Reading "The Streaming Book" by @ballmatthew

Three Years Into Hollywood’s Five Year Plan

As we head into Q2 2023, we’re more than halfway through the five-year streaming plans Hollywood laid out in 2019/20220. It’s now clear who will fall short or come ahead of their projections as well as in terms of revenues, subscribers, profits, and so on, and thus its increasingly hard for market participants to point to some implausible future that they nevertheless believe they can achieve. Instead, they must content with more practical considerations, such as turning back, or renewing their efforts despite longer odds and, potentially, lesser spoils.

Quibi, for example, has been dead for years – and its founders called it quits after fewer than six months in market, opting to return remaining cash to shareholders rather than press further. After acquiring Time Warner in 2018, AT&T announced it would transform HBO into a top three or four streamer globally, while also fortifying AT&T’s mobile business and establishing AT&T’s Xandr as a third major online adtech platform alongside Google and Facebook. In October 2019, AT&T announced that HBO Max would relaunch within sixty days as a three-tiered service. A month later, AT&T delayed this launch to May 2020 and revised HBO Max to a single-tiered SVOD, two moves that presaged the chaotic future of Time Warner under the telephone company.

AT&T's October 2019 strategy for HBO Max, inclusive of a launch within 60 days. The service missed its launch window by more than 150 days and was reconfigued as a single-tier service. A harbinger indeed.

Throughout 2020, AT&T replaced nearly all of its newly installed executive team, including its CEO, chairman, chief product officer, and chief content officer and announced the end of licensing content to rival studios and SVODs, the end of distribution through SVOD resellers such as Amazon Channels and Roku Channels, and its newfound commitment to the notion that all of its feature films would debut day-and-date on HBO Max. Barely a year later, AT&T dumped WarnerMedia, bringing to an end what The New York Times last November speculated might be the “worst merger ever.” WarnerMedia was then taken over by Discovery, a company less than a third of its size, which promptly replaced most of its top executives—the third rotation in five years—announced more than $3B in content write-offs, a return to licensing new and catalogue content to competing SVODs (including an animated Batman series from J. J. Abrams and Matt Reeves, as well as a live action adaptation of the DC comicbook Dead Boy from hitmaker Greg Berlanti), the end of day-and-date film releases on HBO Max, and the return to Amazon’s Channels program. Meanwhile, they announced, in France HBO Max would operate as “Warner Pass,” an SVOD service done in partnership with and solely available through Amazon. The plan WarnerMedia had promised shareholders in Q3 2019, in other words, was not even close to working.

In 2016, Lionsgate, which typically ranks as the 6th or 7th largest film studio annually, bought Starz for $4.4B, citing the importance of direct-to-consumer distribution and vertical integration. Over the following years, Lionsgate spent billions more to launch Starz in dozens of new markets globally and in March 2021 announced that all of its feature films would go exclusively to the service as well. But despite the COVID “pull forward” and a federal reserve interest rate still hovering under 1%, Lionsgate began to rapidly unwind its ambitious plans throughout 2022.

At the start of 2022, Lionsgate announced that it would spin off Starz, arguing that separation, not vertical integration, would unlock shareholder value. By this point, the market capitalization of the combined company had fallen to barely $3B from the $8B it was at the time the original merger. In August, Starz announced that its hotly anticipated original series The Continental, a spinoff of Lionsgate’s blockbuster John Wick franchise, would instead go to Peacock. A flurry of announcements through the end of the year reiterated the failed combination: Lionsgate announced that rather than spinoff off Starz, it would be spun off from Starz (confusingly, Lionsgate also announced that Starz would be rebranded Lionsgate+ in advance of the split); Starz CEO Jeff Hirsch said that Lionsgate selling The Continental to a Starz competitor would be “7–8x better for shareholders,” and Lionsgate also announced that Starz would be exiting more than half-dozen international markets, and took a $1.8B write-down on the acquisition and foreign expansion.

