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Never say never. Netflix co-CEO Reed Hastings says the streaming platform is now open to offering its services at a lower-priced, ad-supported tier. Hastings’ remarks arrive after the streaming giant reported a decline of 200,000 subscribers during its fourth-quarter earnings late Tuesday, its first loss in subscribers in more than a decade. Players like Hulu, Discovery+, HBO, and Disney+ have already moved into the ad-supported landscape or announced plans to do so. Reed Hastings has been very clear in the past about not complicating the subscription model by adding advertisements. Well, he has a point, but in today’s world where the user has so many options to switch services, OTT service has to come up with an arrangement that makes money through alternate sources. Finding this alternate revenue source is not the only problem that OTT platforms have. Let us dive into and understand some of the core problems that the entertainment industry needs to fight and why video games/gamification is a potential solution.
Problem 1 – There are only 24 hours in a day
The problem definition for any OTT/entertainment company has changed to “gaining user attention” from just building content and technology. An analogy can be drawn from Intuit when they started working on Turbo Tax in 1984. During the development of Intuit, Scott Cook their CEO and founder made it clear to the product team that Turbo tax is definitely competing with other similar products such as H&R block but its greatest competitor is pen and paper. The task that Scott gave his team was to build software that replaces pen and paper. Two decades later a very similar use case has emerged for entertainment companies to target. Its users TIME!.
To capture time, we need to understand users’ intention of using a product. A lot of how social media and OTT impact our lives depends on what we want to achieve as users. What you want to achieve when watching a video of your friend’s holiday on Facebook Stories is probably different from what you seek to experience watching Netflix after dinner. Video is a critical component of both experiences but serves very different needs. Video is no longer a homogenous experience and we use video on different platforms for different reasons. This can be divided as discovery vs intent-based viewing. Discovery session involves short and frequent session which are unplanned and usually done for information or inspiration. Examples of discovery-based content would be Facebook or Instagram stories. People usually watch them connect with friends, family, celebrities, or brands. Intent-based viewing on other hand has longer sessions that were planned from an entertainment or relaxation standpoint. Netflix, Disney+, and Hulu would be examples of intent-based viewing. When it comes to intent-based viewing mobile has become a destination for longer consumption.
Considering our intent, this is how we can divide our day. We all have 24 hours in a day, we work, we sleep, we play and we entertain ourselves. An average American is spending around 1.5 hours on OTT/SVOD per day, around 130 mins (2 hours) per day on Spotify/music, around 1.5 hours on gaming, and around 2 hours per day on Social Media. As more and more immersive technologies like Metaverse start to come up, it is becoming a fight for users’ time and attention. Focus on “attention competition” reflects a fundamental and relatively recent change in consumer behaviors and options. In the linear Pay-TV era, consumers picked shows/films after surfing through channels or programming guides. If you had pay-tv, essentially everyone was getting paid and every competitor could acquire a user with a click of a button (remote). This is not how streaming works, instead, services are sold and accessed separately. A user will switch to a different servicer if their current app lacks anything they want to watch. From 2007 to 2014 Netflix was basically uncontested in marking the beginning of the true OTT subscription era, since 2014 the competition has increased with Hulu, Disney+, HBO, and even YouTube.
Getting back to time and capturing users’ leisure time. Economists usually define leisure in contrast to two other uses of time: work and necessity (e.g. eating and sleeping). And to that end, Netflix has tweeted “Sleep is my greatest enemy” and doubtlessly hopes you’ll stream while you eat, too. Lots of folks also use the service while using the restroom, another necessity. In recent years, most of the entertainment industry has adopted Netflix’s mental model. In 2019, Nintendo of America’s President said, “That time you spend surfing the Web, watching a movie, watching a telecast of a conference: that’s all entertainment time we’re competing for.
Problem 2 – OTT/SVOD content has reached a saturation point
People love movies and TV shows, but they don’t love the linear TV experience anymore, where channels present programs only at particular times on non-portable screens with complicated remote controls. Now streaming entertainment – which is on-demand, personalized, and available on any screen – is replacing linear TV. Changes of this magnitude are rare. Radio was the dominant home entertainment media for nearly 50 years until linear TV took over in the 1950s and 1960s. Linear video in the home was a huge advance over radio, and very large firms emerged to meet consumer desires over the last 60 years. The new era of streaming entertainment, which began in the mid-2000s, is likely to be very big and enduring also, given the flexibility and ubiquity of the internet around the world.
