Last week, we discussed the crisis in streaming TV.
Squeezed by consumer demand for streaming content and competition from tech firms like Netflix and Amazon, traditional media players have consolidated via mergers and launched their own streaming services.
But the business model of streaming TV has proven extraordinarily difficult.
This is due to three challenges:
the cost of producing unique content,
the cost of acquiring subscribers for a new service, and
the challenge of holding onto those subscribers when they are perfectly happy to cancel as soon as they binge watch your latest show.
The last problem is likely the worst. The latest data shows that “churn” (the percentage of customers who unsubscribe each month) is on the rise for streamers, as customers grow increasingly cost-conscious.
Despite all this, I argued that the business model of streaming TV is not broken.
The outliers (Netflix, but also Disney and Amazon) help to show the path forward for any streamer who wants to survive and thrive in the current landscape.
The Playbook for Subscription Businesses
We saw that adding advertising (to diversify revenue), and live sports (to reduce churn), are both important strategies to consider.
But neither is enough to build a profitable business.
To succeed, streamers will need to follow a clear playbook for survival among fierce competition.
This means addressing the two biggest challenges of any subscription business: customer acquisition and customer retention.
Acquisition: Brand Matters
Few subscription businesses can rely on a truly unique product as their golden ticket to lure customers in.
The vast majority of direct-to-consumer (DTC) businesses, whether they sell razor blades or mattresses, are like streaming TV: they must stand out from an array of competitors, each creating their own version of your product (i.e. their own TV series and films).
How do you acquire customers without getting into costly price wars, free offers, and promotions?
For the fortunate few, customer acquisition is not so hard. These companies already have customer bases that number in the hundreds of millions (Amazon, Microsoft, Sony) or even billions (Google and Apple)—providing them an incredible advantage in signing up existing customers for any new subscription offering.
Google, Microsoft, and Sony have thus far shown no interest in plowing capital into launching a streaming TV network. But for Amazon Prime Video and Apple TV+, their owners’ massive customer bases have been a huge benefit.
By contrast, the legacy media companies trying to compete in streaming TV (Disney, Paramount, NBCUniversal, and Warner Bros. Discovery) have never previously operated DTC business models. So they cannot rely on existing customer relationships, with massive lists of emails or mobile phones to leverage in their marketing.
For all these legacy companies, I have a message: Brand matters.
Having an established brand—that means something to consumers and gives them a compelling reason to try you ahead of others—is hugely important.
A great brand is especially critical when trying to stand out in a market that is cluttered with literally dozens of streaming services (Tubi, anyone?).
Lessons from Another Media Sector
We can see the importance of brands in the shift to DTC by studying another corner of the media landscape—journalism. A handful of news publishers have weathered the transition to a subscription-first business model and survived digital disruption. They have each done so, in part, by leveraging a distinct and powerful brand: The New York Times. The Wall Street Journal. The Economist.
These and other incumbents discovered that the brands they had built over decades were essential to launching new, direct-to-consumer businesses.
But, what about streaming TV? Among legacy players, Disney has started from the most enviable position. Its brand, built up over a century, resonates with customers and defines a very specific type of content that they can expect. When a customer hears that a new movie or series is coming from Disney, they have a definite set of expectations.
By contrast, if I tell you that a new show is being released by “Paramount Plus,” I can guarantee that means nothing to the average viewer. The same is true for “Peacock” (especially, if you’re younger than Generation X and didn’t grow up with linear TV).
We can even see the power of brands in the lost opportunity for HBO. HBO, just as much as Disney, has a powerful, specific, and compelling brand. For a generation, it has promised a certain kind of premium, adult-level, entertainment: from “The Sopranos” and “The Wire” to “Game of Thrones.”
But with the corporate merger of WarnerMedia and Discovery, the HBO brand name disappeared from its streaming service. The new brand “Max” was asked to stretch from the gritty dramas of HBO to Discovery’s unscripted reality TV.
The value of the brand was back to zero.
Retention: Build the Right Bundle
But even if you are blessed with a great brand, that is not enough. Once you bring in new customers, how will you keep them? How do you stop a new subscriber from becoming a “serial churner”?
There is an old adage that most business model innovation is either bundling or unbundling.
The last wave of digital innovation in TV was all unbundling: splitting apart the old cable bundle of 100s of channels, into separate streaming offers.
Today’s next wave of innovation is all about bundling—combining the right offerings to keep customers coming back.
Bundling is essential because of an iron law of subscription business models: The best predictor of customer loyalty is usage. The more the customer uses your service, the less likely they will ever unsubscribe.
Survival in streaming TV will come down to building the right bundle to keep customers coming back—watching night after night, and week after week.
Only that kind of habit will ensure the next time the customer considers pausing your subscription to save money, they realize there is at least one thing in your bundle that they are not ready to give up.
But not every bundle is alike.
For streaming TV, I see three types of bundles that work.
The Megabundle
In this strategy, a streamer aims to hold on to its customers by making sure that, whatever mood the customer is in, when they open your app, they find something to watch.
The mega bundle is extremely difficult because it requires a three-part experience:
First, it requires a huge, and incredibly diverse library of content across dozens of genres, to appeal to different customers and in different moments.
Second, and just as important, is discoverability. A vast library will only keep a customer coming back if it is paired with a fantastic recommendation engine and an intuitive user interface that make it easy to uncover what to watch next.
