Note: This paper was written in 2019 as a class assignment. I plan on writing a response to this paper to see what changes have occurred since this paper was written.
Abstract
Living in the information age, people all across the world expect information to be at the touch of a button, our demand for media is no different. The market for streaming services is engaged in a war for subscribers, where the best content wins. With Netflix currently monopolizing the market, how will they complete in the future with increasing competition and rising costs. This paper takes a look into the video streaming market and analyzes Netflix’s current monopoly, and the future of the market as Disney and Comcast bring deep pockets and fresh new popular content.
In January of 2007 Netflix announced that it would launch its new video streaming service. This announcement comes four months after Amazon’s similar announcement, and a year before Hulu’s announcement. Since that announcement, Netflix has seemingly been unopposed in its seizing of market power and growth. Many streaming companies have gone out of business over the years since Netflix’s announcement, and many more have announced their own streaming services, increasing the competition in the video streaming market. Even with new entrants and increased competition, Netflix started separating itself from companies such as Hulu, YouTube, and Amazon through market and price control (Fitzgerald, Kendall 2018). “Netflix, the platform inspiring fear and mega deal-making among legacy media companies, is the dominant player…But deep-pocketed new rivals, some armed with unmissable content, are coming for it” (Winkler 2019). The current market has Netflix holding fast to the #1 spot, but the future is anyone’s game. Will Netflix be able to hold on with new and stronger competition? Or will some new company with greater content and pricing be able to regain market control once controlled by Netflix? This paper seeks to evaluate the current market structure and through economic analysis, predict what the future holds for the main players in the video streaming market.
Attempting to determine the market type that Netflix, Hulu, and Amazon amongst others are in requires a careful examination of many variables, such as; product differentiation, competition, number of firms, and barriers to entry. Quickly analyzing Graph 3, it shows that are six major firms in the market, with most of the competition happening in the bottom five, leaving Netflix at the top, unopposed. Limited competition between very few producers, slight product differentiation (original content, and bought content), and medium to high barriers to entry are main characteristics in this market. Thus, the best market type for video streaming services is an oligopoly. The average oligopoly has evenly spread out market power as to limit influence on the others, and that’s where this market becomes unique. Unlike other oligopolistic markets, Netflix has an almost monopolistic control over the other major players. With 55 million domestic subscribers, Netflix has more consumers than Hulu and Amazon combined. Apart from that, “movie executives think that Netflix’s deep pockets and willingness to spend big on original series may be the early sign of a monopoly” (Elder 2016), as well as “the TV industry is now alluding to Netflix as a potential monopolist” (Elder). Netflix currently operates on a different supply and demand curve than the rest of the competitors and is clearly operating at a higher revenue level and no duopoly exists. A duopoly would exist if there was a firm capable of producing the capital necessary to match that of Netflix. “This means that Netflix operates under a natural monopoly where a barrier of entry exists” (Cho 2012). This oligopoly is unique in that there is a natural monopoly within its market that has its own separate barriers of entry to catch up to Netflix’s level.
It is hard to classify Netflix, as it can either be a monopoly or oligopoly. In either instance, entry into the market is difficult as only a few firms have the economies of scale to compete with Netflix. Even the firms who have the economies of scale have difficulty producing, marketing, and securing content for themselves. In other words, the market is very limited in size and scope so that only a few firms have both the economies of scale and can render services at a profit along the demand schedule Netflix falls under (Cho).
Netflix has been in the game too long and has gotten too big for other firms expanded their services slowly to catch up quickly and effectively. A major barrier to entry that exists is content. In order to obtain consumers, one needs to have something for them to watch. Acquiring popular content is a costly endeavor that requires large amounts of capital and a reasonable amount of market power to force the competitors’ hand. Without highly demanded content, one’s product won’t be desirable to the masses and others will flock to a competition company to get the content that is desired.
Graph 3 provides insight into the video streaming market, and the six major players that have a major stake in the market. Going in order of least amount of market power to greatest, the six major companies analyzed are; HBOGo, SlingTV, Hulu, Amazon, YouTube, and Netflix. The graph explains that Netflix is in 73 percent of houses in America, compared to Hulu at around 18
percent.
Table 2 further helps explain the number of subscribers that Netflix has compared to Amazon and Hulu.
Subscribers provide these companies with revenue, which helps further their ability to control the market content and produce content that consumers want. Since 2010, Netflix has had a steady increase in subscribers and today has more subscribers than Hulu and Amazon
combined (domestic subscribers). As Netflix dominates both the market power and battle for subscribers, many new competitors are planning on entering the market to increase competition and even the playing field. Comcast, Disney, and Warner Media are all bidding to enter the market as larger competitors to put pricing pressure on Netflix and the other competitors.
