Reading "The Streaming Book" by @ballmatthew

The Inevitably Profit-Poor State of Today’s Streaming Wars

One of the persistent narratives of the Streaming Wars is that it has become expensive. Expensive for consumers, even though they no longer need to pay for dozens of channels they don’t want to watch, and expensive for SVOD operators, who lose money even though they can now go direct-to-consumer (versus give up margin to distributors) and reach billions of consumers

Streaming was never going to make video cheaper. Why? First, bundles are good for everyone—suppliers and consumers. That’s why they’re so popular. And while we’ve seen three-layer re-bundling (via corporate consolidation, SKU collapse, and aggregator resellers), this model still results in consumers “paying for” content they don’t watch on a given service, without gaining access to anywhere close to all of the content they want to watch but are on other services.

But more importantly, we need to recognize that for all of its innovations (on demand, ad free, recommendations, binge releases, the ability to offer all genres to all people at all times, etc.), streaming has not innovated on the cost side of production. In fact, competitive pressures and changing tastes have dramatically increased the cost of content, not reduced it. Audiences have been fairly clear that, given the choice between low- to no-cost SVODs focused on catalogue content with lower-budgeted originals or high-cost SVODs with extravagantly budgeted originals, they prefer the latter. Consumers complain that buying a half dozen SVODs exceeds the cost of 2010s pay-TV, but the cost of mega-budgeted originals has to go somewhere – and fact that most of these services are (deeply) unprofitable means that consumers aren’t carrying anywhere near the entire burden.

And so, many analysts and executives are now concluding that that streaming video is unlikely to match the margins of pay-TV video. For most of this millennium, U.S. network television EBITDA margins have been in the top decile of the United States, alongside categories such as Oil & Gas and Renewable Energy, which needed those high EBITDA margins to pay for extraordinarily capital-intensive facilities and infrastructure.

In the abstract, this seems nonsensical, but it worked out this way because the very nature of bundle economics and physical cables buried into a yard and connected into a house meant that nearly every in a package thereby moderating competition between networks and pay-TV providers. Furthermore, TV households seldom considered changing their TV provider as the process of doing so was time-consuming, inconvenient (scheduling with a “cable guy” who might or might not arrive sometime between 9 and 5, having to have your lawn dug up and/or wall opened up), all for very little benefit (channels are the same, price mostly the same, etc.).

That model resulted in high prices and bad customer service, but it did have its benefits. Today, we groan about needing to subscribe to service A for show B, and service Y for show Z, but we ignore that it’s because we had only one or two pay-TV providers that all the content we wanted was available from both of them. If you could have bought Comcast or Charter or Brighthouse or Cox or AT&T or Verizon, you better believe they would have had exclusive networks (“TBS, now a Charter Exclusive”) and programs (“the Brooklyn Nets in the NBA Playoffs, only on Verizon FiOS”). The introduction of this competition will necessarily fragment content, and worsen margins.

Sure, streaming is global versus just national, meaning that the Total Addressable Market, or TAM, has expanded. But streaming hasn’t just changed who can deliver video in which country, but who delivers video in the first place. And some of that “who” is Big Tech, and Big Tech delivers this video in support of much, much larger TAMs. While Hollywood participates in the video business to participate in its roughly $650B TAM, Amazon uses the market to grow its $400B share of the $25T global retail business, while Apple uses it to augment its $450B share of the $20T digital economy.

Furthermore, participants in the video business is engaged in hand-to-hand combat for every subscriber, every hour watched, every show, every creator. In the heyday of the pay-TV bundle, networks still competed, but none could be crushed. They were all sold together, shared customers together, and booked distribution deals that guaranteed revenues for 5–7 years at a time, thereby providing a revenue floor that could be reliably invested against, while ensuring distribution to consumers that would lead to eyeballs and, in turn, more revenue via advertising.

Making matters worse, video’s decades-long monopoly over leisure  (discussed in Chapter Two) has come to an end. Families today have myriad multi-sensory, live entertainment alternatives to consume in the home other than pay-TV, from TikTok to Facebook, Instagram, Fortnite and Roblox, Twitch, Supernatural, and Headspace. From 1960 to 2015, TV was the single largest – and also a consistently growing – share of entertainment time. Since then, it has consistently shrunk and will continue to, and has already been displaced by social media and gaming for Gen Z and Generation Alpha respectively.

Understanding what hasn’t been disrupted—and the likely margins—explains a lot of today’s troubles. Today’s Hollywood players are more consolidated than ever—which typically boosts margins—yet their enterprise values have plummeted while also shifting from equity to debt, meaning that the companies are working for debtholders, not shareholders, while also financing content-makers!

There are hopes that the streaming industry’s newfound focus on profitability and “rationality” will help. For years, growth in streaming hours and subscribers papered over a great many poor investments. A show could lose close to half of its audience every season and still see net viewers grow because the service’s subscribership had doubled in the interim, making it look like a success. For similar reasons, shows could justify nearly any budgetary growth because the cost-per-hours would still be flat or even down. Another season might be produced so that the first few seasons had more “catalogue” value. It was also common for subscribers to be offered 50%–90% off an already unprofitable price point if they’d sign up for a year because then, well, management believed these subscribers would finish their year so “hooked” that they wouldn’t even think of cancelling – no matter the price hike. Oh, and such an offering wouldn’t cannibalize existing subscribers, either.

