Navigating the Siren Song of Streaming as Studios Get Caught in the Undertow

Hollywood’s approach to thriving in a streaming world has taken a sharply negative turn in the past few years. Initially, the strategy involved pouring resources into content to lure subscribers and ending profitable licensing agreements with aggregators like Netflix, banking on eventual profitability.

However, it has now transitioned into slashing content spending while desperately hoping that subscribers don’t abandon ship, all in the uncertain pursuit of profitability in the distant future.

The reversal has already dealt a substantial blow to the content landscape, signaled by the demise of peak television. However, its impact on financial improvements remains uncertain.

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Revenue Dynamics Plummet in the Streaming Era

The advent of streaming platforms has fundamentally reshaped the revenue landscape of the entertainment industry, ushering in a new era of monetization dynamics. Traditional licensing relied on a multitude of revenue streams to capitalize upon. However, the rise of streaming services has severely disrupted this age-old model, with originals on the top streaming platforms predominantly exclusive, thereby eliminating traditional monetization windows across markets and competitors.

Consequently, this year, global content spending among media and tech companies is set to increase at its most sluggish pace in over a decade, excluding the lockdown years, marking a significant shift in strategy.

Traditional studios, with the exception of Warner Bros. Discovery (WBD), have struggled to make their streaming divisions profitable. WBD only achieved “profitability” by blending its HBO pay television subscriptions with its direct-to-consumer streaming financials.

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Major Media Company’s Streaming Division Profit/Loss

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Among the above companies, besides Netflix, only Disney and Paramount are anticipated to experience marginal enhancements in profitability this year. Conversely, NBCUniversal and WBD are poised to witness slight declines in profits from their 2023 levels, albeit not significantly.

The traditional windowing model highlights the revenue potential many streaming platforms forego by indefinitely retaining original films and shows exclusively in-house, even after reaching peak customer acquisition and engagement value. While streaming platforms offer unparalleled reach and potential, they come at a significant cost and challenge the supply and demand dynamics of filmed entertainment.

Content valuation has never been more critical, with streaming platforms investing billions in original programming and licensing agreements to stay competitive in a crowded market.

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The Road to Profitability is Reverting to a Cable Television Model

Streaming services have been raising subscription prices over the last few years, incentivizing advertising options among subscribers. Contrary to common belief, this generates more average revenue per user (ARPU) versus ad-free tiers.

This shift to advertising is especially crucial for investors given that Hollywood’s cable TV networks, once the cornerstone growth drivers and profit hubs of entertainment conglomerates, have been severely impacted by cord-cutting and the surge of streaming services.

Mainstream streaming services have entirely abandoned the promise of ad-free streaming subscriptions, and now only niche providers are keeping the optimal viewing experience intact, which leaves room for more specialty providers to highlight diverse content to passionate audiences.

Recent forecasts suggest that streaming revenue is on track to surpass pay television subscription revenue in the U.S. for the first time in the third quarter of 2024, largely due to the introduction of ad tiers by multiple streaming platforms. As streaming gains momentum, traditional PayTV is anticipated to plummet, with its value projected to halve by 2028 compared to its peak in 2017.

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With rising content costs and greater competition, streamers strive for profitability instead of a marketing arms race to lure more “unprofitable” subscribers. The capture phase is waning as streaming services will try everything under the sun to squeeze their existing subscribers in a repeat of the cable television age.

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Streaming Subscribers – March 2024

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FilmTake Away: Amid Eroding Profits, Opportunities for Independents Abound

The prodigious investments required by major media companies to launch new streaming services while simultaneously pulling valuable content from dozens of global distributors have impacted all key studio players, resulting in substantial declines in market value over the past two years.

Against a backdrop of investor skepticism and looming recession concerns, streaming services are compelled to explore alternative avenues for profitability, leaving plenty of opportunities for independent producers, distributors, and aggregators of film and television content.

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