The transformation of the streaming business
Not long ago, everyone in the industry was wondering if streaming will kill broadcast television. Now, the more pressing question seems to be: ‘Is streaming killing streaming?’. And while linear TV continues to shrink and internet TV is constantly growing, the first signs of the streaming wars taking a turn are already visible. The largest entertainment companies operating the leading streamers have started adjusting their approach to the video-on-demand (VOD) business by limiting their content spending, laying off staff and… (the once unthinkable) looking to change their revenue model, by adding advertising.
This year Netflix announced it will limit growth on content spending, and fired about 150 people. Disney trimmed about $1 billion from its programming budget for this year. Warner Bros. Discovery chief David Zaslav has already axed costly trademark projects. Of course, those steps have not been caused only by the growing competition, with new streaming services constantly popping up, but also by inflation, rising costs and the general economic uncertainty that reigns today. To say this as simple as it is: most of the services borrowed money to fund content, looking for long-term growth, inspired by the growing number of subscribers but the current world economy has made those players to be much more prudent fiscally.
That doesn’t mean Netflix, Disney, HBO Max, Apple or Amazon will stop spending huge amounts of money automatically. The indications so far are that Disney will spend $7 billion more than in 2021 - it expects to spend “approximately $33 billion” in content this year, including sports rights. In 2021, Netflix invested more than $17 billion into streaming shows and movies, in line with its 2020 spend but for 2022 it has not released a guidance but experts that amount to be the same as last year. Despite the rumors of cutting back spending on content, WarnerMedia will spend over $18 billion on content this year. That includes HBO and HBO Max, the Turner networks (including CNN and CNN+) and the Warner Bros. studio. Amazon Prime’s total content spend on “video and music” was $13 billion in 2021, up from $11 billion in 2020. The content spend for 2022 will be on par. Apple, which is the richest company of all streaming operators with a market cap of $2.7 trillion, does not reveal content spend details about its Apple TV+ service but by its launch, it had invested $6 billion for that purpose. Peacock forecasts a content spend of $3 billion in 2022, double last year’s number and its goal is to reach $5 billion in annual spending “over the next couple of years.” ViacomCBS (Paramount+) spent $14.7 billion on content in 2021. Of that sum, $2.2 billion was for DTC movies and shows; it now expects DTC content spend to ramp up to $6 billion in 2024. Streamers are expected to spend well over $50 billion on content this year — a very conservative estimate, but one that gives leeway for those that decline to provide guidance.
Despite cutbacks, cancellations and layoffs (and even not launching services in some territories, like HBO Max in Turkey) and most recently the war in Ukraine, streaming services are expected to spend more than ever on original productions next year. Ampere Analysis said that major streaming services will spend more than $23 billion on original content – 10% more than this year’s spending, and more than double what the companies spent on original content in 2019. HBO Max and Amazon will spend the most in 2023 on original content, at more than $6 billion and $5 billion respectively, according to Ampere. Ampere’s data shows Netflix still leads the pack with most new titles, doubling Amazon’s total, which comes in second.
“The business model isn’t as attractive as once thought due to the intensifying competition for time, attention and consumer spending,” wrote Robert Fishman and Michael Nathanson of MoffettNathanson in a recent report. The firm recently lowered its target stock price for Walt Disney Co., Paramount Global and AMC Networks. And while streaming may not be one the most attractive objects on the stock market anymore, there is no shortage of players interested in investing in entertainment. Consumers love the convenience, choice and quality that streaming provides to their TV viewing experience. And as people cut down on their monthly subscriptions, streamers are fighting to retain their audiences and steal new ones. That means spending on big, attention-grabbing productions like HBO Max’s House of the Dragon, the Game of Thrones prequel series, which will cost $20 million per episode, and Amazon’s The Rings of Power, the Lord of the Rings prequel series, which will cost $58 million per episode for a promised five seasons.
“What we’re seeing right now is kind of a turning point for all the platforms to realize that just continuing to try to go get new customers by spending a lot of money on original content is eventually going to run out of steam,” said Kevin Westcott, a vice chair and U.S. technology, media and telecom leader at Deloitte.
Several executives at Netflix’s competitors, who spoke to The Times on the condition of anonymity, say they are keeping their foot on the gas when it comes to spending. They added millions of subscribers in the same quarterly period that Netflix saw declines. Of course, any notion of cutting back on program expenses comes with the risk that other rivals will not let up. Disarmament does not appear to be an option in the streaming wars.
At the same time, competitors are hoping the downturn at Netflix will force the company to rethink its free-spending ways and bring some relief to the rest of the industry. Netflix has already started to cut back on some projects and its competitors believe they have seen the last of the company’s massive overall production deals (including $300 million for Ryan Murphy).
