Ecosystem: Why Streaming Is A Jungle And Who Is Going To Rule It (Issue #6)
Not long after launching Streaming Jungle, I was asked how I came up with the name “Streaming Jungle.” The first part of my response is that “Streaming Wars” was taken. The second part was that this is how I think about the streaming sector after a year and a half of researching and tracking the sector. Streaming is a fight for relevance and survival, a jungle. The goal of this post is to flesh out that metaphor for you, the reader. This should help with understanding why streaming companies behave the way they do. At a basic level the idea is that these companies are evolving based on different playbooks and finding their unique roles in the ecosystem. Multiple companies are battling it out for the top spot while others are content finding their spot lower down the food chain.
Now on a more detailed level let’s look at the breakdown of streaming and see all the places where streaming companies have opportunities to reside and differentiate themselves.
First at the most basic level. What are you using to watch content? Is it on a TV, then are you using a ROKU, Apple TV, Amazon Fire TV, etc. All of those companies have their own streaming services but are also angling themselves as bundlers of multiple services. In effect, streaming replaces the big Cable TV bundle offered by the likes of Comcast and Charter today, and this is where Roku, Apple, Amazon, and others are positioning themselves to try and become the bundler of the streaming future. An example of the power of bundling is Apple’s App Store which over the past couple years has made $60-$80b in sales annually. That number isn’t something to be taken lightly, but better still Apple earns this revenue stream as a curator. This avoids the cyclicality of development costs and as revenue from the App Store scales costs only go up marginally. These principles are the same in streaming and demonstrate how powerful this role will be.
Alternatively, you may be watching on a laptop, in-app, or in a browser. That model is a direct relationship between customer and streaming service. Going one step further, mobile devices allow for on the go content consumption and new types of ways consumers relate to content, making a departure from historic parallels to the cable industry. These are all pathways that can be leveraged. They don’t become truly valued until they are restricted, for example, I doubt Apple will ban Netflix or other apps from the App Store or that Google will block sites of streaming services, but being the gate keeper to accessing content is a powerful positon to be in. All it takes is a small bottle neck to have large scale effects (think of Ever Given in the Suez Canal).
After that first level analysis of how you consumer content, the next level is looking at why are you watching in the first place? Is it for your kids, to find your next binge show, to watch a specific sport, or are you just bored? Depending on the answer different services are better positioned to cater to your needs. It is important to realize that although there are customers for all of these - and some are more sticky. Streaming cash flow comes from recurring usage, some offerings have more stickiness with the customer than others. This is why Netflix’ earning reports are focus on subscriber churn. We can learn from history, Cable TV pioneer John Malone’s word “sports is the glue that holds big cable bundle together”. Where will streaming services and would be bundlers find that glue today? Will it be sports like cable or music, games or something different?
The Streaming Jungle is comprised of multiple companies with different backgrounds trying to solve the same problem – the right recipe that minimizes churn and cost, and maximizes in app stickiness and profitability. Unlike other industries where companies run similar playbooks, Streaming Jungle companies each have different advantages from their media, tech, cable focus and run different plays to dig their competitive moats.
When it comes to creating stickiness – sports is one of the best content types because people love it so much they schedule their lives around it to tune in live. There are also lots of entry points into the space, but they are not created equal and the most valuable sports rights are not cheap. To return to the John Malone quote above the full version is, “Sports is the glue that holds the big bundle together…unfortunately, the guys who own the sports rights know that.” Sports rights prices continue to increase as the leagues and teams that own them continue to realize what their value proposition is to the bundlers in determining stickiness.
An often overlooked niche in the search for stickiness is kids content. Parents want good content for their kids and when a kid becomes attached to a character or show the switching cost for the parent is far worse than keeping a subscription. This is also key because there are only two main kids players currently Disney+ and Paramount+. Between these they have Spongebob, Paw Patrol, Rug Rats, Peppa Pig, all the Disney Princes and Princesses and more. The secondary advantage for kids content is streamers have a chance to build long term relationships. Disney is the gold standard here, building on content for young children then adding Pixar, Marvel, Star Wars, and other franchises to continue through teen and adult years. So using Disney’s playbook as a guide, when looking at streaming who invest in children’s content, do they also have a way to keep them interested beyond one franchise?
High quality content is another key area for stickiness. It has proven defensible by HBO in traditional cable and in streaming as well. But stickiness comes at a cost of continual reinvestment. Fortunately high perceived value is rewarded in pricing power as shown by HBO in the cable industry being able to charge higher rates and Netflix in streaming. Over the past couple of years Netflix’s library has completely transformed as old media has pulled their content on to their own services, but the subscription fee has only gone up.
Low quality content is another counter-intuitive way to achieve stickiness. Initially, investors write off low quality content, but at the end of the day there is a lot of the time when people want to “turn off their brain” and watch something mindless. This is why Discovery between all of its avenues has ~2 billion viewers annually. Low quality content has worse returns, but it does have mass applicability. This is another thing to calculate: the optimization of number of users and value per user. A prime example here are free services like PlutoTV (owned by Paramount) which for the most part only has TV shows and Movies in the public domain and uses ads to monetize it. Or YouTube (owned by Google) having content creators make their own content and only pay ad revenue to creators based on video performance. This is like if streaming services only paid-for content if it was hit on its service (not a realistic possibility, unfortunately). Both of these services have low ARPUs – PlutoTV has an ARPU of $0.31 – but their game is not quality of customers it is quantity. Another example is Discovery’s cable business which has ~2b views although it only receives a low rate from each viewer they do add up. They are trying to make dimes off of hundreds of millions or billions. On the other hand, Netflix is trying to make $10-$20 ARPU off of tens of millions or hundreds of millions. For example, Netflix’s ARPU is highest in the US and Canada at $14.91. Disney is using the Netflix strategy of quality of users for North America but is using a Discovery approach globally.
Playing into scale vs. value of users is the international market. For example, India is the largest streaming market for international streamers at 1.4b people. However, the wealth distribution and standard lifestyle of those in the country is very different from other streaming markets. This means that ARPUs in the region are often less than a dollar even with the right strategy. With exclusive India Premier League Cricket rights Disney only achieved a $0.76 ARPU. For reference, their ARPU in the US and Canada is $6.32 and that is on the lower end of ARPUs for the region. Disney uses a very different strategy internationally. For example, they bought Hotstar which has services in Asia and South and Central America. They also make content specific do different regions. Alternatively, Netflix’s strategy is almost identical in all markets with no sports internationally yet and only some content catering to other markets. For the most part Netflix just dubs over its existing content in other languages. They have achieved a lot of users, but there is a high concentration in western markets and new strategies will have to be implemented to grow into a bigger player in other markets. Warner Brother’s Discovery is set up well with Warner Media’s strong content library and Discovery’s global scale to become a big international player.
Streaming means different things to different sectors like tech, consumer, media, and more. There aren’t many sectors where a single service can address with hundreds of millions (or in some cases billions) of users.
Looking forward, I will track and analyze how the Streaming Jungle evolves and report on where each streamer resides in the ecosystem. Stay tuned. There are exciting things coming in this space and please share this newsletter so others can join the journey and understand the jungle.
Until Next Time,
Soren