Home Entertainment ‘Social Distancing’ — Boon or Double-Edged Sword?

With movie theaters shuttered and government officials calling on people not to congregate in groups larger than 10, home entertainment, including transactional VOD and packaged media, is getting a boost from consumers sequestered at home during the spread of the coronavirus pandemic.

Universal Pictures said it is releasing select theatrical titles concurrent with home entertainment following a weekend box office that saw its five releases generate a paltry $11.7 million in collective ticket sales.

Warner is putting Harley Quinn: Birds of Prey early into digital retail channels. It’s not a big gamble considering the movie has been out in theaters since Feb. 7.

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“Yes, they will see increased usage in home entertainment distribution,” said Michael Pachter, media analyst with Wedbush Securities.

While no studio is going to admit it might profit from home-confined consumers, Wall Street analysts are less concerned about optics and more motivated by trends and cost/benefit analysis, among other factors.

Pachter cautions that any uptick in transactional purchases, Redbox rentals and subscription streaming is limited in its “attractiveness” as investments. Indeed, after Universal and Warner, no other studio has announced expediting retail channels. Box office king Disney has heretofore resisted altering the theatrical window for obvious reasons.

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“There are other things going on out there that limit their attractiveness as investments,” Pachter said.

Home entertainment spending in the fourth quarter of 2019 increased 9% to $6.8 billion, from $6.3 billion spent in the final three months of 2018, according to DEG: The Digital Entertainment Group.

The analyst contends any increased revenue studios make from DVD will be “far less” than the “normal” revenue they would generate from theatrical exhibition. A noted Netflix bear, Pachter says the SVOD behemoth remains an overvalued stock, “but less so now due.” He says Disney will benefit from releasing its movies on Disney+, but will still “lose mightily” on theme parks and cruise ships — both of which are shut down.

“Redbox definitely benefits, but it’s a private company,” Pachter said. The kiosk vendor and its former corporate parent, Outerwall, were acquired by a private equity group in 2016 for $1.6 billion.

Richard Greenfield, media analyst with Lightshed Partners, said the elimination of live sports on TV makes SVOD a valuable alternative.

“To the extent consumers are increasingly working from home and refraining from out-of-home activities, without sports to watch on TV, we suspect streaming services such as Netflix will see increased subscriber additions and higher utilization per account (leading to higher ARPU plans that enable more users per household and lower churn),” Greenfield wrote in a March 12 note.

Analyst Laura Martin with Needham was one of the first Wall Street pundits to predict a home entertainment gold rush as a result of the pandemic. Martin cautions that with the pandemic now centering in Europe, international  Netflix subscriber growth will stall.

“In distressed times, people will give up their Netflix subscriptions,” Martin wrote in a note.

Greenfield disagrees.

“Netflix appears incredibly well-positioned to entertain consumers as [other] entertainment options dry up, especially if more movie theaters close globally,” he wrote.

 

Analyst: Netflix Needs Lower-Price Tier to Avoid Losing 4 Million Domestic Subs in 2020

For years some Wall Street analysts have suggested Netflix offer an ad-supported platform, including running spots similar to what Hulu and Disney+ do. The streaming SVOD behemoth has steadfastly refused to do so.

With the domestic SVOD market near saturation and new entrants Apple TV+ and Disney+ soon to be joined by NBCUniversal’s Peacock and HBO Max, Wall Street again suggests Netflix revisit AVOD.

“Customers are more price-sensitive than previously thought, and competitors like Disney+ are already undercutting Netflix’s prices,” Neil Macker, analyst with Morningstar, wrote in a recent report, as reported by CNBC. “This price differential will cause lower subscriber growth than we had previously expected.”

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Indeed, Netflix added 420,000 subs in the United States in the fourth quarter, ended Dec. 31, 2019 — down from a projected gain of 600,000 subs.

Laura Martin, analyst with Needham, contends Netflix could lose 4 million domestic subs in 2020 without a lower-priced subscription price.

“Netflix must add a second, lower-priced service to compete with Disney+, Apple+, Hulu, CBS All Access and Peacock, each of which have $5– to $7-per-month choices,” Martin said.

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Netflix’s least-expensive streaming price in the United States is $8.99, while a DVD-only rental subscription costs $7.99 ($9.99 for Blu-ray Disc).

The SVOD pioneer recently launched a $2.99 mobile-only streaming plan in India with promising results, according to chief product officer Gregory Peters, who added on the Q4 fiscal webcast that there is “a pretty good indicator that there might be other countries around the world where that kind of offering will work as well.”

Separately, Netflix reportedly is downsizing its marketing department by 15 employees following the hiring over the summer of former BBC Studios marketing executive Jackie Lee-Joe.

Media reports says Lee-Joe sought to streamline the department for operational efficiencies. Netflix, which employs more than 6,900 people worldwide, hasn’t officially commented on the report.

 

Analysts Split on Apple’s Streaming Impact on Netflix

The day after Apple’s media coup announcing plans for an enhanced Apple TV app and related services, Wall Street appears divided depending upon which side of the Netflix stock it sits.

With more than 1.4 billion iOS connections globally, the revamped Apple TV+ service would appear to be a major competitive threat to Netflix’s global base of nearly 150 million subscribers and future growth.

With a history of industry disruption and creating consumer markets through iTunes, the iPhone, iPad and Apple Watch, conventional wisdom suggests Cupertino, Calif.-based Apple could upend Netflix’s burgeoning growth and market dominance — despite its relatively late entry into the over-the-top video ecosystem.

Needham analyst Laura Martin contends Apple TV+ could be “poison” to Netflix by virtue of Apple’s 900 million existing connected consumers and its ability going forward to bundle original content, discounted third-party OTT services, music and video games.

In a note, Martin writes that if Apple is successful converting just 10% of its unique users to Apple TV+, it would be able to fund content with a budget nearly triple Netflix’s. The analyst is also bullish on Disney’s pending Disney+ streaming service, telling media it could generate 50 million subs.

Dan Ives, media analyst with Wedbush Securities, says Apple is separating itself from Netflix by catering to family-friendly content on a secure platform.

“[Apple] is trying to differentiate itself [from] competitors and flex its Apple brand muscles to get more consumers on this ‘trustworthy’ platform,” Ives wrote. “We continue to believe the company has the opportunity of capturing 100 million consumers on this streaming service over the next three-to-five years.”

On the flipside, Raymond James analyst Justin Patterson says Netflix market position is well-built to withstand the threat.

“Similar offerings already exist, suggesting this service is more incremental than revolutionary,” Patterson wrote in a note. “We believe Apple’s and Disney’s launches will not adversely affect Netflix’s competitive position.”

Longtime Netflix bear Michael Pachter, with Wedbush Securities, says that with Apple reportedly spending $2 billion on original content, including licensing content from Netflix’ studio contributors – in addition to offering third-party OTT services — the SVOD pioneer will have increased challenges finding compelling content to justify its standalone service.

“We expect Netflix to suffer the double whammy of seeing existing content migrate to competitive services at the same time that new domestic subscribers are more difficult to attract,” Pachter wrote in a March 26 note.