Leading TV networks HBO and CBS recently announced respective stand-alone streaming services in a move which will intensify the competitiveness of the online TV market. Consumers will now have access to whatever HBO and CBS content they want, whenever they want, without having to purchase a bundled cable package for the exclusive content – enter a la carte television.
HBO announced plans to make its online service available without a cable at a New York-based Time Warner investor presentation in mid-October, targeting the 10 million people in the U.S. with internet connections but no television subscriptions. “That is a large and growing opportunity that should no longer be left untapped,” HBO CEO Richard Plepler said in a press release. “It is time to remove all barriers to those who want HBO.”
Just a day later, CBS launched its own standalone streaming service. For $5.99 per month, viewers will have access to current and previous seasons of CBS shows, like the Big Bang Theory and NCIS, without any cable or satellite subscription.
Analysts suggest the switch to online by two established networks could create a snowball effect for others – already, premium channels like Showtime and satellite companies like DirecTV have discussed releasing web-delivered services.
“Everybody is talking about it,” said Leslie Moonves, CEO of the CBS Corporation in an interview with the New York Times. “It is an important part of our future. Our job is to do the best content we can and let people enjoy it in whatever way they want. The world is heading in that direction.”
Netflix rules streaming sector
Netflix is currently the world’s largest movie and TV streaming platform. The company’s success has paved the way for new market entrants, but for now the streaming giant rules the industry.
Netflix surpassed the 50 million subscriber mark globally in July, 2014, and reached 36 million in the U.S. alone. The number of Netflix’s subscribers is closing in on the 56 million cable users in the U.S. The platform has reached over 40 different countries, following September launches in European nations such as France and Germany. Though the company has recently noted a drop in subscriber growth (670,000 subscribers short of forecasts in July, 2014 according to the BBC), Netflix has experienced steady financial growth and reached the $1.3 billion revenue mark by the end of Q2 this year.
Netflix licenses exclusive content to boast a large, but still limited library. Now, the tech giant has forayed into the world of original content to compete with hit shows on networks like Starz and HBO, garnering 31 Emmys in the past year. Building upon successes like Orange is the New Black and House of Cards, the company has more potential home-runs in production, including a partnership with Marvel to create Marvel’s Daredevil.
Original Content – HBO vs. Netflix
Netflix and HBO now find themselves in direct competition. Will a consumer who can afford just one monthly subscription pay to watch HBO’s Game of Thrones or Netflix’s House of Cards? As the standard of content on these services increases, the companies will be competing over a user’s time as much as their money.
“It’s all about the content and what exclusive content there is,” says Dave Tice, Senior Vice President of Media at GfK. This could mean originality, innovation, and creativity galore, and not just from within the U.S. – the world’s third largest smartphone maker, Chinese firm Xiaomi, invested $1 billion last week into creating original video content to spur sales of its own line of smart TVs.
After raking in $112 million in profit in 2013, Netflix committed $3 billion in spending on TV and film content in 2014 and $6 billion more in the next three years, according to the Guardian. While it pledged to devote a large portion of that spending to original content, still less than 10% of the budget goes towards its own shows. According to CNBC, HBO adds about 200 hours of original content every year, prompting estimates that the established network has something like a $1 billion budget per year for original material.
Netflix has chosen a quality-over-quantity content strategy, using data on viewership and user patterns to track the type of shows that are most successful. This explains why Netflix original series’ like Hemlock Grove, a relatively unpopular show scorned by critics, are renewed for a second season – the data says it should be so.
“Over the years, we’ve successfully developed the art of estimating how much our members will watch a given show or movie based upon how it has performed to date in other, earlier channels and on how comparable titles have performed on Netflix. With Originals, we are now extending that concept to estimate the attractiveness of projects that are brought to us by professional producers,” said the company in an official report ‘Netflix Long-Term View.’
The key is not just quality of content, but sustainability, says Tice. “It’s a question of getting exclusive content and having it be a sustainable, compelling story year over year.” Tice puts HBO ahead of Netflix in that category, as the former network has forty years of history to prove it can keep viewers engaged over multiple seasons. The much younger Netflix still must prove it can achieve such longevity with its shows. While HBO releases a show one episode per week, Netflix releases entire seasons at once, which could lead to binge watching as users subscribe to the platform for a month, and then ditch the service.
While HBO’s profit still swamps its internet rival’s ($1.8 billion in operating profit compared to $228 million), the younger Netflix has established itself as a giant player in the television and movie watching market.
Last summer, Netflix CEO Reed Hastings said in an interview “we have to become more like HBO before they become like us.” Since then, both companies have taken strides to challenge the other, putting the television industry on the verge of an exclusive and original content war set to delight TV geeks everywhere.
The future for consumers and cable
In the past, consumers could only access exclusive network content by purchasing bundled cable packages. Online streaming rectifies this problem – fans can get access to their favorite shows like Game of Thrones and True Detective without paying for unwanted content on the side.
But despite the hype surrounding a la carte-TV, the newly accessible exclusive content will still come at a hefty price for consumers.“I think the consensus is that ultimately if television viewing goes into full a la carte mode, it’s going to cost people more than they are paying right now. They’ll get less choice, and they’ll probably pay more,” Tice says.
The content is available for online streaming, but the costs of subscribing to multiple platforms like Netflix and CBS and HBO, along with other web-delivered services that are bound to spring up, will quickly run up to equal or surpass those of a traditional pay-TV service. Thus, while there will likely be a fragmentation of consumers – some who view TV online, some who stay with cable, and others who subscribe to a mix of both – it’s very possible a scenario might arise in which bundled packages come back into favor.
“I have to believe that the majority of homes in the U.S. are still going to opt for a fairly robust pay-TV service subscription because people hate giving up choice,” says Tice. “People would probably just write one check to one company – it’s easier than trying to manage 20 different networks.”
The offering of online streaming services need not signal the end of cable companies; they could even benefit from the industry’s shift. Cable service providers can capitalize on their broadband business – consumers still need high-speed internet to stream their favorite shows online. According to a Leichtman Research Group report, there has been an ongoing shift from cable subscribers to broadband users in the United States. By the end of Q2 in 2014, the top cable providers in the country officially registered more broadband customers than cable customers.
Furthermore, consumers will still be attracted to cable for other exclusive content, such as live NFL football games. Both CBS and HBO claim that their internet initiatives will not infringe upon existing business.
“In the short-term, I don’t think there’s a huge amount of risk for [cable companies],” says Tice. “The people who subscribe to Netflix or Hulu Plus or who will subscribe to HBO a la carte…they’re households that are very interested in watching television, and they tend not to cut down on their choices. I don’t think it’s going to lead to a mass exodus from pay TV services.”
For the first time, there is a real alternative to accessing exclusive content previously monopolized by cable providers. It remains to be seen how the recent market changes will affect cable bundle pricing and consumer choices, but whichever way you spin it, it’s a victory for the cord-cutters.