The business of streaming movies and TV shows is a horror comedy primed to be remade as an action adventure. American entertainment behemoths such as Walt Disney, opens new tab, Comcast, opens new tab and Warner Bros Discovery, opens new tab have burned through billions of dollars paying for programming and amassing subscribers at cut-rate prices to try and keep up with Netflix, opens new tab. Slashing costs while embracing new strategies and sources of revenue should be enough to turn a shaky start into a happier ending.
Like so many consumer technologies that emerged during the era of cheap money, the ability to watch fare such as “Squid Game,” “Iron Man” or “Yellowstone” over the internet at any time was, in effect, generously subsidized by its backers in the name of signing up as many users as possible. Companies that did so were rewarded, at least until rising interest rates and the fear of a weakening economy led investors to focus on bottom lines.
Even for industry trailblazer Netflix, which broke through to generating positive cash flow from operations in 2020, the new reality is tough. The company, co-founded 27 years ago by Reed Hastings as a DVD-by-mail outfit, as recently as 2018 traded at about 70 times the EBITDA analysts were expecting for the coming year. Today, despite that its operating profit margin has doubled over the last six years, that valuation multiple has fallen by nearly two-thirds, according to LSEG.
The company’s rivals face an even more dire future if they can’t get the financial model right. Some, like Paramount Global, opens new tab, are probably too small to go it alone. Disney’s streaming services, which include Hulu and Disney+, have racked up more than $8 billion in operating losses on some $57 billion of revenue over the past three years. It’s one reason aggressive investor Nelson Peltz is battling the company and seeking two board seats. So far, at the Magic Kingdom and beyond, the main response to all the pressure has been the seemingly curious decision to provide less for more.
TUG OF WAR
To stop red ink from spilling, many streamers have shrunk the amount of programming available while increasing how much customers pay to see it. Paramount, for one, offered fewer than half, opens new tab as many movies and roughly the same number of TV shows in November on Paramount+ as it did a year earlier, according to industry tracker Reelgood. At the same time, the service raised its monthly price by 20%.
It’s a widespread trend. Netflix Co-Chief Executives Ted Sarandos and Greg Peters braced customers and investors for it last week, saying the company, opens new tab would “occasionally ask our members to pay a little extra.” Though an imprecise comparison given the growth of available content and features, a Netflix subscription that cost $8 a month in 2011 now runs as high as $23 in the United States, far outpacing the broader 40% inflation over the same stretch. Similar increases from Disney helped pare its operating loss in streaming by a third for the year ending Sept. 30 from the previous four-quarter span.
The danger isn’t just that once-breakneck growth is slowing, but that existing subscribers will flee when confronted with higher fees, especially since streaming services allow cancellations at any time instead of leaning on long-term contracts traditionally used by cable- and satellite-TV operators. The picture, so far, is fuzzy. Paramount boss Bob Bakish said, opens new tab his service’s churn, or the rate of subscription lapses and desertions, improved following price increases. Others, including Disney, have suffered occasional quarterly subscriber losses.
More broadly, the industry’s average weighted monthly churn ticked up to 6.3% in November from 5.1% a year earlier, streaming research outfit Antenna reckons, based on the approximately 240 million paying subscribers it tracks using its own methodology. Even so, roughly 40% of customers canceling a service signed back up within a year, suggesting they’re taking advantage of promotions or resubscribing seasonally. One challenge will be finding ways to package content in a way that keeps customers sticking around more consistently while snapping up more viewer dollars that streamers have yet to capture.
In many ways, the change of tactics is unavoidable. Some 85% of American households already subscribe to at least one service, according to MoffettNathanson analysts, while half are still cable or satellite TV customers. As cord-cutting accelerates, it should free up a slug of the roughly $80 billion U.S. consumers pay for traditional television and add to the nearly $40 billion they spend on streaming. It’s an opportunity, in particular, for laggards such as WBD’s Discovery+ and Max.
MARBLES
One way to tap into that pot of money will be to target the strongest pillar propping up the old TV model: sports. Live games have been slow to migrate to the streaming realm, but they’re likely to help keep subscribers tethered and command premium fees. Amazon.com, opens new tab, for one, secured the rights to the NFL’s Thursday Night Football through 2032 and just invested more than $100 million to help restructure a bankrupt regional sports network, opens new tab, giving it access to professional U.S. baseball and basketball games. Elsewhere, for the first time, an NFL playoff game was delivered exclusively on a streaming service, Comcast’s Peacock, where it became the most live-streamed U.S. event ever, with an average audience of about 23 million viewers, opens new tab. Netflix just splashed out $5 billion for the rights to broadcast WWE wrestling for a decade.
Bundling can extend beyond just sports, by throwing various services together. Disney offers a variety of permutations for its Hulu, Disney+ and ESPN+, including dozens of channels on Hulu’s live-TV service, which mimics a typical cable package. Moreover, wireless carriers are tempting customers with streaming perks. T-Mobile has partnered with Netflix and Apple (AAPL.O), opens new tab; Verizon, opens new tab, with Paramount, WBD and others. The idea is that stuffing a plan with goodies will deter subscribers from flitting around. Even cable operators are jumping on the bandwagon, with Charter Communications, opens new tab selling packages, opens new tab that include streaming.
Finally, as pricing power starts to reach its limits, having another option makes sense. To help offset sticker shock, some services have rolled out cheaper tiers with commercials included. Amazon this week started including ads, opens new tab on its Prime Video unless customers fork out an extra $2.99 a month. Earlier in January, Netflix touted, opens new tab more than 23 million monthly active users worldwide for its fledgling ad-supported plan, a roughly 50% increase from the figure flagged about two months earlier. The option accounted for 40% of all new sign-ups in the three months ended Dec. 31 in the markets in which it’s available.
Although revenue from advertising is small for now, Netflix expects it will eventually represent at least 10%, opens new tab of the company’s top line. As with subscriber dollars, there’s plenty of old-school money to play for. Media buying agency GroupM forecasts that spending on traditional TV commercials will fall from $53 billion last year to $37 billion by 2028, leaving those foregone dollars up for grabs.
In many ways, that’s the most important point. There’s enough money to shake loose for at least some struggling streamers to succeed. All these strategies – cost-cutting, price increases, bundling and advertising – can be embraced to varying degrees. If balanced correctly, there should be more than one financial winner in the streaming squid game.