From Crush to Crash: The Future of Video-On-Demand


by futurist Richard Worzel, C.F.A.

There’s a crash coming in the video-on-demand (VOD) business, and while we can’t know who’s going to survive, we can assess the landscape and make some guesses. But let’s start by going back and trace the roots of the current market crush, then look at how it’s going to lead to a crash.

Netflix didn’t create the business of VOD. Tech companies have been striving to create something like this since the 1970s through Videotex – an Internet precursor that didn’t offer enough bandwidth to fulfill the dreams of its proponents.

GE attempted to create such a business in the 1990s in cooperation with AT&T, but, again, didn’t have the bandwidth to make it successful. And cable and satellite video suppliers have had successful businesses selling television signals to subscribers for decades, but not on demand. That had to wait until broadband became widely available, as well as for the aftermath of the tech crash of 2001 to subside.

Netflix was lucky enough to stumble on this opportunity at the right time, and was smart enough to seize it.

Netflix Wasn’t the First

You could argue that YouTube was the first to commercialize streaming video on demand, but they were attempting to use the Google model of giving their wares away, and trusting that the advertising that went with it would be sufficient.

But Netflix saw that people were used to paying for certain kinds of products – movies – and started by creating a subscription business model in which they mailedDVDs to their subscribers, which now seems both quaint and clunky. Yet, it allowed them to transition to modern technology after having conditioned their customers to pay for a regular, monthly subscription for their offerings, which were still movies, but now delivered in a faster, more convenient manner through streaming.

At first, no one seemed to notice or care what Netflix was doing with videos, which was part of their remarkable innovation. After all, Apple had no interest in trying to out-blockbuster Blockbuster Video. Microsoft sure didn’t want to be in that business, nor did Google. And Amazon already sold and mailed DVDs to people, so they didn’t really seem to twig what Netflix had done by slipping softly, gently into the video rental business. Besides, Amazon was already starting to offer streaming video to their customers in 2006 – roughly the time that Netflix got serious about switching their emphasis from DVDs to streaming.

Once Netflix started ringing up big numbers, though, other companies started to notice. And now there is a veritable gold rush to make use of the business model that Netflix popularized, subscriptions for streaming video-on-demand. The problem is that there’s not enough demand to satisfy all of the wannabe players.

One Bowling Alley Can Be Successful, But Two Can’t

Business booms that turn into crashes are not new. They have happened repeatedly through history. One of the clearest examples was the introduction to the U.S. market of automated pin-spotting machines by AMF, Inc., which set AMF on the course to becoming “the McDonald’s of bowling” in the 1960s and 1970s[1]. Automated pin-spotting allowed an efficient way to create large bowling alleys without the costs of large staffs of pin-spotters, and led to a surge in bowling in America, and the spread of bowling alleys and bowling leagues across the country.

The problem was that a town that was big enough to support one bowling alley was typically not big enough to support two, so when Brunswick Bowling & Billiards followed AMF into the automated pin-spotting business across America, the business model failed, and stopped offering easy, lucrative success.

The same will happen with VOD subscriptions. Today the number of streaming subscription services is multiplying with Netflix competitors like:
• YouTube TV fighting directly for market share;
• former premium cable channels like HBO moving into online streaming in competition with their original cable and satellite conveyors;
• cable and satellite providers attempting to following Netflix into the market with their own offerings like Sony Crackle;
• traditional broadcasters, like CBS, making their off-air programming available online along with subscription-only new programming, as well as
• traditional content providers, like Disney, who want to monetize their already-enormous catalogs of movies, miniseries, and television programming.

Then you add the tech companies like Apple and Google, which have woken up and realized that this is a serious market, and are belatedly pouring money into their own productions in an attempt to catch up.

The bottom line is that there are now lots of groups that have set their sights on beating Netflix at its own game.

So, how is this going to shake out?

How a Crush Becomes a Crash

One of the appeals of Netflix, or any streaming VOD subscription service, is that for a modest monthly fee, you get unlimited access to what you hope is a wide range of interesting programs. And that’s great when it’s one service. But if you start having to subscribe to 5 or 6 such services to get the programming you want, then the modest subscription service fees start to add up, and it starts being as expensive as cable or satellite.

So there’s a clear limit to how many services consumers are willing to pay for. Indeed, one of the attractions of Netflix’s VOD service is that the cost is so much less than for traditional cable.

But with new offerings flooding into the market, each with its own tantalizing headliners, the result is that the market for streaming services will become ever-more-highly fragmented, not only for VOD services, but also for traditional competitors like cable and satellite. Yet, the costs of providing the range and depth of offerings that consumers want is enormous.

Let’s go back to Netflix. Here’s a take on where Netflix is now from the Los Angeles Times:

The global streaming giant today boasts some impressive stats: 104 million subscribers worldwide, up 25% from last year and almost quadruple from five years ago. Its series and movies account for more than a third of all prime-time download Internet traffic in North America. Its more than 50 original shows garnered 91 Emmy Award nominations this year, second only to premium cable service HBO.