While some industry analysts believe subscription prices will continue to rise, companies are looking to provide alternative revenue sources. Netflix customers have grown accustomed to watching shows without commercials. But some might be willing to put up with ads in return for a subscription offered at a lower price, which Netflix Co-Chief Executive Reed Hastings said is under consideration.
Omdia Senior Research Director, Maria Rua Aguete said: “Netflix is expected to generate just under a quarter of its revenue from advertising by 2027 in the US. With growth in SVOD expected to increase from $86 billion in 2022 to $118 billion in 2027, it comes as no surprise that all the major SVOD services including Netflix want to take part in that growth.”
Omdia estimates that by 2027 nearly 60% of global Netflix subscribers will be on the ad-supported tier. This change will happen through a combination of new subscriber acquisition and “downgrading” of existing subscribers to ad-tier. The research company expects Netflix to cap instream video ad loads and refrain from introducing ads in the user interface to maintain the premium consumer experience, particularly internationally, where hybrid models are not fully established.
In the U.S., about 60% of customers surveyed by Deloitte said they would prefer an ad-supported streaming option; cost is a top reason why people cancel a streaming service. Peacock, HBO Max and Paramount+ already have ad-supported versions of their services and Disney+ has announced plans to launch a similar tier as well. Amazon has rechristened its free ad-supported streaming service IMDb TV as Amazon Freevee.
Executives also expect Netflix and others to start selling programs to cable and broadcast channels, rather than keeping them behind a subscription paywall indefinitely. “You have to be able to sell your shows,” said a veteran TV executive who works for one of the streaming companies. “One company can’t take on all of the cost of these shows.”
Also, some streamers have moved away from dropping all episodes of an entire series at once and are releasing one episode a week, similar to traditional television. “People talk about it in their social media or with their friends and build momentum,” Deloitte’s Westcott said, adding it could grow the show’s audience and keep people engaged longer.
Younger, technologically savvy consumers are more apt to quickly cancel plans after their favorite series airs, and then join a rival service, analysts note. The average churn rate in the U.S. is 37% and is even higher for Gen Z (people born between 1997 and 2007) and millennials (people born between 1983 and 1996), at 50%, according to Deloitte.
“What the behavior is of those younger generations is they’re subscribing to the service to get that original content, they’re watching it, then they’re canceling that service and moving off,” Westcott said, adding the average household has four video subscriptions. “What we see is, people are switching in and out all the time. That’s a very costly model for the streamers.”
Netflix has been investing in mobile games and has acquired several game-related companies. Churn rates on game subscriptions tend to be lower than video, in part because younger generations of consumers enjoy interacting with people on games and they build their social circles around that, according to Westcott.
While streaming platforms try to mitigate rising costs and present more options for consumers, the ultimate goal of being among the five or six top choices for the subscription dollars remains the same.
Half a dozen of services is considered the high end of the number of subscriptions households are willing to take on (those that don’t make the cut could find themselves looking for merger partners). Being included in that select group will become more crucial, as the next step in the streaming business is the packaging of services that can be marketed and sold by broadband service providers to consumers, presumably at a discount.
The concept, expected to roll out this year, sounds like a new version of the cable bundle. In television, the old rules for making money always have a way of coming back.
At the same time, the new shows are being served up to consumers at subsidized prices by streaming platforms making record losses. The only profitable exception is Netflix, but the industry pioneer’s market value has plunged almost $200 billion over the past year because of slowing subscriber growth. Its share price is languishing at a four-year low. Faith in the streaming business model — and investor tolerance for profligate spending — has waned as Netflix’s once-blistering subscription growth has gone into reverse.
Warner, meanwhile, has embarked on aggressive cuts and other “course-correction measures” to squeeze out at least $3 billion in annual savings by 2024, a target it described as “conservative”. Through greater efficiency and more demanding pricing, Warner’s aim is to drive the HBO Max streaming service towards a long-term profit margin of 20% plus. David Zaslav, Warner’s chief executive, has even demonstrated a willingness to wield the axe himself on content he finds lacking. He sent a chill through Hollywood by shelving Batgirl, a $90 million movie that the studio had already started marketing, and taking a tax write-off instead.
All the big media players are putting the brakes on spending growth. Outlay on original productions is still expected to increase next year, but at a much slower pace of growth than the explosive early days of the streaming wars. The second quarter of 2022 had the highest number of total commissions of any quarter since the start of the streaming wars in 2019, with 415 projects given the green light, according to Ampere. But the growth is principally driven by Apple and Amazon, deep-pocketed tech groups that are only dabbling in the media business. The rate of commissions at Netflix and Disney has fallen from previous highs.
