Is Anyone Paying Attention?

Is content still king? My wife and I tend to perform the same ritual every night, where we take turns with the remote control to suggest shows that might entice both of us but can never agree on one. After an hour of fruitlessly scrolling through content from four streaming platforms, we end up going to bed, having sampled an average of three minutes from six shows.

When it comes to content, we have a tyranny of riches. The data must be clear to the streamers because Netflix has even added a button that appears after the user has scrolled too much, with the helpful prompt ‘Can’t decide what to watch? Play something.’ If you think this is bad for consumers, I can assure you it is much worse for investors. There are very few times in corporate history where offering more product options has performed better financially, in contrast to careful market curation. This is especially true when the company is directly making and acquiring the products. User-generated content platforms like YouTube don’t have this problem.

Streaming — the Numbers

It’s rare for a large market-leading firm like Netflix to suffer such a large hit to its valuation. Since its peak in late 2021 at a valuation of $US314 billion, Netflix has lost US$230 billion, which is 73 per cent of its market cap. It’s another indication that we are moving from a future expectations economy to today’s reality economy. While Netflix’s revenue and profits are stable, the loss of 200,000 subscribers (excluding Russia) made the market re-think the entire sector. Quite frankly, it is long overdue for Netflix and other growth stocks in the tech and ‘stay at home’ sector.

However, the issue for Netflix is less about their performance and more about competition eroding their position. Below are two numbers on the total Video on Demand (VOD) streaming market for 2022 that tell an astonishing story:

Forecast content spend = $US230 billion

Forecast VOD revenue = $US83.4 billion

The sector is spending nearly $4 on content for every $1 they receive in revenue – and that’s before profit. No wonder no one can decide what to watch!

It seems as though an endless slew of competitors have entered the streaming market with a deep back catalogue, deep pockets or both. Of course, this erodes Netflix’s advantage. While Netflix is planning to invest a huge $US17 billion on original content in 2022, it’s hardly a leading position. In addition, much of its long-tail content has been removed in recent times as its former suppliers (like NBC, Paramount and Disney) have become direct competitors.

Apple TV is expected to spend $US7 billion a year on premium content with plans as low as $5 per month, plus a free three-month subscription to anyone who buys a new Apple device. This is literally a rounding error for Apple which currently boasts $US203 billion in the bank.

Amazon Prime will spend $US13 billion in 2022 on content to drive Prime memberships. Access to Amazon Prime streaming costs members around $US7 a month, as an added benefit to their fast and free shipping programme.

While Disney is the more ‘expensive’ option at $US12 a month, they are investing a massive $US33 billion in content to grow their bank of almost 100 years in deep content and nostalgia. Paramount Plus is also investing a large sum of $US15 billion in 2022. The competition and relative investment in the sector have been so extreme that CNN pulled the plug on its streaming service after just 30 days and a $US100 million investment.

Without even considering all of the VOD platforms, it does seem like the market has got this right and is asking hard questions about the true worth of certain stocks in this and other tech sectors. All of a sudden, Netflix looks expensive and replaceable.

It is funny how often the market fails to look at what is under the bonnet and into simple financials until stocks start heading south. It’s at these times business strategy implications across industries become more evident. This is especially when the tech darlings are maturing and have reached what looks like full market penetration potential of user bases.

The Free Prize Inside

What’s interesting is that for many players recently entering the streaming space, it’s a quasi-side hustle. It is the ‘free prize inside’ to grow and promote other parts of their business. What we’ll end up with is a classic case of a market being saturated and even sullied, reducing returns for investors across the entire sector. Eventually, it will impact consumers who are presented with a worse product and one that is again interrupted by advertising, as Netflix may need to evolve to create a more price-competitive offer.

Next-Gen Content

As far as entertainment goes, it is financially impossible to compete with platforms where the content is generated by users for free. YouTube, Meta platforms and TikTok have the advantage of literally billions of content producers working for nothing. Ironically, it’s the dream of many content producers that their work goes viral and they are eventually picked and paid to make something for a streaming platform. As investors, it’s easy to delineate these market segments and say they don’t compete directly, but in reality, they do. They are all competing for attention. Attention is something the market can never get more of, despite the corporate investment in chasing it.

From a marketing and technological perspective, it is clear that spending more on content is an unwinnable game. However, it does feel like there is a shift in how content is made and consumed. For any streaming platform to stand out from the crowd, greater creativity is key. Netflix has shown signs of this via its interactive Choose Your Own Adventure storytelling – like Bandersnatch – in which viewers make decisions on how the story unfolds. Another longer-term tech possibility is deep fakes that allow viewers themselves to literally appear in the shows via face swap technology. But the leading light in the future of content is clearly TikTok. TikTok has managed to launch several simple, yet insightful, innovations that allow content iterations and layering on original pieces - combining something original with crowd participation. Their first move was to grant users the ability to grab someone else’s audio, and more recently with duets. This one here is a classic duet song about Crypto Kids that went super viral last week. It’s brilliant.

Pay Attention

Every streaming platform and social forum is competing for attention in what seems like a massively over-invested market. Investors need to pay a different kind of attention. Just like this sector, it is time for us to again look deeply into differences in creative output, and into the finances of companies. We have now entered an uncertain market in many realms, where capital upside is the rarity – rather than the rule. It is times like this that boring fundamental analysis reigns supreme.