Disruption changed the terms of the game
Streaming today isn’t what it used to be. As the streaming model shifts from subscriber growth to profitability, more studios are now positioned to reshape the rules to their advantage. M&E companies with streaming video services are considering charging extra for premium content, reintroducing contracts, and delivering more ads to viewers–and more ad value to advertisers. Such changes could force a reshuffling of subscribers into more profitable and enduring relationships with streamers and studios.
Digital disruptors often succeed by doing three things simultaneously: 1) satisfying persistent, unmet market needs; 2) using technology to scale their services at low cost; 3) changing the economics of the industry to their advantage. The first SVOD disrupters did all three to unseat cable and satellite TV, a business that had been highly profitable for service providers, TV networks, and studios.4 In doing so, they didn’t just change the distribution model to streaming, they disrupted the entire business model of TV and film.
When disruption happens, it can take time to understand the implications. When streaming services started, TV networks and studios thought they had yet another profitable distribution channel for shows and movies: network TV, theaters, pay TV, physical media like DVDs—and now internet streaming services. The high-profit media and entertainment engine seemed to be humming better than ever.
Then came the sting.
As the first wave of streamers grabbed greater market share, pay TV audiences were declining.5 This put pressure on studio business models that were dependent on pay TV revenues. As studios began launching their own streaming video offerings, they made some tactical assumptions:
- Subscriber growth was more important than initial revenues.
- The subscription-only model was the best, perhaps the only, option.
- If they spent enough on content, consumers would retain their subscription.
- Waning pay TV revenues would be enough to support investments required to ramp up streaming content, distribution technology, and marketing.
- With audiences suddenly spending more time at home during the COVID-19 pandemic, M&E companies needed to accelerate their streaming launches while the gold rush was on.
Most of these assumptions have not held up. Subscriber growth was critical, but it likely incentivized lower prices and higher content spending to acquire and retain customers who could cancel at any time. Escalating content costs, high churn rates, low subscription prices, and the lack of ad revenue combined to create losses in the 25-30% range—the mirror image of pay TV profits of +25-35%.6 Investors gave M&E streaming services less time and money to turn things around. The result of the initial disruption, the pressures of COVID-19, and the strategic decisions made many streaming video services unprofitable.7
While media correspondents were reporting on the “Streaming Wars,” another shift was underway. Younger generations now give more of their entertainment time to competitors offering more social and interactive forms of entertainment. For millennials and Gen Z, TV and film are no longer the primary form of media. These cohorts are just as likely to engage with highly targeted, user-generated video content (UGC) and with interactive and immersive video games that often include social experiences.8 They still subscribe to streaming video but are more likely to churn when they run out of compelling content. This has driven up costs for streamers whose only lever for retention has been hit shows and desirable back catalogs.
Not only has the business model for film and TV been shattered, but the landscape of entertainment preferences is evolving to include more social, interactive, and immersive experiences.9 In the quest for profitability, M&E companies should look to find a way to make TV & film accessible to and affordable for as many people as possible, lest they take their engagement elsewhere.
Streamers are unlikely to return to the heady profits of pay TV, but they can improve
To paraphrase Machiavelli, sometimes the least bad option is the best one. M&E companies can’t rebuild pay TV networks, but they can adapt their streaming models to boost profits. They’ve already taken some steps to provide differentiated streaming services based on viewers’ content preferences and budgets. Now they can go further with tiered offerings that could enable more households to be subscribers, with premium content pricing and early access to new releases, and with contracts that could drive greater retention.
More subscription tiers can offer streamers more ways to win
Most well-known streaming services have two subscription tiers: an expensive premium subscription without ads, and an ad-supported version that costs viewers less.10 But there are more ways streaming services can appeal to viewers, based on their desire for premium content or, conversely, a cheaper, bare-bones service.
In Deloitte’s conjoint analysis of US subscriber choices, over 40% of those surveyed are willing to pay more for premium services that include bundled content, such as live sports or video games, even when ads are included with the subscription.11 This content can be costly to license and produce, so the ability to charge extra may be the difference between a profitable or losing average revenue per user (ARPU).
Second, Deloitte’s survey found that subscribers are willing to trade small decreases in the subscription price for higher ad loads per hour. Subscribers might not be willing to watch 14 minutes of ads in practice, especially if competitors have similar offerings with lower ad loads, or they see the same three ads repeatedly. But the principle applies to consumers: subscribers care more about what they pay than they do about ad load.
