The underlying message from both the data measurement company Antenna and the media research group Kagan is that the current business model of streaming operations as SVoD services is not sustainable.
Antenna reported that many new customers unsubscribe within a few months, while Kagan stated that U.S. households subscribe to 3.6 streaming services on average. (Another firm, Leichtman Research Group, reported that it’s less, just 3.1). In terms of actual subscribers, the total number in the U.S. given by UBS is 385 million. And as for the number of U.S. subscribers that will be churning, Deloitte reported a staggering 115.5 million (30 percent).
Nothing new here. The information is out there. It’s simply a matter of adding two and two together. But who’s going to tell the bosses who are risking losing their third residences when they are all playing with a full house and all have four of a kind? (The cards being: Ace, original content; King, sub fee; Queen, brand value; and Jack, low churn.)
But more than poker, it’s becoming just like a game of musical chairs: A portion of customers unsubscribe every month, and the streamers simply have to hope that they’ll sign up more subscribers than they’ll lose. The goal is to make sure that it’s not a zero-sum game. However, in order for Kagan to keep its constant of 3.6, the subs that leave one service have to land on other services when they’re attracted by enticing new releases. Indeed, the streamers need a constant supply of new content produced to the tune of billions of dollars. Netflix recently announced that it will be investing $14 billion in new original content for 2022, and Peacock plans to spend $3 billion. And this is without counting Disney+ ($33 billion), Amazon Prime Video ($11 billion in 2021), HBO Max ($20 billion), and so on.
There are 121 million TVHH in the U.S., so that’s the plateau that at least four of the major streamers aim to reach, which means that, while cost of operations (content, marketing, and services) will escalate, revenue will remain, at best, constant (if competition is reduced there will be a spike of revenue before a given service plateaus again). Lowering the plateau could leave room for, at most, eight SVoD streaming services. But in order to survive the aforementioned game of musical chairs, each has to invest a reported $70 in marketing for each sub to switch services. This is in addition to offering costly original programming, and competing with the so-called “subscription-everything” model (for music, videogames, social media, etc.), which is creating “subscription fatigue.” Under these conditions, it is hard to see how the streamers could be making any profit.
Plus, the “international” card can be used as a profit generator only if a service is successful domestically since the U.S. is the locomotive that makes a streaming service viable.
Right now, the closest to reaching the U.S. plateau is Netflix with 74 million subs in the U.S. and Canada, followed by Amazon Prime Video with 53 million (in the U.S.), HBO Max with 43.3 million (U.S. only), and Disney+ with 38 million (U.S. and Canada), for a total of about 200 million U.S. subs. This means that the main streamers still have 185 million subs left to play with in order to stay with the 3.6 Kagan constant and UBS’s 385 million total subs. This data can explain the 115.5 million churns anticipated by Deloitte.
However, while the four main streamers are barely surviving, the remaining services have to find other business models in order to stay in the picture. One of which could be partnering with other services. Another is by being bundled into multiple services and selling in tiers (like cable TV channels). Then there is the consolidation model used by Italy’s Silvio Berlusconi to acquire two competing TV networks, Rete 4 and Italia 1. Here, the strategy was to outspend the competition for programs. After incurring heavy losses in order to remain competitive, both Rete 4 and Italia 1 eventually threw in the towel and sold to Berlusconi.
But consolidation in this case does not necessarily mean spending less and charging more, because if the 3.6 Kagan constant remains in place, there will always be competition to contend with. Even if four streamers would be dividing the pie equally, the services are not expected to generate profits in meaningful ways due to competitive requirements like expensive programming and high marketing costs.
Other options include converting SVoD into AVoD or FAST services, and offering two-tier services: purely SVoD and a lower-priced SVoD with advertising.
The key, however, in order to reduce programming costs, is to go back to the marketplace to acquire finished content.
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