THB ICYMI: The 10 Myths of Streaming
Not enough people read this. It’s a lot. But it’s post-Super Bowl and not posted late at night, so let’s try one more bite at this apple before I let it disappear into the sinkhole of my newsletter history.
You Need To Ramp Up Spending Wildly To Attract An Audience
Where did this one start? What was the foundation?
Like so many things that Wall St and The Media have wrong about this unstoppable evolution to television from “linear” to streaming, the example of Netflix led them down the primrose path.
Analysts like “Always Wrong” Rich Greenfield, still giggling like a child with a crush over Netflix and its success (and his building of a profile based on being the #1 Netflix fanboy), saw Netflix growing its annual spend and then came up with a magical and unsupportable projection of how many households Netflix could expand into worldwide, and leapt to the argument that as growth continued, spending would continue apace and this would be good business.
But Rich forgot that gravity exists.
However, like the Pied Piper, he led most people in media and a lot of people on Wall Street into believing this was an unavoidable fact of the streaming future.
It is absolutely true that you can malnourished your streamer and its growth with it. Yes. Clearly.
But the mindset that keeps getting repeated like a mantra of blind acquiescence is more reminiscent of an NFT salesman than a successful businessperson. The idea of being first in the market and finding suckers who will buy into your hype is not new and it is a legitimate business model to get rich quick.
But there is no serious business argument - aside from it distracting Wall St - for the floor on original content spending being $15 billion a year for a streamer in an eco-system where the maturing, long-standing leader in the industry has yet to hit $30 billion in revenue in a year. It’s stupid.
And of course, there is this… Netflix is cutting back, not pushing forward on content spending. The increased focus on content production in/for other countries than the U.S. is actually a way of saving money, not spending more. Everywhere in the world is a cheaper place to product content than America. Everywhere.
Netflix apparently spent under $3 million an hour for Squid Game. There is not a “Hollywood”-made series on the channel that they have pay as little for, going all the way back to House of Cards.
And it makes perfect sense. Netflix can produce/buy 3 or 4 series from other countries at the cost of 1 show made in the “Hollywood” system. That gives them 3 or 4 shots at a surprise hit like Squid Game as opposed to an all-American homegrown show.
But let’s push away from Netflix for a moment. I will address this all in other Myth segments here, but each of the other major streaming players is bringing their own unique combination of legacy content and originals to the table. Whether its sport rights or a popular IP library or documentary content or whatever, each is bundling (that word!) their own combination of content and taking it to market with a different pitch.
As we learned decade after decade after decade in ol’ school TV, entire networks that are failing can be turned around almost overnight by 2 or 3 hit shows. Those shows don’t have to be the most expensive. Sometimes they are. Friends and Seinfeld were not… but ER was… but it still wasn’t a show that cost a billion dollars.
You can’t buy your way out of failure. And you can’t cheap your way out either. You can spend fortunes expanding your number of times at bat, which does improve your odds of a hit. Or you can buy the best talent to try to improve your odds. (ShondaLand, yes. Ryan Murphy, not so much.) But a half dozen real hits a year will be able to drive any streamer. How you spend to get there is not a set reality.
Acquisitions Will Fix What Ails Your Platform
There have been 2 major acquisitions in this space.
1. Disney buying Fox assets. 2. Amazon buying MGM.
Disney had mighty IP, but a small library. Also, buying Fox gave them control of Hulu and Star and Hotstar, as well as the Fox TV production arm.
Amazon is also library light, but their primary value play with MGM seems to be acquiring IP and solid television production business.
The third event is Warner Media being spun off into a new business with Discovery. The purposes of this one seem to be a bet by AT&T that the new company can do better for the AT&T stockholders than continuing to operate Warner Media themselves.
The idea of a major studio with a library and IP aquiring a studio with a similar amount of the same, but no separate specific strategic purpose simply makes no sense. More of something that’s not quite working is not an advantage.
