(Welcome to my series on an “Intelligence Preparation of the “Streaming Wars” Battlefield”. Combining my experience as a former Army intelligence officer and streaming video strategy planner, I’m applying a military planning framework to the “streaming wars” to explain where entertainment is right now, and where I think it is going. Read the rest of the series through these links:
In war, what really matters on a map is the “key terrain”. The place on the map that if you control it, you have a much better chance at winning the upcoming battle or war. In Army lingo, terrain that control “affords a marked advantage”. Usually this is the high ground, but can be anything from a bridge to a national capitol, or airfield or even castle, in olden times.
So take a gander at our “map” of the video landscape from last week.
As a commander, where do we want to control? What gives us a “marked advantage”? Well, I highlighted it in yellow.
Last week, I “defined” the map and area of operations. Now we move onto the challenging tasking of describing that map. While I won’t use all of the Army’s frameworks, the concept of “key terrain” really does resonate with business. (Don’t worry, we’ll use other business analysis frameworks as well.)
Today, I’m going to highlight the key terrain the streaming wars will be fought over, and it’s not what most streaming observers and customers think it is. (If I had to guess, they’d call it subscribers.) I’ll start with the “BLUF”, then describe the situation in broad strokes, the reasons why digital bundlers are in a powerful position, the stark choice facing streamers, and finally the ramifications for all players in digital video.
Bottom Line, Up Front – Digital Streaming Bundlers Are Best Positioned to Capture Value
While streamers started as the aggregators—Netflix inspired cord cutting by offering it’s own bundle—in the next five to ten years, the new digital video bundlers (who I call DVBs) will be in the best position to capture value (meaning profit and cash flow) in the video landscape. This means the winners will be folks like Amazon, Apple or Roku, and not Netflix, Disney, Comcast or AT&T.
The Situation: Netflix breaks the user experience monopoly of cable TV
In the past—meaning just ten years ago—the landscape was relatively simple for TV: you turned on a cable or satellite box, and scrolled. Netflix changed that all. Using its installed base of DVD subscribers, it started offering streaming video to its customers. Thus, when you sat down at your TV, you could decide, “Netflix or cable?” Netflix provided a second user experience to watch TV. Some people—though less than usually hyped—cancelled cable just to use Netflix and were dubbed “cord cutters”.
Netflix was so successful, it inspired copycats from Amazon Prime to Apple TV+ to Disney+, who launched this week. Of course, the best place to watch TV isn’t from a computer screen, but from a living room TV. Devices were released to manage all these different streaming platforms, like smart TVs, Google Chromecast, Roku, Amazon Fire TV and Apple TV.
Which leads to my biggest theory of the landscape: customers will want to return to one operating system to manage all their television watching. Crucially, this may include bundling content. The cable companies didn’t just provide one user experience, they provided a bundle of cable channel at one fixed price. That bundle is dying.
But it’s returning. Instead of just channels, though, it will be a combination of virtual MVPDs (like Hulu Live TV, Youtube Live TV or AT&T TV), FASTs (like Pluto, STIRR, Xumi, and Tubo) and SVODs (like Netflix, Disney+, Hulu and Amazon Prime). The question is who mediates that experience. Someone will. And potentially to manage all their payments. And if you’re managing all the payments, you can bundle all the streamers/FASTs/vMVPDs into one monthly or annual price. A bundle.
The question is what do we call them? I’ve taken to the acronym DVB:
Digital Video Bundlers.
I’ve colored this in yellow on my map because of how important I think it is. If an Amazon or Apple can own the customer relationship, they’ll own all the data and be best positioned to capture value from suppliers or competitors. Before I get into the ramifications, let me explain why I think this will happen.
Reasons Why The Bundle Will Return
The return of the bundle doesn’t just seem likely, but almost inevitable.
First, a clear customer value proposition – One user interface for all content.
