Time for the Underdogs to Shine?

When the going gets tough, the competition heats up

As the world tries to move on from the effects of a global pandemic and ongoing geopolitical conflicts with no end in sight, 2023 is shaping up to be another year in limbo.

So far, we’ve seen a bout of market rallies following positive-ish news on macroeconomic factors, like disinflation (that is, lowering inflation rates) and resilient labor markets, only to drop again as reality sets back in. It’s still not clear whether we’re on the path to a soft landing (i.e., no or very mild recession) or a hard landing (i.e., a full-on recession).

It seems like this back-and-forth may continue for some time, and I wouldn’t be surprised if there won’t be an “official” label on this until we’re well into whatever “landing” we happen to find ourselves in (largely as a result of lagging economic indicators that public institutions rely on before they finally make a call).

Economic uncertainty is no fun for anyone, and it's an environment where businesses and industries struggle the longer it goes on, particularly when governments remain focused on cooling off their economies by getting a grip on inflation.

As forward-looking planning becomes even harder to do in addition to higher borrowing costs, businesses across the board tend to become more conservative with their outlook and look inward to improve profitability to be able to weather choppy waters in preparation for a potential storm.

Particularly in growth sectors like tech, we’ve already seen multiple bouts of layoffs, and this could spread to other industries should the current climate continue.

But where uncertainty brews and market leaders divert their attention to protecting their “golden eggs,” so to speak, there may just be opportunity for businesses further down the food chain who’re used to a leaner and meaner environment after many years of playing second fiddle.

Obviously, I’m just sharing my high-level take here, but there are trends in video streaming and online search that I’ve been following with great interest for some time, and increasingly, the narrative across these two sectors is reaching a turning point where the next few moves will be critical in determining whether we’ll see a significant shift in the landscape.

It’s become somewhat of a recurring theme, but some recent graphs from Chartr do capture where we are really well in light of more media coverage around AI disrupting online search and the continuation of the “streaming wars.”

AI disrupting online search

Google’s market share in online search is so big that you have to omit it from any graph when looking at other players in the space.

The graph below shows the market share of other players, and while it’s a bit of a walk down memory lane (Ask Jeeves, anyone?), the main takeaway has been the ensuing battle for second and third place between Yahoo! and Bing.

Since 2020, however, Bing has cemented itself as the second largest search engine, with Yahoo!’s market share eroding significantly at the expense of DuckDuckGo and presumably Google’s sheer dominance. As an interesting side note, Yahoo! continues to be the second largest search engine in Japan (at around 14-15% market share).

While the graph shows a recent decline in market share across the board, I do wonder to what extent the buzz around ChatGPT and AI disrupting search has already impacted the use of search engines.

In an earlier article on generative AI (here), where ChatGPT had been the fastest service ever to hit a million users (in around 5 days), it’s gone on to shatter even more records by reaching 100 million users in two months. It took TikTok nine months to do the same.

Microsoft took advantage of this momentum by putting more money into OpenAI (the company that made ChatGPT) and integrating its technologies into its own products, starting with Bing.

A quick look at search trends for “AI” (ironically, using Google for this) over the last few months shows an interesting narrative that’s been playing out. The hype around ChatGPT has not only managed to sustain itself but has grown over time relative to interest in what Google is doing in AI.

In February, when both Microsoft and Google announced publicly what they were planning around AI in search, Google attempted to try and get ahead with Bard after being caught off guard, only for their plans to backfire; interest in Bard has dropped off significantly.

Meanwhile, Microsoft’s announcement on tightening its relationship with OpenAI not only furthered ChatGPT’s growth but also sparked interest in Bing.

And this is still only the beginning.

While Microsoft and OpenAI aced their first moves in disrupting online search, there have since been some hiccups in testing Bing’s new AI integration, with beta testers trying to find its limits.

Microsoft is no stranger to public embarrassment (remember Tay in 2016?) and should have the PR and marketing muscle to navigate this as they keep their eye on the prize, iron things out, and roll out across more products, particularly its Office suite.

