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[Author's Note: Two follow-ups to last Thursday’s essay:
In the email version of Thursday’s essay “Having ‘Won The Streaming Wars’, What Will Netflix Become?”, the “thesis statement” of the original essay read “The long answer is Netflix management, but the short answer is Co-CEOs Peters and Ted Sarandos”. Because the essay was unusually focused on Peters, the sentence has been updated to read “The long answer is Netflix management, but the short answer is Co-CEO Greg Peters”.
On Thursday morning Stratechery’s Ben Thompson published an interview with Peters—literally as I was editing the final draft of the essay. The interview is a good read. One reader wrote to me, “This interview demonstrates your savvy point about having people who can code leading media companies” (you can read that essay here). It is a perfect example of Peters “going to great lengths to explain that the Netflix platform is the technological foundation of a more diverse set of entertainment offerings.” It also reflects the tightrope walk he faces in trying to explain the technology of Netflix’s business without confusing investors about the complexity of its business model.]
Thursday’s essay concluded that Netflix is gunning to be “the technological foundation of a more diverse set of entertainment offerings” but “what it ultimately will become in the long-run seems to be anyone's guess.” There is a fun way to reframe that conclusion: Netflix now owns some of the future of media distribution but is not betting on owning all of its future. What happens to the rest of the media distribution marketplace is anyone’s guess.
That means there are two paths forward in streaming for legacy media, broadly speaking, First, license to Netflix when the opportunity arises—something that Warner Bros. Discovery is increasingly opting for, most recently with its “Sex And The City” library. The second is to instead monetize valuable library content elsewhere.
The big question is what “elsewhere” looks like given that owned-and-operated legacy media streaming services are struggling to break even: Disney lost $4 billion in its fiscal 2023, and Comcast reported that Peacock lost $2.75 billion in 2023. When Paramount Global reports its results next month, it is likely to report additional losses beyond the $1.2 billion in losses it reported in the first three quarters of 2023.
In other words, the conclusion that Netflix “won the streaming wars” needs to be reconsidered because the “win” may be narrower than perceived. Netflix is not emerging as the default subscription alternative for streaming all legacy media content. Nor is it an emerging default for Pay TV viewers: As Sarandos told investors on the call, “In our most mature markets, we're getting about 10% of TV time.” Nor is it emerging as a streaming platform, only, as it moves into gaming.
Imagining the future of legacy media distribution business models outside of Netflix's walled garden is now a different exercise altogether from imagining their future within Netflix.
Key Takeaway
Netflix appears to be saying there are other media distribution markets yet to be made outside the walls of Netflix for content that does not succeed within its walls. But, those models should be market-making, first, and content distribution models, second.
Total words: 1,200
Total time reading: 5 minutes
Broad Competition
Netflix management regularly writes in its letter to investors that it competes with a broad swath of alternatives for consumers, globally. It described the competition in its most recent letter to shareholders as: “the franchise strength and programming expertise within traditional entertainment companies; ongoing heavy investment from large tech players like YouTube, Amazon and Apple; and broader competition for people’s time, including gaming and social media (TikTok, Instagram etc.).”
Within its walled garden, Netflix has successfully solved a much narrower problem of media distribution: Streaming entertainment that is “on-demand, personalized, and available on any screen.” Outside its walled garden, its competition are solving for different problems. All have found a way to solve for on-demand and “available on any screen" but—excluding YouTube, TikTok, Instagram and Amazon—they have not found a way to solve for “personalized” in the way that Netflix has. Netflix describes this to investors as linear networks failing “to develop first-class apps.” There is Netflix, and then there is everyone else. But, this label does not tell us anything about what "first class" media distribution models will look like outside of Netflix’s walled garden.
1 Billion?
Former WarnerMedia and Hulu CEO Jason Kilar tweeted that the Q4 results suggested Netflix is positioned to eat up all Pay TV models:
“Netflix is getting closer to financially being *all* of Pay TV globally, which would mean no truly competitive [distributors] and the big $$$ that cable+broadcast channels earn today would be kept by NFLX only. Licensing shows will still be a thing, but that’s v small $ in comparison.”
But, Netflix's sales pitch to the market was narrower. For example, Sarandos emphasized to investors on the call that Netflix invested in “52 weeks of live programming every week -- every year” of WWE Raw because “sports entertainment, which is right in the sweet spot of our sports business, which is the drama of sport.” Meaning, some distribution deals involving sports rights will still require buyers outside of Netflix because the economics of the linear pricing model do not make sense within the walls of Netflix. So, if not the linear networks, it will be Amazon, Apple, and even YouTube who have and will continue to foot those bills.
Kilar is arguing along the lines of his 2022 prediction that “If there is a ceiling, and everything has a ceiling”, Netflix will hit 1 billion subscribers. However, Netflix management told a story on Q4 earnings that there are other media distribution markets yet to be made outside the walls of Netflix for content that does not succeed within its walls. Logically, the implication is that there are other battles that media distributors may still win, 1 billion subscribers is not an inevitable outcome, and it remains the early innings of the streaming marketplace.
So, it seems erroneous to believe that Netflix is likely headed to 1 billion subscribers and therefore any content it rejects will not have a future outside the walls of Netflix.
But, the economics
So, there is hope yet for series and movies that Hollywood has long valued to thrive outside of Netflix. The same is true for expensive sports distribution deals (e.g., NFL, NBA). But, the economics are still uncertain in the broader marketplace without Netflix-type personalization. As it wrote in “What We Watched”, success on Netflix is “all about whether a movie or TV show thrilled its audience — and the size of that audience relative to the economics of the title.”
For example, action thriller “The Mother” starring Jennifer Lopez was the most-watched movie of the first six months of 2023, but it was not produced on a traditional Hollywood blockbuster budget in the hundreds of millions of dollars. Its top series “The Night Agent” has no expensive talent attached to it other than showrunner Shawn Ryan, who has previously created the TV network hits “The Shield” and “S.W.A.T.” The budgets for both shows are not available on Wikipedia or IMDb, suggesting the budgets were low—very un-Hollywood—and the sale prices to Netflix were higher but were not priced to reflect the ultimate success. Those outcomes reflect efficient economics and savvy risk-taking within the walls of Netflix are only possible with Netflix's "plumbing" behind "the poetry" of “on-demand, personalized, and available on any screen."
Therein lies the ultimate problem for imagining the future of media distribution beyond Netflix. Netflix may have solved broadly for market-making in media distribution by focusing on personalization within its ecosystem. Meaning, that personalization algorithms ultimately connect supply to demand and then evolve to increasingly bet on what the most scalable forms of “connection” may be within Netflix. To date, that content has been streaming. In the future, games may be an important element of those connections, too.
The key step to scaling markets outside of its walls is to solve for the plumbing of market making and not just continuing to mindlessly deliver content based on what audiences have come to expect from the cable TV and DVD eras. The rest of the market may not evolve into "first-class" direct-to-consumer services until they figure out how to build services that are market-makers, first, and content distribution solutions, second.