Sometimes, A Rising Tide Sinks All Boats

This month’s launch of the new streaming platform, Disney+, marks the dawn of a new age for streaming media giants like Netflix, Hulu, and Amazon Prime Video. As three of the content industry’s giants - Disney, Warner Media, and NBCUniversal - prepare to launch platforms to stream their own shows and movies directly to households, the incumbent platforms are working hard to build their own content catalogs and shore up the loyalty of current subscribers.

In our recent study of consumers in the streaming media industry, we encountered one very strong - and very important - finding about the reaction of consumers to all the new choice they are about to face: When we told people in the study about the new offerings that will launch over the next several months, their perceptions of the value and content quality for all platforms fell.

Let’s reiterate that. The mere idea of more players entering the streaming game caused consumers to perceive all options as being worth less.

As consumers in this industry ourselves, we can make sense of this finding. Subscribers of Netflix, for example, have become anchored to a specific value proposition - in exchange for a certain price month (“Y”), they can access a broad catalog of content (“X”). Subscribers get X in exchange for Y.

Now, however, Netflix is reducing X while keeping Y the same. As other providers refuse to renew Netflix’s rights to the content, it will disappear from the platform. Netflix promises to develop new content for its subscribers, but the actual quality and variety are not known and thus cannot be counted on. The result is that consumers have to pay the same amount for less of their favorite content.

This observation has huge implications for the streaming industry in that it illustrates how the entrance of new competitors can negatively impact customer perceived value from all players. In other words, fragmentation in a market like this can be bad for business all around. While new entrants stand to pick up many of the subscribers that belong to the current leaders, they will do so in an increasingly competitive market with consumers that are overwhelmingly disappointed by their entry. Incumbents, of course, stand to lose some portion of their annual revenues to the new entrants. In many ways, this will be a lose-lose-lose scenario.

This is an interesting observation and it has many implications for how each streaming content provider should craft their strategy (we won’t get into those implications here; you can read all about them on the Streaming Case Study page).

A Different Model of Competition

But the insight runs exactly contrary to what we are taught to expect about the impact of increased competition - and thus, consumer choice.

Traditionally, we have come to expect that increased competition in a particular market introduces some combination of choice, variety, novelty, and lower prices as competitors vie to capture market share by wooing customers. A fantastic example of this can be seen in the ongoing experience of the grocer, Trader Joe’s, as it enters new geographic markets one-by-one across the United States.

Inside Trader Joe’s

Inside Trader Joe’s

Trader Joe’s is a grocery store that offers consumers supreme value through inexpensive, high-quality food, a variety of unique selections, an easy and fun shopping experience, and employees who actually seem to love their job. The chain spends almost no money on advertising and has no loyalty program. And with no self-checkouts, each store has a very high headcount of staff for the industry - an operating cost that hits margins hard. Yet the company outsells all other grocery stores in the US per square foot. In fact, they can’t grow fast enough, as evidenced by Facebook groups begging Trader Joe’s to open a store in their area. Trader Joe’s has redefined consumer expectations around grocery shopping.

Trader Joe’s strategy of growing its footprint at a deliberately moderate pace allows us to see the chain enter new geographic markets one at a time. In fact, we can still remember the first Trader Joe’s opening in Colorado, the state where The Langston Co was founded, just a few years ago.

It seems that whenever a Trader Joe’s opens its first store in a new market, the event is met with fanfare and excitement from customers. The store’s non-traditional products and shopping experience inject a whole new set of options and opportunities for shoppers. And the threat of the new player often causes surrounding stores to increase their focus on novelty, variety, and aggressive pricing; so even shoppers who stick with their regular store benefit from the Trader Joe’s debut.

The consumer reaction to Disney, Warner Media, and NBC Universal in the streaming media industry could not be more different than the reaction to a new Trader Joe’s in the neighborhood. In the case of the latter, consumers are curious and excited about choice, variety, and savings. In the case of the former, consumers are resentful and anxious about losing content they love and paying more to watch the shows and movies they have come to expect.

This trend highlights a very unique artifact of the streaming media market, which is that there is a finite set of popular content to be divided among the streaming platforms. If a newly-launched platform takes the rights to a popular series, it likely means that an incumbent platform will lose them. If consumers want to continue watching the content they love, they will have to switch services or sign up for two services. While all platforms have promised to produce volumes of high-quality original content for their subscribers, consumers are skeptical and uncertain about who will deliver on that promise. This leaves them with lower confidence and greater frustration about the industry as a whole.

The Other Streaming Market

Interestingly, there is another industry that faces a very similar set of unique circumstances - streaming music platforms.

In looking at the streaming music industry today, we see that Spotify, Pandora, and Amazon Prime Music have a lot in common with Netflix, Hulu, and Amazon Prime Video. Recently, we have seen the beginnings of content exclusivity - a familiar part of the streaming video market - begin to take hold in music. Beyonce launched her sixth album, Lemonade, exclusively on her co-owned streaming platform called Tidal in 2016. Garth Brooks signed an agreement to stream a portion of his music exclusively on Amazon Music Unlimited the same year.

As competition for subscribers in the music industry continues to intensify, we suspect that platforms will be tempted to consider exclusive content deals as a strategy for differentiating themselves from competitors. Additionally, any market as large as the market for streaming and downloading music will certainly attract new players over the coming years.

We believe that the outcomes that develop in the streaming video market over the next twelve months will substantially influence the way that the streaming music industry develops in years that follow. If consumers become accustomed to the fragmented video landscape - and with it, the need to switch between providers or carry multiple subscriptions - then we expect record labels, tech companies, and existing players to jockey for exclusive rights to content. On the other hand, if consumer frustration proves to be a lasting factor, then the probable consolidation and bundling that follows will caution the music industry against yanking content from happy subscribers.

Final Thoughts

To sum it up, our research on the changing video media landscape uncovers a highly unusual situation where consumers perceive more competition as a net loss, not a benefit. Given the similarities in how people now consume video content and music, we speculate that an analogous situation could unravel in the music streaming world in the future. Our advice for companies vying in both areas is straightforward: Understand what drives value for your customers and maintain laser focus on creating superior value for them.