Perspectives: Opinions from our network of advisors, investors, operators and analysts on the risks and opportunities they see.

Netflix has made only four acquisitions in its history: the comic book company MillarWorld, Albuquerque’s ABQ Studios, the historic Egyptian Theatre in Hollywood, and now small children’s media startup called StoryBots.

With this latest move, Netflix is banking on the brand’s colorful cylindrical robots becoming “the next generation of Sesame Street.” It also shows that the streaming giant clearly views children’s content as a serious avenue for growth.

And it really has no choice if it wants to come out on top in the streaming wars. Over the last five years or so, we’ve seen a tsunami of new content aimed at toddlers and young children from streaming challengers and traditional media alike. Netflix’s purchase is the latest sign that streaming veterans are reevaluating how they educate, entertain and engage a generation with more buying power than any ever before.

Streaming has radically changed how adults consume television, and the next generation is growing up without knowing it wasn’t always an option. In fact, according to research by Hulu and Tremor Video, 70% of Gen Z equates the phrase “watching TV” with streaming content on the internet. But the growth of streaming also creates an access gap, as some families can’t afford to pay for content that was once freely available on broadcast networks.

Increasing competition in the streaming space presents a unique opportunity for media to connect with children from all corners of the globe. Some kids, though, fall through the cracks because of high costs, lax rules and lack of proper attention.

Netflix Rules the Playground
In the overall streaming battleground, Netflix undeniably dominates. It currently owns about 51% of the market, followed by Amazon with 33% market share and Hulu with 14%.

However, Netflix’s two biggest competitors have yet to find as significant of a foothold in the kids’ market. Amazon’s kids lineup is relatively sparse aside from a few commendable originals, such as an adaptation of the popular If You Give a Mouse a Cookie book and a couple of series based in the American Girl universe. And though Hulu’s affiliation with major media companies has given it a notable lineup of network and cable favorites like Doc McStuffins and The Wiggles, its small market share combined with Disney’s focus on turning Hulu into a more adult counterpart to Disney+ lessens its threat for Netflix.

Netflix currently boasts 148.8 million subscribers, roughly 60% of whom watched family content in 2018. That’s about 89 million subscribers. For scale, the highest-rated show on Nickelodeon, the most popular kid’s network, brought in just 1.4 million viewers in the 2018 season.

Over the last few years, Netflix has substantially bulked up its kids section, and its StoryBots acquisition is just the latest step. The streamer already hosts one StoryBots show, the Emmy-winning Ask The StoryBots. As part of the acquisition, StoryBots creators Evan and Gregg Spiridellis, who also created the popular internet media company JibJab, will expand the StoryBots brand with new series and specials.

Among Netflix’s growing slate of original content are the Emmy-nominated Alexa & Katie and an animated reimagining of Carmen Sandiego. Netflix also has a multi-year deal with DreamWorks Animation, under which the two co-produce shows like Boss Baby: Back in Business and Trolls: The Beat Goes On!. The streaming giant is currently cooking up a lineup of new projects from animation power playersincluding The Powerpuff Girls creator Craig McCracken, The Book of Life director Jorge Gutierrez and Despicable Me co-creator Sergio Pablos.

But Netflix’s impressive slate of upcoming original content is a defensive measure as the space is becoming more competitive.

Netflix has greatly damaged the ratings of top kids television networks. Nickelodeon, Disney Channel and Cartoon Network have collectively seen ratings drop more than 30% between 2010 and 2017. Parent companies of those three networks, Viacom, Walt Disney, and WarnerMedia, are compensating for lost ad revenue by spinning up their own streaming services.

This spells trouble for Netflix, and not just because these companies have characters and brands that will draw audiences wherever they go. It’s a problem because much of Netflix’s kids slate currently depends on license agreements with competing companies, such as Disney Junior’s Sofia the First, Cartoon Network’s Ben 10 and PBS’s The Magic School Bus, as well as DreamWorks’ entire film library and Pixar movies such as Coco and Incredibles 2.

As these media megalords gear up for the launch of their own services, they will pull their intellectual property from competing streaming platforms. Disney has already done this. In 2017, it ended its partnership with Netflix, which previously allowed the company to stream all new Disney releases, in order to populate its family-friendly “Netflix killer,” Disney+. Without a cushion of originals, a swift exit of competitors would leave Netflix lacking appealing options for children’s content, which could spur a mass exodus to Disney+ or other options.

