Streaming Wars 2022 Recap

What's Inside?

• Recent Headlines

• The Good

• The Bad

• Zaslav's Pivot

• August Streaming Guide

Recent Headlines

The Big Ten strikes record for college sports rights totaling over $1B per year in new deal

Top Gun Maverick surpasses Infinity War to become #6 domestic movie of all time

Warner Bros. Discovery makes strategic changes pulling back scripted and kids spending

Walmart enters the streaming wars by bundling Paramount+ to all Walmart+ members

Amazon tests "TikTok" like feed into their shopping app

The Good

Disney and Paramount were able to continue growing their streaming services despite macro headwinds and increasing competition in the streaming wars. Disney added 14.4M subscribers in the most recent quarter thanks to its continued international expansion. Paramount was able to net 3.7M, additional subscribers, in the most recent quarter despite losing 1.2M from exiting Russia, aided by Europe expansion and T-mobile hard bundle. Paramount+ specifically has caught success in the United States market being the most popular new service for people who canceled their Netflix subscriptions per Antenna Data.

UX Upgrades

Now that content budgets have begun to be scaled back, services are further emphasizing UX upgrades to help boost engagement of currently existing content on their platforms. Netflix has led the way for UX innovation for streamers with autoplay and the top 10 lists but now is taking curation a step further by curating "daily picks" at the top of the screen.

Amazon Prime Video underwent a complete UX overhaul and it's much improved now taking inspiration for a Top 10 lists feature from Netflix to help curate content from Prime Video's massive library. The update also includes the rollout of new navigation menu, live TV, scrollability, hubs, and more. Vulture wrote a good article on the updates and Amazon's ambitions for the future.

Prime Video should get a significant spike in viewership thanks to the most expensive show ($1B+ budget) ever made, Rings of Power, and Thursday Night Football both making their exclusive debuts in September.

Paramount+ subscribers who choose to bundle through Prime Video are benefiting as well as the P+ live channels feature got a revamp to help make the experience mirror linear viewing. Amazon has also integrated Freevee within the Prime Video app to make switching between the two services seamless.

Music x Streaming

Streaming services have been experimenting with music to bring subscribers new forms of entertainment that weren't previously possible through linear viewing. Hulu livesteamed the music festival Lollapalooza on its platform as well as creating mini-episodes featuring bands performances like Metallica. Disney+ released a documentary featuring Olivia Rodrigo's journey of creating her hit debut album "Sour". Amazon Prime Video has been creating original concert experiences for their service featuring some of the biggest names in music like The Weeknd, Maluma, and Drake. Paramount+ featured a 25th anniversary concert for South Park that is now available on the service as well as an upcoming live tribute concert for Taylor Hawkins on September 3rd.

The Bad

Diminishing Returns

While investments in content continue to increase for the streaming leader, Netflix reported a loss of 1M subscribers for Q2 despite having a strong content slate including new seasons of Ozark, Peaky Blinders, and Stranger Things. After a strong Q1 led by the Olympics and hosting the Super Bowl, Peacock subscribers flatlined after racking up a $2B dollar hit for parent company Comcast. Big-budget originals were often seen as the best way to grow subscribers but streaming is hitting a point of diminishing returns with increased content investment not necessarily translating into more subscribers. All streaming related stocks are down significantly from the beginning of the year as investors stomach the reality that streaming ARPUs (average revenue per user) will be lower than cable ARPUs in the short-term even with boost from advertisements.

Rising Churn

Streaming services are increasingly becoming reliant on international markets to drive subscriber growth as Netflix, Peacock, and even HBO Max all posted either negative or no growth in the domestic market. Even Disney's 14M+ subscriber additions for the quarter were mainly driven by international markets with extremely low ARPUs casting real concerns on what churn might look like when those prices inevitably are increased. Netflix, which has historically posted the lowest churn in the industry has seen a major uptick in churn with subscribers of 3+ years beginning to finally leave the service amidst a plethora of options per Antenna Data.

Zaslav's Pivot

In the summer of 2019, AT&T announced the name of their streaming service, HBO Max, a bold new idea to go all-in on streaming, focus on going direct to consumers, and be “like Netflix” was the message shared by executives. The irony though is that Netflix had already figured this out, citing "The goal is to become HBO faster than HBO can become us” back in 2013, you can read my full breakdown on this here. Max launched in May 2020, amidst a pandemic, and has been doing everything it can to compete directly with Netflix including offering the service for free to all existing HBO cable subscribers. At the end of 2020 Warner Bros. dropped a bombshell with their "Project Popcorn", a radical experiment to release their entire theatrical slate (19 movies) day-and-date in both theaters and HBO Max for no extra cost. Afterward, Warner Bros. decided to adopt a 45-day exclusive theatrical window for new movies before adding them to HBO Max at no additional cost. However, David Zaslav has decided to move away from that decision now starting with Elvis by making it available for digital purchase after 45 days but with still no HBO Max release date announced.

