Is streaming really a ‘terrible business?’ It depends whom you ask

One question this column frequently asks is: Is streaming a good business?
The answer depends on whom you ask.
Craig Moffett, a prominent Wall Street media analyst, recently queried John Malone, the 83-year-old billionaire media tycoon who helped shape the modern cable TV industry. Malone’s answer, relayed by Moffett in a recent report, was a definitive “no.”
“It’s a terrible business,” Malone said, according to the analyst.
It’s easy to understand why Malone, who made so much money from the pay-TV bundle, would be sour on streaming’s a la carte model of delivering programming to viewers.
But his analysis also shows why Netflix and other streamers exploded in popularity. Rising sports rights costs caused traditional cable TV subscription prices to skyrocket. Meanwhile, the industry was unwilling to let viewers opt out of paying for sports channels if they didn’t want to watch them.
And as so often happens, technology stepped in to break everything apart, much like the MP3 revolution shattered the music industry’s model of selling $20 compact discs with 18 songs, only two of which were hits.
It’s clear how disruptive streaming has been for TV distributors, including cable companies. It’s even worse for satellite operators, which don’t even offer broadband. In an ominous sign, Dish Network’s parent company recently agreed to sell the business for $1 to DirecTV, which will absorb $9.8 billion in debt, pending regulatory approval, as my colleague Meg James reported.
For the Hollywood studios, the answer is slightly more complicated as their streaming businesses inch their way toward profitability after losing billions of dollars to compete with Netflix while also cannibalizing their cash-generating TV channels.
Walt Disney Co.’s direct-to-consumer business turned a profit in the most recent fiscal quarter, with ESPN+ helping to boost the segment while Disney’s entertainment streamers, Disney+ and Hulu, were still in the red. Paramount Global eked out a $26-million quarterly profit from its streaming operations, Paramount+ and free Pluto TV. Much of this progress was due to steep cost-cutting measures.
For streaming leader Netflix, things are looking bright. The Los Gatos, Calif.-based pioneer added 39 million subscribers globally during the 12 months ending in June. Its stock price has climbed 50% so far this year, while Disney shares are essentially flat year-to-date and down nearly 25% from April, around the time its proxy fight with activist investor Nelson Peltz ended. Netflix reports earnings next week, and analysts are expecting strong results.
Still, some observers caution that Netflix’s recent growth streak is likely to taper off. Recent subscriber increases were largely driven by the introduction of a crackdown on freeloaders, with Netflix forcing users to pay extra if they want to let someone outside their household use their account. This initiative, combined with the addition of a cheaper ad-supported subscription tier, has been successful, and competitors including Disney are imitating it.
But the “paid sharing” boost, while effective, can only last so long.
Looking at Netflix’s most recent viewership data, some see reasons to temper investors’ optimism. The service clocked 94 billion hours viewed during the first six months of 2024, up a mere 1% from the same stretch of time a year earlier. With the number of paying members increasing due to paid sharing, viewership per paid user is down year-over-year. And as anyone at the company will readily admit, Netflix is obsessed with engagement.
“This lack of growth may be worrying for Netflix for a number of reasons,” wrote MoffettNathanson analyst Robert Fishman in a recent research report. “For starters, if the lack of engagement growth is due to lack of real user growth, it implies that the subscriber growth we have seen has been simply improved monetization of an existing base — in other words, a de facto price increase.”
If Netflix’s subscriber growth tapers off, its ability to raise prices may also hit a ceiling. Recent analysis from Deloitte suggests that there’s a limit to how much more consumers are willing to spend on streaming services. The firm earlier this year said the average U.S. household subscribes to four subscription streaming services and forks over $61 a month, often in addition to paying for traditional TV.
On Monday, Barclays analyst Kannan Venkateshwar downgraded Netflix’s stock to an “underweight” (or “sell”) rating, citing incoming challenges to future growth.
“[T]he company has had to lean more heavily on new growth drivers to keep revenue growth in the double digits, and some of these, like paid sharing, are likely pulling forward future growth,” Venkateshwar wrote. “Even with these levers, growth is slowing and every lever now has corresponding trade-offs.”
What kinds of trade-offs? Well, if Netflix increases prices, as most experts expect it to keep doing, it risks losing subscribers and engagement. It could try to increase investment in sports rights to improve ad revenue, but that’s a costly business, especially when rivals including Amazon and Apple are bidding up prices.
Netflix argues that its engagement numbers are healthy.
The company consistently ranks as the No. 2 streamer in terms of U.S. TV viewership, coming in behind YouTube, according to Nielsen. Its original shows and movies account for a formidable portion of Nielsen’s weekly top-10 rankings for streaming programs. The company is looking to improve its viewership numbers with a better slate.
During the company’s most recent earnings presentation, co-Chief Executive Ted Sarandos said that, when adjusted for paid sharing, viewership was up in the second quarter compared to the year before.
What can other streaming services do to avoid being swept into the vacuum of space during Hollywood’s ongoing consolidation and Big Tech takeover?
According to Malone, who sits on the board of Warner Bros. Discovery, the future is international. At Netflix, for example, 70% of its users are outside the U.S. and Canada. Warner Bros. Discovery and its streaming business, composed of Max and Discovery+, isn’t anywhere near that. Even though Warner Bros. Discovery’s debt load is significant, Malone told Moffett he likes the company’s chances.
“They’re not going to run out of cash anytime soon,” Malone said. “So they don’t have to do anything while they sit and watch this consolidation in the industry move forward.”
Who among the streaming wars’ participants will be so lucky?
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Crowd-pleasers are generally good business for Hollywood. On the flip side, if an auteur director makes a big-budget movie that seems destined to make no one happy, that film has a pretty good chance of failing at the box office.
That’s what happened with last week’s turkey, Francis Ford Coppola’s “Megalopolis,” and now again with Todd Phillips’ “Joker: Folie à Deux.”
Warner Bros.’s “Joker” sequel opened with a weak $37.8 million in the U.S. and Canada, which is a rotten result by any measure. The final weekend figure was worse than the $40-million projection the studio offered Sunday, in a sign that bad buzz is taking a toll.
For reference, it’s worse than the $46-million debut of last year’s “The Marvels,” the big Disney superhero flop that triggered so much fan anxiety.
The domestic opening weekend take for “Joker 2” was less than half that of its Oscar-winning predecessor. Worse, the film cost at least $190 million to make, way more than the 2019 original’s $55-million production budget. The new movie’s “D” CinemaScore means a word-of-mouth rebound is not in the cards.
Warner Bros. has had a mixed record at cinemas this year, with hits including “Dune: Part Two” and “Beetlejuice Beetlejuice” counterbalanced by whiffs such as “Furiosa: A Mad Max Saga” and “Horizon: An American Saga — Chapter 1.”
The movie marketplace (with revenues still down 11% from last year) should have better days ahead. Upcoming fourth-quarter releases include “Smile 2” and “Venom: The Last Dance,” followed by “Gladiator II,” “Wicked,” “Moana 2” and “Mufasa: The Lion King.”
Production numbers from FilmLA:
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