Member Mailing: Wholesale Media Execs, Churn & Netflix's Total Addressable Market (TAM)
Good afternoon!
The Medium identifies a few key trends each fiscal quarter that reveal the most important tensions and seismic shifts in the rapidly and dramatically changing media marketplace. The key trends help you answer a simple question: "What's next for media, and where's it all going? How are the pieces lining up for business models to evolve, succeed, or fail?"
Read the three key trends The Medium will be focused on in Q3 2023. This essay focuses on "Legacy media companies are throwing in the towel on their bets to own the consumer relationship in streaming and beyond" and "There is a less-discussed lens on how the demand for 'premium content' is being redefined by creators, tech companies and 10 million emerging advertisers."
Netflix has set the market standard for the Total Addressable Market (TAM) for streaming or really any media company: 190 countries not including China, Crimea, North Korea, Russia or Syria. Netflix CFO Spencer Neumann told last year’s Morgan Stanley’s Technology, Media & Telecom Conference that they envision the TAM in household terms as 700 million pay-TV households and 1 billion broadband households outside of China.
Back in 2021, Warner Bros. Discovery CEO David Zaslav believed the merger of WarnerMedia and Discovery could eventually attract 400 million streaming video subscribers worldwide. Disney projected 300 to 350 million subscribers by 2024 across Disney+, Hulu and ESPN+ in its Disney Investor Day in 2020. Fast forward to today, neither Warner Bros. Discovery’s nor Disney’s projections hold up.
Previous Disney CEO Bob Chapek was ousted last November in part because management disagreed with his projections for Disney streaming of a less ambitious outcome of between 230 million and 260 million subscribers by September 2024. Now, 10 months later, his predecessor and successor Bob Iger told investors that they have pared back their Netflix-like international ambitions:
“[T]here are some markets that we will invest less in local programming but still maintain the service. There are some markets that we may not have a service at all. And there are others that we'll consider, I'll call it, high-potential markets where we'll invest nicely for local programming, marketing and basically full-service content in those markets.”
Warner Bros. Discovery has lost nearly 2 million subscribers since the relaunch and rebranding of HBO Max to Max back in May, and management has also pulled back on international expansion plans. So, the logical question is, how did the wholesale legacy media guys get the TAM for a retail media business like streaming so wrong?
Key Takeaway
The wholesale guys did not get TAM wrong, they simply have not and continue not to invest in what the new medium of the Internet requires them to master in order to grow.
Total words: 2,100
Total time reading: 8 minutes
A Quick Primer on TAM
It is worth quickly summarizing how and why TAM is so important. It is a tool for estimating the market size or opportunity for a potential business. Andreessen Horowitz (a16z) has a good simple overview of TAM, arguing: “While there are a few ways to size a market, we like seeing a bottoms-up analysis, which takes into account your target customer profile, their willingness to pay for your product or service, and how you will market and sell your product. By contrast, a top-down analysis calculates TAM based on market share and a total market size.”
They note that “using the size of an existing market might actually understate the opportunity of new business models.” So, a service or product that “provides an order of magnitude better functionality than existing options (like eBay relative to traditional collectible/antique dealers) can also grow the market.”
TAM is a guideline for investors to project growth. It is hard to argue that anyone in legacy media is guilty of purposefully misstating TAM. Most good pieces on the topic acknowledge how estimating TAM is as much an art as it is a science. Asking a question like “How did the wholesale legacy media guys get the TAM for a retail media business like streaming so wrong?” acknowledges that there is an element of salesmanship to TAM, but there is also research behind it.
The Gauge & Antenna Data
Nielsen’s newest monthly The Gauge came out on Monday. It reported YouTube has surpassed 9% of total television consumption time, and Netflix has reached a new high of 8.5%. The next highest was Disney’s acquired platform Hulu at 3.6%, Amazon Prime Video at 3.4% and then Disney+ at 2%. That means every legacy media streaming platform has flattened out at less than 2% of TV consumption across the U.S., or an afterthought for most TV viewers.