Movie Math

Heres a breakdown of the movie supply chain: Theatrical -> PVOD (digital) -> DVD/Blue-Ray -> Pay-One Streaming Window -> Additional Licensing/Syndication

David Zaslav made headlines with the news that DC is completely scrapping the already produced $90M HBOMax Batgirl movie in favor of using it as a tax write-off. Zaslav has specifically cited that he believes in theatrically releasing movies to maximize revenue and that any made-for-streaming movies going forward will require much smaller budgets to be greenlit. Elvis is still going strong theatrically, grossing over $8.5M domestically since its 45th day at the box office while also claiming the top spot on the iTunes movie chart for the last two weeks. Additionally, box office demand has shown a strong resurgence over the past few months. Without any significant releases until October all existing blockbusters have a real opportunity to leg out. Blockbuster movies surely help boost engagement for streaming services but releasing them directly to streaming isn't creating a new boost but rather cannibalizing more lucrative phases earlier in the supply chain like theatrical and PVOD.

There's an argument to made that releasing a movie directly to streaming instead of theatrically can make for a bigger debut but the data hasn't shown that so far, in fact, one of the biggest leading indicators of a movie's streaming success has actually been a strong theatrical run. I’ll start with a major caveat that the MCU is a juggernaut when it comes to entertainment but it’s also important to note that Netflix has a much bigger subscriber base than Netflix so “hours watched” typically skews in their favor. Both of these $200M films debuted with 1.4B minutes watched during their first week on streaming.

Top Gun Maverick and Spiderhead both have a $150M budget as well as featuring the directing/acting duo of Joesph Kosinski and Miles Teller with the former grossing over $1.4B before even hitting digital rental. Red Notice and The Batman both had a $200M budget and The Batman grossed over $700M worldwide before giving HBOMax a content boost. While again both of those movies are part of well-known IP helping pad those grosses, that's Netflix's disadvantage with their current movie strategy. Competing studios will be able to greenlight much more blockbusters as they are turning a significant profit for the studios BEFORE even helping out their respect streaming services, it's not a viable long-term business model for Netflix to keep making $200M+ direct to streaming movies. The new Netflix movie, Purple Heart, has just become Netflix’s #7 most streamed movie within the first 28 days of all time surpassing The Irishman ($200M+ budget) with a MUCH smaller budget.

There is no necessarily "wrong" strategy for movie distribution as it depends on what a studio's main priorities are, but a one-size-fits-all strategy for all movies by a studio is suboptimal. A 20M+ horror movie, 70M+ animation movie, and a $160M blockbuster all have different economics in terms of profitability and should all have different distribution strategies tailored for those specific pieces of content. Content for streaming services can be categorized by its primary function for streaming Acquisition, Engagement, or Volume.

Using this framework a blockbuster may serve as an Acquisition driver so a strong theatrical run can be beneficial for marketing. However, a smaller budgeted movie may not drive new subs but can drive engagement for existing subs so a 45-day window can be enough to turn a profit but still help streaming services. A general rule of thumb would be the bigger the blockbuster the slower it will move through the movie supply chain as it can leg out over its theatrical run and digital rental before debuting on a streaming service. While Warner Bros. has gone with a ubiquitous strategy for the past years rival studios Disney, Paramount, and Universal have all been experimenting with all types of different distribution strategies.

Disney is focusing on maximizing streaming with direct-to-streaming releases and because of the Disney flywheel of parks and merchandise, they can afford to take a loss on a movie outright by doing a streaming release as it will still drive sales for toys and experiences. Universal has been the most experimental regarding release strategy doing a completely PVOD release for Trolls during 2020, a 17-day exclusive theatrical before PVOD, and even licensing movies to Netflix after an initial four months on Peacock. Paramount is somewhere in the middle, generally following a 45-day fast follow strategy but debuting on digital purchase and streaming the same day with the exception of Top Gun Maverick. Paramount does currently have a pre-existing sublicensing agreement with Epix where movies move to after Paramount+, but starting in 2024 that will end with the strategy to keep new movies to help bolster Paramount+.

