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Netflix had a good Q3, reporting results “ahead of forecast” with revenue of $8.5B, 9 million net added subscribers, and an operating margin of 22.4%. Also this week, Disney filed an 8-K report to recast its 2023 financial results through its fiscal Q3 to break out ESPN as a separate segment from the rest of the business. The report showed Disney has lost $2.1 billion in its Direct-to-Consumer segment to date, though quarterly losses have dropped from almost $1 billion in Q1 to $500 million in Q3.
The contrast mirrors the rationale for the recent carriage deal between Charter and Disney. I wrote in Monday’s essay “Reconsidering Streaming's Subscription Models” that the deal “seems to be a step back to the future of the TV Everywhere model” because Disney's struggles have forced it to pivot to a wholesale model with Charter. Meanwhile, Netflix is continuing to find revenue growth with a retail first, consumer first business model.
Liberty Media CEO John Malone suggested in an interview this week the deal “allows cable to start selling hybrid video services, mixtures of streaming and linear.” He then predicted those hybrid services “will prolong the life of linear and continue that revenue stream” and “slow down the transition of big tech becoming the primary provider of entertainment.”
I do not buy Malone’s sales pitch here. Consider the following scenario. If I want to consume older movies or shows from the pre-streaming era (before 2019), is that experience best within:
Netflix
A legacy media Subscription VOD (SVOD) or ad-supported VOD (AVOD) like Disney+,
A free ad-supported TV service (FAST) or
A cable bundle?
The Disney-Charter deal creates one more free option—it basically converts Disney+ from #2 into #3—but price is not the only consideration in that scenario. The world is more complex than Malone describes it: Older content is hard to find due to complex syndication rights deals and poor legacy media streaming user interfaces. Disney may ultimately benefit from a TV Everywhere, “hybrid video service” bundle offering. But no other legacy media SVOD or AVOD services will.
Key Takeaway
The Storytelling Moat has created additional complexity and frustration for consumers in the digital world. Netflix's successful Q3 proves The Distribution Moat is growing in value, and therefore Charter's bet on return of TV Everywhere will be, at best, a stopgap solution.
Total words: 1,600
Total time reading: 6 minutes
Library
The first and most important question for me is where I can find a show or movie I want to watch. The scale of the libraries across services can be overwhelming. As of July 2023, there are 6,621 movies, series, and specials on Netflix. Roku offers 350 linear streaming channels and more than 80,000 TV shows and movies. Fox-owned FAST Tubi offers 200,000 movies and TV episodes. Paramount+ offers 30,000 episodes of TV and 2,500 movies.
It is a guessing game for me whether a show is in syndication on a cable or broadcast, or which pay window a movie is in, or whether either is discoverable within a streaming service. Disney, Warner Bros. Discovery, NBCUniversal, AMC Networks and Lionsgate have been increasingly opting to drop titles from their owned-and-operated streaming services, and instead license those titles to third-party distributors like Netflix or FASTs like The Roku Channel.
Recent Nielsen Top 10 streaming ratings also reflect how non-exclusive licensing deals impact library selection. The recent streaming hit “Suits” is on both Netflix and Peacock, “NCIS” is on both Netflix and Paramount+. Seasons of the CBS series “S.W.A.T.” are on Hulu, Netflix and Paramount+, and seasons of NBC’s “Heartland” are on Hulu, Netflix and Peacock. The movie “The Wolf of Wall Street” showed up in the top 10 movies last week, and it is both on Netflix and Paramount+.
The implication from the Nielsen ratings, which total the minutes viewed on these services across a national panel of U.S. households, suggests that these shows benefit from being in libraries across multiple platforms. I have never had it better as a consumer in terms of choice. But in needing to surface hunt a title across multiple services, I also have never had it worse.
User Interface
Whether I can find the older show or movie I am looking for is also a function of the user interface (UI). I defined “The Distribution Moat” as “the technological expertise behind the algorithms for personalized recommendations, the dynamic user interfaces and operational back-ends for content distribution over the internet.”
Netflix has the most technologically advanced UI, surfacing old shows and movies on the home page through personalized recommendations or search. FASTs share an Electronic Programming Guide (EPG) interface with cable, and FASTs like Pluto TV and Tubi offer personalized content recommendations and UIs. They are easy to use, but also require the viewer to know which channel(s) an old show or movie is distributed.
