The future of streaming (According to the moguls figuring it out)

The three men meet occasionally to discuss the state of the industry. By the time they met on the yacht, they had all agreed that the money-losing status quo in the streaming business was unsustainable.

But what will take its place?

“There was peace in the valley for a period of time,” Malone mused in a rare recent interview, recalling the days before video-streaming upended the lucrative cable business. “Now, it’s quite chaotic.”

That is likely an understatement: The once-mighty Paramount, which owns CBS and a bevy of cable channels, recently replaced its CEO and failed to sell itself after months of negotiations. Warner Bros. Discovery is frantically paying down its $43 billion in debt. Disney laid off thousands of workers and pushed out its CEO as streaming losses mounted.

Paramount lost $1.6 billion on streaming last year. Comcast lost $2.7 billion on its Peacock streaming service. Disney lost about $2.6 billion on its services, which include Disney+, Hulu and ESPN+. Warner Bros.

Discovery says its Max streaming service eked out a profit last year, but only by including HBO sales through cable distributors.

The stocks of legacy media companies are a fraction of their former highs. At the same time, shares of the disrupters — Netflix and Amazon — are close to record highs.

Malone, Roberts and Diller all came of age during the golden era of television. Malone, 83, acquired his fortune by building a cable empire and is an influential shareholder in Warner Bros. Discovery. Roberts, 64, succeeded his father as chair, CEO and the most influential shareholder of Comcast. Since then, by acquiring NBCUniversal, he has transformed Comcast into a media powerhouse. Diller, 82, is chair of IAC, the digital media company, and a veteran TV and movie executive.

By comparison, the heads of Netflix and Amazon are brash newcomers, with little attachment to Hollywood’s golden age.

Ted Sarandos, 59, co-CEO of Netflix, worked his way up through the DVD industry, now defunct. Mike Hopkins, 55, head of Prime Video and Amazon MGM Studios, was steeped in digital as CEO of Hulu, the pioneering streaming service now owned by Disney, before joining Sony in 2017. He came to Amazon in 2020 and reports to the company’s CEO, Andy Jassy, 56.

The New York Times interviewed those three older executives, and the two younger ones, as well as numerous other owners and senior executives of major media companies to assess the problems facing the industry.

Rarely do these executives speak so candidly, on the record, about the challenge in front of them. In our conversations, some consistent themes emerged — all with major implications for investors, advertisers and audiences.

The Magic Subscriber Number

Streaming has long been hailed as a promising business, because companies like Netflix can add subscribers at little extra cost. The more paying subscribers a service has, the more the company’s costs can be spread over a large base, lowering the cost per subscriber.

But those subscribers want lots of options, and the costs of making enough programming can be enormous. As a result, a streaming service’s profitability depends in large part on how many paying subscribers are needed before those TV shows and movies become cost-effective.

There was a time when industry executives hoped that number might be as low as 100 million. But now the consensus among many of the executives interviewed is that the number is at least 200 million, and possibly more.

“If you’re going to be a full entertainment service with live sports and tent-pole blockbusters today, 200 million is a number that can give you the scale with the hope for growth over time,” Hopkins of Amazon said.
Bob Chapek, Disney’s CEO until 2022, also agreed that 200 million was the number that meant “you’re big enough to compete.”

Netflix has reached that, and then some, with over 270 million paying subscribers. Moreover, those subscribers pay an industry-leading average of more than $11 per month.

Netflix is highly profitable, with operating margins of 28%. Disney and Amazon are the only other streaming services with more than 200 million subscribers. No one else comes close.

$50 Million an Episode

Attracting — and keeping — those millions of customers is no cheap feat.

Overall, Netflix has said it will spend about $17 billion this year on programming. That level of spending has produced a golden age for A-list writers and actors, many of whom are flocking to the company.

“It’s a tall order to entertain the world,” Sarandos of Netflix said. “You have to do it with regularity and dependably.”

For Netflix, $17 billion represents only about half of its total revenue. But almost no competitor can match that spending level, the executives said, except for maybe Amazon. Amazon spent $300 million for six episodes of the spy thriller “Citadel” — one of several major bets it has made.

Not all of those pay off. But when they do, the impact can be huge.

Some executives who oversee rivals to Netflix and Amazon say their companies can reduce spending only by producing hits. But that’s been the holy grail ever since Hollywood was created, and no one has succeeded over the long term.

That means streaming services need the resources to invest in a wide variety of projects, knowing there will be some, even many, relative failures for every hit.

“It’s still more art than science,” Sarandos said.

Play Ball

Adding to the cost pressure, the executives said, is the soaring cost of sports programming.

The appeal of live sports is both unique and twofold: They attract new streaming subscribers and reduce churn since viewers want to watch sports live. It is also a big draw for advertisers as streaming services look to increase their ad businesses.