Premiums for producers are also coming down. Where a project might have once secured a 20 or 30% fee on top of costs, that is now more likely to be closer to 10%. “Blockbusters are the best way to keep your subscribers,” Robert Thompson, Syracuse University professor of television and popular culture, told the Financial Times. “If the studios have to cut budgets, it will be on the shows that have smaller budgets — the quirky, smaller shows that have enriched the streaming experience.”
This year Netflix announced it will limit growth on content spending, and fired about 150 people. Disney trimmed about $1 billion from its programming budget for this year. Warner Bros. Discovery chief David Zaslav has already axed costly trademark projects. Of course, those steps have not been caused only by the growing competition, with new streaming services constantly popping up, but also by inflation, rising costs and the general economic uncertainty that reigns today. To say this as simple as it is: most of the services borrowed money to fund content, looking for long-term growth, inspired by the growing number of subscribers but the current world economy has made those players to be much more prudent fiscally.
That doesn’t mean Netflix, Disney, HBO Max, Apple or Amazon will stop spending huge amounts of money automatically. The indications so far are that Disney will spend $7 billion more than in 2021 - it expects to spend “approximately $33 billion” in content this year, including sports rights. In 2021, Netflix invested more than $17 billion into streaming shows and movies, in line with its 2020 spend but for 2022 it has not released a guidance but experts that amount to be the same as last year. Despite the rumors of cutting back spending on content, WarnerMedia will spend over $18 billion on content this year. That includes HBO and HBO Max, the Turner networks (including CNN and CNN+) and the Warner Bros. studio. Amazon Prime’s total content spend on “video and music” was $13 billion in 2021, up from $11 billion in 2020. The content spend for 2022 will be on par. Apple, which is the richest company of all streaming operators with a market cap of $2.7 trillion, does not reveal content spend details about its Apple TV+ service but by its launch, it had invested $6 billion for that purpose. Peacock forecasts a content spend of $3 billion in 2022, double last year’s number and its goal is to reach $5 billion in annual spending “over the next couple of years.” ViacomCBS (Paramount+) spent $14.7 billion on content in 2021. Of that sum, $2.2 billion was for DTC movies and shows; it now expects DTC content spend to ramp up to $6 billion in 2024. Streamers are expected to spend well over $50 billion on content this year — a very conservative estimate, but one that gives leeway for those that decline to provide guidance.
Despite cutbacks, cancellations and layoffs (and even not launching services in some territories, like HBO Max in Turkey) and most recently the war in Ukraine, streaming services are expected to spend more than ever on original productions next year. Ampere Analysis said that major streaming services will spend more than $23 billion on original content – 10% more than this year’s spending, and more than double what the companies spent on original content in 2019. HBO Max and Amazon will spend the most in 2023 on original content, at more than $6 billion and $5 billion respectively, according to Ampere. Ampere’s data shows Netflix still leads the pack with most new titles, doubling Amazon’s total, which comes in second.
Lord of the Rings: The Rings of Power
“The business model isn’t as attractive as once thought due to the intensifying competition for time, attention and consumer spending,” wrote Robert Fishman and Michael Nathanson of MoffettNathanson in a recent report. The firm recently lowered its target stock price for Walt Disney Co., Paramount Global and AMC Networks. And while streaming may not be one the most attractive objects on the stock market anymore, there is no shortage of players interested in investing in entertainment. Consumers love the convenience, choice and quality that streaming provides to their TV viewing experience. And as people cut down on their monthly subscriptions, streamers are fighting to retain their audiences and steal new ones. That means spending on big, attention-grabbing productions like HBO Max’s House of the Dragon, the Game of Thrones prequel series, which will cost $20 million per episode, and Amazon’s The Rings of Power, the Lord of the Rings prequel series, which will cost $58 million per episode for a promised five seasons.
“What we’re seeing right now is kind of a turning point for all the platforms to realize that just continuing to try to go get new customers by spending a lot of money on original content is eventually going to run out of steam,” said Kevin Westcott, a vice chair and U.S. technology, media and telecom leader at Deloitte.
Several executives at Netflix’s competitors, who spoke to The Times on the condition of anonymity, say they are keeping their foot on the gas when it comes to spending. They added millions of subscribers in the same quarterly period that Netflix saw declines. Of course, any notion of cutting back on program expenses comes with the risk that other rivals will not let up. Disarmament does not appear to be an option in the streaming wars.
At the same time, competitors are hoping the downturn at Netflix will force the company to rethink its free-spending ways and bring some relief to the rest of the industry. Netflix has already started to cut back on some projects and its competitors believe they have seen the last of the company’s massive overall production deals (including $300 million for Ryan Murphy).
While some industry analysts believe subscription prices will continue to rise, companies are looking to provide alternative revenue sources. Netflix customers have grown accustomed to watching shows without commercials. But some might be willing to put up with ads in return for a subscription offered at a lower price, which Netflix Co-Chief Executive Reed Hastings said is under consideration.