For years, AMC Networks looked like a case study of modest ambitions and reliable execution in the Streaming Wars, having built up niche horror SVOD Shudder and niche indie SVOD Sundance Now and acquired the niche, but fast growing British mystery/drama SVOD Acorn TV. AMC Networks had also spent years transforming its AMC Premiere service. When it launched, AMC Premiere was $5 per month, but also required a subscriber to first pay for traditional Pay-TV. In other words, subscribes had to pay for linear AMC and streaming AMC, unlike HBO Go, which was free to those who had HBO via their pay-TV subscription, or services like, HBO Now, which provided full access to HBO and did not require a pay-TV subscription. Despite this upcharge, AMC Premiere had no originals or exclusives, and only partial rights to the titles aired by its linear network. In 2020, AMC Premiere was rebranded as AMC+, which required no pay-TV subscription, include acclaimed and exclusive original series that never aired on its eponymous sister network, and even debuted episodes of AMC’s signature Walking Dead franchise a week before they aired on traditional TV. AMC+ cost $9, not $5, and still lacked fully stacked rights to AMC’s series, but subscribers surged. By the end of 2022, AMC Networks had amassed 12 million subscribers and run-rate streaming revenue of more than $2B. But it wasn’t enough. That November, AMC suddenly announced that one in five employees would be laid off, while its CEO, hired only three months earlier, would also depart. Furthermore, more than $400MM in programming would be written off, including series that had finished production and would now never see the light of day, crippling the growth of AMC’s SVOD portfolio. In announcing the changes, AMC Networks controlling shareholder James Dolan said, “It was our belief that cord cutting losses would be offset by gains in streaming. This has not been the case.”

Three years into the Streaming Wars, it’s clear that the original visions for Quibi, AT&T’s HBO Max, the Lionsgate-Starz merger, and AMC’s AVOD portfolio have failed. Another two players, Paramount Global and NBCUniversal, have seen considerably more success, but their visions, too, have required significant course correction.

The company currently known as Paramount Global was formed out of the 2019 merger of Viacom and CBC, which was intended to provide the combined entity with the scale and efficiencies needed to compete globally. When Paramount CEO Bob Bakish unveiled the company’s united strategy in Q1 2020, he established four objectives: (1) building up its three D2C services (Paramount+, Showtime, and BET+); (2) shoring up its linear networks; (3) supplying licensed and original content to third parties; and (4) returning Paramount Pictures, its mostly unprofitable film studio, back to the black. Many analysts and investors argued the impracticality of optimizing these competing priorities. For example, while licensing hit titles (e.g., South Park to HBO Max, Yellowstone to Peacock) delivered revenue, it made the competitors stronger and left Paramount with little to differentiate itself. Another issue stemmed from the decision to continually build up both Paramount+ and Showtime, two general entertainment SVODs that hoped to reach tens of millions of Americans households. Paramount management maintained that the two services were different and strong enough to operate separately and that the approach was best for shareholders, too.

A year after Bakish set those four priorities, he revised them. Now the company would have one core priority: D2C. To that end, Bakish said he regretted prior licensing decisions, would largely wind down licensing to competing streamers, and that the company’s South Park deal with HBO would not continue beyond 2023, while all Yellowstone spinoffs would be exclusive to Paramount’s suite of SVODs. Bakish also announced that many of Paramount’s highest-potential series would shift from its linear networks to its streaming services, starting with the Yellowstone spinoff 1883. Paramount’s film studio, meanwhile, would send much of its slate to D2C, and the rest would go to the service early. Not long after, Bakish announced that 2024 spending on streaming content would grow from $4B to $5B, while linear cash flows would decline more rapidly than previously projected. To fund this revised plan, Bakish raised an additional $3B in debt.

Paramount’s streaming strategy saw further revisions throughout 2022. First, Bakish announced that spending on streaming content would be $6 billion, not $5B (previously $4B). Second, Bakish announced that while the pair would remain separate in the United States, they’d be united abroad. Third, Paramount and NBCUniversal announced that they would form a joint venture to launch a combined service, “SkyShowtime,” in more than a dozen global markets. Fourth, Bakish decided that while Showtime and Paramount+ would remain separate services, those who bought both would be able to watch Showtime’s originals within the Paramount+ app.