A more discerning approach to greenlights, renewals, and film/tv budgets, alongside a reduction in discounting and an increase in pricing, should aid unit economics. At the same time, the prisoner’s dilemma is in effect. While all players are being judicious, their adjustments are not equal in dollar or percentage terms, nor are their competitive positions identical. Put another way, reducing value to the consumer rarely leads to success in an intensely competitive environment, especially if you’re a runner-up.

But more important than modular shifts in investments is the reality that we are exiting the content wave of competition. As was the case in the access era, content-based competition eventually matures. The fact that it’s so easy to distribute content in a new modality, and the importance of this content, means that the market ends up with an oversupply of it. This means that even great content goes largely unseen, and if it goes unseen, then it can’t drive much value, either. And even when it is watched, this is no guarantee of recurring revenues as streaming viewers have become increasingly promiscuous, jumping from service to service to watch the “new thing.”

The end of the content wave explains the present “spending rationalization” across Hollywood. It’s rare that the N+1 title changes much for the N+1 service, and even the leading services are seeing diminishing marginal returns. In 2021, Disney+ aired new episodes of the Marvel Cinematic Universe for 29 weeks, spanning five series, as well as eight weeks of the Star Wars series The Mandalorian. How much of a difference would a sixth and second respective series have made? Notably, 2022 saw only three MCU series, with three live-action Star Wars series.

So, what, then, is next?

There is a tendency to think of the Streaming Wars as an end state. When I opened this essay, I noted that we are nearing the end of the five-year plans unveiled by many of today’s streamers back in 2019/2020, and how that would force more streamers to re-evaluate their futures.

But hopefully, this essay has explained that all mediums are a process—typically a long one. Broadcast television began in the late 1920s and it took until 2002 for it to be passed by pay-TV as the most popular way to watch video in the United States. Two decades later, it remains dominant in many markets, including highly developed ones such as Japan. This also means that pay-TV took more than 60 years to ascend to national dominance—a period that had many technological advancements. And even in 2023, 21 years after taking the crown, pay-TV is still wearing it. For all the emphasis on the streaming wars, it represents barely one in every three minutes watched. This means there’s a lot of time left to capture—this despite the fact we’re already more than a quarter century into the transition.

After content-based competition comes what I call “platform-based competition.” Here the defining problem is “keeping and maximizing the value of a customer. Each player is less focused on what their competitor does and more on their own customer retention and, more importantly, what more they can do with that customer. If access has commodified and content has oversaturated, then sustainable margins, let alone high ones, will depend on a company’s ability to generate more value from a customer than their competitors can.

It’s during the platform era that we'll see current players forced to exit the D2C streaming arena – either bought by a player who can reliably out-monetize them, or instead turning into a supplier to those who can. There are already several such examples. WWE was a relative pioneer in the “Streaming Wars”. In the early 2010s, the company imagined – as Disney came to do several years later – using SVOD to pivot from a B2B content producer to one that went straight to the consumer. In 2014, the company launched the $15 per month WWE Network, which expanded to Canada, the UK, Ireland, and parts of the Middle East and Africa the following year. The service crossed one million subscribers in its first 12 months, and by 2016, it was one of the largest SVODs globally.

Yet in late 2020, WWE abruptly reversed course. Instead of operating a global D2C platform, WWE opted to become a paid channel exclusive to existing SVODs (Peacock is the company’s primary partner).In fact, WWE’s exit had begun years earlier. Whereas most media companies, such as Disney and NBCUniversal, shifted more of their newer series, films, and live events to their SVODs over time, WWE spent much of the late 2010s greenlight new projects that it would then sell to other networks, as was the case with its docuseries WWE Legends, which aired (and still airs) on A&E. And when the WWE’s pre-streaming (or “legacy”) licensing deals expired, the company chose not to fold them into WWE Network, but instead put them back up for action. The classic example here is Raw and Smackdown, which went to USA Network and Fox respectively. These decisions reflected a reluctance to cannibalize revenues and invest in an uncertain future, but also the realization that they could better monetize their content by being paid by someone who could better monetize the ultimate viewer. Indeed, it's likely that by licensing its content to a much larger platform, WWE could better monetize its live events and merchandise sales, too.

Another example is Starz, which also discussed in the introduction of this book. Lionsgate bought Starz in 2016 in the hopes of distributing its own films and series directly to the consumer, rather than being intermediated by SVODs that hoped to buy less and less from Lionsgate each year and instead competed with the company for new projects and writers. But in 2022, Lionsgate and Starz admitted it was “7-8x” better for shareholders if it shifted the John Wick spinoff series The Continental to Peacock – in other words, Lionsgate had wanted to send fans of its theatrical franchises to its SVOD offering, but ultimately realized it was better to be paid to send these fans to a rival SVOD. No surprise Lionsgate is also planning to separate from Starz, but is struggling to find a buyer for a service that was struggling to earn series that audiences were excited to watch. In 2017, MGM acquired Epix with a similar thesis to Lionsgate/Starz. However, MGM never managed to pursue a vertically integrated strategy. Instead, it continued to widely license its catalogue - and often its new films, too. In 2021, MGM, which had been seeking a sale since 2019, was sold to Prime Video.

But the real fun of the platform era is the way it presages the "wars" that are yet to come...