The revenue being earned per hour, per viewer for content shown on Netflix is falling, creating a growing deficit when compared to the revenues earned from a viewer-hour of broadcast television. The research firm Ampere Analysis revealed figures last week showing that in 2012 broadcast TV raised approximately 17.5 cents per hour of viewing (per viewer) and Netflix earned 15 cents. By 2015 the broadcast value had risen to 20 cents but Netflix was down to approximately 12.5 cents. The broadcast figures are based on advertising income and do not include any Pay TV subscription.
“The value of one hour has fallen as consumers watch more and more content on Netflix and prices have not kept up,” Richard Broughton, Partner at Ampere Analysis, explains. He believes prices in the SVOD market as a whole will need to rise, although this is unlikely to mean existing subscription fees are ramped up. It is more likely that additional subscription bundles will be created, and new thematic SVOD services will launch as the market diversifies.
The inference is that these developments will lead to a better revenue-per-hour-per-viewer ratio for the SVOD market as a whole. That suggests the way content is bundled, eventually, will have to give viewers slightly less for their money.
There are fears that the relatively low cost of SVOD could create a new equilibrium in television, which could be bad for producers in the longer-term. Broughton said there is no immediate problem caused by SVOD pricing but there is a danger that the industry sets new expectations for good content that is both cheap and free of advertising.
He warned how perceived value can be eroded by low prices. “DVDs used to be given away in newspapers and that changed expectations in the DVD market.”
The Ampere Analysis figures for Netflix and broadcast earnings relate to Europe and North America and the broadcast figures refer to median revenue per hour (per viewer) cross-market. “What we are starting to see is that the amount of money they [Netflix] are generating per consumer, per hour of viewed content is lower than their competitors who have been in the market for a while,” Broughton says.
At a briefing session last week, Ampere Analysis also revealed the growth in what it calls cord-stacking, which is where homes take SVOD subscriptions in addition to Pay TV. In Q1 2016, 43% of homes took Pay TV only, 26% took Pay TV with SVOD and 7% were SVOD-only (this final figure includes homes with SVOD that have free TV, whether terrestrial or satellite). In Q1 this year the figures were: Pay TV only, 30%; Pay TV with SVOD, 39%; SVOD only, 13%. These figures are based on a 53,000 respondent survey covering North America and Europe, conducted by Ampere Consumer.
One of the reasons people are taking multiple SVOD subscriptions (and Pay TV) is their quest to see all the best content, which is spread between the providers. Ampere Analysis has highlighted the degree to which SVOD services are using exclusive content as a hook. Amazon has 27,000 exclusive titles (not found on another subscription OTT service), Netflix has 5,000, Hulu has 4,000, HBO has 1,000 and Starz has 1,000.
“If you can afford to do it, ‘doubling-up’ is essential to get a comprehensive content offer,” Broughton declares.
Talking about SVOD-only and OTT-only homes, Broughton says income and affordability are more important factors in their choice of service providers than a response to ‘modern’ viewing habits. Ampere Analysis figures show that OTT-only homes are 48% more likely to have an income of less than $15,000 (compared to the average home). These households could include students, so the statistic does not necessarily equate to a permanent lack of economic power. OTT-only homes are 44% less likely to have a household income of more than $100,000 (compared with the average home).
Ampere Analysis points to a lack of competition in SVOD, with three players taking three-quarters of the market between them. In 2016, Netflix earned 52% of global revenue share for subscription OTT, with Amazon taking 16% and Hulu 9%. “Normally in a non-competitive market you see prices driven up but generally we see prices going down,” Broughton noted.
This is because the SVOD companies are fighting against entrenched competitors. These competitors [subscription channels on Pay TV, terrestrial broadcast channels, e.g.] are not in their direct market, in terms of how you count the revenue share, but are effectively providing a similar product.
The cord-stacking phenomenon (Pay TV with SVOD or multiple SVOD subscriptions) means consumers are spending more, overall, on television, at least for now. Ampere figures for Western Europe show that in 2010, revenue per capita for Pay TV and subscription OTT combined was $76 a year. In 2016 this had climbed to $95. For the U.S., the figures are $273 (for 2010) and $311 (2016).
In a further observation about the SVOD market, the analysis firm said there is a reasonably strong correlation between the proportion of local content in an SVOD catalogue and service uptake in a local market. The higher the proportion of local content, the better the uptake, in general terms.
“Localisation is something providers should consider very seriously. SVOD players have been talking lots about localisation but we would argue that it is not happening as much as they would like, with low single-digit [% of local content in catalogue] for most markets,” Broughton confirmed.
One further option for Netflix, in terms of growing its earnings per viewer-hour, is advertising. GroupM, the biggest media buyer in the world, is actively encouraging the service to introduce a hybrid business model, which would mean an advertising component somewhere. Like other buyers, they are concerned that eyeballs should not move out of the reach of brand marketers. We have spoken to many senior TV advertising buyers and there is a consensus that they would happily buy advertising on Netflix. At present there are no known plans for advertising on Netflix – but there is a market for this if they pursued that option.