Netflix doubles profit but Wall Street not very happy

Netflix has increased its annual revenues by 35% and doubled profits over the course of 2018, but that didn’t prevent a 3.8% share price drop in overnight trading.

Total revenue across the 12-month period stood at $15.7 billion, though growth does seem to be slowing. Year-on-year revenue increases for the final three months were 27.4%, with 21.4% for the first quarter of 2019, though this compares to 40.4%, 40.3% and 34% in Q1, Q2 and Q3 respectively. However, when you consider the size, scale and breadth of Netflix nowadays this should hardly be considered surprising.

“For 20 years, we’ve been trying to please our members and it’s really the same focus year-after-year,” said CEO Reed Hastings during the earnings call.

“We’ve got all these ways to try to figure out, which shows work best, which product features work best, we’re a learning organization and it’s the same virtuous cycle, improve the service for our members. We grow. That gives us more money to invest. So, it’s the same things we’ve always been doing at just greater scale.”

This is perhaps the reason Netflix has succeeded in such a glorious manner where others have succumbed to mediocrity or failure. Investments have been massive to build out the breadth of content, while the team has not been afraid to alter its business or invest in content which others might snub. Bird Box is a classic example of a movie some might dismiss, whereas we find it difficult many competitors would have given the greenlight to the original Stranger Things pitch.

On the content side of things, investments over the last twelve months totalled $7.5 billion and Hastings promises this will increase in 2019. Perhaps we will not see the same growth trajectory, as despite the ambitions of the team, another objective for Netflix pays homage to the investors on Wall Street. Operating margin increased to 10% during 2018, up from 4% a couple of years back, though the team plan on upping this to 13% across 2019.

Content is where Netflix has crowned itself king over the last few years, aggressively pursuing a varied and deep port-folio, though it will be pushing the envelope further with interactive story-telling.

“I would just say there’s been a few false starts on interactive storytelling in the last couple of decades,” said Chief Content Officer, Ted Sarandos. “And I would tell you that this one has got storyteller salivating about the possibilities.

“So we’ve been talking to a lot of folks about it and we’re trying to figure it out too meaning is it novel, does it fit so perfectly in the Black Mirror world that it doesn’t – it isn’t a great indicator for how to do it, but we’ve got a hunch that it works across all kinds of storytelling and some of the greatest storytellers in the world are excited to dig into it.”

The team are attempting to figure out what works and what doesn’t for the interactive-story segment, but this is one of the reasons why people are attracted to Netflix. The team are exploring what is capable, brushing the dust away from the niche corners and experimenting with experience. They aren’t afraid of doing something new, and the audience is reacting well the this.

Looking at the numbers, Netflix added 8.8 million paid subscribers over the final three months of 2018, 1.5 million in the US and 7.3 million internationally, taking the total number of net additions to 29 million across the year. This compares to 22 million across 2017, while the team exceeded all forecasts.

However, this is where the problem lies for Netflix; can it continue to succeed when it is not diversifying its revenues?

According to independent telco, tech and media Analyst Paolo Pescatore, the Netflix team need to consider new avenues if they are to continue the exciting growth which we have seen over the last couple of years. New ideas are needed, partnerships with telcos is one but we’ll come back to that in a minute, some of which might be branching out into new segments.

This is perhaps most apparent in the US market, as while there is still potentially room for growth, this is a space which is currently saturated with more offerings lurking on the horizon. Over the next couple of months, Disney and AT&T are going to launching new streaming services, while T-Mobile US have been promising its own version for what seems like years. If Netflix is to continue to grow revenues, it needs to appeal to additional users, while also adding bolt on services to the core platform.

What could these bolt-on services look like remains to be seen, though Pescatore thinks a sensible route for the firm to take would be into gaming and eSports. These are two blossoming segments, as you can see from the Entertainment Retailers Association statistics here, which lend themselves well to the Netflix platform and business model. Another area could be music streaming, though as this market is dominating by Spotify and iTunes, as well one with low margins, it might not be considered an attractive diversification.

The other area which might is proving to be a success for the business are partnerships with telcos.

“It’s sort of been this March from integration on devices and just makes that a point to engage with the service to doing things like billing, on behalf of or we do billing integration,” said Greg Peters, Chief Product Officer.