2023, as you might guess, has already included a number of additional pivots. In February, Bakish announced that Showtime would instead be folded into Paramount+, highlighting that it “didn’t make sense” to run it independently. He also said the company would resume licensing to competitors, with Showtime’s nearly-finished adaptation of the Talented Mr Ripley, starring Andrew Scott and created, written, and directed by Academy Award Winner Steve Zaillian (Schindler's List, Gangs of New York, Moneyball, The Night Of), shifting to Netflix. Paramount also began to cancel and write-off a number of in-production and older originals from its two marquee streaming services (making it likely the company’s $6B target for 2024 streaming content spend will turn back down), and began discussions to sell BET.

Like Paramount, Peacock has seen its share of chaos and strategy changes. Only three weeks after Peacock was publicly unveiled in September 2019, NBCUniversal replaced its lead, Bonnie Hammer, with Matt Strauss, an executive at NBCUniversal’s parent company Comcast. Fortunately, Peacock has had greater success with customers. In January 2020, NBCUniversal outlined its five-year objectives for the streaming service, with topline targets of 30–35MM monthly users in the United States by calendar 2024 and $2.5B in annual revenue. By the end of 2022, Peacock was well ahead of schedule on revenue ($2.6B on a run-rate basis) as well as active users (roughly 30MM). The streamer’s revenue mix was also healthier than expected—nearly 50/50 advertising/subscriber fees, compared to the original 80/20 estimate—thanks to almost 20MM paid subscribers. But losses had swelled.

Comcast had originally said that from 2020 through 2024, Peacock would never lose more than $1B in a single year, cumulative losses would peak at $2B, and breakeven would be achieved in 2024. Yet Peacock lost $663MM in 2020, $1.7B in 2021, and $2.5B in 2022. Cumulative losses now exceed $5B. In the fourth quarter alone, Peacock saw $978MM in losses against revenues of only $678MM, with the losses up 75% YoY and 59% QoQ versus revenue at 69% and 34%.

Comcast has said that Peacock’s early traction justified more aggressive investment, leading NBCUniversal to place significantly more content into the service and alter its strategy. In 2021, for example, Peacock announced it had struck a five-year deal with WWE that involved the latter company shutting down its $10 per month standalone SVOD, WWE Network, to instead operate as a branded channel exclusive to Peacock as part of its $5 or $10 per month premium plan. This incremental budget, in turn, accelerated Peacock’s revenue and user growth but also deepened the cost side of the P&L, and justified the Q1 2023 decision to eliminate Peacock’s free tier. This a fair strategy, but it’s also clear that Peacock lost more money, and faster than projected – and before there were signs of strong audience uptick. After only a year, Peacock’s cumulative losses were $1.3B and run-rate annual losses exceeded $2B—both of which passed Comcast’s initial guide for peak losses over the service’s first five years. And with the service losing $144 for every $100 in revenue, it feels necessary to separate “traction” with “finding product-market fit.” Comcast now says Peacock losses will peak in 2023, at $3B, meaning the service will have lost at least $8B by 2024, and still be billions away from achieve operating profit – let alone return.

And while Comcast was ratcheting up its investment in Peacock, it also continued to hedge its bets. Only a month after Peacock was unveiled with the specific focused on free, ad supported streaming (Peacock’s slogan was “free as a bird”), Comcast bought Xumo, an ad-supported streaming service focused on the US market. And although Comcast had originally announced that Peacock would go global, powered in part by Comcast’s acquisition of European pay-TV giant Sky, the company later changed course, partnering with Paramount on the aforementioned SkyShowtime joint venture, in dozens of markets. In 2021, Comcast formed a partnership with Walmart to sell branded televisions that ran Comcast’s X1 TV operating system; In 2022, Walmart partnered with Paramount+, not Peacock, to offer the streaming service free to Walmart+ members. Another notable move came in 2021. At the time, every other Hollywood giant with a streaming service (i.e. Disney/Fox, Warner Bros., Paramount, and Lionsgate) had announced that it would not sell its “pay-1” movie rights to a competitor. As an example, this would mean that after a theatrical Warner Bros. movie finished its “home video window” (the period in which the film was out of theaters but only available for purchase or rental), it would be exclusively available on Warner Bros.’ HBO Max service for 18 months. NBCUniversal, however, announced that it would share the 18-month-long pay-1 window for its live-action theatrical films with Amazon Specifically, these films would Peacock for the first four months of this window, then exclusively to Amazon for 10 months, then back to Peacock for four months (after which pay-2 would begin). And NBCUniversal’s animated films, such as those of Illumination and DreamWorks, would go to Netflix after four months. These pay-1 deals generate revenue that NBCUniversal uses to fund Peacock, but it also dilutes the service’s offering and routinely confuses customers (Netflix also has most of Universal's animated films after four years, including Minions, Shrek, Trolls, etc.). Finally, there are reports that Comcast hopes to buyout Disney’s two-thirds stake in Hulu, rather than compel Disney to buy out Comcast’s one-third stake for $9B, which would doubtlessly replace Peacock in market.