The constant focus of acquisition talk is on Viacom, Sony, and Lionsgate. Viacom is the only one with a broadcast network… but the general concensus is that broadcast networks will be reduced to brands in short order. None of the three have significant international assets. None of them have fungible sports assets (though CBS has rights to the NFL in its narrow context).
Netflix is a decade into their “build our own library” effort. And now, they are going to abandon that primary focus and spend 9 figures on a studio that has its own quirks and issues and culture and content that it hasn’t yet been able to maximize itself?
Who is selling this idea?
More importantly, why are so many buying it?
The World All Looks The Same
It doesn’t get discussed a lot, but the rest of the world is still as complicated as it has been for decades. Yesterday’s Disney quarterly pointed this out quite clearly, showing that Disney+ Hotstar, in India, has a $1.03 Average Revenue Per User, a point that went overlooked as the lede of most stories was about the overall subscriber count… 45.9 million of which came from India at that $1.03 ARPU.
Netflix, on the other hand, doesn’t break India out. They have been struggling there. But the region - how Netflix breaks things out - that contains India is one of their growth areas, especially in the last quarter. APAC (Asia Pacific) has “only” 33 million total subscribers - this includes Japan and South Korea - but they have the ARPU at $9.26. They have clearly made the choice that dragging down that ARPU isn’t worth the million of new members they could get in India. (There is a discussion about how much of Disney’s success and Netflix’s failure - chosen and not - is based on cricket rights. Different conversation.)
But one of the clouds hanging over everyone but Netflix and Disney+ (just that one Disney streaming channel) is pushing out ad-based streaming (AVOD) to the world. Obviously, there are ads everywhere in the world. But how universal can a Hulu-like package or a Pluto-like package or virtual cable like YouTubeTV be? Not very.
My ignorance in the arena of television advertising in other countries is profound. There are many experts. They will all be employed. Still, I soldier on…
Imagine a worldwide Netflix hit like Lupin playing on AVOD, with not only all the translations and subtitles, but with 14 minutes worth of ads every hour from 150 different countries. This is a feat that has yet to occur.
American content bundlers (studios/networks/producers) have sold off their content to other countries and let them deal with their individual markets. There are international bundlers who seek to buy up chunks of content, pay one price to the Americans, then sell it off country by country (kinda like drug dealers… buying pure and cutting the product to make a profit… hmmm…)
But it’s not just the ads that will be different in pretty much every single country. If these companies want to become core channels in other countries, they need to program locally as well as worldwide.
We are in the fantasy period in which other countries are being mined by Netflix and the rest with some success. And I am thrilled by this. I want the whole of world content to be available to the whole of the world But at some point, there is going to be a lot spent on regional content that doesn’t translate well or at all to other regions, just as there have been American shows that have played well in some countries and not at all in others.
At the point in which that reality smashes into the whole of streaming, streamers will have to start to make choices and not service certain countries fully. This is where Netflix has an advantage by not being as ambitious as, say, Disney. They are growing and maintaining a library of “movies” and tv shows with a bit of concession to regional programming. But as in the UCAN (United States/Canada) market, they are not trying to be all things to all people in any of the regions.
As with all things streaming, Netflix is out ahead on this area too. They have certainly surveyed each country in great depth, even though they are not selling advertising. Pretty much all their sub growth in the last year has been in Europe, the Middle East and Africa (EMEA) and APAC. That’s a lot of territory. And without accusing Netflix of playing with the numbers (as some have), the reporting from the company is not very instructive of where the strength and weakness in these terrirories is.
This is somewhat like the expansion of movie theaters across the globe in the last 20 years. We went from a 50/50 split with international box office in 2001. By 2004, International had the 62/38 edge. In 2010, it was 67/33, international doubling doemstic for the first time. 2012, 70/30. And the peak, so far, was 73/27, almost 3 to 1, in 2017 and 2018. This is where television is heading. (And by “television,” I ultimately mean streaming.)
