Member Mailing #287: Is Growth in Streaming Driven More By Content or Software?
[NOTE: It's Thanksgiving week, so there will be no Friday Mailing barring some unusual market development happening. Wishing a Happy Thanksgiving to you and yours.]
Key Takeaways
Growth is increasingly on the minds of both streaming services and their investors after subscriber numbers flattened in the U.S.
Is the slowdown due to insufficient content libraries? Poor software user experience (UX) and user interface (UI)? Or both?
There is plenty of evidence UI and UX matter to growth, perhaps more than well-stocked content libraries.
The driving factor may be that expanded user behaviors require new software for users to consume more content.
Peacock, Paramount+, HBO Max, Pluto TV, ESPN+, Hulu, and Netflix all offer helpful examples of this tension.
I continue to believe that understanding "user intent" is the difference between success and extraordinary success in legacy media and streaming.
One tension in this perspective is whether user experience (UX) and user interface (UI) matter more than content library.
Meaning, does it matter more to the growth of a streaming service that there is a library that users intend to consume?
Or, that the UX and the UI facilitate faster or better user decision-making for users?
Coincidentally, as I started writing this, I ended up starting a Twitter debate on this topic with Recode's Peter Kafka and AllYourScreens' Rick Ellis (who wrote about the exchange in his newsletter yesterday).
There were basically three perspectives:
Content matters more to growth than software, software matters to retention, only (Kafka);
Content matters to growth, and software also matters to growth but more on the retention/churn side (Ellis); and,
Software matters to growth as much as content, perhaps more (me)
Growth is increasingly on the minds of both streaming services and their investors after subscriber numbers flattened in the U.S., according to both Q3 earnings calls and a Kantar Q3 entertainment report.
Is the reason for the slowdown due to lack of content library due to pandemic-related delays? Poor software user experience (UX) and user interface (UI)? Or some combination of both?
There is not enough evidence to deliver a convincing answer for any outcome. We do not get much, if any, insight into how much a company invests in its software from earnings calls or reports.
When we do learn about it, it is typically an acquisition within a price range that is a small percentage of annual content spend:
Disney acquired a majority stake in BAMTech in 2017 for $1.58B, or 5% of its projected $30B spend on content in 2021; and,
WarnerMedia recently leveraged its $100MM December 2020 acquisition of You.i TV to upgrade its HBO Max app for global expansion, or 1.1% of its projected $9B annual spend on content in 2022 and beyond.
In terms of raw costs, a streaming platform's software calculates to matter exponentially less to growth than content.
But the lens of "user intent" suggests growth will come from more being invested in software that understands user intent, and makes the user experience faster and/or better.
In other words: if "understanding user intent has been the difference between success and extraordinary success in legacy media and streaming" (as I wrote in The Metaverse, Dotdash, & Serving User Intent), then better software that better understands user intent will lead to growth.
Software & Streaming
There is a recent quote from A16Z's Marc Andreessen that I like to refer to as embodying the problems for streaming services struggling with growth:
My partner Alex Rampell says that competition between an incumbent and a software-driven startup is “a race, where the startup is trying to get distribution before the incumbent gets innovation”. The incumbent starts with a giant advantage, which is the existing customer base, the existing brand. But the software startup also starts with a giant advantage, which is a culture built to create software from the start, with no need to adapt an older culture designed to bend metal, shuffle paper, or answer phones.As time passes, I am increasingly skeptical that most incumbents can adapt. The culture shift is just too hard. Great software people tend to not want to work at an incumbent where the culture is not optimized to them, where they are not in charge. It is proving easier in many cases to just start a new company than try to retrofit an incumbent. I used to think time would ameliorate this, as the world adapts to software, but the pattern seems to be intensifying. A good test for how seriously an incumbent is taking software is the percent of the top 100 executives and managers with computer science degrees. For a typical tech startup, the answer might be 50-70%. For a typical incumbent, the answer may be more like 5-7%. This is a huge gap in software knowledge and skill, and you see it play out every day across many industries.
I like this quote as a starting point, especially for these last three sentences about the "huge gap in software knowledge and skill". Because it resonates as a reflection of the obstacles I encountered while working in digital media at ViacomCBS, and while researching streaming media.
Typically, the legacy media C-Suite executives and especially ad sales executives either saw streaming software as a threat to affiliate revenues and/or a lower priority due to the lower revenues attached.
It is a helpful rule of thumb for thinking about user intent in streaming because streaming apps are software.
Andreessen's point is that the extent to which executives responsible for a streaming service understand the math of a sales conversion funnel, "user intent" and the science of the software is crucial to both growth and competing.
