Streaming Service Industry: Profitability
Streaming Service Industry: The streaming service industry is a relatively new and fastgrowing industry within the past decade. The reason why we believe this topic is important is because we are now shifting into a digital era, where we no longer use cable. To assess the industry, we selected the following companies as they’re dominant players in the market. 1. Netflix 2. Hulu/Disney+ 3. Max (HBO/Time Warner Inc.) 4. Paramount The sources we have consulted are listed below: 1. https://ir.netflix.net/ir-overview/profile/default.aspx 2. https://www.britannica.com/topic/Netflix-Inc 3. https://thewaltdisneycompany.com/app/uploads/2023/02/2022-Annual-Report.pdf 4. https://ir.corporate.discovery.com/financials/annual-reports-and-proxies/default.aspx 5. https://press.disneyplus.com/about 6. https://www.britannica.com/topic/HBO 7. https://www.fortunebusinessinsights.com/video-streaming-market-103057 8. https://www.statista.com/outlook/dmo/digital-media/video-on-demand/video-streamingsvod/worldwide 9. https://www.proquest.com/docview/2806184197?parentSessionId=t%2B2vjokuFaoHyD Xf6cNWKF32vB7gizK%2BAJioxAWeRyg%3D&sourcetype=Scholarly%20Journals 10. https://www.forbes.com/home-improvement/internet/streaming-stats/ 11. https://www.themedialab.me/7-key-factors-behind-success-story-netflix/ 12. https://www.forbes.com/sites/blakemorgan/2020/12/07/10-ways-hulu-is-building-acustomer-experience-to-rival-netflix/?sh=1c927dcf6c55 13. Research and Analysis Methods: The majority of our information will be gathered through secondary research, meaning that we will use existing data from reliable sources such as scholarly journals, news articles, and companies’ annual reports. We will be conducting both qualitative and quantitative analyses using this information. For our qualitative analysis, we will be interpreting what attributes make the streaming industry profitable. For our quantitative analysis, we will be using data from the companies’ annual reports to calculate financial ratios and create graphs to show profitability/performance. Below, we have listed the deadlines and person assigned for each task: ● Introduction: Cassandra Reynado (4/3/2024) ● Performance Analysis: Marella Tumambing (4/10/2024) ● Porter’s Industry Analysis: Katherine Lazo & Cassandra Reynado (4/18/2024) ● Key Success Factors (KSF) Analysis: Leon Wu (4/20/2024) ● Conclusion: Chit Seint Thu (4/23/2024) ● Executive Summary: Wilson Tran (3/31/2024) The Streaming Service Industry: Profitability Cassandra Reynado, Katherine Calderon Lazo, Leon Wu, Wilson Tran, Chit Seint Thu, Marella Tumambing Department of Business and Economics, California State University, Fullerton MGMT 449: Seminar in Strategic Management Dr. Farroukh Moshiri May 8, 2024 Table of Contents 1. Executive Summary 2. Introduction 3. Performance analysis 4. Porter’s Industry Analysis 5. Key Success Factors (KSF) Analysis 6. Conclusion EXECUTIVE SUMMARY Because of the ever-growing rate of technology that’s making online streaming the new entertainment industry norm, traditional media is becoming obsolete and we discovered that the U.S. video streaming industry has a high degree of completion and high profitability. This executive summary will assess the significance of the current streaming industry and key factors on how companies like Netflix, Disney+, HBO, etc are competing against each other in this new age of entertainment. The video streaming industry has 147.7 million users in the United States as of 2022 and is expected to continuously increase at a rate of 5.5%, which will result in a rather large total revenue (“Video Streaming”, n.d.). While this industry has a predicted growth in revenue to $86.3 billion by 2029, the cable tv industry is currently declining and will continue to do so. Based on Porter’s Five Forces and key success factors, we came to the conclusion that the entertainment streaming industry is a promising opportunity and profitable even with its current power house competition. INTRODUCTION This paper analyzes the video streaming industry in the US. The video streaming industry will include US-based companies that provide online video streaming platforms; more specifically Live TV, shows, movies, documentaries, and original content. Our analysis is focused on the following companies: Netflix, Hulu/Disney+, MAX (HBO/Time Warner Inc.), and Paramount; as they are major competitors in the US market. Thesis Statement We discovered that the US video streaming industry has a high degree of competition and high profitability. PERFORMANCE ANALYSIS Industry Profitability Revenues are one example of a performance indicator that can help determine the success of an industry. According to IBISWorld (2024), the video streaming industry had total revenues of $51.8 billion in 2021, $53.3 billion in 2022, $56.5 