Member Mailing: After Netflix's Self-Inflicted Wounds, Five Recommendations for Streaming CEOs
If I had the opportunity to sit across from every CEO in streaming right now, I would make five recommendations:
Netflix is suffering from self-inflicted wounds but is still has “won” streaming, proceed with caution;
Netflix’s struggles with password-sharing imply there are limits to reaching 1B streaming subscribers;
Discount FASTs (especially Pluto and Tubi) at your own peril;
Discount YouTube as a competitor at your own peril; and,
If you’re betting on sports streaming to solve for 1-4, you needed to solve for UX/UI yesterday.
It is doubtful anyone would agree with all five, and that is my intent: The common theme is that the “streaming wars” paradigm describes market dynamics that exist more narrowly than most assume, and each should provoke the audience to think more broadly. And each of these recommendations hones in on solving for less obvious market dynamics that exist.
In particular, each and all recommendations highlight a key blind spot that the “streaming wars” paradigm has created for market participants: Free Ad-Supported TV Services (FASTs) - especially YouTube - and smart TV and Connected TV (CTV) operating systems (OSes) are better positioned for the future of streaming than subscription services (including Netflix).
The Problem with The “Streaming Wars” Paradigm
Key Takeaway: There is a war when there is product channel fit. When there is no product channel fit, there is no competition in that channel.
I have long argued against the “streaming wars” paradigm for two reasons.
I primarily understand the streaming marketplace and Netflix’s through the lens of Product Channel Fit: Streaming services must evolve their product to fit the optimal channels where they can reach their target audiences.
As I argued in Why the "Streaming Wars" Are Actually About Product Channel Fit:
[The] data we are getting on "the streaming wars" are not about war or zero-sum; rather, I would argue they are about which companies are savvy enough to understand the marketing required to drive scale in those channels where it finds product-channel fit….
Netflix continues to win the game because it has solved for near-ubiquitous product-channel fit. No one else is coming close to its model, or its marketing economics.
There may be head-to-head competition in certain channels, but unlike Netflix, most streaming services are still figuring out optimal product channel fit across various channels (e.g. Peacock). Meaning, there is a war when there is product channel fit. When there is no product channel fit, there is no competition in that channel. [1]
This all said, one could argue “the attention wars” is the best term, reflecting competition for the attention of consumers across devices and media verticals (gaming, livestreaming, User-Generated Content (UGC)) and generally I think that is true. But, ultimately streamers are going to bet heaviest on the genres of content that drive growth and reduce churn.
Netflix is wounded but is still has “won” streaming
Key Takeaway: Even with projected churn in Q2 and Q3 2022 Netflix has a 33% larger base than second place Disney.
The fact that Netflix wounded but still has “won” streaming - despite its declining stock price - is supported by simple math: Netflix has 221.6MM subscribers, it lost 200K subscribers (-0.1% ) in Q1 and projects to lose 2MM in Q2 2022 (-1.0%).
Disney has 196MMM gross subscribers including ESPN+ and Hulu, and that figure is not de-duplicated for the Disney+/ESPN+/Hulu bundle in the U.S. The Entertainment Strategy Guy recently did an exercise de-duplicating U.S. subscribers across all three subscriptions by estimating the growth of Hulu and ESPN+ since the bundle launched.
His estimate was 15.3MM, and subtracting it from each of Hulu and ESPN+ numbers gives us about 30.6MM fewer total subscribers, or around 166MM gross subscribers. Notably we do not have breakouts of Latin American numbers, where subscribers to Star+ are included (likely small).
So, even with heightened churn Netflix has a 33% larger base than second place Disney, and at a time when streaming growth is decelerating.
The limits to reaching 1B streaming subscribers
Key Takeaway: Streaming services are walled gardens that limit their ability to scale because by limiting their content within those walls & further limiting engagement with their UX/UI.
Netflix revealed on its Q1 2022 earnings call that 100MM subscribers are password sharing. Assuming three to four members per household, that can be as many as 400MM subscribers who are not paying. That, alone, should give anyone pause to buy into former WarnerMedia CEO Jason Kilar's prediction of “a "ceiling" of 1B users for an SVOD service like Netflix or HBO Max.
But there is another lens that a recent 29-tweet long thread from IAB Executive Chairman Randall Rothenberg highlighted: The phenomenon of “the creation of alternative television universes” across “FAST networks, with their livestreaming libraries of studio programming, and “niche universes” of genre-focused apps like Starz, Crunchyroll and AMC’s Shudder (which Rothenberg highlighted as an example.
He predicts:
I can’t help but think that this phenomenon - many, many multiple services, each one looking very much like your old cable universe, but each one actually a walled content garden, blocking out or strictly limiting access to competitors’ content will have as dramatic an effect on television’s economics as the digital platforms have had. Television will no longer be a single coopetitive platform, where 3-10 media giants inhabit the same ecosystem, competing for fractions of share-points against similar rivals which sit next to them, cheek by jowl, in the same EPG, all of it visible to an audience of 100 million households. Rather, there will be many multiple “televisions,” each one striving to keep its own audience - an audience smaller than historical norms - locked in and blissfully unaware of those other televisions inhabiting other dimensions in different space-time continuums.
