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Netflix is a studio that needs reach, so the archetypal unbundler is re-bundling

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At Connected TV World Summit this week, Netflix was described as “the first major studio of the 21st century” by Ben Keen, an analyst and advisor for the technology, media and telecoms sector, and later in the conference Tom Morrod, VP Technology for Media & Telecoms at IHS Markit, added his weight to the view that Netflix should now be viewed as a studio rather than a platform. Morrod pointed out: “Netflix created the technology [OTT/BYOD] to gain reach and audiences in order to build its business case, much like the BBC built masts and towers in the 1950s [for terrestrial analogue broadcasting]. Now Netflix has shifted its business to become a content creator. As a studio, their interest is to have the widest reach possible, so they now have a bundling strategy. Working with lots of Pay TV operators, or anyone else that can give them reach, makes sense.”

Morrod showed a slide with all the Netflix onboarding deals to date, a long list that began in 2013 with Waoo, Com Hem and Virgin Media and includes 2017 additions like Altice, Telenor, Cox, and Verizon. Other major names include Proximus, Bouygues and BT (2014), Telecom Italia, Vodafone Spain, KPN and Bell (2015) and SingTel, PCCW, StarHub and Comcast in 2016. Global deals with Liberty Global, Deutsche Telekom and Orange have been signed along the way. And of course, Sky just announced a forthcoming Netflix partnership.

Morrod looked under the bonnet of the Netflix and Amazon video strategies – which on the surface may look quite similar, with both investing heavily in original content – to highlight their very different objectives. For Amazon it is all about driving the retail business, whereas for Netflix it is a pure content play that puts them firmly in the same camp as companies like Discovery and Fox. But Morrod also drew a more fundamental comparison as he grouped all the major traditional media, born-online media and technology groups into two broad categories: those who seek huge reach with relatively low ARPU and those who have relatively low reach (by today’s global standards) but with high ARPU.

He presented the London audience with a graph plotting the reach and ARPU (based on equivalent per subscriber, per device, per active user, per account figures) of various companies. This showed U.S. satellite (as a category) with the highest ARPU, followed by AT&T, then Amazon, Global Pay TV (averaged, as a sector) and Apple. The reach curve went largely in the opposite direction, with Apple achieving the highest reach for its device/service ecosystem, but based on lower revenues per person. All these companies were characterised as ‘Technology and Bundles’.

After Apple the ARPU line continues to decline, with Netflix, Disney, Discovery, Fox, YouTube and Facebook following in that order. For these companies, there is also a reach line that goes in the opposite direction, so that Disney, Discovery, Fox, YouTube and Facebook have steadily rising reach figures, in that order (with Facebook having the best). These companies are characterised as ‘Content and Advertising’. Morrod wanted to make the point that although all these firms are in the content business in some form, they can be differentiated by their general business model and the need for reach. And the key takeaway is that Amazon is in one camp and Netflix in another, with the latter facing the same challenge as classic content groups like Disney and Fox, namely building reach in order to make a living from relatively low per-user revenues.

Morrod noted that while some content owners are trying to unbundle themselves from Pay TV platforms (to some extent) using direct-to-consumer offers, Netflix is going the opposite direction with its Pay TV onboarding deals. “Some companies are talking about disregarding their partners of the past but Netflix, the archetypal unbundler, has become bundled.”

The IHS Markit analyst listed the companies who now invest the most money in content, a collection that starts with Disney and NBC and is followed by Fox, AT&T, Netflix, Sky, CBS, Amazon, NHK and Turner. But their motivations for spending are different. “Netflix is a content company and is coming into this with a relative pureness, doing similar things to people like Disney and Fox. They create a content offering and want to get to as many people as possible.

“Amazon, arguably, is not doing that. Most people sign up for Amazon Prime Video and most of them spend three times more than the general population [on all goods/services] so it is not a video strategy but a shipping strategy. Video is incidental for Amazon; it is not the main thing they are doing. For Apple, the strategy is to keep you in the Apple ecosystem, so you buy the next iPhone. Facebook wants you to stay on the site to watch more advertising. Not all these companies have the same motivations.”

Morrod admitted that even analyst firms like his do not know where the different business models will lead us, but pointed out that while the Internet provided the technology to allow unbundling, it also allows re-bundling. The fundamental economic decisions facing content owners have not changed in the Internet era, either – they still have to decide on the right balance of reach and ARPU.

Ben Keen later explained his description of Netflix as the first major studio of the 21st century. He says the SVOD giant releases as much – and probably more – original content than any of the major Hollywood studios (about 1,000 hours, or 400 titles, last year, he estimates). But because this shift to ‘originals’ has only happened in the last 2-3 years, Netflix had the opportunity to rethink the entire production and distribution process, from glass to glass (camera to TV screen), he explains.

“I call it the first major studio of the 21st century because it is the first to build a shared cloud-based ‘tech stack’ from the set all the way through to the end-product that is streamed to the subscribers,” he confirms.

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