The issues with this new era come with their own challenges. You have to produce content that will keep subscribers attached to a service. Apart from building IP and limited user time, finding content that will grip the user is difficult. Services often compete for the same story or tell similar stories from a different perspective. Today, we are being told one story many times. Books, Documentaries, and Podcasts all tell the same story. Before watching “The Dropout”, people could have read Bad Blood, the nonfiction book, by reporter John Carreyrou documenting Therano’s failure. Or they could listen to the podcast about Holmes, also titled “The Dropout”, or watch the HBO documentary “The Inventor”. And this isn’t the end of Theranos content, there is a feature film in pre-production starring Jennifer Lawrance and an upcoming docuseries from Real World purveyors Bumin/Murray products. The Dropout | Trailer | Hulu
With so many streaming services jostling over similar content, building repetitive content will only last a few times. This is already bringing a sense of staleness. Users are also asking the question, why should I pay and subscribe to different services to watch the same content. At some point spending our finite time in this world watching the same story over and over will raise questions and the answers will be in finding true IP from the viewer’s perspective. This was evident when Netflix lost 200,000 paying subscribers and it predicts to lose another 2 million customers in the second quarter. This phenomenon of losing subscribers is not limited to Netflix. Kantar published a report that surveyed the state of streaming services in the UK. The firm found that in the last three months, 1.5 million households had canceled a subscription to a streaming service and 38% of those cancellations were made in an effort to cut costs. It shows that households are now provocatively looking for ways to save and the SVOD market is already seeing the effect of this. According to a study by Nielsen, the video streaming industry has reached a tipping point. Although the consumption of content has increased the vastness of platform choices has become overwhelming for the audience. These insights lead us to think about alternatives to grapple for user attention.
Problem 3 – Lacking IP
The problem where every streaming service is offering a story on Elizabeth Holmes becomes the question of where is the IP? In the era of “competition for time” every single organization including Meta, Instagram, TikTok, EPIC, etc is an entertainment company and the most valuable content in the world is a franchise. I wrote about IP (intellectual property) in detail in the “Intellectual Property (IP) is king in OTT/SVOD – Products and Businesses (nikhilmv.com)“
IP brings exponential love to a brand and when we are talking about attention competition not having an IP reflects a deep-rooted problem that cannot be cured by adding subscribers, building games, or producing more content. If a franchise is not able to create generational love one day it will fail to bring views and that will be the end. Some big OTT players sit well within the IP bucket, while some are still working to find one hit show that will develop IP. Disney+ and HBO are well placed with the love of viewers for their content. Netflix is still working to build IP and heavily producing to find a breakthrough.
Disney is a leader when it comes to the collection of best stories. Disney is not only best at collecting them but telling them too. Disney’s Marvel cinematic universe consistently outperforms the Marvel films of Fox and Sony as well as comic book films of DC. Geoge Lucas creator of Star Wars stated in an interview that the only reason he sold star wars to Disney was based on the success they had brought to Marvel and the treatment they had given to the Marvel staff.
For Disney, storytelling is key. Storytelling requires an emotional component that will appeal to consumers of all ages, and Disney has mastered the ability to create those emotions. Every advertisement, commercial, and billboard must remind consumers of those emotions and stories
Let us continue with our example of Disney from above. Theme parks, cruises, ice shows, Broadway, retail stores, merchandise, TV, and more. No other media company has more opportunities to monetize its content and love than Disney. In fact, theme parks are probably the world’s first hyper-optimized microtransaction games. Jungle Cruise photo here, Mickey cupcake there, click to buy a FastPass+, try on an Avengers Academy shirt inside, etc. (Update: Disney has since announced that its new Spider-Man ride will include purchase upgrades such as better web-shooters, powers, and personalized gear – only Spider-lovers need to apply!). Let us also understand one thing here, Disney does not actually collect most of its profits from products. However, the designers, manufacturers, and sellers of these products do. Disney, if they want, can monetize the products more but for them, the real transaction is the continuous love building. The $10 licensing revenue from a lightsaber is insignificant in comparison to the value of a little boy spending dozens of hours imagining as a Jedi Knight.
In the last 2 decades, many franchises have been born and elevated from Twilight to Game of Thrones. Many have grown stronger like Marvel and Star Wars. But in general, most money has been made when these transcended to video games. This is unlocking the IP of your brand.
Enter Video Games
OTT companies today are not only competing with fellow entertainment services but also with gaming companies like EPIC (creator of Fortnite), Riot Games (creator of League of Legends), Activision (creator of call of duty), etc. Riot games recently licensed its internally-produced anime series “Arcane” to Netflix for distribution, rather than take on these duties themselves. It’s hard to imagine this being Riot’s long-term strategy. Let’s say if Riot and EPIC are successful in building another Disney, they will not look for outside partners. Gaming companies are therefore in direct competition with OTT.
