Is the Business Model Broken for Streaming TV?
Part 1: An industry in crisis amid changing consumer habits
The business of television is undergoing profound change—even a crisis—as it transforms for the digital era.
Like so many industries, the incumbents are racing to reinvent themselves for a digital future.
Iconic brands such as Disney, HBO, NBC Universal, Fox, and CBS face fierce competition from digital heavyweights Netflix, Amazon, and Apple.
But the real challenge comes from the consumer: generations raised on social media feeds want their favorite TV shows available on demand, at any time, and on any screen.
The business model of television has been transformed by new streaming services from the old media giants. These “pluses” (Disney+, ESPN+, Hulu+, Paramount+, Peacock Premium+, Discovery+, and Max) all seek to compete with Netflix, Amazon Prime Video, and, yes, Apple TV+.
But as consumers finally get what they have been demanding for years—all their favorite shows and movies available through streaming—they are hardly happy.
First, the price of every streaming service has shot up in the last year.
Second, advertisements now appear everywhere, even on Netflix, where they had been declared verboten from the start.
Finally, viewers are exhausted by searching for shows. “Where do I watch the new series my friend mentioned?” was a minor annoyance when it meant switching channels on your cable box. It’s a much bigger headache when it means signing up for yet another paid subscription.
If consumers are unhappy with this new landscape, they are not alone.
Traditional media companies are hemorrhaging cash as they shift to streaming. NBCUniversal’s Peacock streaming service, for example, lost $2.8 billion last year.
No wonder then, as I talk to analysts and executives, they frequently ask me if I think the streaming model is perhaps fundamentally broken?
Brutal, Not Broken
My short answer is no.
Streaming TV is not an unworkable business model.
But it is an incredibly tough, even brutal, one.
For evidence, we can turn to Netflix, which just posted impressive quarterly results. Netflix is strongly profitable, having reached $2.3 billion in quarterly net income.
Among legacy players, the most hopeful story is Disney, which has seen rapid growth in its Disney+ service since adding it to Hulu and ESPN+. Disney’s streaming business unit has been steadily narrowing its losses and is close to turning a profit. It expects to break into the black by the end of this year.
But, the business model of streaming TV is TOUGH!
There is no question that tight margins and fierce and plentiful competition make it very hard to succeed.
This partly stems from an old challenge: the high cost to produce professional content. Netflix spends over $15B a year on content. Despite cutbacks this year, Disney expects to spend $24B on content alone. None of this is made easier by the high cost of capital, thanks to rising global interest rates. Borrowing money to fuel growth of a streaming business is a much dicier proposition now.
But beyond the cost of content, streaming brings a host of new problems as a subscription business model.
The Siren Call of DTC
Starting a decade ago, businesses that used to sell through traditional distribution channels fell in love with the idea of becoming a “direct to consumer” (DTC) business through the internet.
Going DTC has been the advice of countless digital strategists, marketers, and advertising platforms.
Soon, every traditional consumer business realized that it wanted to “own the consumer relationship” and “be a platform”, just like the tech giants. Whether you were selling TV shows, razor blades, mattresses, or frozen meat, DTC was the goal.
“Be careful what you wish for” in the words of the Greek fabulist, Aesop. It turns out to be costly and hard to run a DTC subscription business in a competitive market (as detailed by my friend Rita McGrath).
First, DTC companies face significant and rising customer acquisition costs (CAC, in marketing parlance). The new TV streamers have found that acquiring customers is extremely expensive and (except for Disney) slow.
Second, once they do acquire customers, companies face the challenge of retention: holding on to them every month as new competitors enter, customer wallets get pinched, and unsubscribing is just a few clicks away.
Neither acquisition nor retention was an issue for media companies in the past.
It’s enough to make them pine for the old cable business model, where all they had to do was create the content and sell the ads. The rest of the cost, and the risk, was on somebody else’s balance sheet.
The Beast of Churn
The worst problem for streamers today is churn, the % of customers lost every month, by unsubscribing.
Churn was not a problem with the old cable TV bundle (do you recall how hard it was to change your plan or carrier?). But for the legacy TV networks turned DTC streamers, churn has been brutal, and it is getting worse.
According to data from research firm Antenna, reported in the New York Times, a quarter of US streaming subscribers have canceled three or more services over the last two years. This is not out of pique, but shrewd cost cutting: fully a third of these consumers resubscribe to a canceled service within six months.