Software & Growth: Peacock
But, for example, as I highlighted back in April in "The Office" on Peacock Is No Longer in Nielsen Ratings (2.0), typically the executives who "own" the vision for a streaming service are not the executives with computer science degrees:
through the lens of The Curse of the Mogul framework, [NBCU CEO Jeff] Shell appears to be a CEO who inherited a Curse of the Mogul strategy from his predecessor, Steve Burke, a longtime legacy media executive who was CEO for NBCU from 2011 through 2020.
Both Burke and Shell are longtime legacy media executives. Technically, Comcast’s Direct-to-Consumer Chairman, Matt Strauss, operationally owns the Peacock vision, and he does not have a computer science degree. But all three ultimately report to Comcast CEO Brian Roberts, who also does not have a computer science degree.
Roberts was reported to be "pressing NBCUniversal to be more aggressive with Peacock" on the content side. But, Peacock reported 54MM sign-ups and 20MM Monthly Active Accounts in Q2: even if content is a problem, a delta of 34MM Monthly Active Accounts reflects a software problem, too.
Specifically, Peacock the app is not doing much to encourage 34MM subscribers to convert to paid, despite the Olympics. Catie Keck of The Verge wrote back in July:
Peacock’s coverage [of The Summer Olympics] was a problem straight out of the gate. The opening ceremony wasn’t streamed live on the service at all (though the closing ceremony will be), even though it was streamed live on the NBC Olympics website. The service is paywalling men’s basketball, seemingly to boost Peacock’s paid plans. And while live broadcasts and on-demand coverage of most other games and events are available for free on Peacock, finding out what’s on and where to watch it has been a chore, comparable to flicking through a cable TV guide....Beyond the technical limitations, there’s also been some confusion around finding where to watch different Olympic games. Live programming has been spread across a bunch of different channels due to the scope of the Games — USA Network, CNBC, NBCSN, Olympic Channel, Golf Channel, and Telemundo are all carrying coverage — so much so that NBC Olympics has regularly published guides to help find what’s on. Peacock’s digital-first platform could have been a huge help in sorting through the mess, but NBC just translated the experience of channel flipping to its app, offering little advantage to cord-cutters. If you do want to watch any of the Games live, you may have to do some additional legwork to find them.
Going forward, according to Shell in the Q3 earnings call, Peacock's emphasis will be on:
a ramp up in originals on Peacock, which is very necessary to continue to grow, to have successful and robust original programming and we're excited about a lot of the things that we're making for the service.
The implication is that Comcast's non-computer science executives think that a lack of content is a problem. But, obvious problems lie in the conversion funnel – registered users are not using the service, even during the Olympics – and the conversion funnel is a reflection of software.
Peacock's software is objectively subpar and seems to care little about the user. It offers no personalization and it does not permit rewinding during sports streaming (unlike cable boxes).
The delta between Monthly Active Accounts is not only about content, and Comcast is an incumbent lacking management who can solve for that problem.
Software & Growth: Pluto TV
A recent example I have used of good streaming software is Pluto TV.
A recent quote from Pluto TV founder and ViacomCBS Streaming CEO suggested what makes Pluto's experience so delightful is that it is "frictionless" and "magic":
Having that simplicity of having people engage with Pluto and having it as frictionless and as built in as possible is a huge advantage and one of the reasons Pluto is one of the leaders in its category....Pluto is a free streaming TV service. It is instant, there is no friction… when we actually launched Pluto we didn’t ask for a sign up because we wanted you to be able to sort of experience that magic of turning on the TV through your web browser.
I also had a fun exchange on Twitter with Andy Weissman of Union Square Ventures last week on why Pluto TV's "frictionless" UX and UI succeeds. Two points I made are worth highlighting:
I’ve been thinking a lot lately about the @PlutoTV UX: that it loads quickly and to the last *curated* channel I watched. That’s its secret sauce (good background on this from @thomasryan on @awallenstein podcast). It’s such a little thing that makes a world of difference
ESPECIALLY when compared to all SVODs. Netflix & Hulu makes a probabilistic set of recs, everyone else self promotes their “best” titles.But Pluto makes my life easy.
Sports viewing on streaming sucks. Across the board. Can’t rewind, a bit of lag for the broadcast to load
Notably, Pluto TV is ViacomCBS's best-performing streaming app with over 54MM users and on track to $1B in revenue in 2021 after generating $70MM in 2018, and "comfortably exceed" that number in 2022.
Meanwhile, we have less transparency into the growth of its sister apps Paramount+, Showtime, BET+ and Noggin, all of which are lumped into a single number in quarterly press releases. The most recent number was 47MM, and there was no breakout of international versus domestic.