However, if OTTs decide to enter gaming (which Netflix already does) they are more likely to build a long-term franchising market. For example, Netflix already has most of the user engagement data, the log-in to the games (stranger things) is the same as Netflix’s log-in. All user activity in the game is Netflix’s property and is super valuable when in the future, Netflix decides to monetize the games. Netflix can finally mix its gargantuan library of content with games. It’s a huge power play focused on snapping up IP. It’s a new way for Netflix to keep subscribers hooked on its service — and gaming could just be its winning play for continued streaming dominance. Netflix’s games can be accessed much like movies, TV shows, and originals, and users can launch games right from within the app once downloaded through the App or Play stores.
Doing this will not be easy both technologically and strategically. Games today need to be online and multiplayer. This would require either building games on peer to peer model or a client-server model. Peer to peer model is fully controlled by players, meaning players send information about their game state and receive the same from opponents to create a simulation. The biggest challenge in peer to peer model is latency due to lag in communication. The client-server model features a server that acts as a centerpiece for communication. Players don’t communicate with each other directly but with the server. Latency issues in this scenario can be managed.
Other portions of the build will require maintaining player accounts, leaderboards, rewarding structure for players based on their performance, and in-built game advertisements. Support features built will be needed such as customer support, live talk, player chats, anti-cheat management, payment system, and game patch/update management. Then there is a technology for distribution, another question is do these companies want to enter the game hardware market such as consoles. If you skip the consoles, that would mean most of the content would need to be on the cloud which will increase infrastructure and management costs.
Cloud game-streaming is very costly and computationally intensive. This is the reason Microsoft, Google, and Amazon are the biggest players in this industry. These companies have attained economies of scale and made cloud computing and transactions profitable. Microsoft gaming has the advantage of the azure scale and it literally uses un-shelled Xboxes as servers. Sony PlayStation uses Microsft Azure for cloud gaming, it’s difficult for OTTs to build a cost-effective and global network of data centers.
The solution to this problem lies in outsourcing. Portions of support and distribution can be outsourced. Services like Discord, Game Tech, and Microsoft can be used for the support system. The game building can be done on EPIC or UNITY platforms. EPIC as I stated forms direct competition, a better option is UNITY. UNITY can also help with distribution across multiple platforms including IOS, Android, Play Station, or Xbox.
This may also lead to potential M&A activities. Let us ponder on it. For OTT it’s more about building franchises and making money from these franchises. Competition is very tough, Microsoft, Sony, and EPIC all have available technology to build and distribute games. Hence the path forward should be about maximizing distribution rather than selling exclusivity. If let’s say Netflix was to acquire Ubisoft at 7B (+50% premium over current market cap). Netflix has $6B cash in hand, it can use a portion from here and take the rest as debt to fund this deal. This gives Netflix excess valuable IP for Ubisoft’s bestselling titles such as Assassin’s creed which sell around 15M copies annually at between $10-60 retail and roughly drive up to 30 hours of playtime over their lifetime. Now $7B is Netflix’s 45% of the programming budget for 5% of its user growth. The key distinction to note, Ubisoft does not only come with the IP of Assassin’s Creed but with a gaming engine, Ubisoft snowdrop. Still buying does not make sense considering the low return, as we all know the end game is user acquisition that sticks. Perhaps the better idea is to use tools like Google Stadia or UNITY (read: Unity and Meta – A formidable combination, it’s a win-win – Products and Businesses (nikhilmv.com) to build their own titles and reach an IP status.
Enter Live game streaming – Another potential solution
Gaming not only limits Netflix’s use case to user acquisition with games, but it also opens another avenue via live game streaming. We cannot ignore the likes of Twitch and YouTube live game streaming which have revolutionized the gaming industry. Professional gamers in recent years have switched to transmitting their screens of video games to a live audience. Live game streaming is the act of simultaneously recording and broadcasting gaming content via social platforms such as YouTube, Twitch, or Facebook live. The rise in popularity of live streaming started in the early 2010s with the broadcasting of esports tournaments and has since grown into an industry in which individual streamers (broadcasters) have made it their full-time job to provide entertainment for an audience of up to tens of thousands of viewers on a daily basis. The audience spectates the gameplay and communicates with the streamer via text chat, allowing both parties to interact. Although most content on live streaming is free, viewers can financially support the streamers through various avenues including monetary donations or via a monthly subscription to a streamer channel.