Even the greatest success story of the “Streaming Wars” has felt the weight of expectations. In April 2019, Disney said the service would launch in November of that year and was targeting 60-90MM subscribers by the end of 2024. Disney+ hit the 60MM lower bound after only 10 of 62 forecast months, with Netflix Founder/CEO Reed Hastings admitting “If you’d asked us a year ago, ‘What are the odds that they’re going to get to 60 million subscribers in the first year?’ I’d be like 0. I mean how can that happen? It’s been super impressive execution.” Shortly thereafter, Bob Chapek hiked Disney’s target to 230-260MM by the end of 2024 – a 200-300% increase that Chapek argued would require a comparatively modest 100% increase in streaming content spend. At the time, the move felt like one of the all-time greatest mic drops in blue chip history, with Disney’s stock quickly soaring from a then-record of $160 to more than $200. However, it quickly felt like an unforced error by then-CEO Bob Chapek, who received only temporary plaudits for his shocking 200-300% hike, and set himself up for a period where further hikes were impossible and disappointment increasingly possible.

By mid-2021, Disney’s share price began to slide. Given Chapek’s ambitious target, many investors began to wonder what further upside could remain in the stock (and even if it did exist, whether it would be large enough to justify parking their investment for years). Worse still, some doubted that the goal was achievable—or even worthwhile. These concerns proved fair. In Q4  2021, Chapek shocked investors by saying that 2022 would see total company content investments grow by $8B YoY, from $25B to $33B. Then, in August 2022, Chapek trimmed his subscriber forecast to 215–245MM, 5.5–6.5% lower, partly as a result of being outbid on Indian cricket rights. By that time, Disney’s stock had nearly halved and spent 18 months as the worst-performing Dow stock—proof that its troubles long predated the market-wide declines of 2022, or the great “Netflix Correction.” Two months later, Chapek was ousted by his exalted predecessor Bob Iger. After a brief pop in its stock price, Disney finished the year at $85 a share, an eight-year low.

After reporting Disney’s 2022 earnings, Iger began to reset Disney’s streaming strategy. This started with unwinding the company-wide organization model Chapek had established in October 2020 (which redid Iger’s March 2018 reorg) and putting an end to public subscriber forecasts (which he started in 2019). Iger also told investors that selling Hulu was “on the table,” (for years, Iger had refused to entertain the matter, having highlighted Hulu as core to Disney’s purchase of Fox and its overall streaming service), while also noting he was “concerned about” Disney’s foray into “undifferentiated general entertainment” (Iger’s original streaming strategy was based on “family entertainment” via Disney+, “general entertainment”, via Hulu, and “sports”, via ESPN+). Lastly, Iger said that the company might return to licensing its content to third parties (which Iger had halted way back in 2018). A month later, Disney agreed to extend its license of Arrested Development to Netflix for another three years. In fact, this license was an upgrade. Previously, Netflix shared Arrested Development with Disney's Hulu streaming service. But of course, times had changed. Even Netflix, the single best performing large or megacap U.S. stock of the 2010s, had lost more than half of its market cap since peaking in October 2021. The "Great Streaming Correction" had arrived.