Streaming Video No Longer Impressing Investors: What’s Next?

Temuera Morrison stars as Boba Fett in ‘The Mandalorian’.

Source: Disney

Over the past two years, media and entertainment companies have been determined to show Wall Street that they have a strong streaming video strategy to counter traditional pay-TV decisions.

The thesis was: Taking more of a consumer’s money directly, rather than collecting negotiated fees from a wholesale pay-TV model, will ultimately be a better business than bundled cable TV. Or, if not better, at least good enough to survive.

The thesis worked for a while. The pandemic has accelerated the push towards video streaming, as people search for entertainment options while stuck in their homes. Quarter after quarter in 2020 and 2021, Netflix, Disney, AT&T’s WarnerMedia, NBCUniversal’s Peacock, ViacomCBS’s Paramount+ and other streaming services showed consistent growth, as reported by CNBC.

Along the way, Disney nearly doubled from a pandemic low of around $79 per share to $155 to start 2022. Netflix continued its blistering pace, gaining 71% from its March low at the start of the year.

But after Netflix forecast first-quarter subscriber additions that missed analysts’ estimates, investors seem to have soured on streaming, or at least dampened their enthusiasm.

Netflix now has 222 million subscribers worldwide. It forecast just 2.5 million net new additions in the first quarter after adding 8.3 million in the fourth quarter. Netflix shares are down 37% this month (CHK TO CLOSE) alone. Disney fell 13% in January and publishes its results on February 9. (CHK)

Superficially, it seems odd that a low Netflix quarterly forecast would scare off investors across the segment. But if Netflix’s growth slows, it may mean that the total global addressable streaming market is significantly below expectations.

LightShed analyst Rich Greenfield told CNBC he still believes that number to be “six, seven or eight hundred million subscribers.” But it is possible that the number is actually much lower.

If true, the value proposition around the streaming industry is changing dramatically. Netflix could focus on raising prices and cutting content spending as profitability, as investors treat it more like a value stock. Free cash flow might start to matter more than future subscriber growth.

Reducing content spending would likely slow subscriber growth even further, especially as new competitors increase their content spending and global reach to grow their subscriber bases. NBCUniversal’s Peacock announced it was doubling content spending to $3 billion in 2022 and $5 billion “over the next two years.” WarnerMedia plans to expand HBO Max to multiple countries internationally in 2022, Jason Kilar told CNBC this week. HBO Max is currently present in 46 countries, compared to more than 190 countries for Netflix.

“If you start to slow content spending when everyone else is increasing, the inherent risk is that you’ll be less successful,” said Michael Nathanson, equity analyst at MoffettNathanson.

Reed Hastings, co-CEO of Netflix, speaks during the 2021 Milken Institute Global Conference in Beverly Hills, California, United States, October 18, 2021.

David Swanson | Reuters

At the end of 2020, Disney significantly increased its worldwide estimate of Disney+ subscribers by the end of 2024, projecting between 230 million and 260 million. (The old range was 60 million to 90 million.)

Given Netflix’s low first-quarter subscriber forecast, it’s plausible that Disney won’t hit its new target. This could cause investors to downgrade further on streaming – making NBCUniversal’s decision to live with billions of dollars in short-term losses from Peacock much more questionable strategically.

Possible solutions

Bob Iger, Chairman and CEO of The Walt Disney Company.

Katie Kramer | CNBC

It seems inevitable that some streaming services will eventually team up and offer products together at a discount. Once this begins, bundles can expand, encompassing more services.

Bundle streaming with other benefits. Another idea is for companies, such as Disney or Comcast, to offer Amazon Prime-like services, including streaming subscriptions along with other corporate offers, such as discounts on theme parks and merchandise.

An annual “Disney Prime” service that included Disney World discounts could theoretically reduce churn, which can be valuable for a company whose stock still trades heavily on streaming numbers. Disney considered the concept, according to a person familiar with the matter, but decided that watching streaming videos was too disconnected from buying toys or going to theme parks to make sense.

Bundle streaming with third-party products. A third idea is to think outside the box with bundling and include streaming subscriptions as part of larger packages, including some that involve third-party products. While television has always been associated only with television, due to the wholesale cable model, digital distribution theoretically allows for all sorts of wacky subscription packages. Streaming services can be bundled with Digital Media or Doordash or Stitch Fix or any other monthly subscription available.

Game. Finally, media companies can follow Netflix’s lead and try to shift investor narrative to gaming. It got a little tougher after Microsoft agreed to buy Activision Blizzard this month for $69 billion, but a big acquisition for a legacy media company like Comcast or Disney would go a long way toward building a mobile game presence. Acquiring Take-Two Interactive (which itself is trying to strengthen itself after agreeing to buy Zynga for $12.7 billion) or Electronic Arts are two potential options. But it’s still unclear if Disney or Comcast want to go in that direction.

“I don’t think, in most cases, there are synergies to be gained from an entertainment company buying them,” Iger says why the media didn’t buy big game companies.

The first phase is over. It’s time for phase two, whatever it is.

If all else fails, there’s always the metaverse.

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