It may not be an overstatement, the executives said, to say that a streaming service can’t survive as a stand-alone business without sports.
The result is bidding wars unlike anything experienced before in the media industry, currently on display during the protracted negotiations for a new 10-year NBA rights contract.

While ESPN, Amazon and NBC are finalizing deals for their packages, Warner Bros. Discovery’s Turner cable network is seen at risk of being outbid. Many in the industry expect that the final deal will be more than triple the last NBA contract.

As the cost of rights soars, will the streaming services actually make money on them? Or will marquee sports events function as loss leaders, drawing viewers to other fare, as they once did for the old broadcast networks?

Wall Street analysts and investors in streaming once fixated entirely on the number of subscribers, ignoring losses, in the belief that prices would someday rise substantially. It’s now clear that price increases won’t be the answer to streaming profitability for most services, the executives said.

After years of championing an ad-free consumer experience, Netflix introduced an ad-supported subscription in 2022 at a steep discount of $6.99 a month. Disney+, Hulu, Amazon, Warner Bros. Discovery’s Max, Peacock and Paramount+ all offer cheaper, ad-supported subscriptions.
“It’s a nice way to get price-sensitive consumers,” said Chapek. “Heavy users will still come and pay the higher monthly fee.”

The results have been explosive. Netflix is on pace to generate $1 billion in advertising revenue this year, according to estimates from eMarketer, and Disney has already generated $1.7 billion this fiscal year. That kind of success suggests that streaming ads are here to stay.

Is It Worth It?

How many streaming services will consumers support? That was one of the mysteries of the nascent streaming world, and the answer is coming into focus: not many.

“I think all the small players will have to shrink down or go away,” Malone said.

A recent Deloitte study found that American households paid an average of $61 a month for four streaming services, but that many didn’t think the expense was worth it.

That suggests the once-unthinkable possibility, many of the executives said, that there will be only three or four streaming survivors: Netflix and Amazon, almost certainly. Probably some combination of Disney and Hulu. That leaves big question marks over Peacock, Warner Bros. Discovery’s Max, and Paramount+.

The Bundling Conundrum

After years of go-it-alone strategies, “bundling” — offering consumers a package of streaming services for a single fee — has become the latest strategy for reaching profitability among the smaller services.

In May, Comcast announced it would offer its broadband customers a bundle of Peacock, Netflix and Apple TV+ for $15 a month. Disney has bundled Disney+ and Hulu, with Max to be added this summer at an as-yet undisclosed price. Venu, a new sports streaming joint venture from Disney, Fox and Warner Bros. Discovery, is planning its release this fall.

However innovative the arrangements, the executives said, the economics of bundling are complicated. Participants need to attract consumers who wouldn’t already subscribe to their individual channels at full price. They must also puzzle through how revenue should be divided among bundling participants of unequal stature.

It’s also unclear that bundling will achieve the scale that participants may be hoping for. Many customers already subscribe to one or more of the bundle options. And if several subscriptions are offered at a discount to attract customers, the average revenue per user declines.

Jason Kilar, the founding Hulu CEO and former CEO of WarnerMedia, has called for a more radical approach than bundling: a new company that would license movies and TV shows from the major studios.

“I’ll call it the ‘Spotify for Hollywood’ path, where a large number of suppliers and studios contribute to a singular experience,” Kilar said. “The studios would be the ones that would be taking the majority of the economic returns from such a structure.”

Media companies have started to embrace licensing deals after a period of avoiding them. During AT&T’s ill-fated ownership of WarnerMedia, the company insisted that its content be shown exclusively on Max. Disney pulled back on licensing deals when it started Disney+ in an effort to force fans to subscribe.

But AT&T then abandoned streaming, merging WarnerMedia into Discovery, and Disney and Warner Bros. Discovery are again licensing their content to their rivals Netflix and Amazon Prime.

End of a Golden Age

All of these changes have had a big upside for viewers.

“It’s been a golden age, even with prices rising,” Chapek said. “You get entire libraries built over decades plus all this new content, and you watch at your leisure.”

But a change is underway, he said: “Now we just have to make it viable for shareholders.”

That will necessarily mean higher prices for customers, more advertising and less — and less expensive — content. That’s already happening.

The rise of advertising may be a windfall for streaming services, but the quest for the mass audiences that advertisers seek risks turning the streaming landscape into a sea of police procedurals and hospital dramas punctuated by major sports events and blockbuster concerts. Ironically, that’s pretty much the model once dominated by the ad-supported broadcast networks.

But Diller sees a path forward for streaming companies. The focus, according to Diller, needs to be on what “has been true since the beginning of time.”

The business, he said, “is based on hit programming — making a program, a movie, a something that people want to see.”

This article originally appeared in The New York Times.