Thanks for the long, thoughtful response... It's a breath of fresh air.
There's a lot to reply to in here, so I'm doing my best to organize.
Assume that the following were true. Streaming services were prohibited from producing content and/or owning it. Also, assume that content owners were prohibited from signing exclusive deals with a streaming service.
What would be the basis on which the streaming services would compete:
- Price
- UI (discovery, control, family profiles, suggestions)
- Quality
Price would either be based on scale (a larger player could negotiate better deals with content providers), margin or cutting quality (delivering at lower bit rates or resolution,
etc.).
Ok, I mostly agree. Simplifying the assumptions certainly helps. For this section at least, I'd make one more simplifying assumption which is that the streaming service doesn't own the network and is barred from exclusive deals. So we're looking at: content creator, streaming service, network provider, playback hardware.
Services would compete on price, I'd say UX (user experience), quality of service (video quality and related factors), and reliability/support.
You'd perhaps expect a few service tiers and at each tier you'd expect price to be a function of a few factors but in a commodity market like this you'd primarily expect it to be a function of costs. Some (economic) rents could be extracted for innovations in UX and the impact on price would depend on whether companies used that advantage for profit or growth, but in general price would approach cost.
Costs would mostly be driven by the underlying content, network and equipment costs and advancements in technology.
Given equal availability of network access and capital equipment, I think, in the end, the price structure for the streaming service is driven by scale (as you said) and technology (both to utilize network and capital more efficiently and to differentiate around UX).
I went through the trouble because I think technology is a key factor.
The reality is that reality is that streaming services are just middlemen and for the most part, do not offer much inherent value. Having the large content producers directly deliver to the consumer, has the potential to lower the overall price, if they are able to reach the needed scale (something that all 5 big major studios should be able to do).
Actually a better way of looking at this is that the content producers are eliminating the middle level of distribution, which should eliminate waste and cut costs overall to the end user.
Maybe, but I'm not sure I'm willing to just take that as a given...
For one thing, there are differences in the existing streaming services. I personally prefer the Netflix app over Amazon or HBO. If I have a preference, then Netflix must be adding value somehow.
For another, there's the question of core competence and the right level of vertical integration. Why are content and streaming the right combination and not include network infrastructure or building cameras and lenses? If the efficiency argument you're making were universally true, then Amazon would have their own fleet of delivery trucks or McDonalds would have a ranching division and we'd go to MGM movie theaters.
If technology and scale drive the pricing structure, is limiting scale to one content provider and making technology development a division of a massive entertainment business really the best combination?
I suspect we would be more likely to see improvements in delivery and UX if the streaming service were forced to compete on those factors alone rather that being what a user puts up with to see Star Wars in 4K 3D (now with 30% more Tauntauns!). Once the streaming service is put inside the content business it becomes an internal monopoly with all the downfalls that carries with it.
Most often, there's a level of integration that makes sense. AOL/Time Warner stands out a warning beacon-- there's a lot of factors that led to that disaster, for sure, but underlying all of them was the question of how much sense it made to put those functions into one company.
Movie studios decided to dis-integrate themselves from acting talent at some point because that level of integration was inflexible. They don't own the theaters. Very often they don't own the distribution.
Part of the reason the studios don't own theaters in the US is that the big studio system was broken up in an
Anti-Trust action-- which also suggests that this level of integration is (or at least was) harmful to consumers.
It is simply because $10 a month cannot pay for all the content being generated. People used to pay $50-$150 for a cable subscription. Eliminating the cable company only eliminates some of that cost, but people were spoiled (and misled) for the short time that Netflix had an unsustainable deal with many of the studios. While they were a small player, studios were just looking at them as incremental revenue. Once they began destroying the studios' larger revenue streams (home video, VoD, MSOs, etc.) something had to change.
I am still not sure how anyone thought that it would be possible to go from a cable subscription for $50-$150 to a Netflix subscription for $10 and expect to receive the same volume of content as before.
Expect to eventually pay about the same as a cable subscription for the same about of content as one would receive from a cable subscription, but being able to watch it all on demand, and be able to rotate through them, keeping only the services you need each month, based on which shows one wants to watch at that moment.
