The monthly bills for a typical household are steadily creeping upwards. With the costs for cellular and telephone services continually escalating so much, it has become a major campaign issue in the 2019 Federal election here in Canada. All of the leading parties have added cellular cost reduction as a plank in their political election platforms.
The costs for cable TV have also grown to disproportional levels. In fact, the number of customers who are now discontinuing their cable TV service is getting so high that it is seriously and negatively impacting the cable TV industry.
As of the end of last year, there were 4.14 million Canadian households, or about 28 percent, that were cord-cutters or cord-nevers (i.e., never had cable). That is up from 3.8 million, about 26 per cent, a year earlier.
The younger generation has moved into apartments and condos and never bothered to buy cable TV. The older generation is facing retirement so they are cutting off cable TV services to reduce costs for a more affordable monthly cash flow.
The Huffington Post shared a forecast from the Convergence Research Group, that said in 2020 there will be more (streaming) subscriber households than TV subscribers in Canada. It made a similar forecast for the U.S. where it says streaming will “far surpass” cable by 2020.
Streaming services will surpass cable as the number-one way Canadians watch TV within two years. WOW, now that is disruption of an industry. It has been incredibly rapid. But, why is it happening?
Amid this shift, Canadian broadcasters will face heavy competition for popular U.S. programming, and some shows may disappear from traditional Canadian TV stations, as U.S. broadcasters set up their own streaming services in Canada, the report suggested.
It paints a picture of a booming streaming industry in Canada, and a struggling cable and satellite business.
But is this a technology disruption or a rejection of the high costs for cable TV? Perhaps a little bit of both, but the cost issue seems to be driving the transformation as Generations X, Y, and Z are all transitioning off of cable TV or never using the services in the first place. And, with the retiring baby boomers cutting the cord too, it paints a very bleak picture for the industry.
The internet connection is now largely replacing several mainstream services as content is now available as TCP/IP streams. But, it is not just television and cellular, music is impacted too. Consumers are shifting to flat fee services or capped services over services that offer a variable cost.
All of the cellular carriers are offering internet as unlimited now, so consumers are avoiding overage charges. A fixed price service seems to be the attractive option to retain consumers. However, consumers remain fickle and can and do change service providers in the blink of an eye. So, customer retention strategies do not seem to offer the customer stickiness that providers expected.
Even the content providers are disrupting their own services. Last year, you would buy a four month NFL viewing package for $50.00 per month and today you can secure it for free. The advent of several new streaming services is seeing the monthly costs driven downwards too.
These consumer changes have impacted Netflix’s revenue too. Netflix bounced back from a disastrous second quarter, adding 6.8 million subscribers and bringing in $5.2 billion in revenue over the past three months, up from 6 million subscribers and $4 billion the same time last year. The company now has more than 158 million subscribers worldwide. The numbers suggest that Netflix is seeing a rebound in subscriber growth, even if it’s not as much as Netflix may have hoped.
Following the October 2019 earnings, Netflix’s stock jumped back up, showing a sign of confidence from Wall Street. Netflix’s stock had dropped around 23 percent since its second quarter earnings in July, which marked the first time the company had lower subscriber growth since launching its streaming service in 2011.
This is the final calm before the storm for Netflix. The next time Netflix reports earnings, there will be two major new entrants in the streaming market: Disney and Apple. Some analysts are concerned that Netflix could see a dip in streaming subscribers, its core business, as people test out new services, Disney+ and Apple TV Plus. Other analysts are less concerned, citing Netflix as the dominant player in streaming right now.
“In this environment the stock looks vulnerable and I question its upside potential when Netflix will soon face significant, real competition from a variety of media companies all launching their own streaming services at a substantial discount to the fees Netflix is charging,” Haris Anwar, senior analyst at Investing.com.
Still, Netflix executives are aware of the wave of new competition they’re facing. CEO Reed Hastings recently admitted that it’ll be “tough competition” once all the different services are available for customers. That includes entrants from AT&T’s WarnerMedia (HBO Max) and Comcast’s NBCUniversal (Peacock) in 2020, too.
“While the new competitors have some great titles (especially catalog titles), none have the variety, diversity, and quality of new original programming that Netflix is producing around the world,” Hastings wrote.
All of this change in the media streaming industry has spelled a cost reduction for consumers as streaming companies battle for market share. Some industry pundits boldly predict that consumers may purchase two or more of these streaming services. But, is that just consumers testing these new services? Will multiple accounts be viable for cash flow strapped consumers or Generation Y and Z buyers who would rather acquire “other” experiences instead of sitting on the couch watching brain-dead television hour after hour?