But, we do know that of the 54MM MAUs on Pluto TV, at least 30MM of whom are domestic U.S.
Paramount+'s software is a reskin of CBS All-Access, which had plateaued at around an estimated ~9MM subscribers after seven years in the market, and before Paramount+ launched earlier in 2021. The software was competitively weaker then, and remains competitively weak now, despite improvements in original content, sports and kids libraries.
Notably, there is no focus on "user intent" in either model: Pluto actively avoids knowing anything about its users. But, Pluto does focus on UI and UX, specifically, and Paramount+ has not evolved its UI and UX much, if at all, since its CBS All Access days. [1]
Software & Growth: HBO Max & Dotdash
Back in May I wrote about HBO Max's AVOD, DotDash, and Unlocking Value Through Fewer Ads. Regarding its relative focus on software and content, I wrote:
Dotdash maximized user engagement by focusing on the best possible answers to users’ questions, with the fastest possible user experience, and loading the fewest possible ads against that. This must-read piece on how CEO Neil Vogel “blew up” the About.com business to pivot to Dotdash helps us to better understand how they did this:
While most digital media companies at the time were focusing on producing fun, newsy content to attract readers, Vogel decided his sites would focus on straightforward, service-oriented articles written by experts that readers would find helpful today or in 10 years. The websites would also load at “lightning speed” and have two-thirds fewer ads than competitors to improve user experience, thereby increasing the engagement and size of the audience—making it that much more attractive and valuable to advertisers.
The comparison in that piece was a comparison of strategies minimizing ad-load on Dotdash and HBO Max's planned AVOD.
But that quote also reflects both the software problem Dotdash focused on – page load at "lightning speed" – and the content problem Dotdash solved for – the best possible answers to users’ questions".
By contrast, HBO Max has spent much of 2021 fixing a glitchy app that was built on top of "a retrofitted version of the old HBO Go and HBO Now services" (a move similar to ViacomCBS's with Paramount+, above). Vulture's Joe Adalian wrote back in August:
While those were both solid applications, they were designed for a very different product. According to the WarnerMedia exec, the main concern of the engineers then was making sure everything didn’t crash when hundreds of thousands of people simultaneously streamed Game of Thrones on a Sunday night. “That program was built for scale, and it was rock solid,” he says. HBO Max obviously still needs to handle a lot of traffic all at once, but it’s serving up substantially more content to a bigger audience — subscribers who are spread around the globe rather than living in just one country. Trying to do that on the existing platform has been a challenge from day one.
This is an important passage: the software worked to meet "user intent" of thousands of people watching Game of Thrones simultaneously... until that "user intent" evolved towards asynchronously watching a broader range of titles.
Adalian added:
The upgraded Max app has been in the works for a while now, since at least late last year, which is when WarnerMedia acquired a company called You.i TV with an eye on revamping the guts of its app. While the new offering won’t look dramatically different for most users at first, “It will be wildly better than what’s out there,” the exec says. “It will just work better across the board.” Of course, the relaunch may result in a few new bugs popping up in the short term — that’s common for any new product launch — but the exec says users will quickly see a much more stable experience. Eventually, once the basic mechanics of the app are fixed, the exec says the plan is to begin introducing more noticeable new features and evolutions, changes that will make for a more “sophisticated and cool and sexier” interface
"User intent" has changed because the user has changed and the content has changed.
The implication is that without new software that solves for that intent, HBO Max will not grow. [2]
But, retail subscribers (direct-to-consumer subscribers) have grown 100% since the acquisition of You.i TV in December 2020. HBO Max evolving its software has contributed to its retail growth.
It should also be noted that HBO Max has also had a direct-to-consumer distribution strategy for theatrical releases (Wonder Woman 1984, Mortal Kombat), and hits like Hacks and The Flight Attendant contribute to that growth, too.
Software & Growth: Hulu & Netflix
It is worth highlighting Hulu and Netflix, too, for three reasons:
Both are the U.S. market leaders with both personalized interfaces and the largest subscriber bases;
Both have seen user growth plateau in the U.S. over the past few quarters, and,
Both have made recent UI/UX changes to evolve their respective value propositions.
#3 is notable because of how significantly different those changes are to the rest of the streaming competition.
Hulu
Hulu integrated ESPN+ into its UI/UX back in March, and has grown by 5% since then (37.8MM subscribers to 39.7MM subscribers). Disney has not much discussed the extent to which integrating ESPN+ into Hulu's interface has impacted growth.