Omdia Senior Research Director, Maria Rua Aguete said: “Netflix is expected to generate just under a quarter of its revenue from advertising by 2027 in the US. With growth in SVOD expected to increase from $86 billion in 2022 to $118 billion in 2027, it comes as no surprise that all the major SVOD services including Netflix want to take part in that growth.”
Omdia estimates that by 2027 nearly 60% of global Netflix subscribers will be on the ad-supported tier. This change will happen through a combination of new subscriber acquisition and “downgrading” of existing subscribers to ad-tier. The research company expects Netflix to cap instream video ad loads and refrain from introducing ads in the user interface to maintain the premium consumer experience, particularly internationally, where hybrid models are not fully established.
House of the Dragon
In the U.S., about 60% of customers surveyed by Deloitte said they would prefer an ad-supported streaming option; cost is a top reason why people cancel a streaming service. Peacock, HBO Max and Paramount+ already have ad-supported versions of their services and Disney+ has announced plans to launch a similar tier as well. Amazon has rechristened its free ad-supported streaming service IMDb TV as Amazon Freevee.
Executives also expect Netflix and others to start selling programs to cable and broadcast channels, rather than keeping them behind a subscription paywall indefinitely. “You have to be able to sell your shows,” said a veteran TV executive who works for one of the streaming companies. “One company can’t take on all of the cost of these shows.”
Also, some streamers have moved away from dropping all episodes of an entire series at once and are releasing one episode a week, similar to traditional television. “People talk about it in their social media or with their friends and build momentum,” Deloitte’s Westcott said, adding it could grow the show’s audience and keep people engaged longer.
Younger, technologically savvy consumers are more apt to quickly cancel plans after their favorite series airs, and then join a rival service, analysts note. The average churn rate in the U.S. is 37% and is even higher for Gen Z (people born between 1997 and 2007) and millennials (people born between 1983 and 1996), at 50%, according to Deloitte.
“What the behavior is of those younger generations is they’re subscribing to the service to get that original content, they’re watching it, then they’re canceling that service and moving off,” Westcott said, adding the average household has four video subscriptions. “What we see is, people are switching in and out all the time. That’s a very costly model for the streamers.”
Netflix has been investing in mobile games and has acquired several game-related companies. Churn rates on game subscriptions tend to be lower than video, in part because younger generations of consumers enjoy interacting with people on games and they build their social circles around that, according to Westcott.
While streaming platforms try to mitigate rising costs and present more options for consumers, the ultimate goal of being among the five or six top choices for the subscription dollars remains the same.
Half a dozen of services is considered the high end of the number of subscriptions households are willing to take on (those that don’t make the cut could find themselves looking for merger partners). Being included in that select group will become more crucial, as the next step in the streaming business is the packaging of services that can be marketed and sold by broadband service providers to consumers, presumably at a discount.
The concept, expected to roll out this year, sounds like a new version of the cable bundle. In television, the old rules for making money always have a way of coming back.
At the same time, the new shows are being served up to consumers at subsidized prices by streaming platforms making record losses. The only profitable exception is Netflix, but the industry pioneer’s market value has plunged almost $200 billion over the past year because of slowing subscriber growth. Its share price is languishing at a four-year low. Faith in the streaming business model — and investor tolerance for profligate spending — has waned as Netflix’s once-blistering subscription growth has gone into reverse.
Warner, meanwhile, has embarked on aggressive cuts and other “course-correction measures” to squeeze out at least $3 billion in annual savings by 2024, a target it described as “conservative”. Through greater efficiency and more demanding pricing, Warner’s aim is to drive the HBO Max streaming service towards a long-term profit margin of 20% plus. David Zaslav, Warner’s chief executive, has even demonstrated a willingness to wield the axe himself on content he finds lacking. He sent a chill through Hollywood by shelving Batgirl, a $90 million movie that the studio had already started marketing, and taking a tax write-off instead.
All the big media players are putting the brakes on spending growth. Outlay on original productions is still expected to increase next year, but at a much slower pace of growth than the explosive early days of the streaming wars. The second quarter of 2022 had the highest number of total commissions of any quarter since the start of the streaming wars in 2019, with 415 projects given the green light, according to Ampere. But the growth is principally driven by Apple and Amazon, deep-pocketed tech groups that are only dabbling in the media business. The rate of commissions at Netflix and Disney has fallen from previous highs.
Premiums for producers are also coming down. Where a project might have once secured a 20 or 30% fee on top of costs, that is now more likely to be closer to 10%. “Blockbusters are the best way to keep your subscribers,” Robert Thompson, Syracuse University professor of television and popular culture, told the Financial Times. “If the studios have to cut budgets, it will be on the shows that have smaller budgets — the quirky, smaller shows that have enriched the streaming experience.”