“And now the latest sort of iteration that we’re working with is, is bundling model, right. And so, we’re early on in that process, but I would say we’re quite excited by the results that we’re seeing.”

This is a relatively small acquisition channel in comparison to others, but it is opening up the brand to new markets in the international space, a key long-term objective, and allowing the team to engage previously unreachable customers. This is an area which we should expect to grow and flourish.

The partnerships side of the business is one which might also add to the revenue streams and depth of content. Pescatore feels this is another area where Netflix can generate more revenue, as the team could potentially offer additional third-party content, hosting on its platform for users to rent or purchase. Referral fees could be an interesting way to raise some cash and Netflix certainly has the relationships with the right people.

Netflix has long been the darling of Wall Street, but it might not be for much longer. The streaming video segment is becoming increasingly congested, while the astronomical growth Netflix has experienced might come to a glass ceiling over the next couple of years. The businesses revenues are reliant on how quickly the customer base grows; such a narrow focus is not healthy. Everyone else is driving towards diversification, and Netflix will need to make sure it considers it sooner rather than later.

The app economy is going from strength to strength

The latest report published by App Annie showed mobile apps had their best year in 2018, and will get better in 2019.

In the report titled “The State of Mobile in 2019 – The Most Important Trends to Know”, the mobile apps analytics firm App Annie showed the latest data of the mobile apps industry, as well as their projections for the near future.

In short, the apps industry is doing rather well. “Consumers spent $101 billion on apps globally in 2018. This is larger than the global live and recorded music industry, double the size of the global sneaker market, and nearly three times the size of the oral care industry,” said Danielle Levitas, EVP, Global Marketing & Insights, App Annie. “Mobile experiences are so central to how we live, work and play and with consumers spending 3 hours a day on mobile, it’s clear how vital this platform is for all businesses in 2019 and beyond.”

Here is a snapshot of the highlights:

App Annie 2019 Snapshot

A few additional data points also caught our eyes:

  • Consumers on average spent 50% more time in mobile apps in 2018 than they did in 2016. Social and Communications apps made up 50% of total time spent globally in apps in 2018, followed by Video Players and Editors (15%) and Games (10%);
  • In Indonesia, mobile users spent over 4 hours a day in apps — 17% of users’ entire day. In mature markets like the US and Canada, the average user spent nearly 3 hours a day in mobile apps in 2018;
  • On average, consumers in the US, Australia, South Korea, and Japan have over 100 apps on their smartphones;
  • 74% of all consumer spending on mobile apps was on games;
  • YouTube accounted for 9 of every 10 minutes spent in the top 5 video streaming apps in 2018. It was also the number 1 app by time spent in video streaming apps for all markets except China;
  • The global consumer spending on dating apps grew by 190% from 2016 to 2018. Tinder successfully defended its number 1 position.

In terms competition between apps and between companies, three Facebook apps occupied the top three spots on the table of monthly active users. The same trio also took the top spots on the most downloads table, but Facebook Messenger edge Facebook to the top. Netflix netted the highest consumer spend on apps (followed by Tinder), while Sony’s Fate/Grand Order sat at the top of the games enjoying the highest consumer spend. Tencent on the hand, thanks to its strong line-up of apps and games, was the company that consumers spent the most on in 2018.

App Annie 2019 MAU

App Annie 2019 downloads

App Annie 2019 spend

The firm predicted that in 2019, the total consumer spending in app stores will double that of the global box office, to reach $120 billion. When it comes to media consumption, the firm sees in 2019 that 10 minutes of every hour spent consuming media across TV and internet will come from video streaming on mobile. Increased availability of premium content and service will also help.

Two years ago, we started hearing from some quarters of the industry that apps economy was dead. To read the latest data from App Annie, that pronouncement was gravely premature.

As Nielsen reports shift away from cable TV Netflix announces biggest price hike

A recent Nielsen report on the evolution of US TV viewing habits reveals a 48% increase in the number of households switching entirely to over the air access.

16 million US homes – 14% of households – are now OTA-only, up from just 9% of households 8 years ago. This constituency is split into older viewers (6.6m) looking to save a few bucks by settling for the good, old broadcast antenna option, and younger SVOD (subscription video on demand) subscribers (9.4m), who get everything they need from services like Netflix and therefore see no need to pay for cable.

