Member Mailing: Streamers Hit a Dead-End (Macro) & Consumers Hit Dead-Ends In Streaming (Micro)
“Well, it’s a bitch,” Netflix Chairman and Co-Chief Executive Reed Hastings said of the results while addressing employees in a town hall on Wednesday afternoon, according to people familiar with his remarks.
One could look at all this market chaos and its disproportionate impact on media companies - if not Netflix in particular (the quote, above)- and broadly conclude that streaming has reached a dead-end. Meaning, declining stock prices now reflect investors no longer believing streaming's business model is the future of content distribution as cord-cutting emerges, either as a growth model or as a business model.
As I argued back in March, I think that is a simplistic conclusion and especially in the case of Netflix and its 220MM subscribers. But, that is also not an unfair conclusion, as I have also long argued with the PARQOR Hypothesis: an optimal media business model in the 21st century will require more attributes than a streaming service, alone. To date, Netflix has struggled to solve for the additional elements of that model.
At a more granular level, Netflix still has an advantage in streaming over other services. All streaming services are each “a walled content garden, blocking out or strictly limiting access to competitors’ content” - as IAB Executive Chairman Randall Rothenberg recently tweeted - but those apps which have the most content are better positioned to succeed than more niche services. His point is that walled gardens are generally, but not always, dead-end experiences for the consumer.
So, generally speaking there are two dead-ends in the post-”streaming wars” marketplace:
At the macro level, the subscription streaming business model hitting a dead-end with investors and potentially consumers (“ Streaming Hits A Dead End”), and
At the consumer level, emerging market and consumer dynamics are being shaped by dead-ends within the streaming consumer experience (“Dead Ends in Streaming”).
These twin dynamics help us to look past the doom-and-gloom of this chaotic market moment, and focus on important market signals about where streaming business models are heading.
Streaming Hits A Dead-End
Streaming is not literally a “dead-end” for media companies and Netflix. All streaming businesses have figured out a model that is working: from niche services like Crunchyroll (5MM subscribers) and AMC Networks (9.5MM) to recent market powerhouses HBO Max (76.8MM) and Disney+ (129.8MM). Even Paramount+ is now on track for 100MM subscribers after relaunching off of the underperforming CBS All-Access.
That said, none are cash flow positive and the market appears to be over-saturated with options for consumers.
Without a story about free cash flow, the streaming business has reached a dead-end.
Whether or not a streaming service is in a position to generate free cash flow now seems to be the new number one concern for investors. The question is, why?
It had not been an issue with Netflix investors before Q1 2022. But now, it seems to be as Netflix is early in its free cash flow story and with the stock price having dropped 73% over the past six months. It is also a story for Warner Bros. Discovery management, as I highlighted last week in Warner Bros. Discovery, Sinclair & David Zaslav's Vision for A Smaller Bundle. CEO David Zaslav and CFO Gunnar Wiedenfels spent much of their first earnings call emphasizing “maximizing advertising and affiliate revenues, tighter cost management and free cash flow.”
It wasn’t clear to me, then, why they were downplaying HBO Max’s growth and playing up free cash flow, until yesterday I read this excerpt from a letter to Uber employees written by Uber CEO Dara Khoswohari:
In times of uncertainty, investors look for safety. They recognize that we are the scaled leader in our categories, but they don’t know how much that’s worth. Channeling Jerry Maguire, we need to show them the money. We have made a ton of progress in terms of profitability, setting a target for $5 billion in Adjusted EBITDA in 2024, but the goalposts have changed. Now it’s about free cash flow.
Across the market, investors need safety and in media and technology they no longer see safety in streaming growth stories (and, as I have argued in the past, it is not quite clear why they assumed legacy media companies could ever solve for streaming).
Netflix’s subscription-only model hits a dead-end
Netflix management made it clear to investors on their recent letter to shareholders that the pull-forward impact of the pandemic - of which they had warned investors of back in August 2020 - had resulted in “revenue growth headwinds” from “our relatively high household penetration”, password-sharing, and increased competition. They have since announced a password-sharing crackdown and a launch of an ad-supported tier in Q4 2022.
