Streaming Wars are over. (Almost)! What’s Next?
Final Consolidation! That’s what's up. Consolidation of content has already started, and the final phase of consolidating the actual businesses is on the way.
There are more than 200 streaming platforms, and only 2 are profitable, Netflix and Hulu, according to IndieWrire.
Two hundred is a big number. For most businesses, you can only make losses for a certain number of periods before shutting down, unless you are intended to be a loss-making operation, being subsidized by a proper profit-making business.
Most of the streaming platforms don't have a rich sugar daddy, and time is up. They have to be bought out by big players or have to simply close shop for good.
Cancellations, stalling daily active user metrics, consolidations, and failures — that’s the current state of the streaming industry. This streaming industry has some space for 6–8 players, but we see even some players in the top 8 trying to solve the profitability issues by looking at being acquired by even bigger players.
Paramount is twerking for a buyer but Peacock is not yet peacocking for a merger.
Disney is acquiring Hulu (full acquisition now) and is also trying the Taylor Swift trick to get more subscribers onboard. Who can blame them, everyone else is trying it. There is even a meme on it, that suggests that Taylor Swift is a pillar of the economy, along with NVIDIA.
Regarding the sugar-daddy sponsored streaming services, being profitable is not important. Amazon Prime enters here, and Apple TV. Walmart can afford to start its own or acquire one of the failing ones. Walmart + has 60m subscribers. It's not the ideal 100m but it has a better chance at success than most of the other 190 players. Walmart can use the channel to advertise as long as it has enough content to keep Plus members within its ecosystem. Copy-paste Amazon but keep it ad-free for a while.
Peacock is growing its subscriber base and seems to think it has the right strategies to get to that 100m profitable subscriber base level. They are making losses for now, but they think that losses have peaked at $2.8 bn. I think they will be in for a surprise. The rate of subscriber growth can only get slower now, and the need to broaden the content catalog beyond NBC’s archive will only get acute. To their credit, they seem to know what they are doing. The NFL playoff trick they played in the just-ended season worked. Brute Force!
What's with the 100m subscriber level? That is scale my friend. Scale is needed in this business. You need the numbers for it to make sense, and the magic number is 100m subscribers.
Content vs. Scale
You have heard them say, “Content is King” over and over again. This is true but there is something bigger than content. Its name is scale.
Yes, content is king, but scale is an Emperor, and what’s a king to an Emperor — Ryan Gosha
Let us rather restate this, with all the grandiose.
Content is king, but scale is a god. What’s a king to a god?
The idea that content is king is okay because whoever owns the content has the power to sell it. You make money from content. However, you need more. If you have good content, you attract eyeballs, and you need to do that on a huge scale. Saying “ content is king” is true to the extent that no eyeball comes if you don't have content, but it is not entirely true to the extent that it undermines the power and value of scale. Without scale, good content is just unknown good content.
Think of this? How many good musicians have struggled for years until they get that one viral song that brings the scale? How often do you stumble across very good content and wonder why it has so few views? How many of the 200+ streaming platforms have very good content but lack the necessary scale, so you don’t even know about them, so you haven’t even tried them, and you are not willing to give them a try, even if they offer you a 3 -month free trial? By the time you get to the 10th streaming service, you are fatigued, not even the lure of a free trial is enough to make you try it. In terms of hierarchy, the king is not above a god.
Both (content and scale) are important in the streaming industry BUT scale is Importantor. Once you get the scale, you can even get away with years of producing poor content. Netflix is guilty of this, they had 3 to 4 years of not-so-great content. They lost a million subscribers the other year, but scale protected them from losses. They had time to correct their mistakes.
Impact of Scale on Business Viability
Because subscription fees per month are psychologically-parametered around an acceptable range anchored at $10, you have to be special to charge anything outside the range, and most platforms are not special, they just provide entertainment. The rest of the game on the revenue side is determined by scale. That’s how scale outweighs content in terms of influence and profitability.
Just a few calcs are all you need to know 100m is the minimum target.
For 100m subscribers, you can get $12 bn per year. Netflix has 260m subscribers and rakes in $33 bn per year. Peacock has 30m subscribers and raked in a billion in revenue in 2023, but given a full year of full subs, it can rake in $3.6 bn. That's an extra $2.6 bn which is why they think the 2.8bn in losses they made is the peak loss. But to retain the 30m who signed up they need to widen and broaden the catalog, which increases content creation costs and your losses. You need something to make the subscribers stay.
You can still make a profit with less than 100m subscribers, but then you will be up against competitors that spend $12 bn on generating content, covering every thinkable niche, including your niche. This is where content meets scale. Those with scale can make any content they want. Netflix has been staying away from live sports and events, but should they choose to knock knock knock, they have the revenues to support that. Netflix can afford to put in a single bid for EPL TV rights and half of NFL TV rights without going broke.
