Hollywood is Disillusioned with Streaming — What Comes Next?
Hollywood is losing faith in the streaming model and scrambling for solutions to cut costs and raise ARPU. Four key aspects to consider in terms of what comes next
Don’t look now, but the era of the “streaming wars” might have come to a quiet end. In a rather anticlimactic fashion, there’s no clear winner; the wars have simply become too costly for all parties involved to carry on.
In response to the post-pandemic slowing of paid subscriber growth, particularly in mature markets like the U.S. and Western Europe, and the rude awakening about the lower profit margin of the streaming model, Hollywood quickly started pivoting away from the growth-driven mindset that dominated the streaming era, and towards ruthless cost-cutting measures to raise the ARPU (average revenue per user). All the recent upheavals in Hollywood, from the recent rounds of mass layoffs at Disney and Warner Bros. Discovery (WBD), to companies removing shows from their streaming libraries and canceling projects for tax purposes, to Netflix’s crackdown on password sharing, to the ongoing WGA strike, are all directly connected to this industry-wide pivot.
All in all, it is evident that Hollywood is entering what Disney CEO Bob Iger recently dubbed “an age of great anxiety,” as the industry actively confronts the new reality and scrambles to find viable solutions. The previous focus on growing subscriber bases for streaming services has been deprioritized to make room for new tactics aimed at improving ARPU. But can Hollywood simply hit the brakes on its decade-long shift towards streaming and remake the TV bundle online again?
Furthermore, while the industry is still struggling to figure out the best way (aka the most profitable way) to distribute its content, generative AI is showing potential at disrupting the content creation process, further complicating the long-term vision for the entertainment industry. If the ongoing WGA strike and the resulting negotiations are any indications, Hollywood seems nowhere near ready to address these emerging issues.
How did it end up like this?
For the past decade or so, the shift from linear TV to on-demand streaming has disrupted the traditional Hollywood business model. Following the rise of Netflix in the mid-2010s, entertainment companies and media owners quickly followed suit, resulting in an era of “streaming wars” and “peak TV,” where content is abundant and competition is fierce. Everybody was chasing the success story and skyrocketing market cap of Netflix, and the social distancing measures encouraged during the Covid-19 pandemic only accelerated this shift towards streaming.
Fast-forward to last spring, the first chink in the armor of streaming model started to show. After years of unbridled growth and global expansion, Netflix encountered its first quarterly subscriber loss in more than a decade, shaking investor confidence and causing a $54 billion drop in the company’s market cap. Doubt over the viability of the ad-free streaming model quickly swept the industry.
The streaming model has been built on the idea of offering unlimited content for a monthly subscription fee, and it has been a popular model embraced by consumers who are eager to leave the confines of linear cable TV. Yet, with the cost of producing high-quality content rising, and the number of streaming services growing, the math behind the streaming model is not adding up.
Under pressure from Wall Street to prove profitability, streaming services started raising prices and exploring ad-supported tiers to supplement revenues. In response, some consumers revolted: churn rates went up dramatically, and more people started to rotate through the streaming services with a “subscribe, binge, ditch, and resubscribe” cycle.
Still, seeing no better options, the entertainment industry continued to double down on ad-supported offerings, hoping that budget-conscious consumers would find value in lower-priced tiers subsidized by ad dollars. From Netflix, which did a full 180 on its historically anti-ads stance, to the likes of Disney+ and Max (née HBO Max), nearly all major streaming services started rolling out ad-supported tiers over the second half of 2022.
The latest data suggests that this pivot towards ad-supported models is working, but only up to a point. According to consulting firm Kantar, during Q1 of 2023, SVoD (paid, ad-free streaming) services lost 2.2 million subscribers in the U.S., while AVoD (paid, ad-supported streaming) gained 2.6 million subscribers, and FAST (free, ad-supported streaming) gained 1.7 million users. The data suggests that U.S. consumers are opting to trade down to less expensive options, or sign up at a lower price point, for better value across their content roster.
Now, in the summer of 2023, Hollywood has become completely disillusioned with the streaming model. As chronicled by a viral piece published in Vulture in early June, many working in the entertainment industry have lost faith in the streaming model pioneered by Netflix, and are quick to blame it for upending the decades-old ecosystem and causing havoc in the entertainment industry. As the WGA writers’ strike continues to highlight the labor tension between content creators and studios caused by the in-flux business model, studios are trying everything they can to course-correct.
From WBD’s new CEO David Zaslav’s aggressive cost-cutting measures, and rebranding HBO Max as Max to integrate the Discovery content, to Disney hiring back Bob Iger to consolidate its TV branches and restructure its marketing division, with reported plans to merge Hulu content into Disney+ in the U.S. by the end of this year, to Paramount rasing pieces and merging Showtime content into Paramount+, to Comcast launching an Xfinity TV bundle that includes a premium subscription to Peacock, to Netflix’s recent password sharing crackdown that reportedly drove a modest increase in new subscribers, and removing its $10/mo basic plan in Canada, every media conglomerate is laser-focused on optimizing their distribution models and operations to maximize profits.