It was less complicated for theatrical. Fewer partners. Less governmental interference. Less competition within each country. Building 10,000 new screens in a country was seen as heroic, adding to the tax revenues and the culture. American streaming companies are paving over existing roads, creating more resistance. And they come in with expectations of how they can build financially, with not every local market a sure bet to be supportive.
It took many years for cable television to become available by 80%+ of America. City by city. Negotiation by negotiation. This is what faces the streamers, but whereas cable was forced to be considerate of local considerations, including content choices like all local channels, content rules, and cable access, streaming is the wild, wild west at this point. Anything goes. But that works both ways.
Successful/Surviving Streamers Will Play On The Same Ground
Big Con or Small Con.
That isn’t an insult. It’s a choice. Disney wants to build a bigger footprint worldwide than the one to which Netflix aspires. Sports. News. Leading Family Content Proivider. The Rest. Bigger risk. Maybe bigger reward. We don’t really know because Disney is really still in its streaming toddler years.
To do what Disney wants to do, they need all the other revenue streams - at least Parks and Merchandising - and structures (ESPN and ABC News) to make the risk (potentially) worth it.
I don’t think Netflix is going to be dragged into the Big Con. They are a great Small Con company… not unlike HBO has been for the last 30 years. $40 billion a year is nothing to sneeze at and that is where I think they will max out (until time revalues money). They would likely argue that $50 billion is within striking distance.
Disney is aiming at more like $100 billion a year, up from the current $60 billion or so.
Where will Comcast and Viacom land as they expand across the globe? Both seem more likely to lean heavily into the AVOD play over the SVOD (Subscription Video on Demand) model. But what will that mean?
Viacom could, in theory, push Pluto in other countries almost as is. Pick up streaming rights to old sitcoms and hourlongs from each country. Add them to the mix of classic Americana with subtitles (which likely already exist) and you have an interesting small-ish business. How much Paramount+ is involved? Which brand do they use? Could be different in different countries.
And what of Warner Bros Discovery? We all have a million questions about how they will operate, but the biggest question is what their level of ambition will be. We realy don’t know yet.
I have written before about how all of these companies can succeed by their own standards. The thing is, they MUST succeed by their own standards or they will die choking on the standards of others.
Disney+ Is The Primary Streaming Key For Disney
The Q1 Disney quarterly report makes plainly clear what has been obvious for a while. Disney+ may be the greatest bait ever… but the real money in the move to streaming for Disney is in the rest of their platforms.
This last quarter, “Linear Networks” aka ABC and cable, generated the most money for the company, $ 7.7 billion, $30 billion for the year. This number is expected to shrink, though the shrinkage is going slower than a lot of people expected. It is generating a healthy profit and streaming is still a few years from projected breakeven. Linear will eventually become all “DTC” Direct to Consumer. But managing that transition is a major part of the responsibility of Bob Chupak & Co for the next 5 years and likely more.
But that is not the myth I am looking to bust here.
Disney has a lot of room for fudging in the way they lay out the numbers. So none of this is gospel. However… domestically…
Disney+ generated an average of $6.68 a month per subscriber.
Hulu generated an average of $12.96 a month per subscriber.
ESPN+ generated $5.16 a month per subscriber.
Disney really needs all of that $24.80 a month from 70 million domestic households to get to $20.8 billion a year from the domestic DTC business.
Currently, Disney+ is generating about $3.44 billion a year domestically. Internationally, it’s generating about $3.12 billion a year (not including India).
Hulu (just the SVOD product) is generating about $6.4 billion year and is a domestic-only product.
ESPN+ generates $1.32 billion a year… to their linear side, which generates a broadly estimated $9 billion a year, which has dropped each of the last number of years.
Disney+ is the sexy sell. There is no brand in the space that owns a niche with nearly this muscle. But it has a natural cap.
Bob Chapek said in the investors’ call that a broader range of content would be hitting Disney+. With due respect, this makes little sense. Weakening the Disney brand to chase the bigger number that they need to get to is just not a great idea. As many quickly pointed out, why have they been pulling along Hulu if they are going to abandon finding Hulu’s unique voice?
