Professor Michael D. Smith on the Battle for Streaming Dominance

Heinz College Professor Michael D. Smith is excited by the changes in digital entertainment, and tells us what we should be watching for as the streaming market heats up.

It wasn’t that long ago that if you wanted to watch a particular show on television, you had to plan for it. You’d have to commit network lineups to memory, break out your TV Guide, and adjust your schedule so you could tune in for the latest episode MTV Unplugged, or Full House, or another show people watched in the 90s like…let's go with Power Rangers. 

This was a time before DVR. A dark time. But we’ve come a long way in the 20 years since TiVo hit the scene. Many people reading this have likely never subscribed to a cable package, instead choosing to stream content from online platforms.

Now, scanning digital catalogs of streaming video on-demand (SVOD) services like Netflix, Hulu, and Amazon Prime Video has replaced channel-surfing and DVR backlogs for many people—research shows that the number of consumers defaulting to SVOD services is on the rise, while the number defaulting to watching live tv is declining. These days, we can (and do) binge-watch what we want, when we want.

The market is responding. It seems like every week there’s another player entering the streaming platform game or ramping up their digital offerings, whether it’s other big tech companies like Apple, Facebook, and Google (which owns YouTube); traditional media companies like Disney, WarnerMedia, and NBCUniversal; or niche providers like Legendary, PlayStation, and Twitch.

For consumers, it’s a lot to keep up with. But Michael D. Smith, the J. Erik Jonsson Professor of Information Technology and Marketing at Heinz College, has been paying close attention to the growth of the streaming market, and how legacy media firms have been responding. He says that the disruption of certain power dynamics in the entertainment industry blew the lid off the market.

“Networks and studios have been powerful for the past 100 years because they were able to control scarcity in how content gets created, distributed, and consumed,” said Smith. “None of these things are scarce anymore. The ability to create content is nowhere near as scarce as it once was, and the ability to distribute content isn’t scarce at all. What’s scarce today is customer attention, and the companies who own that customer and their data are gaining a lot of power." 

Smith says that many companies we may think of as “dinosaurs” in the media industry are in fact adapting to this new reality with impressive speed. He cites the proposed merger of Disney and Fox, the completed acquisition of Time Warner by AT&T, and Hulu as three interesting adaptations for a new digital battleground, in part because they represent very different approaches.

• Hulu is an industry partnership that provides streaming content from major networks, with both a free ad-supported tier, as well as a paid ad-free option. Hulu has been competing in the SVOD space alongside Netflix since 2007.

• AT&T-Time Warner is a vertical merger of a telecommunication giant with millions of customers and a content creator with a gigantic library, including HBO, Cartoon Network, DC Comics (which includes Batman, Superman, and Wonder Woman), and Warner Bros. which includes the Harry Potter films, the Lord of the Rings films, and many other global blockbusters.

“They have the deepest library of exclusive content of any of the content creators. They could bundle their streaming platform with existing services and create strong incentives for consumers to use their streaming platform over others,” said Smith.

[RELATED: Smith and Telang wrote about the AT&T-Time Warner merger for Wall Street Journal]

• Disney-Fox is a horizontal merger of two massive content creators with some of the most popular and valuable properties in the history of Hollywood.

“With the acquisition of Fox, [Disney is] trying to create a huge bundle of content that they can make exclusive in order to win people to their service," said Smith. "You want to watch Star Wars, Marvel, Pixar, The Simpsons, and Walt Disney movies? You’ll have to subscribe.”

To enable their announced streaming service, Disney+, Disney acquired BAMTech, a technology company spun off from MLB Advanced Media, the digital and interactive arm of Major League Baseball. Many observers were scratching their heads about the purchase at the time, but Smith notes that the BAMTech acquisition immediately removed a technological hurdle for Disney by providing a reliable streaming platform.

Smith believes even though these digital offerings by traditional media players may become formidable competitors in the streaming space, Netflix has a head start.

“I think you’d have to say Netflix is in the lead right now, because they’ve got the experience in data analytics, and they own their platform and their customer base. That will be very valuable going forward. Other platforms can still succeed, but they're starting with a lot of ground to make up.”

A shift in the way media is watched, made, and paid for

Another advantage for companies like Netflix and Amazon is that they already have a lot of experience producing original content in a novel way, unconstrained by rigid industry norms and programming schedules. Legacy firms still need to learn and adapt to this new realm of production, which will take a lot of time and money.

On this front, Smith notes that years ago Netflix figured out something very important to its business: By licensing content from studios and networks, it could only feature content that was made with the broadest possible audience in mind. When they determined the future of Netflix was in niche content, they knew they had to make it themselves. 

“Netflix doesn’t run a traditional broadcast or theatrical business model and they never have. They can make things like Roma that probably wouldn’t work in the traditional model,” said Smith. “Their goal is not to get as many people as possible watching the same thing, their goal is to make sure they provide enough interesting content to get you to subscribe next month.” 

So that begs the questions: if a surge of new streaming services floods the market, and they all have that same goal, is it good for consumers? Smith says it’s a mixed bag. 

“It’s great for consumers in the sense that there will be more competition and more content. It’s bad for consumers because things are going to start getting very complex and confusing. With content spread across many competing platforms, it will be a challenge to know which services to subscribe to in order to get the content you want,” said Smith.

As an expert on digital piracy, Smith also worries a crowded SVOD market might lead to renewed spikes in online piracy, as people won’t want to subscribe to multiple services, and may turn to piracy to get what’s not included on their preferred platforms.

A brave new world for advertisers, too

As the SVOD market becomes bigger and brighter, advertisers may feel like they’re sitting at home without a date to the prom. That’s because SVOD subscription models have fundamentally shifted the focus of television executives from meeting the needs of advertisers to meeting the needs of viewers. 

“One of the beauties of an ad-free subscription model is that they don’t have to worry about that tension anymore. They’re in the business of creating as much value as possible for the viewer. That’s their sole focus,” said Smith.

While it’s convenient to not have to watch ads on a service like Netflix or Amazon Prime Video, it remains true that exactly the right ad can be valuable to a consumer, and companies still want to advertise their products. That puts a greater pressure on advertisers and platforms to better know the viewer. 

“Companies and platforms who are continuing to show ads to home viewers need to use data to make sure those ads are relevant for the consumers seeing them, because in this landscape people are less patient than ever with irrelevant advertising.”

But Smith notes that even SVOD services like Hulu, whose tiered subscription has a free ad-supported option, presents head-scratching new problems for advertisers. 

“Ad-based tiers allow advertisers to reach consumers while those consumers try out a service, and that’s attractive. The problem is that the most valuable consumers, at least from an advertising perspective, are disproportionately the ones who will be more likely and able to pay for the ad-free experience,” he said.

Technology and big data have driven dramatic changes in the entertainment industry in a very short period of time. After all, Netflix only began its streaming service in 2007 (as did Hulu) and didn’t start releasing original content until 2012. The current incarnation of Amazon Prime Video is only about eight years old. In this game, it’s anyone’s guess which strategy will prevail. 

But Smith says we’ll find out soon enough.

“Someone is going to win this, and they’re going to win big. We’re not going to have 15 very powerful platforms, or even six. We’ll have two or three, maybe just one. This might be a winner-take-all market.”

Michael D. Smith and fellow Heinz College professor Rahul Telang are experts on technological disruption in the entertainment industry, and co-authors of the book Streaming, Sharing, Stealing: Big Data and the Future of Entertainment.