Last week I offered up my view on how the major SVOD companies (Netflix, Amazon, Hulu) were likely to unseat many of the traditional powers in the US TV landscape. There are a number of reasons why I believe this will happen, but I’d like to highlight one which I’m not sure people focus on enough.
We know that Netflix and others like to trumpet the “watch it anywhere, anytime, on any device” capabilities of internet video. Video on Demand is a user experience that has undoubtedly struck a chord with customers (especially millennials). Importantly, implied in this experience is the concept of non-linear TV, and it is a dramatic departure from how we’ve consumed TV historically.
What do I mean by linear and non-linear TV, and why is it important? Linear TV is TV programming constructed around a timeline: the clock. Traditional networks operate by broadcasting a single, continuous signal, and are therefore required to develop content to fill that timeline; 24 hours a day, seven days a week. Fill that up and they are done.
But linear TV has a natural limit, a cap, a constraint on the amount of content that can be broadcast. There are only so many hours in a day. Once they program their schedule, the networks have no ability to offer anything more to their viewers. And that constraint means there is room for multiple players in the market. After all, not everyone wants to watch the same thing at the same time. Even when the Super Bowl is on, there is a percentage of the market that would prefer to watch reruns of Friends.
Non-linear TV has no such constraint. An SVOD operator can theoretically develop and offer its customers as much content as it wants, enough to program ten clocks. It is handicapped neither by time, nor by its stated theme. Dramas, comedies, children’s programming or documentaries. It has no thematic bounds. Its customers can watch all of those things at the same time all around the world. As such, its only constraint is its wallet.
This is the genius of Netflix. The faster it grows, the more customers it counts, the more money it will have to spend on content. It will eventually be able fund and offer enough content to satisfy most of your viewing needs. In a non-linear world, where resources matter, economies of scale will dominate. That means bigger is better, at least economically. This will be a winner take all, or relatively few winners take all game.
Netflix CEO Reed Hastings gets that. And he is on a mission to make sure his company is the winner.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.