A significant characteristic of this latter category is a move away from the traditional TV to viewing on mobile devices. These smaller screens tend to lend themselves to solitary viewing rather than the more communal TV experience, something that is greatly facilitated by the on-demand nature of these services.

Nielsen OTA chart

Coinciding with the publication of this report is the announcement from Netflix of its biggest ever price rise in the US. The SVOD giant has been investing more than ever on original programming and has such a massive installed base that it seems to have decided it’s time to start thinking about justifying its massive valuation.

“We change pricing from time to time as we continue investing in great entertainment and improving the overall Netflix experience for the benefit of our members,” a Netflix spokesperson said in a somewhat redundant statement to Light Reading.

“For many users, Netflix is an indispensable video services,” said Tech, Media & Telco Analyst Paolo Pescatore. “There will not be much backlash (for now). This is certainly one way to increase revenue significantly. It needs to focus on financials as well as subscriber growth. Netflix is following the traditional pay TV model of increasing prices annually. Expect other countries to increase prices over coming months.”

Anecdotally linear TV viewing seems to be a dying phenomenon. Even when families congregate around the living room TV they’re just as likely to watch a DVD or streamed box set and, if this correspondent’s experience is anything to go by, people prefer to do their own thing on tablets. Netflix is currently the boss of that sector so it’s probably free to keep raising prices for a while yet.

Netflix back in the cash with 36% revenue growth

Last time Netflix reported its quarterly financials it disappointed investors. Three months later its back to its blistering best with revenues of $3.9 billion.

The year-on-year growth of 36% represents a strong quarter for the streaming giant, capturing 6.9 million additional subscriptions, the vast majority of which came from international markets. Net income stood at a healthy $403 million, compared to $130 million in the same period of 2017.

“Overall, this was a strong quarter for the company,” said independent analyst Paolo Pescatore. “Normal service has been restored.

“This was a key quarter for the company following the challenges of the prior one which was a one off and largely down to seasonality. More importantly strong growth in its overseas market is encouraging.”

Back in Amsterdam during this year’s IBC, the international markets were highlighted as critical to Netflix’s continued growth. This is not to say the US market has hit a glass ceiling, but with the current penetration (58 million subscribers) and intense competition for attention, this is not a market Netflix can use to continue the momentum investors have become accustomed to. For Maria Ferreras, VP of EMEA Business Development at Netflix, new markets, new content and new partnerships are key.

On the content side of things, the localisation strategy will have to be accelerated. Creating local content, using local production companies and journalists, is key for engagement, though with new rules in the European Union, the focus will have to be razor-sharp. The new rules will eventually require subscription streaming services to devote a minimum of 30% of their catalogue to European works, while some member states will force Netflix to reinvest the revenues realized in those markets back into local production. This is generally the Netflix strategy, though it might have to accelerate timelines.

In terms of localisation, this is not just on the content side; partnerships with regionalised pay TV providers, ISPs and mobile operators will continue to play a more prominent role. Such partnerships offer a faster route to the customer than organic marketing can, and there are already dozens of examples around the world. Examples from this quarter include the first mobile bundle in Japan with KDDI and an expanded partnership with Verizon to pre-install the Netflix app on Android phones.

“All of its rivals are now making huge bets on video and it cannot afford to be left behind,” said Pescatore. “It now needs to rely more than ever on its extensive cable and telco relationships.”

For the next quarter, Netflix is again expecting good things. Revenues are expected to grow 26% to roughly $4.2 billion, with the team targeting an additional 9.4 million subscriptions. The international markets will be the primary generator of this growth, expected to add an additional 7.6 million subscriptions, though only growing revenues by 10%. With offers and partnerships playing a strong role in creating this momentum, lower revenue growth is to be expected.

Netflix is the premier streaming service worldwide and it doesn’t look like it is going to lose that position anytime soon. Amazon’s own content business is making progress as well, while Disney is bound to offer some resistance, but Netflix is still dominant. New partnerships in the international markets and an increased focus on regionalised content will only add to the momentum. 26% growth over the next three months is a big ask, but the signs are all positive.

Tech firms dominate Millennial Rankings for positive buzz – YouGov

Netflix number one, Spotify number two and Primark number three; who doesn’t love cheap pants though.

