What the leading on-demand entertainment specialists – Netflix and Spotify – will need to do the mount a serious challenge to GAFA in the top tier of Internet platforms and how telcos can help them make the online world more competitive.
This is the first of two reports analysing the market position and strategies of four global technology companies – Netflix, Spotify, Tesla and Uber – that might be able to make the leap to become a top tier consumer digital player, akin to Amazon, Apple, Facebook or Google. The two reports explore how improvements in digital technologies and consumer electronics are changing the entertainment and automotive markets, allowing the four companies to cause significant disruption in their sectors.
The first part of this report considers Netflix and Spotify, which are both trying to disrupt the entertainment market. For more on the increasing domination of online entertainment by the big Internet platforms, read the STL Partners report Amazon, Apple, Facebook, Google, Netflix: Whose digital content is king?
This report considers how well Netflix and Spotify are prepared for the likely technological changes in their markets. It also provides a high-level overview of the opportunities for telcos, including partnership strategies, and the implications for telcos if one of the companies were able to make the jump to become a tier one platform.
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STL Partners is analysing the prospects of Netflix, Spotify, Tesla and Uber because all four have proven to be highly disruptive players in their relevant industries.
The four are defined by three key factors, which set them aside from their fellow challengers:
- Rapid rise: They have become major mainstream players in a short space of time, building world-leading brands that rival those of much older and more established companies.
- New thinking: Each of the four has challenged the conventions of the industries in which they operate, leading to major disruption and forcing incumbents to completely re-evaluate their business models.
- Potential to challenge the dominance of Amazon, Apple, Facebook or Google: This rapid success has allowed the companies to gain dominant positions in their relative sectors, which they have used as a springboard to diversify their business models into parallel verticals. By pursuing these economies of scope, they are treading the path taken by the big four Internet companies (see Figure 1). Google, Apple, Facebook and Amazon have come from very diverse roots (ranging from an Internet search engine to a mobile device manufacturer), but are now directly competing with each other in a number of areas (communications, content, commerce and hardware).
Figure 1: How the leading Internet companies have diversified
Source: STL Partners
The evolution of online entertainment
As broadband networks proliferate and households are served by fatter pipes, telecoms networks are carrying more and more entertainment content. While there are major players in every country and region, there are essentially only six online entertainment platforms meeting this demand on a global scale – Amazon, Apple, Facebook, Google, Netflix and Spotify. These six companies are delivering increasingly sophisticated real-time entertainment services that are generating a growing proportion of Internet traffic, at the expense of traditional web browsing, file sharing, download services and physical retail entertainment.
The six are building global economies of scale that can’t be matched by national/regional media companies and telcos. Global distribution is becoming increasingly important in the media industry, given the prohibitive costs of sourcing content and then packaging it and distributing it across multiple different devices and networks.
Scale is also important for another reason. As the volume of digital content proliferates, consumers increasingly rely on recommendations. The platform capturing the most behavioural data (people who watched this, also watched this) should be able to offer the best recommendations.
Although the platforms with scale have a competitive advantage, they are still vulnerable to disruption because the online entertainment market is evolving rapidly with providers, including rights owners, experimenting with new formats and concepts.
As outlined in the STL Partners report Amazon, Apple, Facebook, Google, Netflix: Whose digital content is king?, most of this experimentation relates to the following six key trends, which are likely to shape the online entertainment market over the next decade.
- Greater investment in exclusive content: The major online platforms are increasingly looking to either source or develop their own exclusive content, both as a competitive differentiator and in response to the rising cost of licensing third parties’ content. Exclusive content may be anything from live sports programming to original drama series and even blockbuster movies. This is an area in which both Netflix and Amazon Video have heavily invested, making the two direct competitors for talent in this space.
- Growing support for live programming: People like to watch major sports events and dramatic breaking news live. Some of the online platforms are responding to this demand by creating live channels and giving celebrities and consumers the tools they need to peercast – broadcast their own live video streams.
- The changing face of user-generated content: Although YouTube, Facebook and other social networks have always relied on user-generated content, advances in digital technologies are making this content more compelling. If they are in the right place, at the right time, even an amateur equipped with a smartphone or a drone can produce engaging video pictures.
- Increasingly immersive games and interactive videos: As bandwidth, latency, graphics processing and rendering technology all improve, online games are becoming more photorealistic making them increasingly akin to an interactive movie. Furthermore, virtual reality will enable people to adopt different viewpoints within a 360-degree video stream, enabling them to choose the perspective from which to watch a movie or a live sports event. For more info, please see the STL Partners’ report: AR/VR: Won’t move the 5G needle.
- Rising use of ad blockers and mounting privacy concerns: Many consumers are looking for ways to avoid video advertising, which is more intrusive than a static banner ad and uses more bandwidth. At the same time, many national and regional regulators are becoming increasingly alarmed by the privacy implications of the data mining of consumer services and products, leading to clashes between the major online advertising platforms and regulators.
- Ongoing net neutrality uncertainty: In many jurisdictions, net neutrality regulation is either still under development or is vaguely worded as regulators struggle to balance the legitimate need to prioritise some online services with the equally important need to ensure that small content and app developers aren’t discriminated against.
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- Executive Summary
- Netflix: much loved, but too narrow
- Spotify: leading a formidable pack
- Lessons for telcos
- Conclusions for telcos
- The evolution of online entertainment
- Netflix: Keeping it original
- Right time, right proposition
- Competitive clouds gathering
- Economies of scale, but not scope
- Spotify: The power of the playlist
- Smaller than Netflix, but more rounded
- Takeaways for telcos
- Lessons for telcos
- Next steps for telcos
- Figure 1: How the leading Internet companies have diversified
- Figure 2: Netflix revenue and paid subscriber growth, 2015-2017
- Figure 3: Netflix has grown much faster than its rivals in the US
- Figure 5: Netflix from a monolithic website to a flexible microservices architecture
- Figure 6: Netflix: SWOT analysis
- Figure 7: Tailoring movie artwork to the individual viewer
- Figure 8: Netflix’s addressable market is growing steadily
- Figure 9: The number of mobile broadband connections is rising rapidly
- Figure 10: How studio films aim to make money using release windows
- Figure 11: Hulu’s broad proposition is a challenge to Netflix
- Figure 12: Growth in digital music is now offsetting declining sales of physical formats
- Figure 13: Spotify’s rapid revenue and paid subscriber growth
- Figure 14: Spotify’s fast-growing premium service is the profit engine
- Figure 15: A SWOT analysis for Spotify
- Figure 16: Spotify has significantly lower ARPU and costs than Netflix
- Figure 17: Spotify’s losses continue to grow despite rapid revenue rises
- Figure 18: Spotify’s costs are rising rapidly
- Figure 19: YouTube is a major destination for music lovers