The market for streaming video is overflowing with new services. That’s good news for binge-watching consumers and a boon for producers and owners of video entertainment.
But this trend could eventually soak streaming-video distributors, who increasingly might find themselves paying escalating prices for exclusive video content in a seller’s market.
The music-streaming subscription service Spotify is the newest well-financed player to wade into digital video. According to the Wall Street Journal, Spotify is in discussions with traditional-media and online-video companies to start a web-video hub. The Journal notes that the initiative “may put growth ahead of profit.”
The video wars are typically presented as pitting “over-the-top” video streamers such as Netflix Inc. (NFLX), Amazon.com (AMZN) and Google Inc.’s (GOOGL, GOOG) YouTube against entrenched pay-TV bundlers such as Comcast Corp. (CMCSA), Walt Disney Co. (DIS) and CBS Corp. (CBS).
Yet the boundaries separating these businesses are blurring, and competition among the unbundled video streaming outfits themselves has become intense, too.
This is perhaps best illustrated by Hulu, the subscription-video service owned by Comcast, Disney and Twenty-First Century Fox Inc. (FOX, FOXA). Once just a repository of back episodes of network TV series, Hulu has had extraordinary growth in viewership and has emerged as an aggressive bidder for exclusive content.
The service grabbed plenty of attention last month when it paid a reported $160 million for the entire 180-episode run of the sitcom “Seinfeld.”
One media analyst who discussed this deal with industry folks at the recent online-media Newfronts advertiser showcase says some were “sticker-shocked” by what Hulu agreed to pay for the show.
Hulu’s owners sought to sell Hulu a few years ago, but pulled the asset off the block in 2013 when bids never rose above a reported $1 billion.
Since then, Hulu has solidified its status as a viable magnet for eyeballs. Subscribership grew 50% last year to 9 million, and hours watched surged even faster, by 83%, with a younger audience than traditional TV commands.
Anthony DiClemente, analyst at Nomura Securities, ballparks Hulu’s market value at $8 billion to $9 billion. He estimates about $850 million in subscription revenue, based on 9 million subs at $8 per month, and figures Hulu had about the same revenue from ads last year. That translates to $1.6 billion to $1.7 billion in revenue. Applying Netflix’s stock multiple of five-times revenue – an aggressive but defensible assumption – he gets to that $8 billion-plus valuation. That, coincidentally, is the valuation Spotify is now seeking in an ongoing private fundraising round.
As impressive as that might be, though, it’s a trivial slug of value for its media-giant owners, which are worth between $70 billion and $190 billion each.
A big question about whether Hulu is viable as an independent player is if its owners have cut it sweetheart deals on their networks’ TV shows, as the standard industry wisdom holds.
Yet DiClemente argues that the parent companies now seem to have encouraged Hulu to use its growing revenue to scoop up third-party content on the open market, such as "Seinfeld." (The network will also be the new home of “The Mindy Kaling Project,” now that Fox has declined to renew the comedy.)
Netflix – whose stock has vaulted to all-time highs above $570 this month on brisk subscriber growth and hit original series – is also a heavy buyer of content. The bear case on Netflix has always involved its need to constantly license and produce shows to feed its all-you-can-eat customer base. The company is currently committed to spending some $9.8 billion over the next several years on video content rights.
This is the context of Spotify’s reported entrance on the scene. While Spotify seems interested more in YouTube-style user-generated content and bite-sized video clips, it is also said to be negotiating with large media companies as it develops ambition as a video broadcaster as well.
The basic economics of the video market goes like this: All humans have a finite amount of time to watch video. For the industry to grow in aggregate, customers must spend more of their day in front of their screens, or they must be willing to subscribe to multiple services to guarantee themselves an overabundance of viewing options at every moment of the day. This could get expensive for consumers, given the need to pay first for broadband service before shelling out $8 to $12 per month for Netflix, Hulu, HBO Now and the like.
This competitive pressure on the streamers requires them to acquire and offer a constantly refreshed supply of compelling, must-see shows and movies. So how much is too much to pay for the best shows with the stickiest audiences?
The new video-streaming players might find out before too long.