Besides cutting ties with streamers, media giants are also substantially upping their interest in children’s production, distribution and tech companies. Viacom has been particularly active in this arena. Earlier this year, Viacom’s Nickelodeon purchased the edtech startup Sparkler. It will now integrate its educational monitoring technology into its preschool-focused service Noggin as a subscription incentive for parents. Viacom also purchased the Gen Z digital media behemoth AwesomenessTV and invested in the kid influencer-based production company in July 2018.

Access Gap
Though more content opens new universes for kids to explore, the proliferation of streaming services and platforms also creates an access gap, as some families can’t afford to pay for content that was once freely available on broadcast networks. Subscription fees add up.

To access these programs, you have to subscribe, and paying for some dizzying combination of Netflix, Noggin, Amazon, Hulu, HBO and Disney+ just isn’t in the budget for many families.

This is why a number of advocacy groups have been fighting back against the FCC’s call to relax the “Kid Vid” mandates, which outline educational and length requirements for broadcasters. Currently, broadcast networks (not cable networks, as consumers pay to access their content) are required to air three hours of educational content each week to keep their licenses. That content must be regularly scheduled programming that is at least 30 minutes in length.

These requirements are crucial, as the groups wrote in a letter to the FCC: “Children of color and those whose families are of limited means will especially be harmed by adopting these tentative conclusions, because they are less able to afford cable, satellite or broadband (even if available), tend to watch more television, and may have fewer opportunities to learn in other ways.”

Believe it or not, public access TV staple Sesame Street has become a prime example of this challenge. In 2015, Sesame Workshop, the non-profit behind the show, was bleeding money.

This led it to sign a five-season production and distribution deal with HBO to keep Sesame Street around. While Sesame’s Street’s original home, PBS, still airs the HBO-produced episodes, it does so nine months after they originally air, which prevents kids without access to HBO from viewing influential pieces of children’s TV at the same time as their more advantaged peers. This is incredibly unfortunate given that Sesame Street has introduced more diverse characters such as a one living with autism, a Muslim character and a puppet with two dads.

As streaming further integrates into society’s media diet, it is vital that regulation reflect the modern landscape. Along with socioeconomic access issues, streaming lives on the internet, which can be an incredibly dangerous place for children.

YouTube Kids, the children-focused streaming app from the online video giant, has been the most notorious example of this. Creators have figured out how to manipulate the app’s algorithm to get malicious and violent content in front of kids. And while streaming services like Netflix and Hulu don’t depend on user-generated content like YouTube Kids, they still don’t play by the rules that broadcast or even cable television does. They will need to ensure that the creative license that has attracted top television talent doesn’t bleed into children’s programming in a harmful way. Regulation, even if it’s self-regulation among producers, will be important in order to ensure content is valuable to the growth and mental wellness of children of all backgrounds.

Time to Grow Up
A lot of children’s content has an educational component and can be seen as a public good, as it benefits society as a whole.

Children can gain valuable skills from TV shows, including language and social skills. And because streaming services are not restricted by network notes or FCC broadcast mandates, they can create shows with storylines and characters that might not make it to mainstream TV.

Streaming services also make it easy for kids to discover cross-cultural content. For example, Netflix features a number of series from other countries like Argentina’s Panam y Circo, Russia’s Masha and the Bear and South Korea’s Tayo the Little Bus. Netflix has also ordered a number of original series that feature diverse characters not often featured on traditional linear television, such as Mama K’s Team 4, its first African original series featuring four black female superheroes; Maya and the Three, a show based on Mesoamerican mythology; and Mighty Little Bheem, a series about a curious toddler and his adventures in his small village in India.

Introducing children to characters that are different from themselves can help them prepare for school and develop compassion for others.

Streaming companies will need to mature alongside the children that are growing up with their content. Television has the power to educate, empower and entertain, but in the wild west of streaming, it’s more important than ever for companies to make careful decisions as they curate and create content for the littlest eyeballs.

It’s arguably even more important for traditional broadcast and cable networks to create accessible content on par with that of Netflix, Hulu and Amazon so that children of all socioeconomic backgrounds have a chance to learn in a fun way.