For the second year in a row, Netflix has topped the list of most positively talked about brands in the UK according to market research firm YouGov. Claiming the crown is certainly a positive, however the technology industry took seven of the top ten spots in the list.

“Netflix’s popularity shows no signs of abating,” said Michael Stacey, Marketing Insights Manager at YouGov. “The streaming service continues to expand its offering, as well as investing in its own ‘Netflix originals’. By its very nature Netflix’s content invites discussion, and YouGov’s rankings show that the brand has certainly harnessed the power of word of mouth recommendations to gain a loyal following among a younger generation of viewers.”

While the research was limited to 18-34 year olds and what they have discussed in favourable terms among family and friends, it is perhaps a good measure of the tomorrows dominant players. This demographic is a key one for many advertisers because of the potential in years to come. Creating a favourable relationship with those individuals today with almost certainly benefit these businesses tomorrow.

Aside from Netflix and Spotify, the top ten featured Apple, Facebook, iPhone, PlayStation and AirBnB. Unsurprisingly for the demographic, budget brands also featured, Primark and Ikea, as well as everyone’s favourite chicken nugget vendor McDonalds.

Interestingly enough, Google made positive moves in this years’ rankings with the Pixel brand. This uplift was partly down to word of mouth as well as internet sentiment, perhaps suggesting positive experience with the device as opposed to those simply being swayed by engaging advertising or PR stunts.

What is worth noting is this is only a measure of the positive things which have been said about the business; YouGov does not data about the nasty stuff. This is pity, reputations are more easily destroyed than enhanced, and we suspect Facebook might not feature as highly is this was factored into the equation.

YouGov

Sky convinces Netflix to do the thinkable: move titles off its platform

Having initially announced a tie-up earlier this year, Sky has somehow managed to convince Netflix to loosen the grip on customer experience, integrating its biggest titles into a very chunky on-demand package.

As part of the partnership, Netflix content will be hosted on the Sky platform, allowing customers to access a huge number of on-demand titles without having to navigate between different streaming apps. Having to navigate through different windows to find the right content can be a frustration for consumers which Sky is certainly addressing, though it does seem to contradict the Netflix ambition to standardise customer experience across all platforms and partnerships.

Across one page users will be able to navigate through Sky’s content such as Patrick Melrose and Tin Star, HBO’s Game of Thrones, Showtime’s Billions and now, Netflix titles such as The Crown, Stranger Things, The Kissing Booth, Making a Murderer and Queer Eye. It’s a lot of quality content for one place, cementing Sky’s position as the UK’s king of content.

“Sky wants to position itself as an aggregator of services as underlined by recent tie-ups, bringing services together is to be offer users a seamless and integrated service experience,” said independent telco and tech analyst Paolo Pescatore. “Therefore, the move further increases Sky’s own value as a one stop shop provider. More importantly it will also get access to Netflix’s catalogue and metadata which will prove more attractive to Disney.”

“Europe lags the US when it comes to cord cutting due to numerous reasons. Among other things the pay TV penetration is a lot lower in Europe and has been dominated by a handful of players. However, both regions are seeing huge growth in binge watching driven by changing user behaviour towards on demand programming.”

The mega on-demand deal will cost £10 a month, alongside a Sky Q subscription, with a 31-day rolling contract available as an option. It might be more expensive than a normal Netflix subscription, but with Sky’s box set content available for £5 a month, professional bingers will be able to save money combining the pair.

Sky Netflix

While this is a massive coup for Sky, it is a strange turn of events for Netflix. Last week at IBC 2018, Maria Ferreras, VP of EMEA Business Development at Netflix, stated that while the business was open to partnerships the experience would remain consistent across all platforms and partnerships. In allowing Sky to host its programming on its own content platform, Netflix has essentially handed over the management of customer experience. It’s an interesting announcement with Ferreras insisting maintaining a high-quality and standardized experience across all platforms was critically important for the business.

That said, another ambition of the business is to make its content as accessible as possible. Improving accessibility is one aspect of the strategy to secure additional subscriptions as the growth rate looks like it is beginning to wobble. Perhaps this is simply a compromise. As growth momentum slows executives have to make difficult decisions, some of which they will not like, and maybe this is one. The drive for new subscriptions seems to outweigh owning the customer experience.

