Streaming is Eating Traditional Media | Streaming Jungle (Issue #1🎉🎉)
Why You Should Follow The Media Revolution
Streaming is a market like no other. Media companies, new and old, compete for hundreds of millions of users. This isn’t a race to be the first like cable or to have the best technology. This is a race to have the best mix of quality content, distribution channels, content moats, and as many sticky users as possible.
Netflix’s growth has hit an air pocket since old media players like HBO, Disney, Paramount, and others launched their services, but the space continues to grow. Since, Disney+’s launch Netflix’s rapid growth slowed, but Disney added ~103m subscribers Q2 2020 and HBO added ~18m subscribers since Q3 2020, and the space as a whole continues to grow.
Many strategic elements contribute to who wins in this market and whose competitive advantage melts away like an ice cube. The highest quality streaming companies generally are long-term buy and hold compounder type of companies. However, this is a new and highly contested space with enormous amounts of cash invested in new content each year. For example, Netflix will pay $17B for content in 2022. So, investors need to monitor company progress to avoid poor capital allocators and risky growth strategies.
Three of the biggest spenders Disney+, Warner Brothers Discovery, and Netflix are spending a combined $70B on content in 2022. Because of how capital intensive the space is, cash burn and balance sheet strength are prime factors that can contribute to media company health.
In this newsletter, I will help investors monitor key industry strategies and metrics in subscriber additions, growth, stickiness, and revenue to understand where the competitive trends are moving in streaming competition. Traditional media players also need to integrate streaming with their core and legacy businesses. For example, Disney’s streaming focus has to mesh with how they think about investments in broadcast TV, cinema movies, and even amusement parks.
For investors seeking diversification, streaming services are a unique way to add global exposure to investor portfolios. Netflix and other streaming companies proved the ability to scale internationally. In many cases, the international markets like Europe and India are just as important to the future subscriber and revenue growth as the US.
Even though it is early days, we have already seen some successes like Netflix’s growth and failures like AT&T’s Time Warner acquisition. Netflix’s success spurred traditional players to try a wide variety of strategies to catch up, but they have not all worked well. For example, AT&T’s Time Warner strategy, execution, and global scale issues led AT&T to spin off Time Warner/HBO Max into a merger with Discovery only three years after purchasing it for $85 Billion.
The Streaming Wars are filled with deep-pocketed companies loaded with content and distribution options. Rather than one clear winner, expect to see many players pull ahead at various points. In their first exchange, Netflix clearly got the better of AT&T and Time Warner, even with the latter’s vaunted HBO content library. Netflix currently maintains a large edge with ~222 million users worldwide, meanwhile, HBO Max only has ~74 million users worldwide. Both have great content, but Netflix is clearly more desirable to consumers, at least so far. Netflix worked to build a stronger global base with content in more languages. They also understood the opportunity and had no other business to focus on. HBO Max on the other hand had its HBO channel (which Netflix overtook for users in 2014) and a base of cable users, plus they were embedded in a phone company.
Netflix won the Streaming Wars’ opening rounds, but competition does not standstill. Yesterday, Netflix just announced that it lost users for the first quarter ever. This is in no small part due to increased competition from new services launched by traditional media players. A prime example of the tolls the Streaming Wars can take on even some of the best streaming companies. Things can turn quickly (Netflix stock was down over 25% after hours), and investors need to monitor service metrics to see what is working.
Netflix subscriber numbers compared to Disney+ and HBO Max
As shown in the chart above Netflix has had many years of strong growth. Now, old media companies coming out with their own streaming services has a double effect on Netflix. First, they offer more streaming options for consumers, and second the streaming competitors often pull their content from Netflix. This combination created a headwind for Netflix as streaming subscribers followed content to HBO Max, Disney+, Peacock, and more in order to continue their favorite shows, which used to be on Netflix. The other clear takeaway from the chart above, whatever the one-day or one-quarter shrinkage in Netflix subscriber numbers, streaming as a whole is not shrinking, it is growing rapidly as consumers take advantage of more choice.
This is a rough patch for Netflix but they still have some tricks up their sleeves. Looking forward, Netflix will leverage the highest global user base of any service and its backlog of data on subscriber habits. Netflix can press its advantage to invest to increase subscriber stickiness or offer ad-supported options at different price points.
While Netflix is a streaming pure-play, old media giants (for example Comcast/NBC, and Paramount) offer streaming as a “Plus 1” to reinvigorate their brands and others offer services as an add-on to their existing platform business (Amazon Prime Video and Apple TV+). Even the methods or goals are not congruent. This diverse range of strategies is what makes the Streaming Jungle so enticing. One business can go after sports rights and children’s programming to win and others try strictly with high-quality shows and everything else in between. Some services are trying to be bundlers of streaming services while others just want to be a stand-alone product. This is a space where creativity is rewarded. Like Netflix’s strategy of data collecting for optimization and other hitherto undreamt-of ideas will give each player moats that will be deciding factors in the conclusion of the streaming wars.
The right streaming strategy should be rewarded over the long run by the market’s weighing machine. The right streaming company will be decided by the international and domestic strategies and how they maximize moats to become dominant scale and possess pervasive stickiness. My goal in making this newsletter is to explore each streaming company and do my best to figure out whether or not they will be successful. In the end, the streaming winners can earn a fair share of large-scale, global recurring cash flow, which should reward their investors over time.
Until Next Time,
Soren
P.S. Since this is the first edition please share it with anyone who might be interested so they can join the journey
Disclaimer: Soren Peterson may have holdings in the companies discussed in this newsletter. Soren Peterson and Streaming Jungle are not responsible for readers’ investing results. I am not a financial advisor, always do your own research.