This is a key point-- it's possible we've had our expectations set by an unsustainable system. We've seen this before with Napster, which set the unreasonable expectation that music was free. Likewise, I've no idea how all those publications will survive under News+.
That said, I'm also not sure exactly how unreasonable it is. Netflix is now $16 a month for 4k content. Disney+ is $7 for 4k content.
So, if you have a choice between "one fee for the world" or $7 for Disney and $9 to spread around to other services, you come out even if you would normally spend about half your time watching Disney content.
This doesn't imply that we're underpaying for content in the Netflix model though. Remember that a person can only watch 24 hours of content in a day. If people choose to only subscribe to Disney and spend their usual amount of time watching, then they've reduced what they're paying for content even though they're consuming just as much.
What it does imply is that Disney is trying to leverage their catalog to "extort" viewers into watching more of their content and therefore paying more for it. If you used to spend a quarter of your time watching Disney, then the Netflix model would eventually settle out to about $4 going to Disney. Now they're saying if you want to watch
any Disney content you have to pony up $7-- encouraging you to consume more of it at the expense of other things you may have otherwise chosen if you want to keep to the same budget.
I don't think the cable model is the best reference point either. In the cable model, content was separate but "streaming" and the network were integrated. In the Disney+ model, content and streaming are integrated. In all cases we need to pay for content, streaming, network and playback hardware.
The cable model included content, streaming and the network. The Disney model only includes content and streaming, the user must also pay for the network. In a lot of cases, Internet fees approach those of the cable fees you mention.
There are other nuances between the two-- the network we pay for today does more than the single purpose cable of yesteryear and removing the network portion gives us more flexibility in moving our viewing across screens if you're willing to pay for more networks (fiber to the home, cellular to the phone etc).
In the old cable model, the cable provider was also a local monopoly, so there were monopoly rents being charged as well.
And, finally, there was the experience the music industry had when everything went digital: people pay for content because they choose to. For a while, there were serious discussions about whether digital meant the end of music sales-- until iTunes came along and made it work. iTunes worked because it was simple to use and reasonably priced.
The lesson being that if you over charge, or make the system too unfriendly to the customer, more of your customers may work around your delivery system. This sets a ceiling on the pricing.
Both assumptions are false. Netflix needed to start producing its own content because it knew that its role as a middleman did not generate enough value, and that, eventually, the content producers would understand this and not renew their deals.
Disney realized that Netflix was not paying anywhere near enough for the value it was receiving and decided that they had enough content to make their own streaming service.
On the other hand, Netflix is not in Apple's TV app because it does not want to be disintermediated. They wanted consumers to have to go to their app, and not let Apple deliver the content without the customer knowing who was delivering it, and not proving the demographic data they wanted/needed. Netfilx choose not to be part of the TV app before Apple started spending money on content.
I suspect you're at least partly right about Netflix's decision to create content. I think it was also a negotiating tactic to make it clear that they own the connection to the customer, and can replace the content owners if they choose to-- putting Netflix in the power position and giving content owners the choice between lower licenses or no license.
But that's also what set up the race-- Disney wants to prove they can access the customer before Netflix proves they can obviate the need to work with Disney.
And I think you're right about Netflix's decision to not join on to the TV app. If their leverage with Disney is that they own the connection to the customer, then Apple is threatening that. You're probably right about the access to customer data as well. I haven't looked at it, but I suspect Apple upholds their privacy standards and limits what Neflix can learn about Apple customers...
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So you’re against too much vertical integration.
I guess I'm against too much of anything. Likewise too little. I'm very much in favor of just the right amount...
Sometimes we benefit from that integration, sometimes we lose. I'm trying to sort out which way this is going...
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People wanted a la carte and that is what we are getting. Hopefully, all the major companies get together eventually to create a bundle for those of us that still like them.
Are we though? This feels like bundling again... If you want Pixar, you also get the Simpsons and since you're getting both you're being charged for both.
News+ sounded more a la carte. A monthly fee for everything, read what you want, the content providers are paid a fraction of your fee based on what you actually read.
In the streaming world, that would suggest an a la carte service would charge a fee, give you everything, and if you watched Cars, Disney would get a piece of your fee that month.
That sounds like the most consumer friendly option. Not sure it's workable, and clearly the content providers want to leverage their catalogs, but I'd be happiest and would pay some premium for that type of service.
