In the long run, vertical streaming deals might prove dangerous for Netflix and similar services as older content producers try to regain exclusivity with their own wireless access
Netflix is again issuing public debt notes to raise capital for expansion and acquisitions, this time for $1 billion, on top of a $1.5 senior notes offering earlier last year. The company is doing well in terms of subscriber additions and more Americans are signing up for streaming packages than in the past few years, with Netflix ahead of its nearest rivals, Amazon and Hulu, and also now HBO by several million US customers.
Netflix may not need that capital just quite yet to face down the proposed $85 billion AT&T-Time Warner merger, though, in the on-demand TV steaming market that would see HBO joined to the telecommunications titan in a vertical streaming deal that combines a content distributor (AT&T) with a major content producer (Time Warner).
Netflix’s own response to the proposal was described by Variety, with CEO Reed Hastings saying that, “The key thing is with us net neutrality,” and that HBO and Netflix original content are treated equally. Still, even Barclays is now suggesting that the time is right for Netflix to reconsider its place in the universe and think of joining forces with another major company, Disney, because further consolidation is likely by the end of the decade at the expense of Netflix, Hulu, or Amazon.
It is true that by combining top grossing content with an ISP, reports FierceCable, that Netflix might have to worry about being limited in accessing the vast Time Warner TV and film library. But assuming the merger succeeds, it would carry many federal limitations to prevent AT&T from shutting Netflix out like this, at least for a few years.
The new entity would also have to consider the stake that Time Warner holds in Hulu, a stake that it might not get to keep in any FCC-approved ruling.
Slaying the giant-slayer
As The New York Times pointed out, the immediate benefits to both companies is somewhat unclear. Though Time Warner is already reluctant to widely distribute its paid content in order to maximize in-house platforms, making any of it exclusive through AT&T platforms would cause it problems. While Time Warner had posted better-than-expected revenues ahead of the AT&T deal, it has been losing subscribers at about 1% a year as subscriptions numbers plateau.
Time Warner also must plan for a future without Game of Thrones, as there are only two (truncated) seasons reportedly left of the popular fantasy series. So AT&T exclusivity might not be the best way to turn these figures around, despite the likelihood AT&T wireless customers would get discounted access in some way to Time Warner’s film and TV offerings.
Netflix, for now, is the clear market leader in the US, with 43% of all subscriptions, compared to 9% for Hulu, and a much higher penetration rate than any of its rivals, though it will eventually have to face down its massive debt. Netflix still has room to grow, though, adding more and more subscribers from outside the US, while Hulu remains a domestic service.
But, with Time Warner’s content on hand alongside AT&T packages, Netflix could one day be in serious trouble. The cable-cutting giant killer could find itself under assault from ISPs, according to a Seeking Alpha investors’ review. They, together with the traditional studios, may follow suit along the path AT&T and Time Warner hope to tread to reduce their dependence on Netflix and regain exclusive control over their content with the help of their wireless partner(s).
Of course, they would all have to work together to make Netflix’s nightmares come true and prove their own offerings and bundles would be far superior despite the exclusivity.
AT&T may benefit more simply by adding Timer Warner content and HBO Now over-the-top content to its DirecTV and U-verse platforms. “Traditional distributors,” says digiday.com, “will continue to play an important role in the growth of OTT because they also specialize in areas that TV networks don’t have an expertise in.” (An added bonus is that Time Warner does have that expertise.) According to The Street, AT&T has been bidding, “for spectrum that TV station owners currently use to broadcast their programming.” It is not alone in this regard thanks to an FCC ruling in 2015. Time Warner competitor Comcast, for instance, will have wireless access starting in 2017, but over spectrum leased from Verizon and is expected to spend $5-6 billion on its own wireless licenses going forward.
Why is this wireless and ISP access so vital? As CNBC puts it, “Media firms face pressure to access distribution as more younger viewers cut their cable cords and watch their favorite shows on mobile devices.” In the new world, traditional content producers and the telecommunications major are banding together to weather an expected sea change in how people watch media. One advantage of this strategy, though it will take years to properly deploy in the view of Deadline, is that the wireless providers, “can collect a lot of data about viewers and use that to decide what programs to produce, and sell premium-priced ads that will go to specific people — not just broad demographics.” This anticipates changes in the advertising sector as well, especially in digital.
It remains to be seen if AT&T can spin the deal with Time Warner better than Comcast did in its abortive bid for Time Warner Cable, which had it succeeded would have given the new entity 57% of the US broadband and 30% of the pay-TV markets. The successful Comcast-NBC merger years before may inspire heavy restrictions on the AT&T-Time Warner merger to prevent the new entity from favoring Time Warner content.
Should the deal be approved – and there are many “ifs” yet to be resolved – one condition for the sale may be Time Warner giving up the 10% stake it purchased in Netflix competitor Hulu this August, for $583 million in cash. Although this is the smallest stake any major studio owns in Hulu – Comcast, Fox, and Disney each have 30% and Time Warner has no say in governance. The deal gives Hulu access to most of Time Warner’s TV and film offerings except HBO, per Time Warner’s request to keep it separate.
Subscription services are having a measurable impact on viewing habits, with Geekwire reporting that in the nearly half of all US households with on-demand video service, people spend about an hour more per day watching content than the other half of households that do not have Netflix, Amazon Video, or Hulu. According to Statista, “Much of the streaming service’s success can be traced back to its ongoing investment in quality content, both original and licensed,” spending $4.9 billion in total for 2015, about a billion dollars more than what Time Warner has spent in the same period.
Time Warner also does not let Hulu run “full current seasons” from Time Warner shows in its monthly service according to The Wall Street Journal. The dispute illustrated the clash of cultures at the two companies, with Time Warner fearing their inclusion would hurt its traditional properties while for Hulu, getting that content up encourages people to watch more of its offerings. That CNN was among the networks included by Time Warner for Hulu to access shows the hopes both companies had in putting news media on the service as a new feature.
Under the merge, though, that 10% stake would probably end up with the new entity treating Hulu and HBO equally – probably more so to Hulu’s benefit.