billion in 2023, and $61.3 billion in 2024. It is currently on a growth trend, with a growth rate of 9.6% from the years 2019 to 2024, and is expected to continue to grow to $86.3 billion by 2029. This is fairly small compared to the revenues of the cable TV industry. It had total revenues of $111.8 billion in 2021, $108.3 billion in 2022, $108.1 billion in 2023, and $105.6 billion in 2024 (Petridis, 2024). However, unlike the video streaming industry, the cable TV industry has been declining at a rate of 2.1%. The forecast for revenues in 2029 is $104.2 billion. Although reviewing revenues is helpful in measuring the success of an industry, the best way to judge performance is to look at profits. In 2024, video streaming services in the US had a profit of $14.2 billion, while cable TV providers had a profit of $12.9 billion (IBISWorld, 2024; Pertridis, 2024). Although the amounts are quite similar, it is important we consider the profit margin. This is because it is “an indicator of financial health… and growth potential” – it will show the percentage of revenue that is retained as profits (Segal, n.d.). To have a high profit margin, the industry would either have to produce high revenues, maintain low costs, or both. The streaming service industry had a profit margin of 23.2% in 2024 and has been on a growth trend of 2.9%. On the other hand, the cable TV industry’s profit margin is 12.2% – almost half the amount of the streaming industry. It is also decreasing at a rate of 0.2%. Lastly, it would be beneficial to compare the number of users within each industry. This number shows the industry’s health and at what stage of the life cycle it is at. According to Statista.com, the streaming industry has 136.6 million, 147.7 million, and 147.4 million users in the United States for the years 2020, 2021, and 2022 respectively (“Video Streaming”, n.d.). The number of users continued to increase at a rate of about 5.5% until 2024 and is expected to continue in the upcoming years. This means that the industry is still in its growth stage. Conversely, the number of households that use cable TV in the United States has been decreasing at a rate of about 5.7% – 77.5 million in 2020, 71.6 million in 2021, and 65.1 million in 2022 (Stoll, 2024). This puts the industry at the decline stage of the life cycle. Taking all of these performance indicators into consideration, we can determine that the video streaming industry in the US is a highly profitable industry. Although revenues are not as high as those of the rivaling cable TV industry, we must consider the industry trends and how these performance indicators have changed over time. The video streaming industry has been growing, whereas the cable TV industry has been on the decline. Streaming services will likely catch up and overtake cable TV within the next ten years at the current rate it is going. Additionally, the streaming industry’s higher profit margin means that profit will grow at a faster rate as revenues grow compared to cable TV. Lastly, the trends behind the number of users for each industry further strengthen this conclusion because the similar, yet opposite growth rates showcase the growing popularity of streaming services and how it is replacing cable TV. Distribution of Profitability Similar to the industry analysis, we will look at revenue to determine the distribution of profitability among companies. According to Netflix’s Annual report (2023), streaming revenue was $33.7 billion in 2023. Since Disney+ and Hulu are both under the Walt Disney Company, their streaming revenues for 2023 were combined in the annual report; it totaled to $19.8 billion (The Walt Disney Company, 2023). Max had a lower revenue amount, totaling at $10.2 billion, and Paramount+ had the lowest of the five, totaling at $6.7 billion (Paramount, 2024; Warner Bros. Discovery, Inc., 2024). It is also important to compare the amount of profits because although some platforms have higher revenues, they may have higher operation costs as well. We will be looking at operating costs rather than net income because each company has revenues and expenses from activities other than streaming (e.g. movie production, TV media, etc.). In 2023, both Netflix and Max were able to earn a profit of $6.95 billion and $103 million, respectively (Netflix, Inc., 2023; Warner Bros. Discovery, Inc., 2024). By dividing these numbers by their corresponding revenue amounts, Netflix would have a profit margin of 2.06%, and Max would have a profit margin of 1.01%. On the other hand, Paramount and the combined Disney and Hulu had incurred losses in 2023. Paramount had an operating loss of $1.66 billion, whereas Disney and Hulu had a combined loss of $2.14 billion (Paramount, 2024; The Walt Disney Company, 2023). This would put their profit margins at -24.69% for Paramount+ and -10.77% for Disney+ and Hulu. Lastly, comparing the companies’ amount of subscribers will help determine their profitability because it removes the distortion in revenues/profits caused by the different membership prices and price increases. Additionally, it shows how far their services reach (which is important for the advertising segment of streaming revenues) and the potential for growth. By the end of 2023, Netflix had the most subscribers in the United States at 80.1 million (Netflix, Inc., 2023). Paramount+ had the second-most US subscribers, with 67.5 million (Paramount, 2024). Then Max, with 52 million domestic subscribers (Warner Bros. Discovery, Inc., 2024). And last are Disney+ and Hulu, with 46.5 million and 43.9 million US subscribers, respectively (The Walt Disney Company, 2023). After comparing the platforms’ revenues, profits, and amount of subscribers, Netflix would be considered the most profitable of the five platforms. This is because it ranked the highest in all three performance indicators. The second-most profitable would be Max. Although it ranked third for the number of subscribers and second to last for the number of revenues, it was the only company other than Netflix to have a positive operating income (and thus a positive profit margin). Disney+ and Hulu would be ranked together as third, which puts Paramount+ as the least profitable of the five platforms. The reasoning behind this is that although Paramount+ had the lower loss and a larger amount of US subscribers, Disney+ and Hulu had the higher profit margin. This performance indicator is more important because it shows that since Paramount+ has a negative profit margin that is twice as much of that as Disney+ and Hulu, then they are losing twice the amount for every dollar of revenue earned. PORTER’S INDUSTRY ANALYSIS The Bargaining Power of Buyers Buyers can threaten an industry by forcing down prices, making a video platform provide better quality, or turning competitors against each other. Buyers hold a lot of power in the streaming service industry because it’s easier for them to switch video streaming providers. This is due to the different price options offered in the industry. To counteract this, streaming services providers must come up with ways to differentiate their product, such as having original content the buyer can’t find on another platform (Faber, 2024). For this industry, buyers are price sensitive and according to Forbes, the recent spike in prices from video streaming services has resulted in more than half of consumers canceling a streaming service. Also, the ad-supported tiers have made a roaring debut over the past year because their price is lower, and customers want low prices (Fitzgerald, 2023). Nearly 88% of US households use video streaming services, and customers’ lifetime value can be increased by video streaming services (Douin, 2023), but video streaming services are not essential to customers’ lives. That’s why it’s easy for customers to cancel their subscriptions. In the following table we can see the different prices for video streaming platforms: Netflix Hulu Disney Plus Max Paramount Plus With Ads Without Ads $6.99 $15.49 (Standard); $22.99 (Premium) $8 $18 $8 $14 $10 $16 $6 $12 (with Showtime) Figure 1 (Woo, 2024) The Bargaining Power of Suppliers According to IBISWorld, the market concentration for the video streaming industry in the U.S is high, where 70% of the industry revenue is generated by the top four companies (n.d.). The top 4 companies are: · Netflix, Inc · Walt Disney Co. · Alphabet Inc. · Amazon.com, Inc The streaming TV and movie industry has gotten more competitive. Netflix has increased its prices multiple times since it launched. Hulu and Disney Plus have increased their prices due to Disney Plus investing more in streaming, and Paramount has raised its prices too (Pierce, 2023). Many streaming services have started producing original content, such as movies and shows, making it easier not to depend on content licensors who own rights to popular content in the US (IBISWorld, 2024). According to Statista “ In-house productions, known as “originals,” are becoming increasingly popular among streaming providers and could make a difference in the streaming wars over the coming years.” (n.d.). Another way that differs one video streaming platform from others is the user experience. Video Streaming platforms have their own library where the media can be separated by categories. Also, not all video streaming platforms let their subscribers download for offline viewing, which makes some video streaming platforms such as Netflix stand out from the others. The Threat of Substitute Products and Services Substitutes for online video streaming platforms include television production, movie & video distribution (movie theaters, DVD), and pirating (IBISWorld, 2024). While they offer similar products such as: movies, shows, documentaries, live TV, and original content; they are not perfect substitutes for online video streaming platforms. Video streaming platforms differentiate themselves from their substitutes through their core competencies: convenience and accessibility, as they can be accessed on multiple devices simultaneously. The revenue for the market of their closest substitute, cable/satellite TV has decreased 2.1% from 2019-2024, deeming it unprofitable (IBISWorld, 2024). To compare subscription prices and product offerings: DirectTV, a satellite TV company’s subscription prices range from $69.99/month to $109.99/month and entails live TV via receiver, a variety of channels, and cloud DVR recordings. However, content accessibility is inconvenient and can only be accessed via receiver/television. Physical media such as disks or tapes can only be accessed through medium of choice, and come in a large range of prices relatively comparable to video streaming subscription prices. Single movie ticket prices are comparable to monthly video streaming subscription prices, and content can only be viewed in theaters, lacking the accessibility and convenience video streaming platforms guarantee. Subscription prices from Netflix, Hulu, Disney+, and Paramount range from $5.99/month to $22.99/month; making video streaming pricing more appealing to consumers. In terms of substitutes, the video streaming service industry is profitable because they offer more competitive pricing than their substitutes, have greater investment in differentiation from other firms, and are more easily accessible to their consumers. The Threat of New Entrants The threat of new entrants in the video service streaming industry is low, considering the high barriers to entry and high opportunity cost of start up. The four largest streaming services in the US hold 92.7% of the market share, making competition extremely intense (IBISWorld, 2024). Some barriers to entry include: legal barriers, start-up costs, differentiation, labor expenses, and capital expenses. Legal barriers include legal compliance costs, licensing agreements, copyright laws, and costly litigations to ensure creative rights are respected. High start-up costs to enter the streaming industry include: start-up expenses, IT infrastructure, robust platform development, and scalable architecture. In terms of differentiation, creating original content requires significant upfront costs for production, talent, and marketing (IBISWorld, 2024). High labor and capital expenses are necessary to hire skilled, speciality workers and ensure the appropriate infrastructure is utilized. For example, in 2023 Netflix spent $13B on content production (Stoll, 2024). New entrants would need a significant amount of technology development, patents on intellectual property, access to innovative technology, and effective marketing along with an extremely high start-up budget in order to enter the video streaming market (IBISWorld, 2024). The streaming service industry is profitable for current major competitors because of the low threat of new entrants. However, it would be not profitable for new entrants in the short-run due to high barriers to entry and start-up costs. The Intensity of Rivalry Among Competitors In An Industry Internal rivalry in the streaming service industry is marked by intense competition. Netflix holds 62.6% of the market share, Walt Disney Company holds 21.4% of the market share, Other companies with 6.3%, Alphabet Inc at 5.8%, and Amazon with 3.9% of the market share as of this year (IBISWorld, 2024). Established players are constantly competing with each other through offering platform exclusive content (differentiation), platform-specific innovative features, competitive pricing, and aggressive marketing. (IBISWorld, 2024). While Netflix holds more than half of the market share, its competitors are also profitable as they continually experience revenue growth. The streaming service industry is profitable in terms of intense rivalry as current competitors increasingly generate revenue through specialized marketing efforts, product differentiation, and price wars. The industry as a whole generated $61.3B in revenue, with $14.2B in profit (23.2% profit margin), a 12.6% increase from 2019-2024 (IBISWorld, 2024). Company Market Share (%) 2024 Revene ($m) 2024 Profit ($m) 2024 Profit Margin (%) 2024 Netflix, Inc. 62.6 38,358.0 8,182.0 21.3 Walt Disney Co 21.4 13,120.0 2,217.4 16.9 Alphabet Inc. 5.8 3,582.5 969.3 27.1 Amazon.Com, Inc. 3.9 2,372.9 172.0 7.2 Figure 2 (IBISWorld, 2024) KEY SUCCESS FACTORS ANALYSIS 1. Content Library: All four companies rely heavily on the quality and breadth of their content libraries. Netflix has invested significantly in original content, producing critically acclaimed series and movies like “Stranger Things” and “House of Cards”(“7 Key Factors,” 2024). Hulu benefits from its extensive library of current and past TV shows, including partnerships with major networks like ABC, NBC, and FX (Morgan, 2021). HBO Max has a rich catalog of HBO’s premium content, including award-winning series like “Game of Thrones” and “Succession,” as well as exclusive access to WarnerMedia’s film library (Xaif, 2022). Paramount+ leverages its parent company ViacomCBS’s vast array of content, including popular franchises like “Star Trek” and “SpongeBob SquarePants” (TBH, 2023). 