It is a significant change from Hulu's past of hosting originals and third-party content from Discovery and NBCU. Hulu has become a distribution channel for the NHL and other major sports deals (e.g., La Liga and Bunde, expanding the total reachable audience by over 2x.
With ESPN+ having grown 24% in the same time (13.8MM to 17.1MM), the implication is that both content and bundled UX/UI drive growth and improve retention on both ESPN+ and Hulu (ESPN+ is not available to users on Hulu without the Disney+ bundle).
But, it is not clear yet whether content or UX/UI matter more. to Hulu
Netflix
Netflix, on the other hand, has gone in a different direction by integrating games in the mobile app version of its devices. COO and Chief Product Officer Greg Peters spoke at length about games in the Q3 earnings call.
Peters noted it is early in the process – "mostly what we've done to date is about essentially making sure that all of our systems are working as we expect" – but the basic objective in gaming is "connecting great content creators into this audience".
One quote, in particular, is worth highlighting:
...we think that this just connects really well with the other work that we are doing. We're creating all these amazing universes and worlds and characters and storylines, and we can attach to the passion and fandom that our members have on viewing those on the video side with game experiences and allow them to go deeper and explore spaces that they wouldn't have otherwise seen on the video side. And so we really think there's a good connection and synergy there. And over time, we'll try and bring those closer together and sort of let those 2 worlds more influence each other and have a more direct connection. But again, that's something that is years in the making. We've really got to iteratively explore, and none of us know exactly what that will look like because we'll have to sort of find our way as we go.
Notably, the term "growth" is missing from both of these descriptions. But, the logic of growth is very much lurking in the background.
We are in the early days of Netflix mobile games, so we will not yet understand how it impacts growth until mid- to late 2022.
Hulu vs. Netflix
Disney is expanding Hulu to sports viewing to capture more sports viewers, and also investing billions in NHL and soccer. One key implicit assumption seems to be a bet on cord-cutting: as more people cut the cord, the more they will need apps like Hulu and ESPN+ to consume sports.
Both apps can capture two different types of user behaviors: sports-only (ESPN+) and both sports and linear TV viewing (Hulu). Content obviously still matters to growth for Hulu and Netflix.
It was revealed last week that Disney CEO Bob Chapek is making the surprise decision to increase content spend for Hulu by 3x to 4x ($8B to $9B, up from $2B to$3B). Netflix will spend $17B on content production and licensing in 2021, alone.
But, Netflix is expanding into games to capture and retain more mobile phone users with 97% of Americans owning a mobile phone of some kind and 85% owning a smartphone, as reported by Pew in April.
Hulu integrating sports and Netflix integrating games can be described as solving for both a content problem (games vs. video) and a software problem. Software is becoming increasingly more important to growth.
It is also worth noting that while key Netflix C-Suite executives have Computer Science backgrounds (Co-CEO Reed Hastings and COO Greg Peters), almost no Hulu senior executives have Computer Science backgrounds.
Conclusion
The point of this essay was not to find conclusive certainty in the available evidence. Rather, it was to take an initial look at how and where this tension is playing out in the marketplace.
There is evidence across the streaming marketplace how the tension of user experience (UX) and user interface (UI) may matter more than content library to growth. But it does not deliver any conclusive answers.
I also believe there is evidence that software is becoming increasingly important to growth, primarily from Hulu's and Netflix's recent moves, but also from Peacock's and Paramount+'s shortcomings.
That said, the basics of streaming are becoming increasingly standardized. Meaning, AWS cloud services and content distribution make launching and solving for the key building blocks of a streaming service easier than it was four years ago.
WarnerMedia's acquisition of You.i TV, above, suggests that not everything is standardized. In a counterintuitive way, HBO Max's failures were built off of what HBO Go and HBO Now did unusually well: serving individual titles to simultaneous audiences at scale.
That was the standard for HBO Max, until it was not.
With the integration of You.i TV, both new and, more importantly, expanded user behaviors require new software to consume more content.
More generally, growth in streaming requires new software in addition to an investment in new content, even with standardization of the technology. Understanding "user intent" increasingly needs to be part of the value proposition.
[1] None of the recently promoted C-Suite of executives at ViacomCBS have computer science degrees. Even Pluto co-founder and ViacomCBS Streaming President and CEO Tom Ryan does not have a computer science degree, but co-founder Ilya Pozin does.
I believe the difference in Pluto's and Paramount+'s respective paths to growth, to date, also reflect that difference.
[2] It is worth noting that HBO Max did not grow in Q3 2021, but only because of the impact to remove the HBO subscription from the Amazon Prime Channels.