Moreover, although the top Netflix subscription is now $20, The Disney Bundle is also right there if you chose Hulu without commercials. One of the advantages Disney has over Netflix is that 3 distinct brands suggests a better value proposition… at least, if they can keep clarifying Hulu and building on ESPN+, which is the one brand directly competing with its linear (more profitable) self.
Disney+ is doing great and brings all the boys (and girls) to the yard. But it’s less than a third of the DTC business that Disney is seeking, first in the United States.
And the real ambition is to bring the whole footprint to the rest of the world at what will surely be a lower ARPU, but to as much as 3x the domestic audience. A worldwide business that generates over $70 billion a year.
The Netflix Streaming 3.0/4.0 Model Is Something Others Can Recreate
I believe we are at the start of Netflix 4.0. DVD was 1.0. Streaming was Netflix 2.0. Original Content was 3.0. And now we are entering the maturing 4th phase of Netflix history. Building a bigger subscriber base is always a priority, but being a consistently profitable company is becoming the bigger priority.
That said, the opportunities that Netflix evolved with and built on are not there for other streaming companies, legacy-based or otherwise.
Market valuation will never be as high, vs earnings or revenues, as it has been for Netflix.
The interest rate will never be as lower - can’t be lower - than it has been for Netflix through their primary period of building a new content base and library.
No one else can ever be the first mover, benefiting from being a breakthrough product in every market as well as with the media, which continues to smooch up to Netflix like a first love.
And Netflix has had a wide berth in creating its voice as a content company that others could recreate, but will be challenged in doing.
Legacy has been a dirty word in the early days of this inevitable shift of all television. But the reality is that all the streamers, including Netflix, have ridden the wake of legacy media and the perceived value of content and talent (on camera and off) developed in the legacy media system.
Shonda Rhimes did not spring whole from the earth when Netflix decided to pay her a fortune to join their team. Eighteen seasons of Grey’s Anatomy may signal a show near its end… but that experience is one no showrunner is having at Netflix. The company isn’t remotely interested in have hundreds of episodes of any recorded series. Could change. Probably will not. The Netflix equivalent of 18 seasons of a show is maybe 6 seasons and 60 episodes of The Crown (up to 4/40 now).
Netflix is a unicorn. No one else gets to wear the horn.
Subscriber Figures Are The Key Stat That Matters
“Money don't matter tonight
It sure didn't matter yesterday
Just when you think you've got more than enough
That's when it all up and flies away”
- Prince, Money Don't Matter 2 Night
Not how businesses actually work.
We have gotten very used to the idea that Wall Street loves ideas more than it loves the ugly, grimy work of execution. It’s The Producers every day, intentionally or not.
I wish it was a more effective part of the Anna Delvey/Sorokin series on Netflix , Inventing Anna, but the willingness, even ambition to embrace The Next Big Thing, even when it makes no sense, is an epidemic amongst the rich. (The show ends up leaning much more heavily on the not-rich supporters of Anna.)
There are 2 separate ideas going at the same time, in terms of streaming. There is the ambition to be rewarded beyond all business reason, like they all see happening for Netflix. And there is the hard reality that if their models don’t become real and profitable businesses, they will be punished, by the market and everyone else.
There is a third idea, that is from another planet, that encompasses Apple and Amazon, for which streaming is a side hustle to a great extent.
Subscriber growth is very important, regardless of the model you are chasing. It is important for revenue and it will be of even more importance to take advantage of the AVOD business, where you are selling eyeballs to advertisers.
Subscribers are also important as we find balance in content matters. For instance, how many subs do you need before a day-n-date release of a “movie” is seriously undermined by your streamer. Netflix, which has taken a number of titles to as many as 800 domestic screens in the last few years, has yet to generate a box office gross worth telling the world about. On the other hand, were there enough paid Peacock subs to interfere with the release of Halloween Kills last October? And again… how much damage did Disney+ do to Encanto by promising a release by Christmas after a Thanksgiving week domestic theatrical release?