Both Amazon and Apple have touted a clear proposition to users, which is the idea that you have one place to go to watch all your content. Meaning: if you log in, every subscription video service is in one location to easily search and browse without having to switch between apps.
(In some cases, this vision is still aspirational, as opposed to realized. But it’s both companies’ dream user scenario.)
This makes sense from the cable example. The big revolution wrought by Netflix stemmed from the idea that suddenly customers now had to choose between two different ways to interact with the TV screen. Once that was severed, the cable bundle no longer offers it all. But neither did the “Netflix only” option, since you missed all traditional cable channels. Or other streamers like Hulu. This makes deciding what to watch just that much harder (and was to Netflix’s advantage).
Most smart TVs don’t offer a simple way to scan between streaming services. Instead, you decide what app to use and go to its platform to browse. Amazon and Apple want to incorporate everything into one user interface, so HBO content would sit next to Disney+ content which is next to CBS All-Access, for example. Meaning you can organize all your video in one place. Here’s Amazon Channels right now to show this vision:
(By the way, Amazon and Apple both ruin this customer experience with a clear user experience fail. When customers surf TV and streaming, the expect everything to be watchable for free. Pay Per View, historically, was always limited to clearly defined section of the cable interface. In their efforts to have an accurate search, Amazon and Apple both surface results for their TVOD businesses, which customers despise. Loathe. Hate. Keep your “pay for it” shows and movies clearly separated from your TV experience.)
Second, a vague customer value proposition – One source for payments.
The second reason cited by folks selling subscriptions is it offers simplicity in payments. I’m less sold on this value proposition because people will likely still search for the best deals. But it’s a potential for some customers and has some value.
Third, a potential value proposition: the new bundle. (Which everyone is predicting)
Bundles are a great tradeoff, hence why cable had one for so, so long. Companies get stability in the form of a long term contract—say a year or 2—and customers get lower prices. The “price” for customers is slightly higher bills to get content they may or may not want or auto-renewals which means payments for services folks aren’t using. (You know I think subscriptions are usually a bad deal for customers, but when quasi-monopolies pop up they make economic sense for the companies.)
Fourth, historically, bundlers have tended to extract a lot of value.
To see this in action, consider the traditional cable offered HBO. For the privilege of distributing HBO to subscribers, of the $15 or so dollars each month paid by subscribers, the cable company kept half. Half!
For all the work HBO did to find programming, make esteemed shows, license movie rights, build its brand and market its series, it kept only half of the $15 dollars customers paid. In exchange, to earn their cut, the cable companies employed armies of sales folks, managed the billing process and offered lots of promotions. But really they offered access to their subscribers, and and they got half the revenue for their
rent seeking, er, work.
If we default to a world of 3-4 operating system providers, they stand to reap enormous rewards by essentially offering the same
rent seeking, er, service fees. If Apple TV is the default TV viewing experience for 30 million folks—including their operating system—few streamers could afford to NOT be on that system. Same with Amazon or a Roku.
Fifth, one streamer can’t win it all.
The reason is obvious: if you want to watch a TV show from more than one streamer, then you can’t only have one streaming subscription. If you want to watch The Mandalorian or Marvelous Mrs. Maisel or Star Trek or Stranger Things or Game of Thrones, you need more than one subscription. Of course, you can start and end subscriptions. (The churn scenario.) While lots of customers will do that, it is hard and a bundle may be an easier option for customers who don’t want the hassle.
Obviously, this is a shot at Netflix, who I’ll address specifically at the end. The point, though, is that it looks very unlikely that Netflix “becomes TV”, at this point, which was a prominent theory just 3 years ago. Same with either HBO Max, Prime Video, Hulu or Disney+. They may all be part of the future majority of TV viewing, but they won’t monopolize this industry. Further, if you want sports and news, you’ll need multiple streamers or vMVPDs or FASTs to get those needs.
And if no single streamer can monopolize TV, then you’ll need aggregators to sort it all out.