Now before anyone gets too excited about this being a possibility for every content platform, this will probably not be the case. Ferreras highlighted last week that each partnership is weighed on its own individual merit. There are frameworks in place to guide the parameters of each relationship, though the end product will entirely depend on who is sitting on the opposite side of the table.

Taking this an example, Netflix might have been happy to hand over the customer experience management because Sky has an excellent content platform which it has spent years honing; it is a solid experience with content easy to find. Others cannot say the same, take Virgin Media for example. We cannot imagine Netflix would allow a similar integration of content due to the cumbersome nature of the TV offering.

The search for new subscriptions will certainly take Netflix into some interesting partnerships. After the last quarter’s results, were subscription growth looked to stagger, there might be more pressure for executives to loosen the stranglehold on the platform, and be more flexible when it is discussing partnerships. Netflix still has the upper-hand when it comes to negotiations, though if it wants to maintain its lofty market cap ($152 billion!!!) it will have to be more pliable. Offering more access to its valuable customer data and behaviour insight could be one of those areas.

IBC 2018: New content, new markets, new partners – the Netflix growth plan

Netflix is one of the largest technology companies on the planet, but there is still mountains of room for growth over the next few years.

Speaking at IBC 2018 in Amsterdam, Maria Ferreras, VP of EMEA Business Development at Netflix pointed towards some quite remarkable figures. In the 11 years since Netflix starting its streaming business the platform has amassed 130 million subscribers. While this is of course an astronomical figure, some might have assumed it would be higher. With profits of $2.8 billion over the last twelve months, the opportunity for growth is still buoyant.

The question which remains is how to do this. Netflix has been incredibly successful in securing subscriptions through its own marketing strategies, though partnerships with telcos and broadcasting businesses are top of the agenda for Ferreras.

“What is critical for us is making sure Netflix is available,” said Ferreras. “It’s all about making access easier.”

The idea behind these partnerships is creating opportunity. The partner organizations might not only have a better relationship with potential customers, but they also address some key challenges in terms of billing and experience.

On the billing side of things, Ferreras asks the industry not to use Western standards when assessing new territories. For example, in Saudi Arabia not only is credit card penetration low, a number of the domestic brands are not accepted by eCommerce sites. Partnering with the telcos offering consumers in this market an opportunity to pay through their own billing platforms. There are numerous other countries around the world where this could be the case, meaning partnerships with telcos offer an opportunity to engage new customers who were not accessible to the business before.

Looking at the experience, this is about accessibility once again, but a different twist. Here we are talking about the content aggregation model, taking away the complication of accessing content through multiple windows in the fragmented content ecosystem. With the Netflix app installed on set-top boxes, content platforms or smart TVs, the frustration of exiting applications before entering new ones is removed. With both billing and navigation, it’s all about simplifying the experience.

Such partnerships tie into another column in the growth plan; entry into new markets. While some territories have been experiencing the Netflix bonanza for more than a decade, there are still markets where the brand is a newbie or even non-existent. This is the simple aspect of the plan, launch in new regions, though the complication comes with the experience.

Some areas are mobile orientated, some have poor connectivity and some have lower-end devices. In each of these circumstances, the Netflix proposition needs to be adapted to standardize the experience over every device. This standardization also extends to the different partnerships as well. There is no such thing as differentiation here, the Netflix platform will be the same wherever you go.

The final pillar is localisation. Ferreras said Netflix will continue to aggressively expand its content portfolio, not only moving into new genres, but also creating content which is targeting specific countries or regions. This is where Netflix needs to improve in some regions, as the depth of content in the right language or genres lacks. It is a work in progress, though local co-production initiatives with partners will help accelerate this process,

One area Ferreras highlighted the business will not be heading is live sports. The objective of Netflix is to innovate through creating experiences which other platforms cannot. In sport, Netflix is increasing its portfolio with sports documentaries and interviews, though this is content to support the sports story. When delivering live sports to the consumer, not only does this not fit with the on-demand ethos of Netflix, but it cannot do anything different from traditional broadcasters. As a genre, live sports does not fit the bill.

Netflix might be an internet heavyweight, but the opportunity to grow is still quite surprising.

Netflix disappoints investors but the juggernaut is still chugging forward

Netflix’s share price is down after it missed self-imposed net adds forecasts, but an extraordinary amount of marketing spend hints this quarter might just be a bump in the road.