People also shouldn’t be surprised that Google was asleep at the wheel, given their effective monopoly of the market (and not wanting to disrupt their “golden egg”).

Their rushed counter-move with Bard will probably end up being a much-needed slap in the face for Google to remember that they’re still the 600-pound gorilla in the room.

But now that Pandora's box has been opened, there’s no going back. Things will change, and I remain optimistic that the consumer experience will ultimately improve.

However, make no mistake, Microsoft and OpenAI aren’t disrupting search to benefit you and me. Well, not just you and me. As for-profit entities, they believe they stand to gain a lot from this.

Let’s not forget that while Google revolutionized online search back in the day, it also pioneered and then monopolized online advertising. It has been so profitable for Google that half of their revenues still come from advertising today, despite years of trying to diversify.

Prior to the AI hype, even as people laughed at Bing as a search engine, Microsoft still generated more revenue from advertising than Twitter and Snapchat combined.

There’s a reason why this is happening now. Online search is entrenched in society and highly profitable, but trying to fight the status quo has been ineffective so far.

Generative AI has proven itself disruptive (perhaps sooner than anyone expected). And while the cost today is still commercially unattractive at scale, it is likely that it’ll come down over time (as we’ve seen with new technologies in the past).

Everyone else in the room with Google sees this as the trump card to change the status quo. And they could be right; whether or not Google remains at the top, the landscape could look very different. But online advertising as a business model isn’t going anywhere.

Online video streaming is continuing to heat up

Taking our attention to “Over The Top” (OTT) streaming platforms, or video streaming, the competition has been ongoing for some time.

Looking at the graph below, Netflix had long been dominant in video streaming before Disney, HBO, and Paramount entered the market in the years leading up to and during the global pandemic.

The sector being a crowded market is somewhat of an understatement. Notably, Amazon Prime Video, Hulu, Apple TV, and Peacock are absent from the graph and sport approximately 200, 48, 25, and 20 million subscribers, respectively.

Collectively, that’s over 800 million subscriptions raking in monthly fees. Obviously, these aren’t unique subscriptions, as it’s (unfortunately) not unusual for a household to hold multiple subscriptions in order to be able to keep up with their favorite shows.

Historically, many video streaming platforms, including Netflix, had licensing deals with IP owners to distribute many of the popular movies and TV shows that we all know and love. This contributed to kickstarting the “cord cutting” movement.

Over time, as interest in the sector grew, the tech companies that had developed and managed the platforms (and also had access to the end customer, a key asset) also started producing their own original programming.

Conversely, many IP owners, like Disney, ended up not extending licenses and began to develop their own platforms to get a larger slice of the pie.

While the writing had been on the wall for some time, the global pandemic set the stage for the grand finale to kick off. As consumers were stuck at home, OTT subscriptions shot through the roof, forcing industry players to accelerate plans and go “all-in.”

As I covered in a previous article on the subscription business model (here), managing a video streaming platform and producing original content comes with enormous costs.

And while OTT platforms saw incredible growth as they rode the momentum of people stuck at home during the pandemic, it began to cool off as economies opened up in 2022. They’ve now had to resort to other revenue-generating efforts, such as new pricing tiers and restricting account sharing, that have drawn ire from consumers.

Should the trend of increasing paywalls between video streaming services continue, I do believe that the market will not be able to sustain this many players, especially during more uncertain times.

Consumers faced with higher costs and less willingness to spend will increase the trend of “subscription hopping.” That is, changing subscriptions more frequently depending on where the content they want to consume happens to sit.

This adds a lot of pressure to the much-coveted subscription-based business model, which is supposed to provide more cash flow certainty.

Over time, we may just see consolidation in some shape, way, or form. And while some may think that this could end up being a boon for customers in terms of having more content available with a single subscription (like in the good old days), I suspect that costs will unfortunately remain high.

Whether Netflix stays on top remains to be seen. It managed to build a big lead that has since eroded significantly. And as the sector grows more desperate, it makes me wonder what role new types of partnerships and revisiting past business models (like licensing) will play over time.

See you in the next one!

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If you missed last week’s article, feel free to read it below:

On Investing: Keep It Simple