so.
Read the full article on Livewire here.