Over the last three months, Netflix forecast it would add 6.2 million subscriptions to its ranks, though reality told a different story as only grew by 5.2 million. For most, adding an additional 5 million customers would be cause for celebration, but such are the lofty expectations surrounding the Netflix brand, pre-market trading brought share price down 11.82%. Netflix is the golden child of Wall Street right now, share price has climbed 147% over the last twelve months, and we suspect it won’t be long before the wrongs have been corrected.

“We should not forget that Netflix is still the first truly global pay TV service – quite an accolade within a short period of time,” said Paolo Pescatore, Tech, Media & Telco Analyst. “This latest quarter may be a slight falter for Netflix, but it still sets the benchmark for its rivals. It underlines my belief that Netflix needs subscribers and it needs them fast. It is still growing, but not quickly enough in light of its growing costs.

“Typically, this is always a challenging quarter due to seasonality. And more so this quarter given the success of key global events such as the World Cup in driving fans to tune into live TV. This might have a further negative impact on its 3Q18 results.”

The team ended the quarter with a total of 130 million subscriptions, and revenues of $7.6 billion over the first six months. Another interesting number is $1.006 billion, the total spent so far in 2018 on marketing. This is an astronomical ratio, and demonstrates the importance of securing new subscriptions to the Netflix business model.

Netflix currently sits in the same tenuous situation as Facebook; while there might still room for growth, a reliance on a single revenue stream is far from the ideal situation. This is a dangerous route for Netflix to travel, as it will become increasingly expensive to secure the signature of new customers, though the rest of the industry will be becoming even more worried. Netflix is a heavyweight in this segment, with a very hefty bank account, will disruptors or those looking to diversify into content be able to compete with the Netflix financial clout?

“It needs to diversify and offer more than just a streaming subscription service,” said Pescatore. “By offering new features such as T-VOD or EST it would be well placed to generate additional revenue. Look at its rivals such Amazon who has a successful diversified business model. No pure play provider can compete with others that offer a range of services and business models. There will always come a point that it’s less about subscriber growth and more about revenue.”

From a marketing perspective, aside from entering the advertising dog-fight for subscribers, Netflix will find success by partnering the telcos. These are organizations which can offer credible access to potential customers in a non-intrusive manner, with Virgin Media being the most recent example. Netflix might arguably be the best content provider in terms of quality right now, but in terms of breadth of services and value, it will struggle to compete with Amazon before too long.

On the content side of things, an Amazon Prime account gives the user access to a wide range of content, including new original productions such as Utopia, a series written by Gillian Flynn, author of Gone Girl. This subscription also entitles users to free delivery on the eCommerce site, access to eBooks, music streaming services and other benefits. New partnerships and aggressive marketing campaigns are needed to continue subscription growth as the value proposition of competitors might be starting to eclipse the quality of Netflix programming.

A single revenue stream is not necessarily the most attractive position for a business, though if you still consider Netflix a genuine takeover target in the short- to mid-term, it’s not the end of the world.

This has not been the most successful quarter for Netflix, but it’s only a disappointment in comparison to the tearaway trail of the last couple of years. Over the next three months the team is forecasting revenues of $3.988 billion, growth of 33% year-on-year, with paid net adds up 5.2 million. The news will continue to be good for the next couple of years, but those will an eye on the long-game will point out a need to diversity the Netflix business model.

Telecoms and media industries driving the highest M&A year ever

M&A deals involving telecoms and media companies in 2018 has registered a historic high of over $300 billion, six times higher than last year.

According to data from Thomson Reuters, the published value of proposed mergers and acquisition deals globally has totalled $2.5 trillion this year, beating the previous high of $2.3 trillion in the same period in 2007, the year before the global financial crisis. This is also 64% higher than 2017.

The biggest boost has come from the media industry, which has reported a value of $322.5 billion. In Europe, which contributed to close to $0.8 trillion to the market, next only to the US, three out of the eight biggest M&A deals this year take place in the media industry: Comcast’s and Walt Disney’s acquisition of Sky, with a combined value of $65.6 billion, and Vodafone’s $21.8 billion acquisition of Unitymedia GmbH.

One driver behind the vibrant media (as well as telecom and technology in general) M&A market is the fast technology progress, in particular internet and cloud-based services. “Businesses that take a ‘cloud first’ approach are often able to achieve fast organic growth, which puts them in a strong position for acquisition, either of a company or by another company,” said Paul Landsman, Investment Director at Livingbridge.

