Viaplay and Netflix: a tale of two streamers

For one, a denouement as bleak as the darkest Nordic noir. For the other, a classic feelgood Hollywood ending. This week highlighted the apparent contrasting fortunes of two streamers: Viaplay and Netflix.

For Viaplay, one of whose noir originals is called Exit, we witnessed the culmination of an apparent meltdown. The Sweden-based outfit announced that it was cutting its headcount by 25% and abandoning most of its international markets in favour of a retrenchment to focus on its Nordic backyard and the Netherlands. Viaplay is also mulling a possible disposal of assets or even the sale of the company. As if on cue, Canal+ has stepped in to take a 12% stake.

For Netflix, on the other hand, the sweet smell of success: the SVOD giant’s strategy of cracking down on password sharing seems on the surface of things to be paying dividends. The SVOD giant racked up net additions of 5.9 million paying customers in the quarter to June, well ahead of analysts’ expectations.

Viaplay’s fate offers a cautionary tale. Seen as an example of how European media companies could successfully respond to US streaming giants through a strong local presence and a canny mix of approaches suited to specific international markets, with a strong, un-Netflix-like emphasis on sports rights, it has become more evident that Viaplay ultimately lacked the scale and resources to weather the wider difficulties faced by streamers in an increasingly crowded market, the downturn in advertising spend and the ability to make a heavy investment in content pay off.

For a Netflix, with 20 times the annual revenues of a Viaplay, scale is not an issue. However, the company’s apparent success in translating password sharers to paying subscribers does not mean that it is immune from the woes affecting the wider sector. It is noteworthy that the company’s revenue growth in Q2 was a lot less dramatic than the jump in paying subs, with the streamer trimming its pricing to accommodate the new economic reality and adjust to the expectations and competitive environment of different market around the globe.

Asked about the impact of ‘paid sharing’, the company’s initiative to convert those password-sharers into paying subs, and Netflix’s wider prospects to drive revenue growth, CFO Spencer Neumann sounded a cautionary note on the company’s Q2 analyst presentation.

“If we step back on thinking about our revenue growth and components overall or within a given region, it’s driven by a combination of pricing, volume and new revenue streams like ads,” he said.

On pricing, he said, “we’re now more than a year out from any price adjustments in our big revenue countries. We largely paused them during paid sharing rollout and so that’s to be expected.”

Advertising is not expected to be a big revenue growth driver in the near term.

“For ads, that new revenue stream, we’ve expected a gradual revenue build, and so that’s not expected to be a big contributor this year. So it continues to be on target,” said Neumann, noting that even in the North American market, ad-supported SVOD was “still very, very small overall because it’s still nascent to the business”.

That leaves paid sharing: “So most of our revenue growth this year is from growth in volume through new paid memberships, and that’s largely driven by our paid sharing rollout. It is our primary revenue accelerator in the year and we expect that impact, as Greg said, to build over several quarters.”

One-time hit

But paid sharing is really something of a one-time hit for Netflix. Ultimately, once password sharers have either departed or signed up, the boost to the top line from this will tail off. The company that is still the world’s streaming leader will have to find another way to deliver growth that also delivers profit – meaning keeping a hold on programming costs too.

Advertising remains unproven and is also highly competitive. So once the paid-sharing dividend is accounted for, Netflix’s main lever to nudge the top line upwards is pricing. In the current economic environment, implementing price hikes will be difficult. The company’s removal of basic without ads in key markets may or may not help at the margins. Differentiated pricing in emerging markets may shift the needle a bit but will not necessarily transform take-up in competitive markets where video piracy is also rife.

The fact is that while different streaming services are not perfect substitutes for each other, consumers have limited time and spending power. Instead of relying on one pay TV big bundle for their entertainment needs as in the past, they now increasingly jump between different premium services, taking advantage of month-by-month subscriptions, and also look to free offerings.

Ditching that month-by-month no-contract model in favour of the old pay TV model, an option suggested by some, is probably not a viable choice for streamers – it simply doesn’t match up with the way they are viewed by their customers.

Viaplay’s troubles show how difficult it is for smaller fry to succeed (or even survive) in this world. But for even the biggest fish, like Netflix, that Hollywood ending may prove elusive.