Time for a Correction?

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Something seems wrong in the streaming media sector. I honestly can’t put my finger on it, but it’s a strong feeling. To be fair, there might not be anything "wrong"—the industry might be simply "in flux."  

I had the same feeling in 1998, 2002, early 2008, and 2014. The first three I attribute to investment, particularly in overall global network capacity. I have written numerous times about the spikes in consolidation and M&A activity in the streaming sector that follow the opening up of large intercontinental fibre routes. This effect—let's call it the Robinson Theorem (!)—appears like some form of "fiscal drag" that emerges as streaming markets whose prices are based directly or indirectly on network supply and demand become disrupted by huge increases in underlying network supply.

Indeed there has been a large increase in capacity recently. Transoceanic cables such as Marea are coming online. Africa has been significantly lit up on its east and west coasts in the past 3 years. Despite the continued attempts to balkanize the internet as the geopolitics between U.S., Europe, China, and Russia fill the pipes with gossip and "news," there is no sign whatsoever that these networks are failing to offer more and more capacity into markets that are demanding more and more content.

Inasmuch as this capacity bubble is ballooning, I am therefore not surprised that I feel ill at ease. As my theorem is playing out, we are seeing the traditional broadcasters metamorphosing to adopt IP as a medium that is, at the very least, finally being accepted as "good enough" to carry premium content to end users. 

While old, arthritic, and often lacking innovative vision, these traditional broadcasters have access to capital, decades of understanding how to market content to audiences, and powerful relationships with regulators that allow them to force their propositions into the market. One way they can adapt to the new consumer-led technologies of the IP markets is to acquire any upstart venture that looks a bit like it may be disruptive. 

And here we have to look at a secondary market, and one that I personally despise: the venture capital market. 

Venture capitalists are experts at inflating the apparent value of these disruptive upstarts and inserting themselves in the value chain to ensure that those capital-rich traditional broadcaster—and on occasion the modern IP-native unicorns—pay top dollar for such acquisitions. 

Barely a week goes by these days where I don’t see a "me too" startup (usually consisting of executives with less than 3 years in the sector) raising funds to enter the streaming market that are simply beyond realistic. Tens of millions of dollars are being invested in startups whose established organically grown, longstanding competition barely turn over such amounts. There are so many new companies that are critically suffering at the moment because they have taken on an overinvestment and have no hope of showing their VC an ROI. The market analysis that has justified such investment mustbe flawed.  

There are numerous companies in our sector that have been steadily growing their business for 20 years, who turn over perhaps $20 million, and who have key relationships with all the major players. These are good, solid, organizations dominant in their niche, whether that's CDN, DRM, encoding, service orchestration or some other area. 

Then there are executives who move into the sector from telecoms or traditional broadcast and see these organic companies, think "We can do that too," and clone the organic company's business model, website, and positioning, and simultaneously leverage the media hype around cord cutting, Netflix, Disney, and so on. They convince investors that the addressable market for their "me too" niche technology proposition is going to grow into the $10 billion-plus range, and that a significant VC round will help them capture a dominant market share.  

But this is pure fantasy.

Let us throw some very rough conjecture on the table—and note that this is not intended to be an accountant’s NPV or a futures valuation but a dose of reality. Remember that for every $10 billion of revenue from a consumer proposition, you have to tap $1 from every person on the planet. Given that only about 3 billion are online, and only half of those have broadband, that ARPU—for a broadband internet premium streaming proposition—jumps to roughly $10 per user. 

We see recent surveys noting that U.S. citizens are only prepared to spend $21 per month on their combined OTT subscriptions. That makes $252 annual spend on premium subscriber OTT services, and that is in the developed U.S. market. So is it feasible that a new technology provider can offer ~$1 per user per month of value into the delivery chains of the major OTT operators? 

Frankly, I doubt it. That is 5% of topline revenue. It is almost at a taxation level.

Now there are obviously huge margins of error in my numbers here, and we would be venturing into weeds to debate any of them. But to be honest, I really think the margins of error in an article that has taken me an hour to write are probably no different to the margins of error in a fundraising business plan that has taken months to write and used to raise $10 million. The level of conjecture is the same. I see OTT sector valuations in the $100 billions and more, where I see the largest suppliers in the market operating with net income in the $200 million range at absolute best. 

This is why companies like Ooyala fail. It is why AWS won’t break out its revenues from AWS Elemental after spending $250m+. It is why the diversification into immeasurable "security futures" in some of the larger CDNs are so important to inflate the perceived value to investors. It is why cloud companies are actually reaching peak growth despite only a few years ago projecting growth many times beyond what we see today. It is why startup after startup in our sector drowns in stakeholder management while desperately issuing a press release every time they raise an invoice for $10.   

As I indicated at the start of the article, I can feel we are due for one of regular market corrections in the streaming sector. 

The VCs will have had their fingers burned one too many times, and hopefully head away and stop distorting the streaming sector and blowing smoke. Good riddance to them (what need is there for VC in a small and well-networked market that needs little or no capital and can scale on public cloud opex economics?).

The survivors will be those companies who have not over promised, nor over imagined the scale of these markets. 

Yes, streaming is awesome, the technology is great, and the adoption and growth in the sector is beyond what many of us who have been in the sector for decades could have hoped for. But we also need to keep it real if we want to sustain the sector and grow stable companies and livelihoods for those passionate about it.

[This article appears in the Autumn 2019 issue of Streaming Media Europe magazine as "View From the Edge: Time for a Correction?"]

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