Based on theories of immersion, the viewers can be distinguished between three different orientations of a streamer, which determines the amount of interaction that takes place between them: (1) as professional, which focuses on the streamer’s expertise in challenging and competitive games, with little to no interaction with viewers; (2) as a hedonist, where the viewers experience a game’s aesthetics through the streamer, usually without competitive pressure, sometimes in the context of emergent gameplay such as speedrunning. or open-ended (sandbox) experiences and role play. In these streams, there tends to be little interaction with viewers, and it is mostly about the game being played; (3) as a companion, which is more about the streamer as a person rather than an extension of the game avatar.
Before we jump into video game streaming as a model for OTT, let us look at a few stats to understand the market for live game streaming.
- The global gaming live streaming audience hit 730M in 2021, 10% higher than in 2020.
- The audience will continue to grow to 920M by 2024 at a CAGR of 9%
- Twitch has 46 billion minutes watched per month, it’s the 31st most popular website.
- There are 3.3M Twitch broadcasters every month.
- 55% of Twitch users are between 18 and 34.
- In 2020, YouTube alone had 100B watch time hours and 40M+ gaming channels
- More than 80,000 YouTube Gaming creators hit 100,000 subscribers
- Over 1,000 gaming creators hit 5 million subscribers
- Over 350 gaming creators reached a whopping 10 million subscribers!
Live streaming has untapped potential and can make the viewing experience better than traditional linear TV. Live streamers can use these gamification approaches to boost engagement, attention to ads, and commerce opportunities with their events. Hence, video is no longer a homogenous experience and we use video on different platforms for different reasons. Creating an interactive drama like Netflix’s “Black Mirror: Bandersnatch” is one thing, but gamifying a live stream is quite another. I see two major technical issues making it particularly challenging.
The first is synchronization between the live stream and video data. Data powers gamification and much of the value is lost if it’s out of sync with the video. If a game appears after the action is complete, it’s more annoying than engaging! Imagine, for example, a poll asking a football audience if a foul was interference after the next down is complete.
The second issue is ensuring synchronization between what all the viewers of an event see. Features like polls, betting, and chat rely on it. Keeping video latency very low – to a second or so – is a great way to handle the problem.
If you are wondering do we really have a population that is interesting in gaming and does it really makes sense to invest billions of dollars for a smaller population read this excerpt from my “Metaverse and Numbers” blog. Here is what I wrote.
The video game market was around $175B in 2020 and will reach $218B by 2024 according to newzoo, growing by 8% CAGR. The Asia Pacific will be the biggest market generating almost 50% of the revenue. Among segments, smartphones will be the biggest and fastest-growing segment with revenue generation of ~$94B. Also, the global players will reach 3.3B by 2024 up from 2B in 2015. The current market distribution is shown below:
Let us talk about Netflix for a moment and what they are trying to achieve in the gaming space. As of April 2022, Netflix has 18 games under its umbrella while only 2 games have Netflix IP. Here is the full list. These two are Stranger Things:1984 and Stranger Things 3: The Game. Last year Netflix also acquired Night school Studios. Night school Studios is best known for their critically acclaimed debut game, Oxenfree. All 18 games can be accessed via the Netflix app, but require local installation. User is sent from the Netflix app into their device’s app store (google play or apple app store). Users can then open the game from Netflix or their phone’s/tablets home screen. Currently, there are no microtransactions as part of these games, but in the future, if Netflix does decide to add transactions and payments, they will have to pay 30% to the app stores. The single sign-on (SSO) approach is critical for Netflix as the gaming network will still be free to Netflix users.
Gaming has never been so diverse and fast-changing. With the advent of metaverse and web3.0, the gaming ecosystem is now attracting mainstream gamers and developers. AR and VR market is growing making gaming and entertainment more realistic.
To conclude, as games like Fortnite expand into more non-gaming experiences, a lot of franchises will pursue cross-media storytelling. Building up a franchise and keeping the user engaged by the exponential increase in love for content will enable OTT players to build and keep subscribers. One thing that can be really understood from these facts around IP is to build love as an entertainment company. Anyone can tell stories, but very few can tell a story well. MCU is not great because it has Captain America or Iron Man. It’s the ability to create a love for sub-characters like Falcon or Wanda. How all of this plays out is hard to predict but interactivity is certainly on its way to continue to gain leisure time. The problem of “where to watch” is not even the primary problem for OTT. The primary problem has changed to fill the gap “what to do” in the leisure time for users. Today users have multiple options to fill “what to do” in leisure time. The primary competitor to video is gaming and is probably the solution OTT should focus on.
Just saying: From what we have seen so far with the balance sheets of Netflix and Spotify, we can all argue about their monetization potential. But the fact they have reached millions and control how they spend their time cannot be ignored. Service providers will need to find alternatives to gain user attention. Technology will be used to create deeper engagements and form stronger bonds with enthusiasts. The answers are to diversify beyond video, like beefing up staff for gaming services
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