The next phase of the Streaming Wars saga is nearly upon us. We're about one month away from the launch of Apple's (NASDAQ:AAPL) and Disney's (NYSE:DIS) streaming video services. And while they are priced to move at $4.99 to $6.99 per month, respectively, that extra entertainment money is going to come from somewhere.
The problem will compound when consumers are given even more choices with the introductions of HBO Max from AT&T's (NYSE:T) WarnerMedia and Peacock from Comcast's (NASDAQ:CMCSA) NBCUniversal early next year. Not only will there be two more premium options for consumers to choose, but those services are also expected to be more expensive than Apple TV+ or Disney+.
That said, management from nearly every company with a stake in the game is confident that its service will thrive. And with good reason. Consumers are showing an increasing willingness to subscribe to multiple video services, and early demand has surpassed expectations. But people don't have an unlimited budget, in terms of time or money, so where will that consumer spending come from?
Digital downloads and rentals
If someone can stream more of the content they love, the first thing they'll stop doing is paying for individual downloads. The music industry has seen a huge impact on digital downloads now that practically every song is available as part of an all-you-can-listen buffet. Streaming music accounted for 80% of the industry's revenue in the U.S. during the first half of 2019. Digital download revenue fell from $2.3 billion in 2013 to $1 billion last year.
The streaming video industry isn't quite the same as streaming music. But as more content becomes available on streaming platforms, the less content people will take from digital downloads.
Here's the rub. Digital download and rental sales have already fallen off the cliff. Self-reported rental and download spend in the U.S. has been cut in half since 2012, according to Parks Associates. The average consumer claims to spend only a couple of bucks a month on downloads.
So while companies with digital video stores like Apple or Amazon.com could see a further decline in downloads, there's not much farther to fall.
Other home video entertainment
There are two other areas of home video that could see a significant impact from the plethora of streaming video options available: DVD and Blu-ray sales and pay-TV subscriptions.
Believe it or not, people still buy DVDs and Blu-rays. Disney generates billions from physical sales of its catalog every year. But when every Disney movie becomes available for streaming, the appeal of the shelf full of boxes for baby to pick out becomes less appealing. That represents a huge opportunity for Disney to attract a large group of consumers to Disney+, but it comes at the cost of cannibalization.
Not every media company has home video sales as strong as Disney's, but giving customers another way to watch their favorite films or series without needing to buy physical media will surely cut into those sales. That also means companies like Disney, with greater home entertainment sales, have a greater risk as more entertainment transitions to streaming.
The bigger entertainment budget for most households, however, still goes toward a pay-TV subscription. The average pay-TV household spends over $100 per month on its subscription. Cutting or shaving the cord will open a considerable budget for streaming video.
The losers here are traditional cable providers such as Comcast and AT&T. Disney may be a winner with its relatively low-cost Hulu + Live TV subscription, but investors should expect cord-cutting to keep declining considerably as more premium streaming options come to market. Comcast is reportedly going to offer the Peacock service free with ads to its cable subscribers as an effort to prevent cord-cutting, but it'll also offer the service ad-free for a price.
One challenge both consumers and analysts have with evaluating the streaming video industry is mental accounting. The idea that if consumers spend a certain amount on home entertainment per month they'll only ever spend that amount per month is a fallacy. Spending will go up and down depending on a number of factors. Importantly, none of those factors are "how much did I spend on streaming video last month?"
In other words, Netflix doesn't have to lose for Disney+ to win. And consumers don't have to cut the cord just because they want HBO Max.
The average household spends more on eating out and drinking than on entertainment, both in-home and out-of-home. It spends nearly three times as much on transportation. Maybe one fewer trip to a restaurant per month will open the budget for spending on a few new streaming services.
While digital downloads and pay-TV will continue to suffer as more streaming services come to market and streaming gains popularity, most consumers won't drastically change their behavior around other sources of entertainment. They might, however, shift their whole budget around to prioritize the things they want most. So whichever services offer a compelling content catalog are very likely to succeed despite other well-established and popular competitors in the market.