Netflix May Become TV’s iTunes

When you think of Amazon, you probably think of online retail and / or e-books. When you think of iTunes, you think of music. But will a day come when Netflix becomes synonymous with online video instead of just one of many providers of streaming video on demand?

Netflix May Become TV's iTunes

The outlook for that future certainly looks bright, but what will it take to get there? Already the TV industry is in the midst of two key transitions: a shift to online viewing and a secondary shift to mobile viewing. Both trends signal trouble for the traditional pay-TV model.

Internet TV versus traditional pay-TV

Analysts Andy Hargreaves, Evan Wilson and Evan Wingren of Pacific Crest Securities put together an interesting report entitled “The Future of TV: The Internet Is Here and It Only Knocks Once.” Netflix, Amazon, Hulu and other companies have seen the writing on the wall for some time and prepared for the boom in internet TV before pay-TV providers could scramble quickly enough to catch up.

In fact, statistics indicate that internet TV services have grown so much that they’re starting to play in the big leagues, competing against the world’s biggest traditional media companies. It’s no wonder that the pay-TV industry is trying desperately to consolidate and grow through acquisitions.

Regulators halted the proposed Comcast – Time Warner Cable merger due to concerns about competition, but now Charter Communications is trying to take Comcast’s place as a suitable buyer for Time Warner. And it looks like regulators just may go for this second deal because it doesn’t combine the two largest providers in the U.S.

Why traditional pay-TV is in trouble

The Pacific Crest team notes that currently, traditional pay-TV has a stranglehold of the economics of video with 95% of the total economics. That amounts to about $185 billion in U.S. revenue and with high margins too. (All charts / graphs in this article are courtesy Pacific Crest.)

Internet Trend

The problem with pay-TV is that customer satisfaction is very low. All four of the top multi-channel video programming distributors received scores in the bottom fifth of the Harris Reputation Quotient. Naturally, this creates an environment that’s ripe for disruption—an opportunity that Netflix and other internet video providers are happy to take in spite of the challenges that are presented to them.

Unsurprisingly, the younger demographic is spending more and more time with internet TV rather than pay-TV. Also younger viewers dominate subscription video on demand and other hybrid TV models.

Internet Trend

The video industry is also seeing a dramatic increase in time spent watching videos on mobile devices. The firm reports that this metric is growing faster than traditional TV viewing is declining.

Mobile Usage

Further, the minutes consumers spend on media are sometimes doubled because consumers are also spending time on messaging, games or other apps while watching TV. According to the Canaccord Genuity team, the result is a “distracted, multitasked consumer.” This also means that targeting and access are more important than ever.

Ad dollars versus subscription dollars

Another interesting shift that’s happening in the TV industry is the transition from most of the dollars being earned through advertising to most dollars being earned through subscriptions. The success of Netflix highlights this transition.

The analysts say many are assuming that eventually, there will be a one to one ratio of ad versus subscription dollars in TV. However, they think that the minutes which are shifting from traditional TV to online are put toward subscriptions, making it seem likely that subscription services will attract more TV dollars than ad dollars will. This is yet another good point for Netflix which indicates that Mad Money host Jim Cramer may not be so crazy about his predictions for the company after all.

Netflix Market

Of course this is great for Netflix and Amazon but bad for Facebook and Google.  For now anyway, Google has taken the lead in online video through YouTube. The Canaccord Genuity team thinks Facebook’s opportunity in video is more limited than most think this year. As a result, it’s simply too early to say whether Facebook will gain traction here.

Will Netflix be the “search engine for video”?

One of the points the Pacific Crest team makes is that while many see content as king, content can only reign if viewers can actually find it. They consider that Netflix could be the company that will make it easy to find content and suggest that Netflix could become what iTunes was to the music industry and what Amazon was to e-books and now is for online retail. They note that iTunes now catches more than 60% of online music sales, while Amazon collects more than 60% of e-book sales in the U.S. and is bigger than the next 10 e-commerce players in the U.S.

Further, they note that scale is what usually drives content distribution concentration online, as demonstrated by the above companies. Netflix will certainly have the scale necessary to become TV’s iTunes or e-commerce’s Amazon by the end of next year.

Netflix Expansion

The Canaccord Genuity team also points out that Netflix has advantages in terms of being able to “identify attractive content faster than its competitors and purchase more efficiently. Management has also demonstrated that they can learn and adapt quickly to what is a fast-evolving industry.

Additionally, average usage of Netflix has increased to about two hours per day. Meanwhile many formerly popular cable channels are seeing tumbling prime time ratings.

netflix usage

Apply may be the first to offer linear online video

Although things look good for Netflix right now, one player that hasn’t entered the ring yet is Apple. If the rumors are correct, the company could be putting together a linear TV offering. In some ways, this could be bad for Netflix, depending on what the service ends up looking like. However, if the focus is more on linear TV rather than video on demand, Apple could cause pay-TV providers to see their subscriber numbers dwindle further.

The reason for this is simple. Apple will be able to combine the data benefits of Netflix, getting immediate feedback on what viewers are watching rather than waiting for the Nielsen numbers, with ad revenue that’s akin to what pay-TV offers. This will improve targeting for advertisers and should enable Apple to charge more for its ads than pay-TV can.




About the Author

Michelle Jones
Michelle Jones was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Michelle has been with ValueWalk since 2012 and is now our editor-in-chief. Email her at Mjones@valuewalk.com.