Streaming internet video services have changed the way billions of people consume entertainment content. It wasn’t too long ago that televised shows were broadcast at a specific time each week during which viewers would tune in to watch.
Next came red Netflix (NFLX - Free Report) envelopes which would arrive in the mail containing movies on DVD.
Then, right before our eyes, Netflix transformed from that simple mail-order business to one of the biggest studios, creating its own original content as well as purchasing the rights to iconic movies and television shows for eye-popping sums.
It’s been more than 21 years since the series finale of the breakthrough NBC sitcom Seinfeld aired it’s highly anticipated finale episode in May of 1998, but Netflix just paid somewhere near $500 million (the exact terms have not been disclosed) to acquire Seinfeld streaming rights beginning in 2021. The Hulu streaming service – which is majority owned by the Walt Disney Company - will continue to own the rights to Seinfeld until then.
Netflix previously paid $100 million dollars for the rights to broadcast the 1990’s other most popular sitcom, “Friends” for a single year, but lost that show – as well as “The Office” - earlier this year.
HBO Max recently wrapped up the rights to “The Big Bang Theory.”
How is it even possible for streaming services to spend such vast sums of money for the rights to content that was produced so long ago?
The answer is competition. With Amazon (AMZN - Free Report) Prime, Hulu, HBO, Showtime and new streaming offerings from Disney (DIS - Free Report) and Apple (AAPL - Free Report) coming soon, the race to acquire the content that viewers will keep paying between $5 and $15 a month to consume is heating up.
In 2018, Netflix spent a staggering $12 billion on content, and predicts that that will grow to $15B in 2019. The company is expected to have revenues of just over $20B in 2019 – meaning that roughly three quarters of gross sales goes toward the production and purchase of content.
Original shows are the holy grail for streaming services, hooking customers on binge-watching storylines that can’t be found anywhere else, but old classics like Seinfeld also keep viewers coming back for their favorites from the past.
Walt Disney’s new planned offering – Disney Plus, which is set to debut this Fall - puts the heat on Netflix as it is expected to include every movie, television show and cartoon the Disney company has ever produced – a truly formidable catalog. Disney’s acquisition of Fox means popular offerings like “The Simpsons” and the X-Men series will also be available in a top-tier $12.99 monthly package that also includes Hulu and ESPN.
Disney’s entry into the market is a potentially troubling development for Netflix. The best-level Netflix service costs $16/month and doesn’t include nearly the variety of content that Disney already owns. The most recent $3/monthly price increase is the biggest price hike ever at Netflix, but was necessary to continue the huge spend on content that keeps customers coming back.
Netflix is still the clear leader in the streaming wars, but the increasing cost of content threatens gross margins across the industry. Though the company is still growing revenues at a 25% annual rate, there is some natural limit to how many customers they can attract and how much they can charge.
The entry of sophisticated and deep-pocketed competitors like Disney is good news for customers who now have more entertainment options available to them than ever before, but it could well be bad news for the bottom line at Netflix – the industry’s biggest innovator so far.
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