• Streaming’s breakneck growth has started to slow, meaning investors are likely to switch their focus to the profits the leading players can generate. 
• Computer games studios are starting to flex their muscles as a surge in lockdown gaming, and the Activision Blizzard bid shows their worth.
• Entertainment technology is being used to enhance real-life events, meaning its fortunes are not simply tied to lockdowns.
• Virtual reality and augmented reality are likely to prove the next tech battleground, and emerging as a hardware leader could be the key to big profits.

We scroll, we click, we stream, we play, we comment, and we create. Long gone are the days when being entertained largely involved sitting and watching.

The upheaval caused by the emergence of new entertainment technology over the last decade has meant seismic disruption for some companies and fantastic opportunities for others.

Covid-related lockdowns accelerated changes in the entertainment we consume and how we consume it. Bored and housebound, the world tuned in to the possibilities offered by entertainment piped into the home over the internet. And growth is expected to continue.

Research firm Statista estimates digital advertising sales will hit $515bn (R8.1tn) this year and rise to $683bn by 2026, while video-game revenues are forecast to go up from $175bn to $237bn over the same period.

Video streaming is expected to rise from $82bn to $116bn by 2026. However, that would represent a marked slowdown on the breakneck pace of growth that saw revenues surge from $28bn in 2017. Strains on growth in the market were vividly illustrated by last week’s shock news from the world’s largest streaming service, Netflix, that 200,000 subscribers had left in the first three months of this year, with another two million expected to follow over the next quarter.

Is content king?

Fast-growing markets that lack strong barriers to entry tend to attract floods of investment. Over recent years, this has been the story of streaming services, especially video streaming, which has enjoyed ballooning sales.

Here, leading platforms, like Netflix, Disney+ and Amazon Prime Video, are going head-to-head. Disruptive models such as Google’s YouTube also redefine the relationships and boundaries between viewers, creators and advertisers. As competition ramps up, billions of dollars are being thrown into content creation by mainstream streaming services that hope to attract new subscribers and keep existing ones.

Broker Morgan Stanley forecasts that spending by big streaming companies will grow by 12% a year between 2022 to 2025. This is likely to be ahead of revenue growth, which the broker thinks will be closer to 10%. Revenue forecasts could, however, prove optimistic after the pandemic bump, which accelerated the uptake of streaming services.

As Netflix’s results suggest, the land grab in the streaming market may already be drawing to a close. If so, now comes the fight for profit.

‘We’re moving from a phase of growth to a phase of maturity, consolidation, churn and competition between existing players and emerging players for the same base of people,’ says Paul Lee, a UK partner at consultancy Deloitte, who specialises in technology, media and telecommunications.

Customer stickiness is likely to become increasingly important to profitability. It is expensive to win new subscribers, and it pays to keep them, reinforcing the need to invest in content. Consultancy Deloitte estimates that streaming services have a 35% customer churn rate in the world’s most mature market, the US. Meanwhile, churn could be around 15% in the coming years globally.

How to win the streaming wars

With video streaming becoming increasingly competitive, big players are looking to differentiate themselves by investing in artificial intelligence to identify and highlight content to individuals that will keep them coming back. New features are also being added to platforms which create a social element to viewing through group-watching functions.

There is also a growing interest in experimenting with tiered pricing structures. And old-school tactics of weekly episode releases to generate a buzz around flagship series could also become more commonplace. But ultimately, content and word of mouth is key.

Streaming businesses with extensive production experience, such as Disney, may prove best placed. During this period of high spending by streaming businesses, the biggest winners could well be the companies focused on producing content rather than simply distributing it. But there is also the threat for these traditional media players that streaming could eat into much higher margin revenues from cable services. 

Winners may also be found among companies that can use streaming services to drive higher-margin revenues, whether Apple sells earbuds to its music streaming subscribers or Disney sells theme park tickets.

Game on

Covid provided a major boost to the video gaming industry. Statista estimates lockdowns led to a 155% surge in console sales and a 53% boost in digital gaming. Many individuals became first-time gamers, and their new habit is likely to stick for many of those.

In this entertainment realm, top content producers are also showing their worth. Microsoft’s largest ever proposed acquisition – a $69bn bid for video-game developer Activision Blizzard – underlines how valuable the best studios are.

Video games are not just played but also watched. As a result, there is huge viewer interest in live and recorded gameplay: Amazon-owned game streaming service Twitch has recorded a four-fold increase in viewing figures to almost 25 billion hours a year over the past five years.

Meanwhile, studios are flexing their muscles to demand better commercial terms from digital distribution platforms. Epic Games made a headline-grabbing power play in 2021, as the maker of smash-hit video game Fortnite took Apple to court and pulled the game from its app store over alleged abuses of market power.

While neither company could claim a decisive victory from the legal wrangle, Epic managed to get some of what it wanted, and it could be a sign of things to come. US lawmakers are also getting vocal about perceived monopoly powers.

Social animals

The network effect fostered by popular social media platforms – the virtuous cycle whereby more users of a service make for a better experience and generate more value for its owners – is also under scrutiny. These platforms have long stood accused of using tactics from the gambling industry to get users hooked.

The charges levelled against the social media titans range from spreading conspiracy theories to encouraging suicides and self-harm. As a result, some are now finding it harder to recruit the best staff.

Data use is also an increasingly contentious issue. This was brought starkly to public attention in 2018 by Cambridge Analytica, a UK company that bought the personal data of millions of Facebook users to inform political advertising.

Entertainment technology is also being used to enhance live events. Improved visual and audio technologies are expected to create more immersive experiences in settings ranging from gig venues to museums. In addition, as the world moves beyond Covid, consumers are likely to re-embrace their old habits with gusto, seeking opportunities for entertainment outside their homes.

And wherever there are eyeballs, there are advertisers. So the advertising industry seeks to quantify the impact of non-digital marketing, such as billboards and TV slots. This could have noteworthy implications in an industry that has flocked to the reassuringly measurable world of online advertising over the last decade.

Social media advertising is also expected to bring content consumption ever closer to the purchase of goods with a seamless see-it-like-it-buy-it experience.

Disrupting the disruptors

Entertainment technology also faces the prospect of fresh disruption. Web 3.0, while still ill-defined, is often billed as a development that will disintermediate the hugely profitable platforms that dominate the digital media and entertainment landscape today.

Big tech, meanwhile, has its eyes on the next prize, spending big to become the dominant hardware providers for the burgeoning virtual reality and augmented reality markets. The potential prize is controlling the platforms of the future and taking a slice of the revenues flowing through them, as Apple has so successfully done with its market-leading smartphones.

Linked to this idea, we have a buzzword du jour: metaverse. Again, there are several possible definitions of what the metaverse will be, and the idea currently seems a bit woolly. However, most believers seem to agree that it will be massive and highly immersive. The renaming of Facebook as Meta underlines the excitement.

Video games are perhaps the closest to turning this ephemeral idea into reality.

‘A lot of what people call the metaverse was previously called virtual reality or augmented reality or just plain video games,’ says Lee.

‘When people talk about Fortnite being the metaverse, it’s just a video game with lots of players and changing content.’

We may soon add other interactive elements to our scrolling, clicking, streaming, playing, commenting and creating. Staying at the forefront of these developments will be key for entertainment companies.