D2C: a world of three

The launching of Disney+ and HBO+, to start competing against Netflix for video streaming supremacy around the world might be interesting ground to start evaluating the future of the global entertainment industry, without leaving aside the rest of competitors to appear and several other incumbents: Amazon and the telcos.

Disney has announced a strategy of funneling its blockbuster movies through theatres, marketing the rest of what looks like a vast amount of content through streaming. AT&T appears to be planning to widen HBO's appeal and combine it with Warner Media inventory and future product. Netflix is fighting its financial condition: negative cash flow resulting from excessive production expenses, in a context where its stock exchange value appears to depend mostly on the number of new subscribers acquired during the past quarter, a volatile benchmark.

Amazon and Apple are different animals. The company headed by Jeffrey Bezos is entrenched in solid sales and web services, does not depend on Prime Video subscriber preferences, although it pays close attention to these whimsical customers. The Tim Cook-directed enterprise is facing slumping iPhone sales, probably due to their ever increasing price and the threat of tariffs. And, it never really paid too much attention to the streaming business, although it has the technical advantage of being able to integrate its technology to iPhone and AppleTV devices.

So far, so good. But, as we have already discussed earlier, several questions emerge:
a) Research shows that, in the U.S., households are currently subscribed to an average of 2.6 services, and mention that they are willing to spend no more than some $30 per month. This, in addition to their Internet connection. Cord-cutters mention price as the main reason for leaving linear cable TV, may find that subscribing to several streaming services will cost them more or less the same.
b) The cable operators, as soon as substantial streaming offers appear, will try to slash the per-subscriber fee they are currently paying. This may represent loses of hundreds of millions dollars in revenue for the programmers, at a time they are spending strongly on their D2C operations. The current deals with Netflix run under different parameters because, to the linear pay TV operators, they represent additional income and ‘a way to keep the subscribers connected’ to their network.
c) Several majors are relying on co-production deals with regional partners --such as broadcast networks in Latin America-- to feed their channels with original content. The point is that, at this food chain, broadcasters must occupy a pole position in order to provide the required promotion for the content. And, the PayTV systems involved are increasingly requiring that the entire season be available at their site for binge-watching. Therefore, while co-production is good for financial reasons, it’s less of a help to the cable network at the local market; true, the content may be applied at markets outside the broadcaster’s reach, but the content must ‘travel well’.

In addition to these ‘internal’ issues, there is little doubt that the European and many other governments will start imposing local production quotas, in order to ‘preserve national identity’. Brazil, which seems to be now at the reverse process of scrapping its Ancine local production structure, has led this process in Latin America; Mexico and Argentina may eventually issue ‘protection’ rules which might interfere in the normal business development plans blueprinted by the largest players.

Last but not least, there is a “choice” issue. The current approach seems to believe that customers will somehow find access to all the product, and eventually subscribe to those services that appeal the best to their profile. The rub is that there is no analytical way to compare different streaming services; this usually results in a high churn rate, when the final user, with a fixed budget, gives up a certain service in order to allocate money to subscribe to another one that, at that moment, looks more appealing. The TV Everywhere experience has shown that end users are bad at switching providers, even if the service is free.

Integrators are an usual proposal when it comes to discussing these issues. The question is: What’s the sense of installing a middle entity when you are on your way to reach directly the client? Integrators would become what cable operators are now: a device for the end user to reach the desired content. And, integrators would probably select the best part of the inventory made available by the producers, avoiding the “too much choice” confusion that users are prone to suffer.

Streaming services are on their way to become the leading content providers, yes. But the trip to that desired universe where you can access anything that comes to your mind is far from being bump-free.