But I digress…
The key stat that will matter for streaming after the first 3 or 4 years of losses projected by every new streamer is… profit.
And again, our friends at Disney offered a perfect example in the last quarterly. India aka Disney+ Hotstar. 45.9 million subs. Biggest sub line for Disney DTC. But $1.03 ARPU.
Now, this may be the best that Disney or anyone else is going to get out of India. This will not be the last market with this kind of outlying stat. But $570 million a year gross from a market the size of of India isn’t making anyone in Burbank giggle with delight. Plus, there is a lot of talk that if Disney loses its cricket franchise (not Jiminy, the sport), that number will crater.
Point is, 35% of Disney+ subs generate a buck a month.
This is not the power stat moving forward. It’s just the first one we had.
Amazon and Apple Don’t Care About Making Money
Look at their financials.
The profits of Amazon, for instance, are not necessarily what you would expect. On the retail business, the operating income is less than 4% against net revenues. Internationally, it’s less than 1%. But AWS, their streaming services side, generates a 28% operating income on net revenues.
Amazon’s retail business is amazing… but it’s not exactly thrilling… even with $450 billion a year in net sales.
But the $50b - $60b internet business? Ka-ching!
Where does Netflix live in all this? Around 8% net on about half the revenues of AWS.
It is absolutely true that Apple and Amazon (and Netflix and Disney, etc) will spend an enormous amount to build their businesses, with some amount of fat that could be excised. But the number of pieces being juggled by these companies is massive. No one line of spending really matters… not even buying MGM/UA… and that is the 2nd biggest acquisition that Amazon has ever made.
How many billion a year would Apple or Amazon need to be spending on their consumer-facing streaming businesses to be considered important to those companies? Probably 5x what either is now spending.
IP Won’t Fade Like Movie Stars Have Faded
We are still in the era of IP obsession.
Let’s take a step back.
When DVD launched, making home entertainment a sell-thru consumer product for the first time, it outstripped theatrical revenues pretty quickly. It would later crash, but that isn’t the conversation for here and now.
When DVD rose, studios took 2 tracks aside from selling new content. One was trying to resell every piece of library material on a DVD, the new delivery system. The other was to mine every bit of IP they could find a writer or director to embrace.
The most remembered conceit in the game was The Disney Vault, which, starting with VHS, put classic titles into the marketing place for a brief window, after which it would be taken out of circulation for 7 years. The genius of this notion was best exploited in VHS, for which a new window of children would be born to Disney AND VHS tapes would be completely worn out. DVD didn’t work as well for Disney because discs lasted longer.
In any case, after a couple of years of distributors mining their film vaults, they were mining the depths of their TV vaults, maintaining the illusion for a couple of years that everything was hunky dory in DVD World. It wasn’t.
Meanwhile, CG landed, particularly with Spider-Man in 2002. We had already been though 3 Batmen by then. The international theatrical business meant more and more product was going to focus on a piece of IP or concept, rather than a star.
Pushing the industry further from the star system was the increasing price of star talent caused by the aforementioned DVD business. There was so much money in DVD that agents had figured out how to squeeze that money out of the studios before (and without regard to) the DVD release. That was the period when $20 million stars were the norm. But while we were being dazzled by the increased paychecks, the DVD market was fading from competition with itself and too many shelves filled with DVDs unwatched.
It all came to a head with 2006’s Mission: Impossible 3, when Sumner Redstone used Oprah couch-jumping as an excuse for separating from Tom Cruise, when the real issue was that Cruise took home $60 million - which factored in DVD in a big way - and the net from the theatrical release and the initial DVD sell-thru still left Paramount in the red.
Why tell you all that?
Things ebb and flow.