Perhaps the most telling sign of the end of the streaming wars is the recent development of media companies licensing out their content to competing streaming platforms rather than keeping it to themselves. For example, WBD is reportedly considering licensing some of its content, including some HBO shows, to Netflix and Tubi, and it is confirmed to launch a FAST channel on Amazon’s Freevee. While this decision may seem counterintuitive, as Warner Bros Discovery already has its own streaming service, Max, which offers both ad-free and ad-supported tiers, ultimately this move would help WBD reach a wider audience and generate additional revenue from licensing fees. If more media companies were to follow suit, Netflix would be in a great position to benefit, as the streamer has the biggest global subscriber base to monetize the licensed content against.
So, the streaming wars are over. What comes next?
For starters, a re-evaluation of the content windowing strategy is in order. Some analysts were quick to blame the shortening theatrical release window for Hollywood’s decreasing profits, but a recent NYT report suggests otherwise: Universal Studios, which has shortened its release windows for its theatrical releases since the early days of the pandemic, says on-demand windowing has increased the overall audience for its films. The studio let viewers rent or buy movies earlier for a higher price, which made more than $1 billion in less than three years, with nearly no decrease in box-office sales. How to balance between milking profits through a conventional windowing release and making a film accessible to most people before it cycles out of the cultural conversations will be a tricky line that Hollywood will need to walk.
Secondly, Hollywood also needs to figure out how to make ad-supported plans actually work for streaming services. Right now, streamers are trying to lure more viewers to the ad-supported tiers with the promise of low ad loads, compared to that of linear TV, but the inevitable pressure to stick more ads may be difficult to resist. For viewers, the potential disruption of a previously ad-free experience may be hard to stomach, but there are real opportunities in new ad formats that could increase the CPM of streaming ads that streamers should explore. Case in point: shoppable ads that leverage connected TV’s interactivity to drive sales directly, which Peacock is in the early stage of testing.
As analyst Doug Shapiro points out, streaming TV profits may never replace the declining profits of traditional pay TV. For one, traditional TV monetizes at about twice the rate of streaming TV per hour of consumption; and two, video overall monetizes about 50% higher than gaming and three times higher than audio per hour of consumption. The transition from linear to streaming is effectively wringing out this excess monetization in the process. Therefore, exploring new formats to make up for the lost excess revenue should be imperative for streaming services.
Thirdly, Hollywood will need to figure out what to do with live sports content. As the last remaining factor holding back some cable TV users from cutting the cord, migrating sports content from the major leagues to streaming would completely unravel the linear TV business and decrease overall profitability. Yet, moving sports content towards streaming also seems inevitable in the long run, given the viewing habits of younger sports fans.
Over the last 12 months, the streaming services have seen a heightened interest in adding live sports to their content library. Whether it’s Apple TV+ adding MLB and MLS content, and Apple going as far as orchestrating international soccer superstar Lionel Messi’s recent move to Inter Miami in MLS to boost the appeal of Apple TV+, or Netflix experimenting with a live golf match featuring famous F1 drivers and pro golfers, it is clear that Hollywood sees live sports as a valuable asset. Live sports content naturally lends itself well to ad-supported viewing, which aligns nicely with Hollywood’s new focus on increasing ARPU. Compared to the likes of Comcast or Disney, digital-native players like Netflix, Apple, and Amazon benefit from having no cable business to protect, and may start investing heavily in live sports content to drive ad-supported viewing.
Lastly, Hollywood will need to reckon with the existential-level threat that generative AI may pose to their core business — producing highly-differentiated, quality content. The proliferation of short-form video, popularized by TikTok, is already altering some consumers’ perception on content quality and length, while lowering the entry barrier of content creation and access to a global audience. For some, virality has become a new metric for quality. The rise of generative AI, coupled with new types of virtual production tools, will further lower the entry barrier to creating the type of high-production value content we typically associate with Hollywood.
For an industry still reeling from the change in content distribution has had on its overall business model, a revolution of content creation might be too much to fathom. Of course, burying your heads in the proverbial sand won’t help, and there’s no putting the AI genie back in the bottle either. Leaning into it and starting experimenting with potential use cases, such as automating parts of content creation to personalizing user experiences, may be a wiser response in the long run.
Of course, not everybody will be on board at first — the recent backlash over a Marvel series using AI to create the opening title sequence served as a primal example of this knee-jerk resistance, which points to a larger issue of the ethics around generative AI. But, if and when the generative AI tool becomes good enough to produce the type of content that could rival a Hollywood studio output, or even simply captures user attention at scale like a viral TikTok would today, then it’d be time for the entertainment industry to develop new business models centered around AI-powered content creation.
Until then, let’s figure out how to make streaming work first.