It is an important point he is making here: a fundamental limitation to the ability of individual streaming services to scale is that they do not communicate with each other, and there is no Electronic Programming Guide (EPG) to capture their programming simultaneously.
He is also arguing the User Experience (UX) and the User Interface (UI) of an app matter as much as, if not more than, the content (which is also an argument of Product Channel Fit). The “TV universes” that are easiest to use and with the largest libraries are likeliest to win.
But above all else, he is saying that the UX and UI of streaming services "will have as dramatic an effect on television’s economics as the digital platforms have had."
In other words, if we may see a single app capture 1B streaming subscribers, but it is more likely we will see them captured by multiple apps that are free and ad-supported. Counterintuitively, we may also see niche apps thrive at a smaller scale.
Discount FASTs (especially Pluto & Tubi) at your own peril
Key Takeaway: FASTs offer the best passive viewing experience within a walled garden.
The rocket ship growth story of FASTs like Tubi and Pluto has been out there for a while: Pluto drove over $1B in revenue in 2021, up from $210MM in 2019 and Tubi projected to reach $700MM in 2022, up from $145MM in 2020
Pluto’s is strong enough (over 6X growth in revenues since acquisition) that Paramount CEO Bob Bakish was complaining to Bloomberg’s Lucas Shaw it is “the service that continues to get no respect” (making it the Rodney Dangerfield of streaming?)
I think he is right. In Paramount+ Bets on User Interface... While Warner Discovery Bros. Talks Up Content, I included this quote from Paramount Global Streaming Chief (and Pluto TV Co-Founder) Tom Ryan:
Pluto is a free streaming TV service. It is instant, there is no friction… when we actually launched Pluto we didn’t as 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.
His point is that the user experience of Pluto is built to be frictionless “magic” for the user.
That is a point that Rothenberg indirectly makes, too: “because [FASTs and niche services] are live, they don’t force the viewer to commit to a choice; she can go back to being a white-noise-consuming, channel-surfing couch potato”
It is also a point about how cord-cutting and the emergence of streaming apps have brought about the death of the Electronic Programming Guide (the “EPG” in his tweets) and the passive viewing experience around it. But, as Rothenberg tweeted, FASTs are bringing it back in a new form:
you can happily live in the Pluto universe… surf its EPG list of galaxy-channels, and land on any one of 100-odd simultaneous livestreamed program-stars, without ever giving a second thought to that old TV universe - you know, the one filled with NBCU and CBS and CNN and ESPN and Fox News.”
That is "magical", and one could argue it is better than the user experience that Netflix provides (and Netflix is now updating its interface). [2]
Discount YouTube as a competitor at your own peril
Key Takeaway: YouTube creators are able to take more “swings” with content for their audiences at a lower cost than streamers & are able to reach more consumers via CTV.
This is a point I have made on multiple occasions, but let’s start with the numbers:
135MM CTV users in the U.S., alone
2MM content creators worldwide, and growing
$30B in ad revenues annually, and growing (its Q1 2022 revenues grew by 14.4% year-over-year, which was short of a target of 25%)
That all said, my favorite figure is the $3.5MM that top YouTube creator MrBeast spent on his version of Squid Game, which has now racked up more than 246MM views since last November. As I wrote in More on Why MrBeast's Squid Game Matters in 2022:
With a $3.5MM budget, MrBeast pulled off faster and better than most streaming services, but on a per episode budget well above most [Hollywood] productions.
With a creator community running 2MM strong, assuming MrBeast is in the top 0.1% of creators, that means there are 2,000 other creators positioned to threaten Hollywood and legacy media streaming services (and I dove into this in my opinion piece for The Information, Why YouTube Sees Hollywood’s Future in the Creator Economy).
But, its more than 2,000 creators with their eyes on the prize, as a Wall Street Journal article from last October highlighted:
YouTube’s strategic partnership managers advise about 12,000 creators, said Jamie Byrne, the platform’s senior director of creator partnerships. Each is assigned a portfolio of about 10 to 20 video makers. If a star producer misses a weekly video post, the YouTube managers are likely to know why, Mr. Byrne said.
“We’re texting with them at all days, all hours,” Mr. Byrne said. “We have a close connection.”
Based on the above, there two competitive dynamics with YouTube that should be keeping legacy media executives awake at night, but don’t yet seem to be:
They have competition at scale in producing and distributing content faster and cheaper OR faster and better; and,
YouTube is outperforming the streaming marketplace by not investing in content and instead simply by directly supporting and investing in a select group of thousands of creators who are now able to reach 135MM CTV consumers in the U.S.
YouTube creators are able to take more “swings” with content for their consumers at a lower cost than Netflix and legacy media streamers, and are able to reach more consumers (nearly 2B monthly visitors globally) across more devices than Netflix.