2. Original Content Strategy: Netflix, Hulu, HBO Max, and Paramount+ all invest heavily in producing original content to differentiate themselves and attract subscribers. Netflix’s strategy of creating binge-worthy original series and movies has been particularly successful, leading to a loyal subscriber base (“7 Key Factors,” 2024). Hulu focuses on a mix of original programming and next-day streaming of current TV episodes, appealing to viewers who want to keep up with their favorite shows (Morgan, 2021). HBO Max emphasizes the exclusivity of its original programming, often targeting high-profile creators and A-list talent to produce premium content (Xaif, 2022). Paramount+ aims to appeal to a wide range of audiences with a diverse slate of original series and movies, including reboots of beloved franchises and new productions (TBH, 2023). 3. User Experience and Interface: The user experience and interface of streaming platforms play a crucial role in attracting and retaining subscribers. Netflix is known for its intuitive interface, personalized recommendations, and seamless streaming experience across devices (“7 Key Factors,” 2024). Hulu offers a variety of subscription tiers, including an ad-supported option, and features a user-friendly interface that makes it easy to navigate its extensive content library (Morgan, 2021). HBO Max provides a visually appealing interface with curated collections and enhanced features like HBO Max Hubs, which offer a dedicated space for content from specific brands or franchises (Xaif, 2022). Paramount+ focuses on simplicity and ease of use, with a clean interface that allows users to quickly find and access their favorite content (TBH, 2023). 4. Global Expansion: As streaming becomes increasingly global, expanding into new markets is essential for growth. Netflix has been a pioneer in international expansion, launching its service in over 190 countries and territories worldwide and investing in local-language content to cater to diverse audiences (“7 Key Factors,” 2024). Hulu is currently available only in the United States, but its parent companies Disney and Comcast have plans to expand the service internationally through partnerships and licensing agreements (Morgan, 2021). HBO Max launched in the United States in 2020 and has since expanded to select international markets, with plans for further global expansion in the coming years (Xaif, 2022). Paramount is available in several countries, including the United States, Canada, and Latin America, with plans to expand into additional markets in Europe and Asia (TBH, 2023). 5. Brand Recognition and Marketing: Building brand recognition and effective marketing campaigns are crucial for attracting and retaining subscribers in the competitive streaming landscape. Netflix has built a strong brand identity as the go-to destination for streaming entertainment, thanks to its extensive marketing efforts and memorable original content (“7 Key Factors,” 2024). Hulu benefits from its association with major media companies like Disney and Comcast, which provide marketing support and promotional tie-ins with other products and services (Morgan, 2021). HBO Max leverages the prestige of the HBO brand and WarnerMedia’s vast media empire to attract subscribers through targeted marketing campaigns and strategic partnerships (Xaif, 2022). Paramount Eg capitalizes on the legacy of its parent company ViacomCBS and iconic brands like Paramount Pictures and MTV to appeal to a broad audience and drive subscriber growth (TBH, 2023). Conclusion REFERENCES Dess, G. G., McNamara, G., Eisner, A. B., & Sauerwald, S. (2024). Strategic management: Creating competitive advantages. McGraw-Hill. Douin, V. (2023, February). Maximizing value for video streaming services. EY. Retrieved from https://www.ey.com/en_us/alliances/maximizing-value-for-videostreaming Faber, T. (2024, March.). Video streaming services in the US. IBISWorld. Retrieved from https://my-ibisworld-com.lib-proxy.fullerton.edu/us/en/industry/OD6197/competitiveforces#concentration Fitzgerald, T. (2023, November). Disney, Netflix and more price hikes cause subscribers to axe streaming services, study says. Forbes. 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