Everyone knows that feeling. It’s 2am and you’ve just watched the eighth or ninth episode of a show. Instead of going to bed, and against your better judgment, you keep watching.
Whether it’s Game of Thrones, Stranger Things or House of Cards, you’re streaming them over the Internet at home using video streaming websites like Netflix (NASDAQ: NFLX) and HBO – which is owned by Time Warner (NYSE: TWX). These services are now as routine as shopping online but almost a decade ago no one could have dreamed how much of a success they would become.
With 85% of all US households boasting at least one video streaming subscription and more than 50% owning a television that is Internet-enabled, it’s no wonder the US video streaming market was worth an estimated US$6.6 billion in 2016.
What makes video streaming so popular?
*WARNING: Game of Thrones spoilers ahead*
According to Collins Dictionary, the term “Binge-watch” was the most popular buzzword of 2015. And it’s thanks to streaming sites like Netflix. Before I knew it, I had watched six seasons of Game of Thrones in two weeks (Can I just say, Littlefinger’s twist of fate – WHAAAAAAT?).
Unlike, paid cable programming which follows a fixed schedule (remember in the early 2000s where we had to wait a whole week for the newest episode of Friends to come on the telly?), streaming sites allow us to stream almost any series at any time, anywhere – all we need is a working Internet connection and a compatible device.
In 2015, the average cable bill for American households came up to US$99 per month. The vast majority of these channels that are offered, viewers never watch.
In comparison, users only need to pay an average of US$8.99 and US$7.99 for a Netflix and Hulu subscription respectively. These offer on-demand viewing of content as well as suggestions of what viewers might like to watch in future based on their past viewing choices.
What drives costs?
1. Third Party Licensing
The video streaming company may license or rent the right to stream a movie from the rights owner. By doing so, the company acquires the right to stream the movie to its customers. These rights are usually held by production companies such as Lionsgate Media, MGM Studios or Walt Disney (NYSE: DIS).
With third party licensing, the firm can cut down on the upfront production cost (i.e. the costs to produce the movie), as these are borne by the production companies. However, licensing costs are recurring and may snowball as the firm builds its content library in the long run.
2. Proprietary Content Development
Okay, this may sound crazy. But, according to Variety, HBO is spending around US$15 million per episode in producing the final season of Game of Thrones while Netflix is paying around US$8 million per episode to produce the second season of Stranger Things.
These costs seem astonishing so why are HBO and Netflix producing their own content when they can choose to license content from third parties?
Well, producing successful content can help firms avoid recurring costs associated with the need to license third-party content. For example, HBO lucked out with Game of Thrones – the series won a total of 38 awards, becoming the most decorated series in the history of Emmys.
What drives revenue?
The main source of revenue for video streaming firms comes from subscribers who pay monthly subscription fees.
Rising demand of video streaming
In 2015, US revenue for video streaming services such as Netflix and Apple (NASDAQ: AAPL) TV grew by 29% to US$5.1 billion. In comparison, the market for cable and satellite TV expanded by only 3% during the same period.
With consumer preferences continuing to shift from cable TV to video streaming, we’re excited to watch the growth of this up-and-coming sector.