While much has been made of targeted advertising (for good and ill), streamers should make their ad channel valuable to advertisers and agencies. But they should also be working to innovate on advertising content that is more engaging for consumers. Ads can be more creative, drafting on fast-moving trends and memes, and leveraging social media influencers and creators. Streamers can also experiment with prerolling ads before the start of shows. If streamers can find the right balance between these factors—and show stronger value to advertisers—they might unlock greater profitability.
Windowing and higher prices for the best content
Deloitte’s analysis also shows the pricing power—or lack thereof—that streamers have in the market. A leading brand might charge US$19.99 and gain about 15% of the market. To equal it, a weaker brand can only charge US$8.99. Even at US$5.99, the weakest brand can only capture about 13%. The lack of pricing power for less popular brands impacts ARPU and can make their path to profitability more difficult. Indeed, brands with low pricing power may need to find a way to make at least a few cents from each subscriber–or consider getting out of the direct-to-consumer (DTC) business.
Brand preference is often the result of tenure in the market and high-quality content. Leading brands’ pricing power can enable them to experiment more with tiering, while potentially looking at the relative value of their best content. In times past, cable TV offered some of their high-performing content as pay-per-view options, such as charging an extra US$65 to watch an exclusive boxing match. Live and appointment viewing could potentially drive more premiums for timely access. New movies and series could reintroduce windowing for different subscriber tiers, allowing premium members immediate access while delaying access to those keeping their costs down.
Deloitte further predicts that streamers will soon reserve premium content—shows, sports, movies, and games—for two kinds of viewers: Premium subscribers who opt for a high-cost subscription and mid-tier subscribers who sign up for a year. Minimalist subscribers and nonsubscribers will need to pay a premium for the best movies, TV shows and series, games, and sports—or wait 30 days until content is available on their plan.
Fighting churn with bundles and longer-term subscriptions
Easy cancellations can enable a certain percentage of consumers to “churn,” meaning that they will sign up for a service and cancel it later—perhaps sooner. Today, streamers allow viewers to watch premium content with a minimum investment of time and money. Subscribers can binge a show or two in a few days then cancel if they like. For most streamers, it can take several months of subscription revenues just to recoup their acquisition costs.12
In the year ahead, some streamers will likely introduce more friction to cancellations. They may offer bundles that combine multiple SVOD services or other streaming media services at a lower overall price–and with a six-month or year-long subscription. Some may pursue more collaborations with telecoms providing mobile and data plans. This could initially scare off some subscribers, such as those that churn frequently to chase content. But lower-priced tiers and bundles that spread costs out could make it easier for more people to maintain subscriptions–and for streamers to sustain revenues.
The bottom line
Just a few years into the streaming wars and many studios that leaned into DTC are seemingly realizing how much streaming disrupted their industry and how difficult it could be to be profitable as a streamer. It has been said that history doesn’t exactly repeat but it does often rhyme, and 2024 will likely see a return of some of the mechanisms and business models that helped media and entertainment companies become highly profitable before the streaming revolution. In this way, the industry is expected to try to rewrite the new rules of the game to be more favorable to their businesses.
Pursuit of subscriber growth has generated more costs than revenues, but now profitability is driving many streamers. Streamers are trying to learn how to make money off every viewer through a tiering strategy that offers options for premium subscribers and bargain hunters. For consumers who prefer to “hit and run,” streamers may need to charge a higher price for premium content. TV and film studios are primarily in the business of producing premium content, or at least more premium than social UGC. They’re likely in the position to demand higher prices for that premium.
More studios and streamers will likely consolidate or rebundle into offerings that make it easier for consumers to find and pay for access to all the content they’re looking for. Others will likely license more of their content to other channels–or fall back from DTC and become content dealers, solely producing content to sell into any channel willing to pay. Some content may include premium pricing, and more are expected to syndicate into other providers, retreating from the cost burdens of exclusive content.
Profits may also depend on trimming costs and cutting churn, but without charging a realistic price for their content, streamers will likely be challenged to find profitability. Charging more may cut streamers’ subscriber numbers initially but could net them more valuable subscribers. Either way, they should look to reach a reasonable and profitable ARPU or consider getting out of the DTC business. Ultimately, profitability is in service to the king: compelling content. Streamers may need more content, better advertising, and novel synergies with gaming and social media. But greater ARPUs and lower operational costs may help fill their coffers more than debt financing subscriber growth at all costs.