Legacy media SVOD or AVOD services create a similar problem for consumers because they offer “simple, similar-looking interfaces and limited personalization” on top of their enormous content libraries, as I wrote last week, making discovery more difficult. So, the best UI solution for me is Netflix, and the worst is a legacy media AVOD or SVOD.
Price
Until the Disney-Charter deal, FASTs had been the only solution that is free for me and therefore are the best solution for watching older content. Legacy media streaming services are all priced below $10 per month. Netflix with Ads is $6.99 per month, Netflix’s Basic and Standard tiers are priced at above $10 per month. The price of its Premium tier was just raised to $22 per month. Cable bundles are the most expensive ($60+ per month).
The Disney-Charter deal bundles the Disney+ Basic ad-supported offering into the $60 per month Spectrum TV Select package for 9.5 million customers. Charter will pay Disney a wholesale price for the service. ESPN+, and then later the ESPN DTC service, will be provided to subscribers in the Spectrum TV Select Plus tier at no additional fee.
So, Disney+ and ESPN+ will be free for me within Charter, but that outcome assumes I both opt into a particular Spectrum cable bundle and then also opt into subscribing to those services. Depending on which older show or movie I want to watch, neither is an obvious solution, and especially when FASTs and/or Netflix offer similar or the same content for free.
Churn
All options are vulnerable to churn. Cable bundles are currently navigating cord-cutting, having lost 1.73 million subscribers in Q2 2023, according to the latest statistics from Leichtman Research Group. That is about a 2% quarterly churn rate across over 70 million households.
Both legacy media AVOD and SVODs are navigating growing churn rates according to recent Q2 data from research firm Antenna, but only the churn rates of Netflix and Max have been trending downwards.
FASTs do not have churn, per se, as they do not rely on credit cards or require accounts to watch the service. Because they are free, they effectively are analogous to broadcast channels and rely upon tune-in at scale.
TV Everywhere returns? Or Not?
Based on the above, is the return of the TV Everywhere or “hybrid video services” model better for consumers? Charter will hold more distribution negotiations with cable networks over the next 18 months, and Malone’s bullishness for the model suggests we will see more of these deals.
The fact that the Disney-Charter deal converts the Disney+ “Storytelling Moat” of Disney, Pixar, Marvel and Star Wars content into a FAST is a great deal for families and is a significant change for consumers sensitive to price. The deal also maps to trending consumer behaviors in the U.S.: Nielsen data shows FASTs The Roku Channel (1.1%), Tubi (1.3%) and Pluto TV (0.8%) competing neck-and-neck with Peacock (1.1%), Paramount+ (1.0%) and Max (1.2%). Tubi has the most consumption. From the perspectives of pricing, what Malone and Charter have accomplished with the Disney-Charter deal maps Disney+ to growing FAST consumption, but also positions its expensive bundle in competition with FASTs. Malone's comments suggest that was not intentional.
The return of the TV Everywhere model also may not matter for other potential legacy media partners. The churn data for a legacy media SVOD or AVODs reflects unreliable consumer demand for Paramount+, Peacock and Max, all of which have churn rates around 7%, according to Antenna. The higher that rate creeps up to 8.2%, the closer they are to losing one subscriber for every new subscriber per month.
Disney is on the lower end, just above 4%, partially because of its bundling with Hulu (near 5%) and ESPN+. That data point aside, the implication is clear: Disney’s lower churn reflects higher demand for its library and the higher churn rates for other services face lower demand for their libraries. “The Storytelling Moat” is insufficient for consumers, and the hybrid services seem unlikely to change that.
Last Thursday, I wrote: “The lesson from The Distribution Moat… is that streaming subscribers increasingly demand a more multifaceted relationship with the storytelling and the storyteller.” Based on the above, we can more simply state that consumers demand a mix of UI and library at an affordable price. Malone’s vision does not offer that. His vision also doubles down on “the complexity and frustration that embody most MVPD relationships with their customers” as Netflix writes in its Long-Term View for investors. Netflix describes itself as a “relief” from that dynamic, offering members the ability to “leave when they want and come back when they want” and “a personal experience that finds for each person the most pleasing titles from around the world.”
So, I envision disappointing direct-to-consumer data will emerge from Disney and other legacy media streaming services this quarter. The Storytelling Moat has created additional complexity and frustration for consumers in the digital world. Netflix's successful Q3 proves The Distribution Moat is growing in value. Charter's bet on return of TV Everywhere does little to change that beyond price, and therefore it will be a stopgap solution, at best.