The video streaming service industry has blossomed since Netflix’s introduction of a subscription-based, over-the-top (OTT) service (one offered directly to viewer via the Internet) in 2007. The industry has rapidly developed since, growing from a small number of firms offering these services to over 50, continuing to flourish, with its newest entrants being Disney Plus and HBO Max, both based in the United States. The report will analyse the recent developments in the industry, focusing on a flood of M&A activity in the past 12 months.
ViacomCBS, an American media conglomerate originating as a result of a merger between Viacom and CBS, announced early last month the rebrand of its video streaming service. The new subscription-based OTT streaming service is called Paramount Plus, deriving from its own studio Paramount Pictures. The studio suffered a three-fold decrease in box office revenue in North America from 2 billion USD in 2011, the highest revenues to date, to 564 million USD in 2019. The merger is thus seen as an attempt by ViacomCBS to revive Paramount Pictures’ withering business by following the model of its competitors AT&T and Comcast, both US multimedia conglomerates which developed their own OTT streaming services HBO Max and Peacock respectively. Although the video streaming industry is fiercely competitive with huge companies such as Netflix, Disney’s Hulu and Amazon’s Prime Video benefiting from significant market caps, there are still a number of firms who believe there is space for new entrants.
Following the COVID-19 pandemic and resulting lockdown restrictions, millions of people were forced to stay at home, with the resulting increased spending on home entertainment being a knock-on effect. This has boosted the performance of recent entrants into the industry, including Disney Plus, an OTT streaming service provided by Disney launched in November 2019. The streaming service has seen a total of 95 million subscribers since its launch, roughly half of Netflix’s, exceeding Disney’s initial prediction of 90 million subscribers before 2024. The astonishing number of subscribers is estimated to bring The Walt Disney Company an annual revenue of nearly 3.7 billion USD. Despite the remarkable number of subscriptions, however, Disney was substantially financially impacted by COVID-19. It has been reported that Disney’s operating income (profit minus operating expenses) fell by 49% from 1.94 billion USD in the third quarter of 2020 to 1.3 billion USD in the fourth quarter. Although Disney Plus, together with Hulu and ESPN Plus, has caused the company more than 400 million USD in operating losses (profit minus operating expenses), the entertainment giant still decided to double its annual investment in producing original content to around 15 billion USD by 2024. However, evident from the 3% increase in the company’s share price after the announcement of the enormous increase in investment, the prospect of Disney Plus seems bright, at least to investors.
Paramount Plus, launched in the middle of the pandemic, provides evidence to investors that there are still market gaps to be exploited in the streaming industry. The decision to launch the service came after a successful year for CBS All Access, the predecessor of Paramount Plus. In the third-quarter report published by ViacomCBS, the predecessor saw a 33% increase in the number of subscribers from 13.5 million in 2019 to 17.9 million in 2020, compared to Netflix’s 23% increase. This indicates a promising outlook for the company’s streaming service. With Viacom’s famous studios like Nickelodeon, MTV and Paramount Pictures which has produced a wide range of classic films like Mission: Impossible and The Godfather, ViacomCBS’s forecast of 65 million subscribers purchasing a plan on Paramount Plus by 2024 seems reasonable. The platform would also include coverage of live news and sports, which Netflix does not provide. With the excitement surrounding this new streaming platform, the shares of ViacomCBS rose more than 20% in February. Thus, it seems unsurprising that the company has decided to increase its investment in streaming from 1 billion USD to 5 billion USD annually by 2024.
Fortunately for those involved in the industry, the pandemic has brought positive impacts in terms of demand, which has translated into increased revenues across the board. The new players in the OTT video streaming industry have presented more choices to consumers, which should benefit consumers as increased competition for subscribers drives companies to improve the quality of content on their platforms. However, the rising competition in the industry seems to have quite a few detrimental effects for subscribers as streaming service providers compete to buy the licences of several classic TV series and films, meaning individuals need an increased number of streaming services to watch their favourite shows from the past. Such is true when AT&T bought Friends for 425 million USD, resulting in Netflix losing the right to the well-known TV series. Such fierce competition is likely to continue in light of the emergence of new players, such as Apple TV Plus, HBO Max and Peacock. Time will tell whether the competition will lead to consumer-based innovation, or whether it will continue to reduce the number of shows available on each service as they become spread across a greater number of competitors.
By Sam Cheng
Sector Head: Daniel Regan