Netflix versus Amazon Prime Video – depth versus breadth

The first half of 2021 has been a year of continued change and disruption for subscription video. The global incumbent subscription video on demand (SVOD) leaders, Netflix and Amazon Prime Video, have been busy signalling to the financial markets how they intend to entrench their market dominance in light of the ongoing market acquisition pushes unleashed by the D2C disruptors following the D2C ‘big bang’ moment of Q4 2019 – Q2 2021. Netflix announced in January that it was no longer going to borrow on the financial markets to fund its day-to-day operations – specifically for its content acquisition budget, which is now driven predominately by commissioning original content for its service. This leaves the SVOD leader with $14.9 billion of outstanding long-term debt to service as it seeks to live within its means by commissioning future content from its ongoing cashflow. In Q1 2021 alone Netflix spent $500 million on servicing this debt pile versus $1.7 billion in net income generated over the same period. 

The increasing cost of borrowing is also starkly highlighted by the $1 billion in new debt raised in 2020. The risk for Netflix is that its market dominance has been achieved through an aggressive market dominating rollout of original content ($18.5 billion spent on new content in 2020 alone) which has been fuelled by cheap debt. With an average interest rate payment of around 4% for its debt, Netflix has taken full advantage of the unusually low interest rate environment of the previous decade. With inflation now starting to kick in globally, the cost of servicing this debt can be expected to rise accordingly. The US consumer price index has risen by 4.2% between April 2020 and April 2021, according to the US Bureau of Labor Statistics. This compares with the 1.2% rate of CPI for the whole of 2020 in the US. Therefore, Netflix could have looked at a 3x increase in its cost of borrowing if it had continued with this debt-fuelled expansion into 2021.

Amazon goes for the M&A approach

On the other hand, Amazon, while also continuing to spending heavily on original content (an estimated $7 billion in 2020 alone), has decided to play to where the ball is moving (library) rather than where it currently is (originals) by acquiring MGM for $8.45 billion last month. The rational is simple for the tech major; buy an extensive in-depth set of proven mainstream assets and brand franchises which can then be subsequently activated via new originals commissioning as and when required. 

Retention is now key

As the silver streamer demographic wave of age 55+ consumers continues to upturn preconceived assumptions about streaming audiences, subscription video faces a stark strategic choice – continue with tried and tested yet loss-leading originals strategies, or seek to broaden and deepen the consumer proposition by appealing to pay-TV-familiar consumers who are seeking a streaming pay-TV solution as opposed to a niche video content offering. This means adding sports and news to the D2C mix to replicate the cross-demographic appeal of the traditional TV subscription. Get this right, and the newly acquired silver streamers will stay – get it wrong, and they will seek out competing services which will offer these table-stakes TV genres.