Getting on to the video-on-demand wave?
A decade back, global cable-TV giants would never have imagined that online content streaming would become so popular to an extent it would threaten the very existence of these billion-dollar cable-TV giants. However, this is exactly what is happening today. The growth of over-the-top content streaming, or OTT as it’s referred to often, is threatening the continued profitability of many cable-TV giants, and the OTT content streaming is gaining traction in various forms. The media industry is going through radical changes at present, and companies are willing to invest multi-billion dollars to shape the media industry. As investors, it is of utmost importance that we always stay on top of our game, and there is no better place to invest our money than where significant growth potentials persist. However, many investors wonder whether the growth of video-on-demand market, or commonly the OTT market, is a thing of the past. In this article, we will dig into the OTT industry to assess whether investors should ride the tide or not.
How far has the industry come?
In 2012, the OTT industry was in its infant stage. Not many investors would have imagined that the industry would turn out to be a billion-dollar industry within a very short time period.
Number of OTT video subscribers worldwide (in millions)
(Source – Statista)
Many tailwinds have driven the industry forward, but a few factors stand out as the key drivers of the exponential growth of this industry. One of the primary drivers of the industry is the touch of personalization provided by OTT streaming providers such as Netflix. For example, Netflix recommends movies and TV shows by analyzing the historical usage of the platform of a user, and this touch of personalization has attracted millions of customers as sifting through cable-TV channels only to realize there is nothing that fits the taste-buds of a customer has long been one of the biggest disadvantages of using a cable-TV subscription service.
Other factors that have contributed to the growth of the OTT industry include;
- OTT services are cheaper than traditional cable-TV packages.
- OTT subscription services do not generally have a contract period, and consumers can enjoy multiple subscriptions at the same time and cancel any one of those subscriptions at their discretion, without incurring any penalties.
- Rapid development in information technology, and the increased number of people with access to internet on a global basis.
As per a recently released report by Sandvine, video streaming accounts for over 50% of total internet traffic on a global basis, which provides an insight into the unfathomable growth of video streaming. Many investors would be surprised to know that Netflix is the leading contributor to video streaming traffic in the Americas and ranked 3rd in the Asia Pacific region.
(Source – Sandvine)
The industry has indeed come a long way, but an investor who missed the opportunity to invest in this industry early should rather assess whether there’s more room for the industry to grow.
Where will the industry go from here?
Netflix is still the undisputed leader of the industry, but many companies are lining up to make sure their presence in the industry is felt. While an increased level of competition might not be good news for Netflix investors, it sure is good news for end users and the industry.
Amazon Prime Video is the closest peer Netflix has at present, but they have not posed a meaningful threat to Netflix’s growth in the past. However, billion-dollar companies with access to user data of billions of people are lining up to enter the OTT industry. For example, Apple and Disney have already announced the launch of their very own content streaming platforms that would be available for users from this Summer. Facebook on the other hand launched the Facebook Watch platform, which has the potential to attract a significant number of viewers from developing regions as the Watch platform is not a subscription-based platform. Rather, Facebook monetizes the Watch platform by running advertisements.
Key developments to watch out for in 2019
|Facebook Watch is in its infant stage but has already gained traction. The massive active monthly user base of around 2 billion will surely help Facebook build on the viewer base. Facebook has already purchased rights to broadcast few major sports leagues and is expected to expand its horizons by acquiring more broadcasting rights for sports events. The massive, multi-billion dollar cash balance, is one of its many advantages, which would naturally be useful in acquiring or creating original content.|
|Apple||Apple is already spending billions of dollars on purchasing and creating content, and the platform will be launched in this Summer. With billions of devices sold worldwide and a second to none brand value, coupled with billions of dollars in cash, Apple is poised to make a major break-through in the streaming industry. The readily available user-base to market its platform provides Apple with an edge to gain traction in the streaming industry at a faster clip than most of its potential rivals.|
|Amazon||Amazon Prime Video is the closest competitor of Netflix at the moment and is closely tied to the Amazon Prime membership, which will drive the popularity of the streaming platform in the future. Amazon Prime Video has already established a user base in India which would be a major catalyst in competing with its rival, Netflix. Though Amazon could not be of a meaningful challenge to Netflix in the U.S., the situation will surely be different outside the U.S. As Netflix’s future growth story lies outside the U.S., Amazon is poised to become a major threat as the company will most likely price their offering at a very attractive rate than Netflix, backed by its billion dollar business and its intention to market Prime Video as a complementary service to Amazon Prime members.|
|Disney||Disney is all set to launch Disney+ in the latter half of this year which will house original content from Disney, Pixar, Marvel, and Star Wars. Disney has already made their intentions clear on creating original content surrounding their iconic characters, which will pose a major threat to existing industry players. In addition, Disney might cease selling their movies to Netflix, which would certainly become an obstacle for Netflix to remain the industry leader.|
|YouTube||YouTube TV is still in the very early stages, but the subscriber base has been growing throughout 2018. Even though YouTube is making losses in this front, it is currently working on bringing in more TV channels to its platform. In addition, YouTube TV will certainly focus on creating original content, and it has the luxury of pushing the service in front of billions of users and possibly adapt an advertisement based model which will help gain traction in a competitive market.|
|Cable-TV providers||Cable-TV providers have been hit hard by the rise of Netflix and the OTT video streaming industry. Most cable-TV providers are now focusing on negating the threat posed by Netflix by introducing their very own OTT video streaming platforms. While these efforts have not been able to present a major threat to Netflix so far, I believe this will change in the future as these companies understand the industry dynamics on a broader level. Their existing user base will help a smooth transition from a cable only model to a blended model with an OTT video streaming platform, which would be a catalyst for growth in the future.|
The future of the industry is original content creation, and all the companies operating in this industry have already identified this. Billions of dollars will be spent on creating original content that has the potential to gain and retain viewers from various parts of the world, and leading players in the industry will especially focus on creating original content in local languages in regions such as India and Brazil to penetrate these markets better.
Along with the billion-dollar expenditure that would be incurred by video steaming service providers to gain traction in regions outside the U.S., we expect the OTT video streaming industry to grow at a stellar rate for many years to come.
Internet penetration in Asia is higher than ever at present, and further penetration will open doors for many companies to market their products and services to a wider user base, which should help these video streaming companies add millions of more subscribers within the span of a few years.
The industry is certainly poised to grow, but this doesn’t mean that all the companies operating in this industry will benefit from this expected growth of the industry.
Should you ride the tide and invest in video streaming companies?
We believe that investors need to take a cautious approach when investing in this lucrative industry. Even though growth prospects of the industry are significant, the level of competition is increasing, which would act as a barrier for some companies to earn economic profits for a prolonged period of time. A decade ago, any investor could have blindly invested in Netflix and realized a gain of a lifetime, but this is not the case anymore. Careful attention should be paid to understand the dynamics driving each of these video streaming companies to identity growth opportunities, risks, and the financial health of all these companies before making an investment decision. As an industry matures, exponential growth will cease to exist. The video streaming industry will mature within the next decade, which should prompt investors to invest in industry leading companies that are expected to build competitive advantages around their products and services offering.
In conclusion, the video streaming industry is poised to grow at a stellar rate, but investors need to choose their options carefully.