This is a guest post by Richard Armstrong who is an early stage investor in many startups in both SE Asia and globally. Plus Richard has cofounded several companies.
Guest Author: Richard Armstrong
Do you watch Netflix? Or maybe you have a VPN and watch Prime Video or HBOMax?
I have a friend who regularly rotates between 4-5 of them. He basically subscribes for a couple of months to HBOMax and watches all his favorite shows, then he unsubscribes and subscribes to the next one, eg. PrimeVideo.
Then he circles back the following year to catch the next season of his favorite shows on Netflix again.
This is not uncommon. Why?
Because the quality of the content on many of these streaming providers has gotten quite good. Everyone has at least a few hit series.
And today i’ll dive into some of my thoughts about this industry and how it will shape up in the coming years.
The war begins
The rapid growth of the streaming industry in the late 2010s, in particular Netflix, led to what is now known as the “streaming wars,” with numerous companies entering the market.
Initially seen as a promising and highly profitable sector, it has since revealed significant flaws in its business model.
Phase 1: Subscriber Growth at All Costs
Early on, streaming services focused on rapid subscriber growth, often at the expense of profitability.
The competition led to an oversaturation of the market, with multiple platforms vying for the same audience.
This intense competition forced companies to continually invest in new content to attract and retain subscribers.
However, the expected growth in subscriber numbers did not materialize as anticipated. For instance, Netflix experienced stagnation and even slight negative growth in 2022, while Disney+ saw a significant drop in subscribers in 2023.
Phase 2: Shift to Profitability
As subscriber growth plateaued, streaming services began focusing on profitability.
This shift included measures such as cracking down on password sharing, introducing ad-supported subscription tiers, and bundling services.
Despite these efforts, the challenge of sustaining profitability remains. The original value proposition of streaming services—high-quality, ad-free content at a low cost—has eroded.
Consumers now face higher prices and the need to subscribe to multiple platforms to access desired content, diminishing the initial appeal of streaming services.
Key Challenges and Issues
High Content Costs:
The need to continuously produce high-quality content to stay competitive has led to skyrocketing production costs. Companies like Disney and Netflix spend billions annually on content, straining their financials.
Subscriber Churn:
As the market becomes saturated, retaining subscribers has become increasingly difficult. Many consumers subscribe temporarily to watch specific shows and then cancel, leading to high churn rates.
Bundling and M&A:
To counteract these challenges, companies have turned to mergers and acquisitions, as well as bundling services. While this can increase content libraries and subscriber retention, it also introduces complexity and integration issues.
Ad-Supported Models:
Introducing ad-supported tiers has helped attract price-sensitive customers, but it also shifts the business model closer to traditional TV, potentially alienating consumers who sought ad-free experiences.
Wrapping up
In my view the streaming wars have highlighted the unsustainable nature of the current business model in the streaming industry.
While the sector continues to grow, the fierce competition and high costs associated with producing exclusive content make it difficult for companies to achieve long-term profitability.
And as the industry evolves, I think we’re going to continue to see more consolidation and players focusing on specific niches.
However I also think it’s going to be very interesting how AI begins to change the game. Because with AI it is possible to create great content with much lower budgets.
And so perhaps there will be a streaming race that will be a race to the bottom?
Or perhaps will one player grab all the market share and create a sustainable, massively profitable business?
Well in any case, grab your popcorn and let’s watch how this plays out.