There is clearly a shift on today to reduce the monthly costs. New services like ride sharing and uber or Lyft have been hitting the pocket book too. So, the younger generations who embrace these transportation services often to the tune of several hundred dollars a month are shifting away from buying their own cars too. A car at a condo means buying a parking space and these can range from $20,000 to $50,000 plus depending upon the condo and the location. Other car costs like fuel, maintenance, and insurance make a car an unnecessary luxury in an urban setting like Toronto, Montreal, or Vancouver. So, Detroit is feeling the pain as gas guzzlers are not selling as they once did. Detroit is responding with new, smaller, less costly vehicles, and now there is a rush towards environmentally friendly cars such as electric vehicles and hybrids.
The industry disruption has never been this intense, and will never be this light again.
In this disruptive age, established business models are clearly under attack.
According to historian Peter Watson, humans have been trading goods and services for more than 150,000 years. During that time, we’ve always believed that to sell more of an offering you had to produce more of it. The underlying notion was that a single unit of a given product or service could be used only by one customer at a time. Any increase in production therefore required a commensurate increase in labour, resources, and equipment. While volume advantages did translate into lower average costs per unit, economies of scale could never get the average cost down to zero.
Digitization is reframing this ancient belief in powerfully disruptive ways. In fact, of all the reframes, the digitization of services has had the most devastating effect, since it can destroy entire industries. What’s driving prices to zero is the reframe that multiple customers can simultaneously use digital goods, which can be replicated at zero marginal cost. Massive open online courses, for example, provide a nearly zero-marginal-cost for education. With these so called MOOCs, we can reframe how we learn and how learning is delivered. Are the classic ‘bricks and mortar” school about to become a part of history? It is a realistic result.
Consider the implications for telecommunications, where the dominant belief has been that value is best captured through economies of scale—the more telephone minutes sold, the lower the unit cost. As a result, the larger the mobile-phone plan, the lower the cost per minute. One telecommunications company is upending this belief by making customers an “all you can eat” offer. It realized that unlimited use of voice and texting units comes at no additional cost to itself, so it can compete against emerging voice-over-IP competitors. This telco started to offer unlimited texting and voice plans by focusing its economic model on making money from data usage and from its investments in a huge data network and storage capacity. Such plans eliminate confusion among customers and increase their satisfaction. As soon as the network has reached its planned return on investment, incremental data service will also be free.
We are now approaching this next generation threshold of disruption. So, hang on, change is coming fast.
Alexander, J. (2019). Netflix won’t ‘shy away from taking bold swings’ as streaming competition heats up. The Verge. Retrieved on October 18, from, https://www.theverge.com/2019/10/16/20917387/netflix-streaming-wars-earnings-subscribers-q3-disney-apple-stranger-things
de Jong, M., & van Dijk, M. (2015). Disrupting beliefs: A new approach to business-model innovation. McKinsey Insights. Retrieved on October 18, from, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/disrupting-beliefs-a-new-approach-to-business-model-innovation
About the Author:
Michael Martin has more than 35 years of experience in systems design for broadband networks, optical fibre, wireless, and digital communications technologies.
He is a business and technology consultant. Over the past 15 years with IBM, he has worked in the GBS Global Center of Competency for Energy and Utilities and the GTS Global Center of Excellence for Energy and Utilities. He is a founding partner and President of MICAN Communications and before that was President of Comlink Systems Limited and Ensat Broadcast Services, Inc., both divisions of Cygnal Technologies Corporation (CYN: TSX).
Martin currently serves on the Board of Directors for TeraGo Inc (TGO: TSX) and previously served on the Board of Directors for Avante Logixx Inc. (XX: TSX.V).
He has served as a Member, SCC ISO-IEC JTC 1/SC-41 – Internet of Things and related technologies, ISO – International Organization for Standardization, and as a member of the NIST SP 500-325 Fog Computing Conceptual Model, National Institute of Standards and Technology.
He served on the Board of Governors of the University of Ontario Institute of Technology (UOIT) [now OntarioTech University] and on the Board of Advisers of five different Colleges in Ontario. For 16 years he served on the Board of the Society of Motion Picture and Television Engineers (SMPTE), Toronto Section.
He holds three master’s degrees, in business (MBA), communication (MA), and education (MEd). As well, he has three undergraduate diplomas and five certifications in business, computer programming, internetworking, project management, media, photography, and communication technology. He has earned 15 badges in next generation MOOC continuous education in IoT, Cloud, AI and Cognitive systems, Blockchain, Agile, Big Data, Design Thinking, Security, and more.