Sixth, Aggregation Theory
The return of bundling is also the natural end state for Ben Thompson’s (of Stratechery fame) “Aggregation Theory”. Aggregation theory asserts, roughly, that when it comes to digital, where marginal costs for more users declines or is zero, whoever can aggregate the users/things, will be positioned to gather the best returns, and the aggregation leads to future aggregation because of demand side increased returns.
Where I disagree with him is how he applied this in digital video. Thompson picked both Netflix and Youtube as companies becoming the aggregators. But Netflix never made sense to me. Sure, they’re buying tons of video, but they weren’t really aggregating all the content or all the users. Or offering all the content. They were aggregating some of the content.
He’s not wrong though. Someone will aggregate the aggregators, which is the bundlers. As he says, offering an integrated solution which modularizes others. That’s the bundlers of the future. So if you believe in aggregation theory, you see the danger that some streamers face.
The Stark Choice Facing Streamers: To Join or Not To Join
If new bundles come, in the form of device or operating systems, the streamers face a stark choice when offered to join the bundle by Roku, Amazon or Apple:
Option 1: Join the bundle. In exchange, all their shows will mix with other shows. They’ll lose the customer data and ability to curate the user experience. Meanwhile, they’ll have to pay a deal tax if customers subscribe through Amazon or Apple. The brand also risks being deluded since customers may not associate specific shows with that streamer, but Amazon or Apple.
Option 2: Skip the bundle. The risk is if it becomes the dominant experience, you won’t be part of customers time every night on TV. Customers will make the choice to either go with the bundle expericence, or your app. Further, there is no incentive for Apple and Amazon to push your app in their customer sales funnels since they don’t make any money doing it. If customers don’t tune in, you risk them churning or tuning out.
As Reed Hastings said recently, the battle isn’t over subscribers, but over time spent. Which turns into subscribers. If there is a huge, valuable bundle, it could end up taking a lot of that time that current streamers dominate.
Ramifications for Aggregeddon – Who Wins and Who Loses?
The results of this theory are fairly clear in that “he who aggregates, wins”. The converse—and why I named this article “Aggregeddon”—is that the company arguably most associated with digital video has the most to lose. Let’s start there and go company by company to review who is closest to “grabbing” this key terrain.
Netflix – The Aggregeddon Scenario
To repeat for the umpteenth time, I do not expect Netflix to “die” anytime soon. But like debating if a hot dog is a sandwich, it depends what death is. If “death” is “run out of business and declare bankruptcy”, I don’t see that. If death, on the other hand, is “decrease market capitalization by 75%”, that seems possible. (As Richard Rushfield said, if Netflix becomes the “Yahoo” of the 2010s, is that a fate worse than death?)
Here’s why. As just mentioned, Netflix is going for all the marbles. Netflix’s audacious goal is to “become TV”. So they force customers to go off platforms to pay them directly with credit cards when they subscribe. This is a hurdle, but as the dominant platform, they can insist on it. They also refuse to integrate with any bundler lest they lose customer data or dilute the brand.
Yet, Netflix has made no plans to aggregate the aggregators themselves. Franky, Netflix is doing the opposite. Netflix has no plans to launch a device or operating system or their own bundle. Hence, they can not move down this value chain. They’re stuck at “aggregating” TV shows and films.
Worse, Netflix only offers entertainment programming. Meaning if customers want sports or news, they also need more subscriptions. Which means potentially the bundle will suck them in, taking time from the Netflix app. That valuable time Reed Hastings just described needing to win.
Right now, Netflix has selected the “go your own route” path. And it’s worked. But competition has been fairly weak. If competition ramps up, and other offerings get better, Netflix may have to join these bundles. That risks becoming “just another streamer”, which again goes against their entire growth strategy. It’s the biggest strategic risk to their business model and we don’t talk about it enough.
