Ted Gioia writes:
Netflix’s market share has been declining steadily, and has now fallen below 50%. One estimate claims that the company’s share of consumers fell more than 30% in a single year. Netflix’s recent quarterly report was a disaster, spurring a share sell-off. You could easily conclude that “Netflix’s long awaited funeral is finally here”—as Bloomberg hinted in its blunt assessment of the results.
Of course the company is still worth quite a bit, so my own view is no more or no less optimistic than what the market indicates. Still, it is worth asking what the equilibrium here looks like. There is also AppleTV, Disney, Showtime, HBOMax, Hulu, AmazonPrime, and more. I don’t think it quite works to argue that we all end up subscribing to all of them, so where are matters headed? I see a few options:
1. Netflix and its competitors keep on producing new shows until all the rents are exhausted and those companies simply earn the going rate of return on capital, with possible ongoing rents on longstanding properties of real value (e.g., older Disney content). These scenarios could involve either additional entry, or more (and better?) shows from the incumbent producers.
2. Due to economies of scale, one or two of those companies will produce the best shows and buy up the best content. We end up with a monopoly or duopoly in the TV streaming market, noting there still would be vigorous competition from other media sources.
3. The companies are allowed to collude in some manner. One option is they form a consortium where you get “all access” for a common fee, divvied out in proper proportion. Would the antitrust authorities allow this? Or might the mere potential for antitrust intervention makes this a collusive solution but one without a strict monopolizing, profit-maximizing price?
4. The companies are allowed to collude in a more partial and less obvious manner. Rather than a complete consortium, some of the smaller companies will evolve into “feeder” services for one or two of the larger companies. Those smaller companies will rely increasingly more on the feeder contracts and increasingly less on subscription revenue. This perhaps resembles the duopoly solution analytically, though a head count would show more than two firms in the market.
It seems to me that only the first scenario is very bad for Netflix. That said, it seems that along all of these paths short-run rent exhaustion is going on, and that short-run rent exhaustion is costly for Netflix. They keep on having to pump out “stuff” to keep viewer attention. It doesn’t matter that new shows are cheap, because as long as the market profits are there the “bar” for retaining customers will continue to grow. Very few of their shows are geared to produce long-term customer loyalty toward that show – in contrast, people are still talking about Columbo!
Putting the law aside, which economic factors determine which solution will hold? My intuition is that there are marketing economies of scale, but production diseconomies of scale, as the media companies grow too large and sclerotic. So maybe that militates in favor of scenario #4? That to me also suggests an “at least OK” future for Netflix. The company would continue its investments and marketing and an easy to use website, while increasingly going elsewhere for superior content.