But, it is also worth noting that Netflix’s open ambitions to become Disney - both in animation and as a broader business model - have reflected that streaming, alone, has never been its long-term objective as a business model. Its moves into gaming also reflect the logic that streaming, alone, cannot attract new users or retain existing users in an increasingly competitive streaming marketplace.
The suddenness of a dead-end for Netflix’s growth ambitions for its subscription model may be a surprise, but Netflix has always assumed this dead-end was coming. The pandemic accelerated its arrival. As I highlighted last week, Netflix’s current dilemmas reflect a broader failure of execution against that accelerated new reality.
Without the ability to scale, most niche services/universes face investor skepticism
Niche services face an interesting dead-end in streaming. The belief of most streaming executives - based on research - is that ultimately there will be between four and six SVOD services in consumer homes.
The assumption is niche services cannot ever reach scale because their Total Addressable Market is limited by genre (e.g., Crunchyroll with Anime, Shudder with 49 sub-genres of horror) or by target demographic (e.g., Starz targeting “under-served” female and black audiences). That also means investors who are not enthusiastic about streaming are even less enthusiastic about niche streaming bets.
In response, smaller legacy media companies like AMC Networks have instead played up their cable businesses (like Warner Bros. Discovery) because, as The Hollywood Reporter’s Alex Weprin recently highlighted, that story helps them to “bridge the gap between the uncertain present and a more sure-footed future.”
The story of smaller legacy media networks betting on streaming has evolved from one of chasing the now-mythical streaming multiple to pursuing streaming as supplemental revenues to more predictable linear affiliate and advertising revenues.
Disney quickly evolves past subscription-only streaming
Last, it is worth noting Disney’s ambitions to compete with Netflix head-to-head have hit a dead-end. It has recently moved into ad-supported streaming models - including moving its Dancing With The Stars broadcast from ABC to Disney+ - and is increasingly betting on live sports in its streaming models (ESPN+ and Hulu bundle, Star+).
Meaning, it is no longer competing head-to-head with Netflix for streaming subscribers - especially kids and family content - as it has a very different Total Addressable Market with its portfolio of content verticals. It is also evolving its streaming model in ways that Netflix cannot. As I wrote recently in Why Two New Disney+ Discount Deals Reflect Advantages Over Netflix:
Unlike Netflix, Disney does not need to build anything new (e.g. games) for this new generation of consumers. Rather, it can simply bundle existing value propositions in the middle to longer tail of its product offerings and create marginal revenues.
As the PARQOR Hypothesis sums up, Disney has a more dynamic and flexible business model than any of its competition in streaming. In large part, this is because it generates 40% of its operating income from theme parks.
Dead-Ends in Streaming
I think the macro doom-and gloom story about Netflix’s future and “Streaming Hits A Dead-End” has distracted from how, at the consumer level, dead-ends in the consumer experience are shaping emerging market and consumer dynamics (“Dead-Ends in Streaming”). These dead-ends are more iterative in nature, reflecting how consumer behaviors are evolving as a result of various user experiences across the streaming marketplace.
Dead-ends in User Experience (UX)
The main dead-end in streaming lies in the user experience (UX). As Randall Rothenberg tweeted, above, the streaming UX of every streaming app is a walled garden. That means, for the consumer, they are effectively navigating walled dead-ends (as I highlighted in Hulu Is The Future of Streaming Bundles).
Maybe certain aggregator interfaces like Comcast’s Xfinity, Amazon Prime Channels or Apple’s TV app help to reduce friction for consumers across streaming apps. But, the Electronic Programming Guide (EPG) may be a superior viewing experience than streaming apps because it offers a singular TV universe for finding content to consume, whereas apps are each and all non-interoperable universes.
Rothenberg envisions the outcome of “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."
Discount FASTs (especially Pluto and Tubi) at your own peril
Rothenberg argues that FASTs are better positioned than subscription streamers to capture consumers “as the singular “cable universe” continues its entropic spiral, as SVOD services encounter consumer price intolerance, and as regulatory pressures cut into the effectiveness & advantaged pricing of digital audience targeting”.
The emergence of streaming apps have brought real competition, at scale, to the EPG and the passive viewing experience it enables. But, FASTs are bringing it back in a new form, for free, and are creating competition for both the linear EPG and subscription streaming services at scale (Pluto TV has 68MM subscribers worldwide, up nearly 6.25% in one quarter).