Zaslav is at a crossroads to decide on a new direction for Warner Brother's overall strategy and with a specific mention of sublicensing on the most recent earnings call, it sounds like the former NBC executive will be going with Universal's strategy. Taking a further look at Nielsen's Top 10 data we can see that the licensed 2021 movie, Sing 2, actually performed better in the first week than Netflix Original Sea Beast, with 1.2B minutes debut week compared to Sea Beast's 920M minutes. Netflix has refused to commit to a theatrical strategy thus far, so maybe landing a licensing deal for new Warner Bros. movies after HBO Max can help them better compete on the movie front. Netflix would hypothetically have licensing deals for new releases from 3 out of the 5 major studios!

Streaming's Paradox

Alongside the pivot away from making big-budget streaming movies is also a reduction of scripted content, animation, and live-action kids entertainment completely. Zaslav wants to focus more on cheaper unscripted content and a curated variety of content to drive growth for the new combined streaming service, to be unveiled later this year at Warner Bros. Discovery’s investor day. HBOMax has quickly become many people's favorite streaming service, ironically maybe the service is “too good” to be profitable.

From the beginning it was announced that HBO Max and Discovery+ will merge into one service, it’s not the most profitable decision to combine the services. If you have lower prices and lower revenues to start off, you need to cut content costs to get to profitability. Casey Bloys and HBO team is already producing tons of great scripted content so HBO originals can be enough to draw in subscribers without needing more HBOMax drama or big-budget made-for-streaming movies. Additionally, having the best content offering possible isn't the goal of a streaming service instead it's really about having just enough different content to keep customers satisfied enough to not cancel their subscription. HBOMax scored the highest of any streaming service in overall satisfaction with a 94% for this year, and the new management is seeing that as an opportunity to scale back their content spending.

We are approaching a phase of “peak streaming” with big-budgeted dramas House of the Dragon, Rings of Power, and Andor all premiering in the next month for their respective streamers. EntertainmentStrategyGuy wrote a great article breaking down the upcoming genre wars. While dramas do often tend to drive significant viewership the key to making a sticky product is having a variety of content including comedies, unscripted, animation, and movies alongside dramas. Streaming services are dealing with higher churn across the board, without any penalties for breaking subscriptions like in cable, customers are now subscribing for a specific show and then cancelling when it ends. Services have to program around this by stretching content out over multiple months and new programming best practices. Besides genres, content can be categorized by its primary function for streaming services: Acquisition, Engagement, or Volume

HBO's newest show, House of The Dragon, just debuted with a record-breaking 10M viewers within the first 6 hours of release. Expect HBOMax to release Elvis on streaming towards the end of the show's run as a way to drive engagement for subscribers who otherwise may have churned out after finishing the show. HBOMax also wants subscribers to begin binging through the service's library including hit shows like Friends, Succession, and Game of Thrones. Top Gun Maverick will be used to drive sign-ups for Paramount+ and as a lead-in for the launch of new shows as well as the return of NFL on CBS to keep those new subscribers stick around. Expect movie windows to remain dynamic factoring in both box office performance and upcoming slates for streaming services to decide on release dates.

While I’ve made the case for the business rationale behind some of Warner Bros. Discovery’s recent decisions the execution of these changes could have frankly been handled better. One year ago, David Zaslav touted his expertise in talent relations and being able to attract top talent to work with Warner Bros. as a key reason for the merger's success. The directors of the 'Batgirl' movie found out about the cancellation when they were in Morocco for one of the director's wedding where they were planning to back and make some final edits afterward. A number of the creatives behind the animation projects that have been removed from HBOMax to avoid paying out residuals have publicly complained expressed frustration and even supporting piracy now for fans to enjoy their projects. Zaslav has also expressed an ambitious plan to rebuild the DC universe akin to the Marvel Cinematic Universe which sounds great but will also require lots of long-term investments that won't help the company's profitability. Ant-Man, Incredible Hulk, and even the first Thor movie all weren't necessarily 'hits' but were crucial projects to help build out the longer-term MCU strategy. Additionally, DC already had an uphill battle to attract top actors and now with fears of getting a project scrapped in post-production, I imagine lots of agents are telling their clients to possibly hold out to see if they can land a role as an upcoming Avenger or X-Men instead.

Make sure you are subscribed to the newsletter as my next post will break down in-depth how Top Gun Maverick became the biggest movie of the summer and why I’m extremely worried about Disney as a brand.

📰 August Streaming Guide

House of The Dragon - HBO Max

Only Murders In The Building (S2) - Hulu/DisneyStar

Better Call Saul (Final Season) - AMC+

She-Hulk - Disney+

Orphan: First Kill - Paramount+

Loot - AppleTV+

Rings of Power - Prime Video (September 2nd)

Jurassic World: Dominion - Peacock (September 2nd)

Cobra Kai (S5) - Netflix (September 9th)