The business dynamics of industry are also in constant change, even the definition of what qualifies as media companies. The US federal judge has recently given green light to AT&T’s $85.4 billion acquisition of Time Warner, dismissing the government’s argument that the deal would be anti-competitive. This is largely down to the fact that more consumers are “cutting the cord” and switch to services like Netflix and Amazon.

This has brought about a change in the business relations between telecom companies like AT&T and content providers like Netflix. While in the past the content companies would pay telcos to transport the content, through its vertical integration, AT&T itself is becoming a media company competing with most likely its biggest client. Netflix is taking up 20% of the world’s downlink bandwidth. And this is calculated when it is not even operating in China.

Consequently, a new kind of question is being asked of the regulators. While the cable networks are losing their grip on viewers, hence the lack of concern for monopoly of the future AT&T / Time Warner combination, the Internet is increasingly being dominated by the so-called FAANG (Facebook, Amazon, Apple, Netflix, Google).

The financial capacity of these giants dwarfs any conventional media company. Netflix is planning to increase $3-4 billion investment in original content next year, on top of its already jaw-dropping $12-13 billion this year. The incremental amount is already bigger than the BBC’s total programming budget, according to a recent analysis of the company done by The Economist. The regulators need to consider how to protect the consumers that cannot or are not willing to subscribe to the premium over-the-top (OTT) services.

This is further complicated by the issue of net neutrality, or the lack of it. In markets where there is no legal requirement for net neutrality, regulators may have a hard time guaranteeing consumers receiving basic services from telcos who have a conflict of interest in transporting all media content including that of its own.

Though there is no sign of market cooling down yet, factors outside of the financial market may play some critical roles in the future M&A decisions. The on and off and on again US sanction against ZTE (and implied investigation of Huawei), and China’s drawn-out process to approve Qualcomm’s proposed acquisition of chipmaker NXP Semiconductor are the most recent and most obvious examples. They may lead potential acquirers and targets to be more cautious when it comes to companies with significant business interests in sensitive markets.

Virgin Media joins the Netflix bonanza

Virgin Media is the latest telco to cash in on the aggregator trend, building on a partnership with Netflix to allow customers to pay for the streaming service through their Virgin Media bill.

Starting in October, builds on a partnership dating back to 2013, with Virgin Media claiming more than 700 million hours of programming have been watched through the Netflix app on Virgin TV’s platform. The team might be stating it was the first to lure the Netflix goldmine onto its platform, but it has turned into a fast-follower when it comes to integrating bills, after similar announcements from BT and Telefonica in recent weeks.

“Virgin TV has always been about giving our customers the TV they love all in one place,” said Jeff Dodds, MD of Consumer and Mobile at Virgin Media. “We were the first to embrace this open philosophy by embedding Netflix into our platform back in 2013 and it’s clearly something that our customers absolutely love. By expanding our relationship further we’re forming an even deeper relationship with our friends at Netflix and giving our customers a simpler way to pay for the service.”

Such partnerships are likely to become much more common as the telcos search for the much-hyped convergence business model. Content is seemingly a critical factor of this business, though attempting to compete with the traditional players in the content market by owning rights and distribution deals is a treacherous path; just ask the BT consumer business. Instead, providing a channel to the consumer, a content aggregator, is becoming a more popular idea.

As one of the most, or arguably the most, popular content streaming business on the planet, integrating the service into the media platform is a very sensible idea. It answers a frustration of the consumer, the increasingly fragmented distribution of content across different platforms, while also adding to the Virgin Media content experience, which could be deemed average at best. The more partners telcos like Virgin Media add into the mix, the more engaging the content platform will become, which in turn should reduce customer churn year-on-year.

The key word here is scale, as quality is unlikely to be a differentiator over the coming years. We suspect all major telcos with a content platform will have similar partnerships with the likes of Netflix before too long, therefore the differentiating factor for customers when choosing a telco will be simplicity. The more partners mean more bills which can be streamlined into one place. Unfortunately providing adequate breadth for the content platform will need a considerable amount of leg-work; it will be a long slog, but the rewards of the convergence business model are already beginning to become apparent for companies like Orange and Sky.