How Are Modern Media Subscription Services Building Competitive Advantages Against Traditional Media?

Photo of Zach Fuller
by Zach Fuller

Media, with its creative nature, often likes to define itself as distinct from other industries, and yet it is governed by many of the same principles that shape other areas of commerce. With the shift to streaming in full swing, how are media business models being affected by the market forces that influence its ability to experiment with pricing and other modes of monetisation.

Switching costs: Companies with a deep moat will have products and services that deter their customers from switching to their competitor by enforcing a high switching cost. For example, in the telecommunications industry, it is commonplace that the benefits of switching from a phone plan outweight both the time and effort involved, as well as the likelihood that the company will implement a counter offer to keep the customer for at least another year.

  • High commitments plus sunk cost fallacy: Cumbersome pay-TV models have an annual cost rather than the monthly cost favoured by streaming services. If users have already paid upfront, there is likely the feeling that they should remain rather than cutting your losses.

  • Inertia and myopia: The longer someone subscribes and has a habit of paying for a subscription embedded, the less likely they are to churn out.

Regulations - Net Neutrality

This is largely a US issue, but potentially will have reverberations across the globe, as net neutrality would put the power firmly in the hands of the telcos. Telco companies controlling media distribution could, in theory, slow down buffering on Netflix and Amazon Prime, thus disrupting the user experience for customers of these services. With their heavy reliance on those controlling the pipes, streaming services would immediately become vulnerable. However, they compensate for this lack of control of the digital pipes by controlling the relationship with the customer, building brand equity and distribution.

  • Network Effects: A product or service having numerous users could cause a positive effect on the value of that product to others. The way to leverage this is to effectively ‘socialise’ the platform by creating a place for people to interact. Users then feel they cannot leave for another platform because the current platform is where their friends are.

  • Inflating content costs: Netflix will have invested $8 billion in content by the end of 2018, forcing other companies to compete. This expenditure is not just about creating premium content, it is actually a shrewd strategic move. By inflating the costs of content creation at the premium end of the market, Netflix is creating a barrier to entry for competitors, plus the expectations of premium production compensation have risen. Not only does this force other competitors to spend more, it is also more difficult for new companies to emerge and attempt to steal market share from Netflix. This issue is likely to be exacerbated by telcos’ involvement, where companies such as Verizon, with its combination of high, free cash flow (a metric which unlike revenue and earnings is more difficult to manipulate), means it can likely spend freely on content and distribution acquisitions.

Above all, premium content in the media business remains a hedge against commodification. Media’s USP is that it stops other services becoming dumb pipes or commodities. Once telcos can no longer compete over utility (speed of service etc), then delivering premium content becomes imperative as media is one of the more difficult areas to commodify (try creating a shot for shot remake of Game of Thrones and aside from the legal implications, see how big your fanbase is). In the era of a complete lack of content scarcity (YouTube etc), premium offerings arguably become more valuable than ever, and it is this that is inflating the content bubble presently being experienced by media.

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