Lastly, the megabundle requires a steady stream of new stuff to watch. New content is what drives conversation and coverage in the press, among friends, and in social media. This new content can be filmed series and movies, It can be live sports. Or it can be both. (Expect to spend a LOT on production or licensing).
Our best example of a megabundle strategy is Netflix.
The company has built a vast library of content over the years. Most of it may not be to your liking. But almost everyone can find their niche (food documentaries, quirky small-town murder mysteries, period costume dramas, standup comedy, etc.) to fill countless stretches of washing the dishes or working out on the stationary bike.
Netflix was an early pioneer in recommendation engines, and it is still unmatched in its ability to serve up suggestions for what to watch.
And the company continues to invest heavily in new content, that is increasingly international in scope.
The Focused Bundle
This strategy is a bit different.
Rather than a deep library with dozens of different genres, the goal is to focus on a category of content that has a devoted audience. This audience should be large enough to build a strong business on, without needing to appeal to everybody.
Think of it as a bundle of content geared for a particular type of viewer.
The most successful example here has been Disney+. For families with kids at home, this service has a targeted library of “must have” content from Disney, Pixar, Star Wars, Marvel Studios, as well as Natural Geographic and more.
The Walt Disney Co. built up this bundle via a series of acquisitions in the years leading up to its launch of the Disney+. The combined effect is an irresistible pull for parents of young children.
No surprise then, that we saw Disney has the second-lowest churn rate, after Netflix.
We are about to see another attempt at this strategy—a “focused bundle” for sports fans—by the end of 2024. This is when Disney (owner of ESPN), Fox Sports, and Warner Bros. Discovery plan to launch a streaming service combining live sports from all three. (Each company with own one third of the joint venture.) The new streaming service does not yet have a name or price. But analysts are guessing at $50/month.
We could see other approaches to a “focused bundle” for sports.
I’ve long believed that popular sports leagues (who actually own the content that ESPN and others license) could do better by offering their own leagues’ games through their own “focused bundle.”
Imagine the NFL, NBA, or UEFA Champions League offering a standalone subscription for fans: Watch one game for $10. Ten games for $50. The entire season for $125.
There could be a great opportunity for sports leagues to cut out the networks and go straight to their fans.
The Multipurpose Bundle
The third and final option I see to keep viewers hooked on your subscription streaming TV service is what I call the Multipurpose Bundle.
In this strategy, streaming TV is bundled with another type of service that is used by the same customer or household.
That may sound counterintuitive. But we have two strong examples of this.
The first is Prime Video. As mentioned last week, the TV streamer has been nearly immune from churn, because most of its subscribers get the service as a feature bundled with rapid home delivery of ecommerce, as part of an Amazon Prime subscription.
The other example is Apple TV+. The streaming TV channel is frequently bundled with other services as part of “Apple One.” If I were paying $10/month for Apple TV+ by itself, I can guarantee I would have paused my subscription between my favorite series. But once I bundled it, at a discount, with my iCloud storage and Apple Music, I stopped asking whether the TV shows were worth keeping each month.
What’s Your Competitive Advantage?
But, what if you honestly are not able to pull this off?
What if you lack a compelling brand that truly stands out from the competition? Or a bundle that can quell the customer’s itch to unsubscribe as soon they finish watching your newest, hugely expensive TV series?
It may be time to reconsider your strategy—and your commitment to becoming a DTC business.
This is something Lucy Kueng and I discussed in our recent interview. The role of traditional media has shifted. They are longer the titans of media or the gatekeepers they once were. But they do still matter.
I wouldn't be turning to Prime Video for something to watch most nights, if it weren't for all the content there that was produced, and is still licensed, by legacy media companies.
Good strategy starts with being honest about where your competitive advantage lies.
Ask yourself: are you really going to create a digital destination that can stand alongside and compete with Netflix, Amazon, and Apple?
For many, the best path may be to leave it to others to run a streaming subscription business, while you focus on maximizing the value of your content by licensing it to them.
The Winning Playbook for Subscriptions
There is a playbook for streaming TV.
To succeed as a direct-to-consumer subscription business, you need to do two things incredibly well:
1) Acquire customers without huge costs
The means having either a large addressable customer base to sell to (like Apple and Amazon), or else a brand that has real pull in the marketplace of media.
Disney has a brand: “family.” HBO had one (before the Max disaster): “premium adult fare.” Netflix arguably has one as a first-mover: “the streaming innovator.”
Do you?
2) Keep subscribers coming back
We’ve seen three ways to do this.
There’s the megabundle—with a huge library of content, great recommendation engines, and a steady stream of (expensive) new stuff.
Or the focused bundle—Instead of all things to all people, offer everything you’d possibly want if you are a certain type of viewer. A family with children at home (Disney). A fan of British television (Britbox). A sports fan (the new joint venture?).
Or else, a multi-purpose bundle—like Prime Video paired with Amazon Prime or Apple TV+ paired with other services in Apple One.
OTHERWISE…
If you don’t have a strategy for both customer acquisition and retention, but you do have great content, then stay in that business and sell it to the highest bidder.
Oh, and, if you’re continuing to produce more content, try to build a brand that means something for the long haul!
(You’ll want it to be ready for the next wave of disruption.)
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