Amazon and Apple – The Bundlers
Meanwhile, these are the two companies I’m using as the default for this article for a reason. They both launched DVBs, and they have the deepest pockets to spend to make their visions realities. Plus, they have armies of engineers to throw at the problem and huge device penetration already. They’ve signed up CBS All-Access and HBO as well, and both have Disney+ on their devices, which makes the strong backbone for potential bundles too.
Roku – The little stick that could.
Somehow, it’s been competitive with the titans of Amazon and Apple, mainly because it was first (ish). While it still acts mostly as a smart TV, it’s working on integrating content into a better user experience and potentially could offer its own bundle. If my theory is true—and it spend enough cash to compete with the “AAs”—it could be a huge winner.
Comcast, Disney & AT&T – Potential Bundlers
These are all companies who could offer psuedo-bundles. Disney has a bundled price with Hulu, ESPN+ and Disney+. The challenge is it doesn’t have one experience to offer for other streamers, like its own Hulu Live TV offers HBO and Showtime, but no Disney+. (Seriously, why haven’t they started selling this yet?) We need to monitor Hulu here for them to become a true DVBs. The other Disney issue is a lack of device or operating system to leverage. (Roku could be the play here.)
Comcast is much better positioned with their “Flex” box, and integrations with Amazon Prime and Netflix. I’m not sure they sell subscriptions, but that could be added for other streamers fairly easily I’d assume. They already have the infrastructure to do these sales. (Also, I’ve seen speculation that Roku could help Comcast’s technology base and ad-sales.)
AT&T, like Disney, is a wildcard. They’ve launched a vMVPD, and control wireless customers but not devices and don’t have an operating system. But they’re thinking about this. If they weren’t so cash strapped, Roku would be an obvious play here. (Turns out, buying Roku would help lots of streamers stand against Apple and Amazon.)
Youtube – Does it join the bundle?
Technically it’s “free” so throwing it in the bundle isn’t necessary to surviving. The question for bundlers is whether you let in all the Youtube content. For all the tremendously good material it has, well, there are alt-right conspiracy videos one or two clicks away. However, if the goal is to capture all the videos folks watch, including top videos in folks DVRs/watch-lists is a value add.
Google writ large also has bigger plans for media, as it has followed the “tech giant” model of offering TVOD (Google Play), streaming (Youtube live) and video games (Google Stadia). And it’s own vMVPD, which gets pretty good reviews. This vMVPD plus Android OS is the best bet to make their own TV device. (They had made Chromecast back in the day, but it’s unclear what the next iteration of that device will be.)
ViacomCBS, Discovery, Youtube, DAZN, AMC and smaller streamers – The biggest potential losers
These are the streamers most likely to suffer under the new regime. As DVBs gain power and control of viewership, the other streamers will essentially take the terms offered to them. Unlike Youtube or Netflix, they don’t have the size or customer relationship to even consider doing their own thing. (ViacomCBS with Pluto TV could try something interesting.)
Conclusion: The Future Will Be Messy
Overall, here’s my take on the landscape of the 8 biggest players in media (my definition) and the potential bundles they could offer. You can see who can clearly offer a bundle and who will have trouble. Also, the device/OS line is the most important area for DVBs and is really where the aggregation can occur:
The thing about key terrain is usually both sides know it. Don’t expect the streamers to go down without a fight. Netflix and Disney+ will fight like hell to keep revenue out of bundler’s hands. And the bundlers will leverage all their power in return.
As that chart shows, despite the simplicity of my theory, the future will be anything but. Payments are already messy. Folks have Prime through Amazon directly or Hulu through Spotify or they pay for Netflix up front. And everyone will want their own pass at data. So as the DVBs fight to control the future viewing experience, they’ll have tons of hurdles including fierce battles with the top streamers.
The risk for streamers is that even a little bundling carries a lot of risks to the business model. Someone will “become TV” to replace the old cable bundle, as it starts to fall apart, but any one streamer will have difficulty doing that.