Yesterday, subscription streaming research firm Antenna released churn data that the weighted average of churn in the U.S. has increased +34.5% YoY from 4.6% in June ‘22 to 6.1% in June ‘23. Every Premium SVOD (except Peacock) has seen an increase in churn since June 22. Antenna suggested that price increases in response to investor demands for profitability have been a factor.
Together, both sets of data offer complementary lenses on the same problem. For example, Antenna data shows that Paramount+ has a nearly 8% churn rate and its Showtime app has a churn rate of over 9%. Meanwhile, Nielsen shows Paramount+ at 1% of total television consumption. But Paramount has recently increased the prices of both its ad-supported tier and a new ad-free premium tier, Paramount+with Showtime.
Price increases typically reflect inelastic demand and market data for the U.S. shows how Paramount+ does not have that. Also, internationally, Paramount+ has relied on “hard bundles” — when a streamer works with a local provider “to give their customers immediate access to a streaming service (e.g., Paramount+), as well as direct-to-consumer and à la carte distribution or sometimes a hybrid of all three" — to achieve growth. Both data points suggest Paramount+ is utility used on an as-needed basis rather than a must-have for consumers. There are similar stories in the data for Disney+ and Max, both of which have low usage on TVs and higher churn than Netflix’s ~3.5% (Max at 6% and Disney+ at just under 5%).
Also, Nielsen data is showing that free services are competing neck-and-neck with paid services. Tubi is performing better than Max, Peacock and Paramount+. The Roku Channel is performing better than Paramount+. There is some market dynamic driving consumers to free services on TVs, which is still the most valuable real estate for advertisers.
Why Increase Prices *Now*?
In this light, one logical question is: Why are we seeing Paramount, Disney and Warner Bros. Discovery raise prices in the face of flattening growth? Because increasing prices on obviously elastic demand risks killing their ability to reach their projected TAM, both domestically and globally.
We do not have much available data on demand for these streaming services, but the data we do have tells us that the demand for streaming services in the U.S. is elastic and not inelastic. Internationally, there is also unmet demand but it is not inelastic. For example, international growth is effectively flat for Disney, having lost 18 million subscribers from Disney+ Hotstar year-over-year (due to the loss of Indian Premier League cricket) and only grown Disney+ by 600,000 subscribers over the past quarter and 13% year-over-year. The path to 1 billion subscribers seems more academic than practical at this point.
In another sense, price increases are not an ill-considered tactic. Around two-thirds of Hulu’s U.S. subscriber base is ad-supported, and its ARPU is typically almost double the base price of its ad-supported tier (previously $6.99 and now $7.99 per month). As I wrote in January 2022:
Hulu reported an ARPU of $12.75 in FY Q1 2022 on a higher monthly price of $6.99 for its ad-supported offering. Assuming two-thirds of its audience chose the ad-supported model, again, Hulu generated $15.58 off of its ad-supported offering, or $8.59 in ad revenue per user over the quarter (up from $8.27 or 4% from Q1 2021).
The Nielsen data on FASTs suggests that streaming consumers will tolerate ads to watch content. Netflix has doubled ad-supported subscribers in a handful of markets from 5 million to 10 million in one quarter. Disney+ has reported a gain of 3.3 million ad-supported subscribers in the past quarter, and that 40% of new subscribers have signed up for the ad-supported tier.
This would imply steep price increases on ad-free premium tiers from Disney (up $3 for both Hulu ($17.99) and Disney+($13.99)), Paramount (up $2 to $11.99 for Paramount+ with Showtime) and Warner Bros. Discovery ($1 for Max and a $5 increase for Max Premium at $19.99) especially are intended to push subscribers to its ad-supported tiers for the purposes of monetizing them better. But the internet as a medium forces them to compete with free services that can scale and engage those same consumers, too.
