‘Viewers love a cliffhanger more than investors. The predictable ending here is that Netflix emerges victorious.’
By Jennifer Saba
NEW YORK – Netflix boss Reed Hastings keeps rewriting the streaming script. His $160 billion company, along with rivals Walt Disney, Warner Bros Discovery, Paramount Global and Comcast’s NBC Universal are confronting the next phase of the industry’s economics.
Creating and licensing films and TV shows is as expensive as ever, but consumers want to pay less. And Wall Street will no longer abide growth at any cost. As with all things technology these days, the priority is the bottom line.
The problem, or opportunity, is that compelling entertainment powers the business. To provide it depends on having a solid catalog of programming, and the ability to expand it.
For that to happen requires enough subscribers to support the growth while also making profit. Netflix has the most viewers and has started to generate meaningful cash flow. Then there’s everyone else.
Scene 1: Roll Film
Hastings benefitted from being first to market in 2007, the same year Apple unveiled the iPhone. Investors believed in the idea and tolerated big losses at Netflix. Hollywood producers valued having another buyer of their product beyond cable and satellite TV operators.
Disney, for example, raked in an estimated $300 million a year after giving Netflix access to its treasure chest that included some Star Wars movies, according to Morgan Stanley research. The relationship worked for nearly a decade, but as Netflix — once dismissed in 2010 by Time Warner’s then-boss as the “Albanian army” — increased its market value by 40 times in the decade through 2017, the dynamic changed.
Netflix became more of a threat, especially as it started creating series such as “House of Cards,” prompting media companies to hatch plans for their own competing services. By then, however, Hastings already had a giant head start.
Scene 2: Enter Antagonists
Disney+ debuted in 2019, followed by HBO Max (rebranded by WBD this week as Max), Paramount’s namesake flagship service and then NBC’s Peacock. The crowded competition started to spook investors, and for good reason. Netflix lost 200,000 customers in first quarter 2022, sparking a 40% plummet in its share price since.
Hastings and co-CEOs Ted Sarandos and Greg Peters refocused on retaining Netflix’s stronghold. Cheaper streaming options with unique programming were luring viewers, leaving Netflix in a tough spot as it raised prices. Ultimately, it responded by rolling out a lower-cost package that includes ads and started cracking down on people freely sharing access to their accounts with friends and family.
The tweaks have shown early signs of working. In the most recent quarter, Netflix grew subscribers 5% from the same quarter a year earlier, surpassing 232 million, far ahead of most peers. In effect, Netflix customers now pay a bit less on average, but without really sacrificing the top line.
Scene 3: Battle Royale
Some of the success also relates to the sheer quantity of choice of what to watch. Netflix also has the best programming, according to surveys from CNET and Engadget, giving it some pricing power. Others are trying to follow suit. Paramount+, started in 2021, is joining forces with sister Showtime to widen its offerings. At $12 a month for the premium service, it is about a fifth cheaper than the comparable offering from Netflix.
Paramount grew subscribers in the first quarter by about 50% from the same period in 2022, to 60 million, still less than Disney and Netflix.
NBC Universal lags, in part because of parent company Comcast’s ownership stake in Hulu, which is controlled by Disney. Even at just $5 for Peacock’s cheapest tier, it counts only 22 million subscribers despite 69% first-quarter growth.
Disney boss Bob Iger is somewhere in the middle. When he oversaw the rollout of Disney+, it was a relatively inexpensive service built around the Star Wars and Marvel Entertainment franchises owned by the Magic Kingdom. They helped quickly build the Disney+ paid-subscriber count to match that of Netflix.
Iger is pivoting, however, indicating earlier this month that a broader general-entertainment bundle, including Hulu’s more adult-oriented fare, makes more sense. The flagship Disney+ lost 4 million customers in the quarter ending April 1 from a year earlier, with price hikes largely to blame.
Scene 4: Ammunition Hunt
Constantly providing fresh shows to keep and attract new subscribers comes at a steep cost. Since 2019, the industry increased its spending 40% to an estimated $136 billion this year, MoffettNathanson analysts reckon. Those commitments also don’t vanish when the spotlight shifts to profit.
Netflix has the edge in this regard, too. It invested $17 billion in programming such as “The Diplomat” last year. The figure represents approximately $72 per customer, compared with about $76 in 2021. Disney’s $30 billion of equivalent spending last year equates to $130 per streaming subscriber. WBD and Paramount spent three times as much as Netflix on the same measure.
The comparisons are imperfect. Disney, Paramount and WBD also operate cable and broadcast networks, and don’t specify what portion of the expense is allocated to streaming. Sports programming is particularly expensive and included in the sums, but Disney’s plan to stream live sports on a stand-alone ESPN service, also suggests convergence is accelerating. — Reuters
