Figures recently released by Roy Morgan Research estimates that in just three months to June, Netflix (NASDAQ.NFLX) was accessible in 559,000 or 6.1% of all Australian households.
The company hopes its service will be in a third of all Australian households within 5-7 years. However, such a forecast might be a tad pessimistic. If the service was to somehow maintain the current rate of growth (granted a big if), it would hit 33% of households in less than a year. Even at seven years it still would have reached that mark faster than Foxtel, owned by News Corp (ASX:NWS) and Telstra (ASX:TLS).
Whether it is one, five or seven years, there is little doubt that Netflix is going to be a major player in household entertainment and free-to-air networks should be worried.
Television networks attempt to draw the eyeballs of people between ages 16-54, because these are the key demographics that advertisers traditionally target. They also happen to be the people most likely to use online streaming services such as Netflix and are not afraid to pay for content.
Channels Seven (owned by Seven West Media (ASX: SWM)), Nine (Nine Entertainment Co (ASX: NEC)) and Ten (Ten Network Holdings (ASX: TEN)) have all launched their own streaming service but with little success so far. Considering Netflix has been at this game for a long time, the networks have a long way to go to catch up and Netflix offers arguably the best all-round product. There is also talk that Netflix will soon negotiate global rights deals with studios meaning they could cut the grass from the other provider’s content in the near future.
Whilst Netflix does not (as yet) play any advertising in their content, advertisers are expected to follow the crowd in the transition to online.
A recent PWC report on the media industry forecast that by 2019, over half of Australia’s total advertising spend will be directed to online content provider’s. Free-to-air television is forecast to suffer the most, dropping to 28% from 30%. If this transpires, it would mean flat revenues at best over the next four years for the FTA networks.
There is a structural shift in how people watch entertainment content and unfortunately for the major free-to-air networks it is all going against them. If, as we previously discussed, Netflix and other online streaming services manage to take away some of the amount of live sporting content free-to-air networks can show then the last strong foundation they had will have cracked.
The sharemarket appears to share this gloomy prognosis, with the three listed free-to-air networks all underperforming over the past year.
Disclosure: Staff members own shares in News Corp and Ten Network Holdings.
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