Summer 2019

Streaming's Expanding Landscape

The global market for SVOD programming is outpacing North America, and having a profound impact on the future of the film and television business

By Chris Morris

Illustrated by Gordon Studer

It's hard, sometimes, to see beyond our own backyard.

Every Sunday, the media pounces on that weekend's domestic box-office numbers. What succeeded? What failed? What defied expectations? It's a fun exercise, but it's ultimately a lop-sided view of the industry—one that doesn't take into account the increasing dominance of the international box-office business. In fact, in 2018, while the domestic (U.S. and Canada) box office was $11.9 billion, the international number was $29.2 billion.

Roughly 800 million people live in North America and Western Europe, which have traditionally been the focus of the Western media and the entertainment industry. The rest of the world, though, is populated by 6.8 billion people. (Fig.1) And economic development, trade and technological advances are providing opportunities that hardly existed just a few years ago, dramatically expanding the potential global audience for all forms of video content. All of this is having a pronounced effect on the present and future business of film and television. It's a startling realization, given how U.S.-centric our focus has been.

It's no surprise that the story of subscription video on demand (SVOD) is not a mere repetition of the feature tale, but an essential dynamic of this fast-rising business model.

When looking at Netflix or its competitors, media reports often center on the growth of the company's U.S. subscriber numbers. But it's a misguided view that doesn't take into account what SVOD services themselves, and the stock market, see as the most important growth story: international.

Netflix and Amazon, the largest U.S. SVOD companies, while still early in their international roll-outs, are driving enormous growth of their subscriber bases. While Netflix didn't put an emphasis on expansion beyond the U.S. until 2016, its number of international subscribers already eclipsed those in the U.S. by the end of the second quarter of 2017. And by the end of 2018, the company had amassed a staggering 81 million international subscribers, while those in the U.S. totaled 58 million. (Fig.2) Amazon Prime Video also began its global push in 2016. And while the disparity isn't quite as large, DGA estimates show that its international subscribers (39 million at the end of 2018) also top domestic subscribers (37 million). It is likely that this trend will continue and accelerate.

Development of International

One of the hurdles SVOD companies have faced historically in the developing countries is the lack of high-speed internet services. But as mobile speeds increase with 4G and 5G, there's less need for hardwired connections. Consumers who didn't have access to broadband or over-the-air content can, or soon will be able to, access it. That makes SVOD the platform of future global growth as original and library video content can be delivered directly to users—and monetized.

The subscriber numbers for global SVOD further emphasize the growing strength of these markets. North America, as of 2018, had 136 million people paying for an SVOD service, while the current number in key international markets is 419 million. But the big story here is that China alone has 267 million subscribers to Chinese streaming services. (Fig.3)

Dollars and Cents

However, big subscriber numbers don't necessarily correlate to big consumer spends in developing markets where annual incomes are significantly lower. North America is still far and away the cash cow for SVOD companies, taking in more than $9.02 in monthly average revenue per subscriber (ARPU). By comparison, China, with its 267 million subscribers, only collects $2.56 per subscriber. (Fig.4) That hurdle is one that might be bypassed thanks to a variety of business models in this space. The key to boosting spend in new markets might lie with a hybrid approach that companies like Hulu, as well as a number of international services have established. By combining a subscription model with ad-supported video on demand (AVOD), this hybrid could close the gap. According to Hulu, it's proven especially lucrative, allowing the company to have a lower monthly subscription price at $6 (with ads) while bringing in $15 a month per subscriber when ad revenue is included. The major streaming services in India have also taken advantage of the hybrid SVOD/AVOD model.

The Big Battle Zones

China and India, with their explosive subscriber growth rates, are essential battle zones for the major U.S. streamers. Combined, the two countries have more than 2.7 billion citizens (the U.S. is home to less than 327 million).

Chinese consulting firm Entgroup says paid subscriptions to the country's online video platforms have grown at a compound rate of 119% over the last three years. And with 800 million people online in China, there's massive upside.

The market potential is catnip to investors, who have driven Netflix stock to as high as $400 per share. Yet at present, no Western streamer has been able to broach China directly with its service due to the country's restrictions. Even YouTube has been blocked since 2009.

An alternative is to license content to Chinese companies. And with the region's enormous growth has come high demand for content from Western studios. According to data from Ampere, there are 3,000+ U.S. titles currently licensed to stream in the Chinese market by way of local streaming heavyweights like Tencent Video, iQiyi and Youku Tudou, which are slugging it out to dominate the Chinese market. (Fig.5)

The new global dynamic is also a driving force in some of the media industry consolidation that has taken place in the past year. Take Disney's purchase of Fox for example: the deal not only gave Disney a large additional library of content, it gave the company ownership of Hotstar, one of the largest streaming services in India. While Hotstar touts nearly 7 million subscribers, the company's ad-supported platform is utilized by a staggering 300 million active monthly users.

India, at present, has more than 500 million people connected to the internet (primarily mobile), with another 800 million waiting in the wings. Netflix and Amazon are both racing to boost their presence in the country, both buying libraries and commissioning dozens of original films and TV shows. They're making inroads, but like China, the Indian market is dominated by local players, including the already mentioned Hotstar, Eros Now and Hooq.

What's Old is New Again

This growth, and the potential for much more, is not only driving stock market valuations, but also causing established "legacy media" companies to embrace the SVOD business model and the markets and valuations they offer. Disney, AT&T (via WarnerMedia), NBC Universal and the BBC/ITV are moving away from the traditional licensing model and setting up global direct-to-consumer initiatives of their own. Tech giant Apple has also thrown its hat into the ring, investing heavily in original content. (Fig.6)

The rush to spend billions on original content, not only by Apple but on an even larger scale by Netflix and Amazon, is an arms race against the legacy media companies, which are poised to bring their massive libraries of content back home when their services launch.

It's well known that library titles and repurposed content are in large part what drive consumers to these services. Despite Netflix launching hundreds of original programs, library content still makes up nearly 65% of viewing on the service, according to data analytics firm 7Park. That includes major Netflix draws like NBC Universal's The Office and Warner Bros.' Friends, for which the streamer recently shelled out $100 million to keep for an additional year.

In Demand

Streaming video is still a new technology in the grand scheme of things. And like any fast-developing industry, it's going through rapid changes. Early entrants such as Netflix and Amazon are facing looming competition from a variety of companies. And the spread of fast, reliable cellular technology has opened up a much bigger world of viewers.

The Industry / Technology

Articles on creative issues and new technology in features, television and new media.

More from this issue
The latest DGA Quarterly includes our cover story on Streaming's Expanding Landscape, the DGA Interview featuring Jean-Marc Vallée, features on televisions's producer/directors, Homeland, Game of Thrones, American Ninja Warrior and more!