On the low end of 10m subscribers, you only make $1.2 bn a year. This is where the bulk of players are. Not profitable at all. Jimmy Donaldson (MrBeast) makes $700m a year and could break into that $1.2 bn a year level, without running a standalone streaming service, just riding on YouTube. Of course, MrBeast has to fork out insane amounts (content creation costs) for the surreal videos that he makes, like blowing up trains and shit.
By the way, MrBeast has 244m subscribers. If he was a standalone platform, he would be second only to Netflix in terms of the number of subscribers. But then if he was a standalone platform, only a handful would be willing to pay a subscription fee to watch. We are digressing from the topic, but it brings in some perspective on scale vs content breadth and width.
Close Example — Youtubers Quitting
The scale vs content, driving profitably informs us of the need for consolidations.
Earlier this year, a lot of YouTubers were saying they were quitting YouTube. What is at play is the same dynamics that we are referring to about the Streaming Business for big guys. These YouTubers quitting are not small channels. These are big channels with millions of subscribers. ..and these are people who were or still are very passionate about what they do (i.e. running their YouTube channel), yet they want to quit. Most of them have small expense bases so they will come back, and they will not quit forever. The ones who had higher production budgets had to cut that down and do basic unedited videos. It's a separation event, driven by the changes to the YouTube algorithm and ad-payouts.
The cost of creating content, when you take it as your profession, vs the rewards they were getting now in the form of ad-revenue share was no longer worth it. It’s a congested space. Google tries to maximize profits and screws creators. To survive as a creator, you need scale that Jimmy Donaldson (MrBeast) type of scale. Niche creators can never get that, by definition. And the space that MrBeast occupies can only be occupied by a few creators. To ride on the algorithm and get scale you might have to try the lowest common denominator type of content meant for low-frequency brains. Anything outside of that doesn’t get the necessary scale and reach.
So, even YouTube channels are consolidating, the bigger ones take more space, the smaller ones and the niche ones fizzle out, and the economics behind the algos push for that outcome.
By the way, my top 2 YouTubers are in those niche pockets. They have stopped producing content, they now produce once in a blue moon, and they never threatened to quit. I am a paying member of those channels.
The main challenge faced by a content creator is monetization.
Did we have an excessive number of YouTube channels? No! I don't think so. But we have an excessive number of streaming services.
Ad-supported plans, Events, Live Sports & Big8
Not everyone will be able to spend $17bn per year on content creation costs like Netflix or go gung-ho spending like MrBeast, or pay $110m for a single NFL playoff game like Peacock.
The reality is that streaming platforms with below 100m subscribers are eventually going under. The recent pivot towards ad-supported plans is not going to work because consumers are spoilt already, they don't want ads on streaming services so the uptake will probably not be significant. The pivot needs to be on an industrywide basis for it to work, and that is hard to attain.
Sara Fischer, at Yahoo Finance, says consumers are willing to spend 39 dollars per month on this, meaning they can afford to simultaneously subscribe to 3 or 4 different streaming services. If that is true, it means there is enough space for 6 to 8 players as long as they all have sufficiently different offerings. One family might have streaming services 1,2,3 and 4, another might choose 2,4,7, and 8, and so on. Few choose one. As of now, most have more than 3.
Of the 200 streaming services in existence, if we say 160 of them will go out of business, the task at the hands of the Big8 outside of Netflix would be to ensure they onboard those subscribers that were not already on their platform. If the niches are captured by Netflix, then we will have a Big4 instead of a Big8.
A kingmaker deciding point on who laughs last in the streaming wars is events and live sports. There is no space for all players on this one. Only the big boys, which is why we might have a Big 4 instead of a Big 8.
Can GenAI be the Saviour?
If you are not living under a rock, you have probably seen the AI-generated videos from Sora, a Generative AI tool created by OpenAI. It’s still closed to the public. It allows the user to generate a video from a text prompt.
OpenAI generated a video of a woman walking in Tokyo, and Alibaba’s EMO AI made that lady sing. It's full circle.
This innovation can lower content creation costs drastically and reshape the streaming industry. The industry can then accommodate a lot of players. At the extreme end of adoption, it can affect streaming negatively since consumers can generate an hour-long movie based on the desired prompt.
Of course, we are far from either early adoption or extreme adoption. To generate a one-minute-long video is still very expensive in terms of the tokens (compute costs) needed. It is prohibitively expensive, so it's not going to happen anytime soon. However, if GPU prices come down very quickly, we might see GenAI saving the industry from consolidations.
In the absence of that, the final phase of consolidation is taking place.
Ciao!
