How Do We Get to Profitable Streaming?

Wells Fargo announced a downgrade for Paramount Global, questioning the long-term profitability of their streaming strategy, especially given the rapid linear TV declines plaguing the industry, including Paramount. Given that the library of content Paramount owns is worth more than the company itself, it was suggested that Paramount Global follow in the steps of Sony: get out of streaming and become an “arms dealer,” licensing content to other streaming platforms who very much need content. Something that Paramount is partially doing; you’ll occasionally see movies and shows go from Paramount+ and Showtime to a competing service. However, Paramount set a goal that in 2025, all its owned movies and shows will only be found on its own streaming services.

At least Paramount Global can rest easy that it had the strongest growth of all streaming services in the first half of 2022, with a worldwide subscriber base of nearly 67 million, with 46 million on Paramount+ alone, and nearly 72 million active users on Pluto TV, the number one FAST service. Nowhere near Netflix or HBO Max in subscribers, but certainly higher than Peacock. At 15 million subscribers, and 30 million active users, it has struggled to find a wide audience through its original slate of smart comedies and the home of Bravo and NBC. To supplement the service, NBCU ended deals with Hulu for its programming, and Peacock spent a great amount of money on Yellowstone, the WWE Network, and now is the home of Hallmark, both the on-demand movies that are huge ratings grabs for the holiday season, and the linear networks, a first that a streaming service is carrying a linear channel it doesn’t own.

And except for Netflix and Hulu, none of these services are profitable. It’s hard to gauge Prime Video and Apple TV+ as these are just complements to a larger ecosystem, but certainly for the other streaming services, even Disney+, they all spend billions of dollars on content and are all not in the black. And especially looking at a service like HBO Max, what was regarded as the best streaming service with nearly 80 million subscribers, experienced major cutbacks and cancellations, with many of its shows and movies licensed out to other services. So, how do we get to the future of streaming?

First, we have to deal with cable. For many people, it comes as a shock to many that cable networks get any investment today. When G4 announced its revival, a great number of people were confused as to why its return involved a cable channel. It’s because even today with lessened viewership, cable is still an insane source of revenue. In carriage and retransmission fees and premium subscriptions, Paramount Global’s TV division made from the beginning of January 2022 to the end of September over $6 billion. And television advertising also made over $6 billion as well. After expenses, they made over $4 billion. In that same timeframe, Paramount’s streaming division made $2.5 billion on subscriptions and $1 billion on advertising. And after expenses, they lost $1 billion. With lesser viewership, and a declining business, linear TV still made money, and had an easier time bringing in A LOT of ad dollars. It helps that Paramount has a broadcast business with CBS to help with the growing number of people using antennas, but it still brings the point home that streaming is just not where it needs to be yet, and it’ll probably take a decade until we see some big shifts in dollars.

So how do we get there? If we use Paramount Global’s financial reports, we can make some assumptions. Paramount spent $4 billion on streaming expenses, which likely not only includes money for producing content, but also marketing and app maintenance so the service continues to function and develop across platforms, which isn’t cheap. But let’s just say they need to get expenses at $1 billion and that’s just used for content. In 2021, Netflix spent over $10 billion on content and brought in over 120 original titles to Netflix. Lots of new content is important to consumers looking for the best value. If we assume that one high-budget series of 10 episodes or a movie costs $50 million to produce, and if we’re looking to stay within that $1 billion budget, that’s 20 titles for the entire year. And that doesn’t include licensing other movies and shows to supplement the service.

It certainly doesn’t hurt to have the “arms dealer” approach. Sony makes a lot of money selling their theatrical releases and library of movies and shows to services desperate for new content. Uncharted, the 2022 film based on Sony’s popular video game franchise earned hundreds of millions at the box office, and likely scored a lucrative deal on Netflix, as it was the top movie of the week it launched. And Paramount themselves are no stranger to licensing their content. HBO Max paid $500 million for a five-year South Park deal for all seasons including new episodes after they premiere on Comedy Central. CC also made a deal that turned its critically acclaimed but low viewed 2019 premieres into Max Originals. And Yellowstone, cable’s biggest show, undoubtedly scored a lucrative multi-year deal for Peacock exclusivity. As well as the other shows and movies licensed out by Paramount that left Showtime and Paramount+ this year.

The question is who has the better strategy? If we see more consolidation (and I really hope we don’t) or if services opt to just shut down, there won’t be as much of a need for more content, which puts into question if the “arms dealer” approach will be as lucrative in the future. Companies will always want to make their own content rather than pay to license another, especially if they are successful at doing so. And if something like Paramount+ can find success by being a top streaming platform, they won’t have to pay out as much for outside content. They can keep all the revenue for themselves, which is the goal for all the streaming services.

Unfortunately, we’re still in the early days of streaming, and we have yet to see where this whole thing will end up. The big streaming services may continue to operate as usual, but the smaller ones like AMC+ may get swallowed up like Discovery+ will soon be with HBO Max, and Hallmark’s offerings into Peacock. The big names may stay, but who knows where the little companies like A&E Networks will go.