The threat of new competition doesn’t have everyone convinced that Netflix’s “leadership position is going to last as more and more competitors move into the streaming space, especially in the United States” (Ingram 2017). If this future competition is to give Netflix a run for their money, who has the best chance? In the current market, no one can produce the amount of content, have deep enough pockets, or have the same economies of scale as Netflix, so how will new competition change that? “Disney is the best-positioned to challenge Netflix. Its content, from “Frozen” to “Avengers” and “Star Wars,” is must-have viewing for many households around the globe” (Winkler 2019). Netflix has recently struck up a deal with Disney to get exclusive rights to
stream all of their new content, and with Disney entering the market with their own streaming service, Netflix will either be forced to pay more for these rights, or abandon them and replace them with other popular or original content. “Disney has already indicated that its movies and TV shows in the future will be reserved for its own streaming effort” (Flint 2019). Going forward, the competitions best strategy is to drive Netflix’s production costs up, forcing their revenues to drop and forcing the popular content people demand away from Netflix, towards the other smaller competitors. Netflix hopes to offset these higher production costs, and other variable costs required
to feed their original content spending spree by raising rates. In Table 1, a breakdown of all the major players and their plan prices is presented, and Netflix clearly isn’t the cheapest option, so how can they afford to raise prices time after time?
Due to their substantial market share, the amount of pricing power they have has allowed them to get away with this price increase (Winkler2 2019). Glancing at Graph 1 and Graph 2 one can conclude that even after multiple price increases, Netflix hasn’t seen a slowdown in new subscribers.
Hulu recently lowered their plan prices in hopes to attract more subscribers to increase revenue to more strongly compete with Netflix and Amazon, and has seen some record results from this move (Mullin 2019). Netflix will soon reach a point where the plans they offer get to expensive. “Consumers will shell out only so much to be entertained. What better way to create price competition than launching a free streaming service?”
(Winkler 2019). Graph 5 illustrates this point by showing that as price increases, total revenue (TR) increases until a certain point where consumers are no longer willing to pay for your service.
At this TR maximizing point, TR starts begins decrease. This is because “higher Netflix prices could have frugal customers rethinking how much they spend on rival services” (Flint 2019). Netflix is not the sole provider of popular content, and should not take this new competition lightly as substitutes exist within its own market
A major barrier to entry in the video streaming market, as discussed earlier, is content. A company needs to supply a product that is demanded by consumers. “For Netflix, the best strategy to withstand the challengers is to double-down on original, exclusive programming – as it has been doing” (Winkler 2019). This is shown graphically in Graph 7, indicating that since 2012, Netflix has increased its original content by 3,000 percent.
Original content is the true point of differentiation between the many firms competing for subscribers and increased revenues. “So far, Netflix’s strategy of betting big on programming appears to be paying off” (Flint). Hulu is also seeking to strike gold with original content by increasing its price on its TV plan and lowering the price on its cheap plan, hoping to attract more consumers, thus increasing revenue. This will help Hulu “compete with competitors like Netflix Inc. and Amazon.com Inc. that are spending billions on programming” (Mullin). Netflix currently has a $6 billion content budget, compared to Amazon’s $2 billion, and Hulu’s $2.5 billion. “It is clear that Netflix is spending significantly more
than Hulu and Amazon Prime” (Stewart 2019) and that is shown in the current market place with Netflix leading the market with twice as many subscribers, and deeper pockets than the rest. With Netflix’s deep pockets, it has allowed them to supply the content they want based on the demand
they are seeing, but the increased competition, and the inevitable loss of all Disney content, puts Netflix and the market in an interesting spot. A spot with higher competition and Netflix’s profit margins are expected to take a hit as their costs for new popular content increase. Netflix currently spends $100 million more than Hulu and Amazon (in 2015) combined to acquire new popular
content, showing strong monopolistic power, in an oligopolistic market (as seen in Graph 6).
Netflix finds itself in a pretty comfortable spot right now, with little competition knocking at their doors, allowing them to producing more OGC than any single cable network, operate at low costs (thanks to economies of scale), and provide the content that consumers demand at whatever price they determine. The future isn’t clear, but with future competitors such as Disney threatening a market entrance, the market is seeing new players emerging, putting market pressure on its biggest contender, Netflix. The name of the game is content, and whoever produces the best OGC, wins. Its hard to see Netflix losing its number one spot in the near future, but its monopolistic power over the other firms is likely to dwindle as future competitors enter the market, stealing back content and closing the wide gap Netflix has set for itself.
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