These “serial churners” are an alarming trend. As Jonathan Carson, CEO of Antenna, told the Times “In three years, this went from a very niche behavior to an absolute mainstream part of the market.”
With prices rising, churn rates are doing the same. Most streamers are losing 6-9% of their customers every month, including Peacock, Paramount+, Max, and Apple.
But the problem of churn is not universal. Netflix is mostly avoiding it (3% churn), as is Disney, with families reliant on its content for kids (4.6% churn).
And then there is the case of Prime Video, which for most customers comes bundled with their Amazon Prime subscription. Who wants to give that up? (We will see more on the importance of strategic bundling…)
The Return of Ads
Three rising costs—content, acquisition, and retention—are all reasons for a surprising turn in the streaming business: the return of advertising.
Ads are appearing not just in Netflix, but everywhere—by now, on every major streaming service but Apple TV+.
Why?
Advertising is an opportunity to shore up the business model of streamers.
First, ads can generate incremental revenue from your existing customers. Amazon added advertisements to every existing Prime Video subscription this year. Customers were given an option to pay $3/month to “upgrade” to the ad-free experience they had before. Either way, Amazon gets more revenue on each existing subscriber.
Second, advertising allow streamers to go down market, seeking new subscribers willing to enter at a smaller monthly fee by tolerating ads. Since announcing its crackdown on password sharing, Netflix has found that 40% of its subscriber growth is from its cheaper advertising tier.
The biggest evidence of a shift in Netflix’s business model is that it announced it will no longer reveal its subscriber numbers.
Back in Netflix’s heady “growth before profit” days, subscriber growth was THE number the startup published for investors to judge its performance. Now, as the mature category leader, Netflix wants to focus its reporting on more traditional measures: revenue, net income, and operating margin.
Having more subscribers is no longer the goal of the streaming business.
Pivot to Live Sports
The third major shift in the streaming landscape today is a pivot to add live content, most notably live sports.
The original streaming services (Netflix, Amazon Prime, Hulu) were all about recorded content, but that changed. Prime Video has exclusive rights to Thursday Night Football from the NFL. Apple TV shows Major League Soccer. And sports have become a mainstay on Paramount+, Peacock, and of course, ESPN+.
Even Netflix has made its first move into live sports, with a $5 billion deal with World Wrestling Entertainment to license its “Raw” programming, which launched the careers of Dwayne (The Rock) Johnson and John Cena, among others.
Reuters’ Harshita Varghese recently asked me if the move to live entertainment (with hefty licensing costs) was meant to bolster the advertising model of streamers, given the reliable audience numbers that live sports provides.
I think it may help with advertising. But Netflix now publishes data on the viewers of all its shows (a big break from its historical precedent, driven by the writers strike of 2023). So, advertisers can now know what kind of audience they will reach on hit scripted shows like “Stranger Things” and “Bridgerton.”
I believe the bigger opportunity for live content is with combating churn.
Live content, especially sports, gives fans a reason to tune in regularly. It drives repeat viewing vs. “binge-and-unsubscribe”, where viewers blast through a new show in a week then cancel their service until the next show comes along.
The End of Binge?
Which brings me to my prediction of the day.
The “binge watch” model of streaming may also fade, as did the “no ads ever” model of Netflix.
Today, only Netflix still holds to the practice of releasing every episode of a series on its first day.
By contrast, Apple, Prime Video, Disney, and Max all release their original shows in a drip of episodes over weeks. When you’re striving to keep every subscriber coming back repeatedly, it just makes sense.
Netflix buried its commitment to never show ads. I’m guessing that its single-release model might be the next to go.
Tune in Next Week…
Is all hope lost for the legacy media players? Can nobody else repeat Netflix’s success in building a profitable business out of streaming TV?
I would strongly argue no.
Subscription business models are extremely tough to get right. But there is a winning playbook of strategies that can lead to success for any company that follows it.
I’ll layout out that playbook in my next article. (LINK to Part 2 HERE)
Tune in next week – same bat time, same bat channel!
NEW BOOK:
“THE DIGITAL TRANSFORMATION ROADMAP: Rebuild Your Organization for Continuous Change”
ORDER NOW:
Hardcover: https://amzn.to/41U85dl
Kindle: https://amzn.to/3OWD437
Audiobook: https://bit.ly/DXR-Audiobook
Bulk orders up to 60% off: https://bit.ly/DXR-bulk-orders