Netflix paid an insane about for the next 2 sequels to Knives Out. This was new turf for them, as they bought the franchise off the surprise success of the first film. But one of the reasons the company’s IP game has been seen as weak is that they have previously invested in flailing IP… like Adam Sandler. Now they have a Madea movie coming. They got Cobra Kai after it failed on YouTube Red, which has worked out.
The standard for success of Netflix or on other streamers is not what it once was. It may seem unfair to say that the bar is lower… but the bar is lower. You are pushing product to a captured audience of paid subscribers who see the internal promotion for shows over and over and over again. Show tourism by viewers is encouraged.
As a result, IP should work for Netflix, at least in terms of getting sampling over and over.
Netflix had 7 series that are on other networks or were on other networks that have been more viewed in 2021 than any Netflix Original series and 3 more in the top mix that are newly minted as Netflix Originals. But once you get to the Netflix hits, 5 of the Top 6 are not established IP. They are truly original… in that way. Squid Game, Virgin River, Bridgerton, You, The Crown.
Adam Sandler is nowhere to be found amongst the top streaming “movies” of 2021. He is still a good value play for Netflix. He has a solid audience that is happy to watch his new content as part of their sub experience.
Whatever bait you want to use to draw an audience, movie stars or IP, ebb and flow… ebb and flow.
Launching Original Movies On Streaming Pumps Up Sub Numbers
This is one of my pet peeves because there just isn’t evidence - at least public evidence - that this claim, used endlessly in the last 2 years of pandemic fun, has any basis in reality.
Disney has 11 of the Top 15 streaming movies in 2021 according to Nielsen. 8 of the 11 were not offered for free with subscription, day-n-date, by Disney. 5 of those 8 were released in theaters before Disney+ even launched.
Jason Kilar, at Warner Media, continues to claim that putting Warner Bros movies on HBO Max, day-n-date, was what built the streaming channel by 5.3 million domestic subscribers in 2021.
Estimates of how much was spent on HBO original programming in 2020 and 2021 and moving forward vary dramatically. We don’t really know. But how many billion did Kilar spend on HBO Max for original content if the WB movies are responsible for all the growth? Why spend it?
But this is a digression really. The question isn’t about nitpicking the past. It is about what the future will bring.
What the numbers suggest with the top Disney movies from the last year (inc early 2022), Luca and Encanto, is that the 2nd week of release is when they draw the biggest crowds. This jibes with Netflix, particularly on Squid Game. It’s similar to a theatrical hit. Opening is important, but word of mouth is what builds a real success.
So how do you best establish word of mouth? This is the debate of 2022 and 2023 to come.
One of the interesting things about Kilar’s Folly, aka Project Popcorn, is that Warners spent lavishly on marketing, even as they undercut their theatrical. All 18 of those movies at least had the spend to make it theatrically. Half of them got to $50m or more at the worldwide box office.
The two real hits during Project Popcorn Were Godzilla vs Kong and Dune. Both did just over $100m domestically in theaters. GvK did $368 million internationally and Dune did $291 million.
But what could they have done domestically without day-n-date and would the subscriber growth have been more positively affected by a greater theatrical success before the films showed up on HBO Max after a window, whether 45 days or longer?
Then the next question, whether I like it or not, is whether another $20 million or even $50 million at the box office really matters?
But then, the biggest question… does a movie with weeks of theatrical success have an even bigger impact if it hits streaming after that?
Remaking the Pay1 window that used to be on cable 9 months after theatrical release (it used to be longer) makes sense. It will cannibalize physical media sales, though those have become marginal. It costs you the outside revenue from whoever had the old Pay1 window. So all that is really left is the streaming window. And how we value that is an ongoing debate.
So the question remains, what is the audience interest value in a traditional theatrical release vs a release directly to streaming? We may not get that answer for a long time. But as of now, there is zero proof that dumping original movies meant for and of high enough quality of wide theatrical release drives and holds subscription numbers any more so than other, much cheaper, original content or library content that still drives a lot of views.