Streaming Services: Can Everybody Win?
During Morgan Stanley’s TMT investor conference last week, Disney CEO Bob Iger referred to commentary that other public companies have made about their streaming services, noting that “every one of them is going to be highly profitable in a couple of years and grow subs by the tens of millions. It can’t possibly happen…(They are) all seeking the same subscribers and in many cases competing for the same content. Not everybody is going to win.”
There is a lot to unpack in this statement, much of which I’ve looked at in depth before, and so I thought I’d revisit all of it here. Below are some of the recent totals, guidance or implied expectations that the largest media companies have provided around revenue and subscribers:
Comcast’s Peacock has implied (by way of commentary indicating its content budget would increase to $5 billion over the next couple of years, and assuming that 50-60% of revenue is allocated to content at Peacock as is the case for many other services) that it is aiming for around $8-9 billion of revenue in 2024. Presuming around half of this figure would originate from subscriptions, it would imply $4-5 billion in related revenue up from what might have been slightly more than $1 billion in 2022. The service ended 2022 with 20 million subscribers and so with assumed price increases, the aforementioned revenue figure implies somewhere around 50-60 million subscribers in 2024.
Paramount has guided towards a $9 billion total revenue figure for its DTC segment in 2024 with 100 million or more non-unique subscribers for Paramount+ and Showtime’s OTT product. This compares with 77 million at the end of 2022, which led to $3.4 billion in subscriber fees last year. With fee increases I could estimate that they are aiming for close to $6 billion in subscriber revenue during 2024.
Warner Bros. Discovery has guided towards 130 million non-unique subscribers in 2025 between HBO Max and Discovery+ which compares with 96 million at the end of 2022. Assuming a relatively constant progression, this would mean around 120 million at the end of 2024. It’s important to note that there are still many subscribers who access HBO Max primarily through a traditional MVPD - perhaps 30 million in the US and 20 million globally – and so these gains imply a fairly significant growth rate for stand-alone DTC subscribers, but represent around 24 million new subscribers through the end of 2024 either way. If they were able to grow their subscription fees by 10% each year and numbers of subscribers by 10-15% they could conceivably grow related revenues from $8.5 billion in 2022 to around $13 billion in 2024, with all of the gains (and then some) attributable to streaming services.
As for Disney itself, during calendar 2022 their DTC segment revenues amounted to just over $20 billion. However, backing out the Hulu vMVPD in order to enhance comparability, I get to a revenue figure that is closer to $16 billion. With the Iger’s return there is a clear focus on a profitability goal rather than the company’s prior subscriber growth goals, which means they are no longer guiding towards specific revenue or subscriber targets for the segment.
$20 Billion+ in New Spending on Streaming and 100+ Million New Subs By 2024 Seems Achievable in Context of Global Industry.
Looking at this group of companies in combination we can see guidance calling for around 87-97 million new subscription-based streaming accounts and at least $10 billion in new revenue from subscription fees before accounting for any gains Disney will see. More broadly, presumably Netflix, Amazon and Apple will each continue to pursue growth from their streaming services. It’s not hard to imagine another $10 billion in subscription revenue associated with this second group of companies by 2024 from, say, another 40-50 million new subscription accounts alongside ongoing price increases.
Altogether, these services could see gains from 2022 levels which I estimate were around $80 billion globally (plus or minus many billions, depending on assumptions made for Amazon Prime Video and Apple TV+).
Growth of $20 billion or more in spending on streaming services by consumers over the next two years seems entirely achievable, especially if we consider that total spending by consumers on video content is presently multiples of this figure. In the US alone, spending on video via pay TV, streaming services and theatrical content combined to more than $140 billion annually last year. The rest of the world probably amounts to something similar. Even if we assume that there will be stability in total video spending, there’s a lot of room for a greater-than $20 billion to shift from traditional video and theatrical spending into streaming services over two years
The driver of this shift should be fairly straightforward: from past analysis I believe that there is a direct (if rough) relationship between share of spending on content by packagers of content (i.e. studios/distributors) and share of consumption by viewers. Consumers will ultimately spend money to get access to the most desirable content wherever it is, within the constraints of a total household budget. Keep in mind that even as many household budgets tighten, video services remain a relatively cost-effective way for most households to entertain themselves, and so even where there are cost-of-living crises, video-related spending can still be resilient.
If owners of media conglomerates chose to spend relatively more on content for their linear broadcasting and cable properties or for traditional theatrical films, it’s plausible that consumers would be more likely to hang on to traditional subscriptions or attend the cinema as they once did. But there’s almost no way this will occur. It’s not as if Netflix, Amazon and Apple are going to stop investing in their streaming video businesses, and this factor alone should be enough to cause Comcast, Paramount, WBD and Disney to continue increasing content spending on their streaming businesses.
Profitability Is Achievable At Scale, and Within Reason
One thing I didn’t find in my review of recent commentary was much about expectations for high profitability, although Paramount’s Bob Bakish said at the same conference that they “continue to see this building towards a TV media like margin business.” I’m doubtful he’s referring to the 40%+ operating income margin that Viacom enjoyed a decade ago, before he was CEO there. Perhaps something closer to a broadcast network-like business closer to the mid-teens as CBS or Disney’s ABC might have seen around that time is more realistic. That’s actually where Netflix is at present, and appears to me as a plausible outcome for a streaming service that pursues global scale.
If a media company pursues streaming with enough scale, it’s not a bad business overall. While streaming margins are not as good as the overall enterprise margins these businesses saw in the, pursuing them is almost certainly better than the alternative of not pursuing them at all, as traditional businesses will erode either way. In that context, the only streaming services who won’t win are those who don’t attempt to play, or who don’t attempt to play at a large-enough scale.