Sports streaming needed to solve for UX/UI yesterday
Key Takeaway: Major sporting events need less friction in the UI/UX to drive viewership for sponsors and advertisers
I recently argued that even if a service can solve for sports - which HBO Max, Paramount+ and Peacock are touting as their strategic advantage and Paramount Global CFO Naveen Chopra describes as valuable to long-term consumer acquisition - User Interface/User Experience (UI/UX) in The Tiger Woods Comeback Story vs. Streaming Bundles:
Because the Tiger Woods story is effectively lightning-in-a-bottle TV, an extraordinary return under extraordinary circumstances. But, the user experience of streaming makes it harder for 120MM U.S. households with permanent internet access via broadband to consume it over streaming than linear. Hulu and ESPN+ have made it easier, but there is still friction.
More friction between viewers and the feed means fewer viewers, and in turn, fewer ad views. Fewer ad views, in turn, will result in disappointed OTT and CTV advertisers, the precise outcome that Disney does not need as it builds out its ad-supported OTT story for advertisers across Disney+, ESPN+ and Hulu.
Disney’s execution of The Masters across ESPN+ and Hulu highlighted how much major sporting events need less friction in the UI/UX to drive viewership. With Amazon and YouTube TV taking on MLB rights, that issue of friction is true for every streaming service. That means, billions of dollars in annual sports streaming rights are subject to the User Experience and the User Interface.
So how will friction be solved for sports in streaming?
There is the expensive answer and then there is the less expensive answer.
The expensive answer is that Smart TVs and CTVs own the real estate and the software that can put individual games one-click away for users on home screens. But that means streaming services paying to play, and both Smart TV and CTV OSes and the streaming apps themselves evolving their respective software into one-click access (also an example of Product Channel Fit).
My guess is these negotiations have already begun as more ad dollars shift into CTV. Sports deals have left streamers with sports rights vulnerable to rent extraction.
The less expensive answer lies in the assets streamers already own. Prime Video and YouTube benefit from TV operating systems owned by Amazon and Google, respectively. Disney owns the Hulu vMVPD and also has a stake in FuboTV, but that accounts for about 8MM of 120MM broadband homes. Paramount+ owns Pluto TV, perhaps the most frictionless UX/UI in streaming and reaching 60MM+ homes worldwide.
These are all examples of in-house solutions, but the open questions are whether any of them have sufficient scale to deliver a better solution and whether they can do so internally.
Conclusion
I think Randall Rothenberg’s point about streaming services as “contained universes” hits on the fundamental weakness of the “streaming wars” paradigm: yes, these services are competing for users’ attention and time across platforms, so there is a “war” in that sense.
But, it also hits on the more important point that the competition is not just about content but also about product: meaning, TV is a lean back experience that has been guided by the Electronic Programming Guide (EPG) for the past few decades, and streaming is considered to be an alternative to linear as a lean-back experience.
Except, in streaming, two key variables are different from linear:
Streaming TV is both a lean back and a lean forward experience
The EPG has been replaced by both Smart TV and CTV operating systems, and by individual app streaming interfaces.
That has resulted in three problems for all streaming services:
Free services may have more content than paid streaming services at a lower cost, and this will always be an advantage for YouTube.
Without a general EPG across all streaming apps, the simplest use case for consumers will either be to default to an app or set of apps, or Smart TVs will increasingly extract more rents to help these apps improve their performance (and I think streaming apps with billion dollar sports deals are particularly vulnerable because they will need better performance for ad deals).
Given 1 and 2, paid apps face the increasing likelihood of increased marketing costs in order to scale because they will be competing with free and Smart TV interfaces.
All three point also to a particular risk for both subscription and ad-supported models: the more streaming apps must rely on Smart TV and CTV software to scale - and especially to hit ad impressions goals - the more expensive it will be for them to do so.
In other words, UX and UI are variables positioned to have "as dramatic an effect on television’s economics as the digital platforms have had".
Ultimately, as I argued in last week’s The Vibe Shift… “It’s All Happening”, “we have to start wondering whether Wall Street and the broader streaming marketplace simply have yet to comprehend YouTube’s success. Because it is important to remember, YouTube is the only walled content garden that also offers competitors’ content, even if in clips or shorter form.
If its walled garden - which hyper-serves content to its users with personalized, algorithmic targeting - continues to succeed, it becomes harder to imagine consumers wanting to continue to pay for smaller walled gardens that serve them less. The outcome: a lot of sunk costs in content that may never be watched, or may ultimately be watched on a FAST.
Footnotes
[1] I think because product channel fit requires streaming services to find “wins” on platforms, a better term is '”the genre wars", which I have previously argued are more like focused, zero-sum conflicts around specific content genres than broader head-to-head, zero-sum conflicts between platforms for the same audience. This approach explains the success of the demographic-focused strategy of Starz at a smaller scale (19.7MM subscribers for content targeted to black and female audiences), and the continued success of anime-focused service Crunchyroll (120MM users, 5MM paying subscribers).
Also, even with the emergence of the Nielsen streaming ratings in the US, it is still difficult to measure when and how consumers are making decisions to watch content on one app and not a competing piece of content on another, even if those decisions are implied and not observed.
[2] But, also, as FASTs grow, the linear brands matter less and less to consumers. It is a lurking issue for Peacock and Paramount+, whose interfaces rely on tiles for its various linear brands on its home screen.