Enter McLuhan
It could be said that to their credit, the wholesale guys were right to parrot Netflix and Netflix management were the ones who got TAM wrong. But that argument misses a key nuance: Netflix sort of got the TAM wrong in the sense that it miscalculated demand for an ad-supported tier. But then it rapidly built out the technology within its proprietary back-end, then partnered with Microsoft for ad delivery, and now over 4% of its user base is on an ad-supported tier.
That move revealed what the wholesale guys got wrong: The medium is the message, and Netflix’s TAM was predicated on mastering the technology of the Internet as it became the new medium for content distribution. As Netflix management wrote in its recent letter to shareholders:
“Long term success takes strength in both entertainment and technology, a combination that’s not been required of large media or tech companies in the past. It’s about one’s ability to work with the best creators; to produce and license movies, TV shows and ultimately games across multiple genres and languages globally; to create a stellar discovery engine; to build great partnerships and payments systems; and to continually pierce the zeitgeist with consumer passion and fandom.”
That detailed list is as “the medium is the message” a sales pitch as you may read in streaming. Meaning, the mistake wholesale legacy media leaders made in their estimates of streaming TAM is that they misunderstood the internet as a one-to-one replacement for cable distribution.
Commoditized technological solutions have allowed legacy media streamers to piece together competitive streaming services, but that has not changed the constant need to invest more deeply in the shift from wholesale to retail. Legacy media management teams also have been proven to be less invested in delivering “great” solutions like Netflix, as reflected in the fact that the user interface of every legacy media app looks and operates almost exactly like each other. Technologically, the linear wholesale model relies on cable distributors “to create a stellar discovery engine” or “to build great partnerships and payments systems”.
Effectively, they have failed to invest in better understanding and adapting to what Marshall McLuhan described as the “active processes which are invisible” in this new distribution environment. Discovery, payment, fandom, gaming… Netflix provides a list of the elements of the medium they have invested in mastering to keep their TAM expanding when everyone else’s is reducing. The wholesale guys did not get TAM wrong, they simply have not and continue not to invest in what the new medium of the Internet requires them to master in order to grow.
Management’s Self-Preservation
This last point calls to mind an argument made back in January 2022 by The Wall Street Journal’s Holman W. Jenkins, Jr. He was then focused on the question of why shareholders were not more enthusiastic for AT&T’s unwinding of its $85.4 billion acquisition of Time Warner. Jenkins argued that at the root of AT&T’s decision was management’s “unwillingness to resolve a corporate governance conundrum”:
It could not make the necessary investments in both its telecom and its Hollywood properties while continuing to pay the large dividend that a certain class of AT&T shareholder was expecting. Fifty years of Nobel Prize-winning financial economics provides an answer: So what? Cut the dividend and AT&T will attract new shareholders who value its growth opportunities. But it’s hard also to escape a suspicion that AT&T management recognized that new investors would want new managers for new opportunities, not a bunch of telecom veterans. In short, AT&T is proceeding with its chaotic unmerger so AT&T can go back to being a company that the market will let AT&T’s current leaders keep running.
Ultimately, Jenkins is highlighting one good answer why the wholesale legacy media guys got the TAM for a retail media business like streaming so wrong. If they had gotten the TAM right, and invested properly in the business to have produced a growth model, they would be out of their jobs once new investors understood that the wholesale guys lacked the requisite skills for a retail world.
The implication is not that the TAM is small for legacy media company streamers — something that Netflix suggests is not true in its descriptions of “an intensely competitive” marketplace — but rather that the TAM is limited by the wholesale guys managing retail businesses towards the limits of their wholesale skillsets. There may be no better example than Robert Iger, who laid the conditions for his return from behind the scenes by actively undermining his retail-first successor Bob Chapek.
So, the wholesale guys may not have gotten the TAM wrong. Rather, it’s that the wholesale guys are the wrong guys with the wrong incentives for building growth models towards the TAM Netflix envisioned.