The implication is that emerging competition between paid and free streaming services is not just about content but also about product. Users not only now face a choice between whether to pay for a service, but between passive, lean-back viewing experiences (FASTs) and more engaged, interactive viewing experiences (SVOD, AVOD).
If streaming is indeed hitting a dead-end as a business model while FASTs grow, then free, lean-back viewing experiences will continue to win and more engaged, lean-forward and interactive viewing experiences (SVOD, AVOD) will lose consumers.
Discount YouTube as a competitor at your own peril
I wrote in After Netflix's Self-Inflicted Wounds, Five Recommendations for Streaming CEOs, that, because free services may have more content than paid streaming services at a lower cost, “this will always be an advantage for YouTube”.
YouTube is a FAST and the largest one worldwide:
135MM CTV users in the U.S., alone
2MM content creators in YouTube's Partner Program 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%)
It also is approaching nearly 1B videos hosted on its platform, and a personalization algorithm that solves for dead ends.
But the second bullet point is key: YouTube’s 2MM content creators are moving closer to Hollywood’s model than Hollywood is moving toward YouTube’s. Every SVOD, AVOD and FAST competing with YouTube isn’t competing with a platform. Rather, it is competing with millions of talented creators with enormous followings and the ability to gather millions of views. The cost to YouTube is minimal - effectively creator funds and agency-like services for those creators.
All this suggests that, as the twin market dynamics of streaming hitting a dead-end and dead-ends in streaming kick in, YouTube is best-positioned to survive these market dynamics in the long-term because of its scale, its outsourced content creation model, and its platform economics.
The PARQOR Hypothesis & the impact of dead-ends in streaming
The PARQOR Hypothesis argues that the media businesses most likely to succeed in streaming and beyond must meet five attributes, and highlights any missing pieces they (arguably) may need to solve to optimally succeed.
Those attributes are summed up in the BEADS acronym:
an Aspirational Brand
Existing user base at scale
Multiple Avenues to monetizing the same IP, and
Daily value proposition (something new for fans to consume daily)
Sales Channels: Online (digital) and offline (physical) commerce
The PARQOR Hypothesis scores Disney+ and Apple TV+ with 5 out of 5 BEADS attributes, followed by Amazon Prime Video and Comcast’s Peacock tied for 2nd with 4 out of 5 BEADS attributes. Paramount+ comes in third with 3.5 BEADS attributes.
That would imply that these four services (and possibly Paramount+) can survive the twin market dynamics of streaming hitting a dead-end and dead-ends in streaming. It also implies that current market leaders HBO Max and Netflix must solve for the BEADS attributes they are missing, or otherwise, their streaming models are on a path to hit a dead-end with consumers and investors.
These both suggest the subscription streaming marketplace will fragment based on those services that are able to expand the value proposition for the consumer into an ecosystem, and those services which are unable to do more.
Conclusion
The key phrase above is “the twin market dynamics of streaming hitting a dead-end and dead-ends in streaming”. They are not mutually exclusive trends, and are quite interdependent.
To date, subscription streaming models have offered consumers a simple value proposition and investors a simple story: can they continue to add subscribers and reduce churn? And if they can't either or both, then what will happen?
I think the market signals we get from the macro market dynamic of streaming hitting a dead-end all point to that simple business model no longer works for consumers, for investors, or surprisingly even for its Netflix, its most successful business.
The market signals we get from the micro market dynamic of dead-ends in streaming at the consumer level all suggest that the subscription model must evolve beyond offering streaming, only. Because that model is positioned to lose to free services that have more content and greater scale.
It is worth noting how two new discount deals from Disney, which I wrote about recently, may reflect an important market signal for both dynamics:
Disney+ subscribers can save up to 25% on their visits to Disney World theme parks most nights between July 8 through September 30, 2022; and,
A new National Geographic Premium with Disney+ subscription bundle
These two deals solve for dead-ends at the macro level and keep the consumer at the micro level, despite the limitations of the UX and a smaller library. Notably, Netflix is nowhere near being able to replicate this, while Comcast could across its Universal Theme Parks and Peacock, but has yet to signal any moves in this direction. Apple and Amazon have gone in a different direction, bundling streaming with other subscription services.