But there’s another set of numbers that could spell trouble for the company’s breakneck growth. Netflix has accumulated a hefty $20.54 billion in long-term debt and obligations in its effort to produce more original content.

Its net cash outflow this year is forecast to grow to as much as $2.5 billion, up from $1.7 billion last year.[2]


Netflix has built its success on providing a steady flow of interesting programming – but it has to keep running faster and faster to keep its growth going, and money is flooding out of their coffers. And since much of the money it has used to create its subscriber base is borrowed, the question becomes: Will success kill it?

Now, Netflix has been very lucky, but also very nimble, and very smart about building a remarkably successful business. So, what does all this portend for the market?

So, What’s Ahead for VOD?

The entertainment business is, and always has been, a high cost, high demand business. The rewards for doing things well are high – but the costs of mistakes or missteps are just as steep.

Having an established market position matters, so that Netflix, Amazon, and HBO start out with a big advantage. But having deep pockets matters a lot as well, because there will be inevitable bombs, or seasons that don’t do as well as hoped. At such times, it helps to have enough money to weather them. This means that companies like Apple and Disney, even though they are late out of the gate, are likely to be able to make it if they are smart – and willing to absorb initial losses.

So, here’s my assessment of who is going to survive the coming crash:

  • Netflix – As I said, it has been both lucky and smart. However, I think in the long run it will take more. As a result, I think that Netflix will survive either by attracting a deep-pocketed backer/investor, like Apple, selling out completely to another industry player, or going bust. Depending on who a potential backer might be, the name might persist or be changed to something else, like Sony or Apple.
    One of the key aspects of Netflix that often goes unnoticed is the way they analyze their viewers’ behavior, and use it to promote other videos their algorithm calculates each individual would find of interest. This is a very smart, but very difficult, use of Big Data and analytics that doesn’t show from the outside, but will be a key factor in Netflex’s – or another other VOD supplier’s – future success. And it may well be that their groundbreaking work here is what will make them as appealing an acquisition to deep-pocketed wannabes as their subscriber base.
  • Amazon – Amazon has one of the most remarkable business models around in their Amazon Prime subscriber base. People actually pay money to be able to buy things on a favorable basis. Costco does the same thing, but Amazon’s base is actually broader, and offers the company more flexibility in completely unrelated areas like health care and VOD. As a result, its subscribers have more than one reason to stick with Amazon, even if they have a dud movie, or a down season. And Amazon has deep pockets, so I have to believe they will make it.
  • Disney – Disney is another company with many different marketing avenues, and all of them work together synergistically. It has perhaps the world’s greatest back-catalog of movies and television programs for families (as well as some distinctly adult fare), plus some of the hottest current labels, such as Marvel, Star Wars, and, more recently, 20thCentury Fox. It also has very deep pockets, and an enormous production and marketing machine.
    And Disney has a pattern of testing out new markets, then jumping in to create their own, special market. For instance, they effectively chartered a cruise ship line for a few seasons in the mid-1980s (“The Big Red Boat”) until they had tested the market and found it to their liking. Then they created their own cruise line, which charges premium prices, but attracts fanatical devotees with the result that while the Disney Cruise Line is one of the smaller players in that industry, it still makes a very hefty contribution to Disney Company’s bottom line.
    So, unless they manage to tie their own shoelaces together, I can’t see how Disney can fail to create a highly diversified and successful VOD to complement their many other offerings.
  • Apple – This is a more speculative pick, and based on Apple being able to create an iTunes-like ecosystem for VOD. I doubt whether Apple, despite its deep pockets, can jump into video production and make a big enough splash to maintain a significant market share. Moreover, that’s not Apple’s behavior pattern. They like to create premium products that are different and distinctly better than their competitors, gathering a smaller, but highly profitable, market share rather than compete on price in a broader, commodity-priced field.
    But, on the other hand, there will be a lot of video-on-demand groups that can’t quite make it on their own. If Apple can create a structure that supports the ecosystem and pays for the fixed overhead, then rewards producers on a per-viewer basis, then it might well be that Apple can repeat its iTunes success in VOD. Failing that, or a major acquisition, like buying Netflix, I don’t think Apple can make it on their own.

I doubt whether most of the other contenders have the right formula, smarts, and staying power to survive, long-term, in what promises to be a crushingly competitive market. Some, like HBO, may survive for a time on their talent and knack for creating cutting-edge programming, but will eventually stumble. Some, like CBS, are unlikely to bring anything special to the table, despite their extensive (and somewhat dated) back catalog.

Most tech companies, like Google, really have very little to bring to the party other than money and desire. Unless they can come up with some remarkable tech gizmo that gives them an edge, those tech companies that want to get in this market should, in my view, try to buy Netflix or some of the other also-rans rather than re-inventing the wheel.

© Copyright, IF Research, November 2018.


[2]Ng, David, “Netflix is on the hook for $20 billion. Can it keep spending its way to success?”, website,