The Content Arms Race Continues to Escalate

In January, I authored a report for TDG on the Big-3 SVOD & the Original Content Arms Race that examined the market conditions that were driving dramatic increases in content expenditures amongst Netflix, Hulu, and Amazon Prime Video -- especially for original programming

Since that time, the content arms race has continued to escalate, as the competition has stiffened, and the economics of the global market have made previously unworkable production costs viable. Should we expect OTT content budgets to continue to balloon to unprecedented levels? The short answer is ‘yes.’ Analysts such Nat Schindler of Bank of America Merrill believe there is still considerable opportunity ahead if companies can achieve just “reasonable penetration levels internationally.” 

Netflix recently reached 130 million subscribers on a global basis with more than half, roughly 74 million, coming from international markets. With Netflix aggressively looking to capture market share in less mature international markets, this content arms race has no détente in site.

How Much Are the Big-3 Spending?

TDG projected in January that total content spending by Netflix, Hulu, and Amazon would increase more than 40% between 2018 and 2022, from $17 billion to $24 billion. Additionally, we forecast that the growth of spending on original content would accelerate even faster, rising from $4.7 billion in 2018 to over $10 billion in 2022, up 121%. Today, other firms are introducing forecasts very much in line with our original expectations from January.

Among the Big-3 SVOD providers, Netflix remains the clear leader in both market share and content expenditures, and is reportedly planning to deliver a mind numbing 700 new original shows and 80 movies in 2019. Perhaps this is what is required to lead in this space given the growing number of competitors battling for mindshare.  

Amazon is also upping its game, pledging to deliver more broadly appealing, ambitious, and attention-grabbing shows. It sunk more than $60 million into the recently released Jack Ryan, starring John Krasinski, and have already reupped for a second season. In addition, Amazon is moving forward on the even more expensive and ambitious Lord of the Rings adaptation, which reportedly costs the company $250 million merely for the rights, with production costs estimated to reach $500 million.

After the success of The Handmaid’s Tale, Hulu is not resting on its laurels, significantly ramping up spending on original titles. High-profile shows such as Stephen King’s Castle Rock will debut later this year. The fact that Hulu will support the series on both its live TV and on-demand services points to a unique competitive advantage the company has over SVOD competitors, old and new.

As to the Implications…

While it is a great time to push binge-worthy shows, the abundance of original content comes at a cost. International growth has afforded content creators much larger budgets to develop their content. But these costs will ultimately be passed on to consumers in the form of higher fees, leading subscribers to consider whether the service is worth the cost. In this calculus, the variety and quality of original shows will prove critical to not only holding on to existing subscribers but to attracting new ones.

Amazon, Hulu, and other SVOD streaming services should continue to invest more heavily in original content to clearly differentiate themselves and avoid falling further behind Netflix. That is an inescapable fact, especially with competition steepening. Disney set to debut a self-branded direct-to-consumer streaming service next year with exclusive content from the Disney, Marvel, Star Wars, and Pixar libraries.

Conclusion

Greater investments in producing originals mean consumers will enjoy access to a broader range of high-quality entertainment. Fueled by international growth, this trend will continue for the foreseeable future, as major media companies like Disney pivot to a direct-to-consumer focus, and Netflix and Amazon hasten their evolution from distributors of licensed content to major studios in their own right.

Brad is a Senior Advisor for TDG and is a highly accomplished digital marketer and advisor for leading entertainment and technology focused organizations. Prior to TDG, Brad served as the marketing lead for Motor Trend OnDemand, the premier OTT destination for gearheads and was the VP of marketing at Hallmark Labs for the launch of their family-friendly SVOD service. He currently lives in Los Angeles, CA.