To return to streaming video, it’s easy to see that we are in the content wave as we enter 2023. As discussed above, all of the “tech entrants” now agree that the multi-billion-dollar slates of original series, films, and sports are essential to competition. As mentioned, the count of original series in production is at record levels, and more than half of those are being produced by streamers. We also know that legacy players have been forced to ratchet up their investments. But the two clearest indicators are behavioral.
Let’s start with the SVOD operators that came from the pay-TV era, such as Disney, NBCUniversal, and Paramount+. To start, these companies envisioned their services as catalogue-only streamers. But by late 2019, each had come to the conclusion that exclusive original series were needed too. Not long after, they began to place their best and highest-budget new series on these services, as Disney+ did with The Mandalorian. But starting in 2020, this strategy kicked into a new gear. Suddenly, the Hollywood giants began to shift series they had announced for their cable networks would instead be streaming exclusives. ViacomCBS, for example, announced that 1883, the prequel to Paramount Network’s Yellowstone, the most-watched new cable series since 2015, would no longer air on its linear network Paramount but rather on Paramount+. In 2018, FX announced its intention to double its original programming hours by 2022. In March 2020, Disney announced half of its slate would now be exclusive to Hulu. In early 2022, Disney announced that after 30 seasons since its launch in 2005 as one of broadcast TV’s biggest reality series, ABC’s Dancing with the Stars would be shifting exclusively to Disney+. During this three-year period,2020-2022, some media companies, such as Paramount and NBCUniversal, announced that their streamers would not just carry the live sporting events of the linear networks, they would carry more games and leagues, too.
This transition prompts two unmistakable takeaways. First, Hollywood’s largest media companies had decided that all available whatever content they could place on their streaming services, they would place on their streaming service, and as soon as possible. To be clear, this was far from everything – the major TV networks had long-term distribution agreements with Comcast and Charter, et al, and which obligated a certain number of original programming hours or exclusive sports. And linear revenues were still important to financing streaming dreams. But at their core, TV networks are about content. And their parent companies had decided that the best place to put this content was not TV but streaming. This, not the launch of TV Everywhere apps, or standalone SVODs, meant the end of pay TV had truly begun. As I wrote in 2020:
It helps to think about the modern history of pay TV as having three phases—the last of which is fatal. From the start of the century through about 2015, many viewers griped about, if not outright resented their pay-TV providers. But during this period, pay TV was consistently getting better. Every year it had more content (especially regional sports networks) and better content (Mad Men! Breaking Bad! Game of Thrones!), while its UI/UX improved and the ecosystem added streaming functionality (TV Everywhere). Pay TV’s problem was that its minimum price was too high for the average family and its minimum offering overserved the average family. And every year, pay TV kept getting more expensive, widening the value delta between it and low-cost substitutes such as Netflix. The second phase was from 2015 to 2019. During this period the pay-TV ecosystem continued to improve (again, more content, better content, better UI/UX, better TV Everywhere apps), while vMVPDs emerged that offered far lower prices and “skinny bundles” emerged from traditional MVPDs. In other words, the value of traditional TV improved on both the product and the cost sides. At the same time, SVODs continued to grow in number, while also rapidly growing their original content offerings. The third phase began in 2020. For the first time in history, pay TV began to get worse as each network’s parent company began to harvest its best series for their D2C streaming offerings, most valuable live sports rights made non-exclusive, and prices began to surge. This is one of the reasons why it’s hard to believe in the vMVPD model over the long term; after all, its suppliers don’t believe in it, even now.
Another perspective on the rise of content-based competition comes via consumer behavior.
To reframe a point from the introduction, US households added 144MM new subscriptions in 2022, 18MM more than in 2021. However, they also cancelled 118MM subscription, an increase of 36MM. As such, the net number of subscriptions added in the year fell from 45MM to 26MM.
This behavior is further clarified as we focus on “serial churners.” Nearly 20% of subscribers have churned more than three servicesin the last two years. This is partly because there are more services to subscribe to and thus more services to churn from and to. However, the trend here is clear, linear, and without even a temporary reversal: every month, this share goes up. And it will probably continue to go up. Customers continue to jump from service to service in pursuit of the series they want to watch and when.
Typically, long-term subscribers—those who have subscribed continuously for at least 24 billing cycles—exhibit substantially lower churn profiles than the average customer. This is because after 24 months, the service effectively becomes a ‘utility’ to the subscriber, with cost a passively accepted part of their ongoing operating expenses. Accordingly, these customers tend to churn at half to two-thirds the rate of a service’s blended monthly average. This reduction is particularly impactful for services such as Netflix and Hulu, which are more than fifteen years old and thus over-indexed to long-term subscribers (Netflix likely has tens of millions of such subscribers). However, this pair has seen its long-term churn rates surge. Netflix averaged 1.4% from 2020 through 2021 but 1.8% in 2022, while Hulu went from 2.6% to 3.0%.
Another perspective on the shift to content-based competition is demonstrated by the fragmentation of consumer attention. Parrot Analytics finds that Netflix’s share of total online demand expressions for streaming content peaked in 2017. That year, Netflix and Amazon held nearly 76% share combined (61% and 15%, respectively). Since then, Netflix has lost roughly 0.9% share per quarter, while Amazon has shed 0.3%. In contrast, Disney+ and Apple have amassed 7.5% share each.
Netflix's extraordinary share was never sustainable. Even if it were the largest streamer in the world and therefore drawing upon many of the best series in the world, it could never be half of all content demand in the United States - not if it had competition. There are simply too many shows, many of which Netflix could never purchase, and which are based in franchises with large, deeply passionate fanbases. But the other question is what, save for widespread M&A, could Netflix have done to maintain its share? Would another five blockbusters been sufficient? How many more shows total would have been needed to achieve that - a hundred? Such is the nature of the content-based competition era. Content is both essential, but also with diminishing marginal returns. We'll pick this up in Section 4, but first, let's talk about what we learned about content during the content era.