2024 Lookout: Streaming Market

The Streaming Market

After discussing the outlook of the aviation industry, i now turn to the streaming market, in this second installment of the 2024 Outlook series.

Netflix changed the way people watch TV and movies and sparked a transition to online video on demand, pushing legacy entertainment giants and tech behemoths into the market. Despite this shift to streaming, high inflation, price hikes, content saturation and post-pandemic consumer behavior have created challenges for streamers.

The leader of the industry overcame those headwinds with strategic initiatives, while Disney is working on similar strategies. Tech giants like Apple are making strides, while legacy media companies such as Warner Bros.Discovery try to build up their platforms. Sport programming is poised to become more important, FAST services are gaining popularity, while bundling could be the next trend.

Netflix

The streaming market boomed during the pandemic years, as people stayed at home and turned to online services. However, the world has returned to normalcy since then and a series of factors have created headwinds over the last couple of years. High inflation is top amongst them, squeezing disposable income, at a time when consumers have a slew of options to choose from (including free ones). These adversities were evident at Netllix's loss of more than one million users in the first half of 2021, which had also caused its stock to plunge. The streaming pioneer was forced to two strategic changes, which bear fruit, leading to an acceleration in revenue and subscriber growth in Q3.

The launch of a lower priced tier with the inclusion of advertisements in the US and elsewhere, is the first one. This is the way forward for the industry as it offers a cheaper entry point to price pinched consumers amidst increasing competition and generates an additional revenue stream. During the Q3 earnings call, Netflix said the ad-supported plan accounted for 30% of signups in the applicable countries and sees a $180 billion market worldwide (exluding Russia and China), so the potential is definitely immense.

The second critical change is the crackdown on password sharing, which Netflix had previously estimated at 100 million households. It rolled out a new policy this year that limits access to one household, implemented to almost all countries by now. This gives it a growth runway, since it turns sharers to paid members. The new strategy is "working" according to co-CEO Greg Peters, who said that "we're positive in terms of both revenue and subscribers" compared to pre-launch on all regions.

Disney

The Walt Disney Company had a rough 2023, as its traditional media assets suffered from cord-cutting and weak advertising, while its studio division had a disappointing box office performance. Its streaming services also faced difficulties, conceding the top spot to rival Netflix. However, the reinstated iconic CEO Bob Iger has been restructuring the company and now transitions from fixing to "a new era of building".

There are already promising signs, with the streaming services adding subscribers in the last reported quarter (July-September), for the first time in a year. The financials of the Direct-to-Consumer (DTC) business improved further and the company expects it to turn profitable within 2024. The improvement was largely driven by the success of the recently introduced ad-supported tier, which accounted for half of the additions in the last quarter, according to the CEO.

Encouraged by the successful rollout of its rival's password crackdown, Disney is also going down the same road. Mr Iger believes that "stronger standards" on account sharing will improve the DTC business, although meaningful impact is not expected in 2024.

2024 Themes

Progress on the ad-supported subscription plans and the account sharing policies of streaming leaders Netflix and Disney will be closely followed in 2024. There are though, more trends to look out for during the new year.

These include the streaming progress of legacy entertainment giants and tech behemoths like Apple that have thrown their hat in the arena, the increasing importance of live sports programming, the rise of FAST services and prospects of bundling.

Entertainment & Tech Giants

Traditional media companies are struggling against an adverse environment that weighs on their studio business and linear networks, while their DTC platforms are still in their infancy and mostly unprofitable, against a highly competitive backdrop. Warner Bros. Discovery (WBD.us) has decades worth of critically acclaimed and fan loved content, including the perennial success story HBO, while Barbie is the highest grossing movie of 2023. However, streaming success remains elusive and its 95.1 million subscribers as of September 30, are no were near those of Netflix and Disney. The CEO spoke of "generational disruption" in the media industry that is difficult to overcome with a streaming service that's losing billions of dollars, high interest rates and soft advertising. ^[1]

Tech giants on the other hand, have the wind in their sales, as their deep pockets allow them to invest in producing strong content and building their streaming services. Apple and Amazon.com are the best examples and although this is still a small part of their business and they don't disclose figures, they are making swift progress. Apple became the first streamer to win the Best Picture Oscar with CODA in 2022 and is already generating Oscar buzz for the 2024 ceremony, with Martin Scorsese's Killers of the Flower Moon and Ridley Scott's Napoleon. Apple TV+ is part of its services segment, which is expanding rapidly, generating record revenues in the last reported quarter.

Amazon.com has also produced shows and films that are popular amongst viewers and critics, making for an appealing streaming offering. During the Q3 blockbuster results, CEO Andy Jassy said that streaming is "often one of the top 2 drivers of customers signing up for Prime" and spoke of increasing conviction that Prime Video can be "a large and profitable business in its own right". The firm has also announced a subscription tier with commercials, to rollout in early 2024 in the US and expand into more regions later on, while adding a cost to the ad-free version.

Live Sports

Live sports programming is becoming increasingly important, since it can draw recurring crowds and is a good medium for placement of commercials, which is now a key pillar of most major streamers. According to Nielsen, Broadcast TV viewing has been increasing over the past three months in the US, boosted by the start of sports competitions. ^[2]

Disney is the biggest player and 40% of its fiscal 2024 content spend will go to such programming. It owns ESPN, which it plans to transition into streaming, in a move that can unlock tremendous value and shape the market. Tech giants Apple and Amazon.com offer live matches, with the latter saying it attracted 15.1 million viewers for the Thursday Night Football (TNF) season opener. Furthermore, the league turned to Amazon Prime Video for broadcasting the first ever Thanksgiving week match, instead of choosing a traditional network. ^[3]

Netflix is out of this arena, despite rich sport-adjacent content, but tested the waters with November's Golf tournament and invests in ramping up its live capabilities. Although it has not shared any immediate plans for live sports, it will likely need to eventually tap the market in order to compete. Securing sport rights however is a costly and difficult task, while streaming is also technically challenging.

FAST & Bundling

Traditional broadcast TV where viewers tune in to watch whatever is on at that time is sunsetting as consumers turn to video on demand platforms like Netflix and as advertising proceeds drop. Consumers however, seek alternatives due to high inflation, streaming price hikes and content fragmentation. As such, another form of linear TV is gaining traction, known as FAST.

It stands for Free Ad-supported Streaming TV, which is like traditional TV with preset programming and commercials, but online. Roku, Paramount-owned Pluto TV and FOX's Tubi are some popular examples, with such services drawing rising viewership this year, according to Nielsen ^[4]. Recent research by Kantar showed that FAST is the fastest growing streaming tier in the US, with 47% of households using such an option each week ^[5]. It will be interesting to see if the leaders of the industry, like Netflix and Disney resort to FAST subscription tiers, which would be a logical next step after the inclusion of advertising and their efforts to lower the entry costs.

The forces that turn viewers towards FAST options, could also lead competing streamers to bundle their offerings at a lower price, compared to what consumers would pay for separate subscriptions. Merging looks hard, at least in the near term, but bundling could be the way forward. The first shot has already been fired, as Verizon said it will offer Netflix and Warner's Max at an 40%+ discount. ^[6]

Conclusion

Streaming leader Netflix regained its throne in 2023 thanks to its strategic changes that have provided a subscriber and revenue growth runway. 2024 will be crucial to see how long this will last and whether Disney's initiatives will allow it reemerge as the leader of the market. We will also be eagerly awaiting for more details around its plans to make ESPN a streaming service.

High inflation, pricier subscriptions and multiple options have turned consumers towards free platforms, which look poised to continue to grow, while streaming giants may be forced to bundling. Traditional media companies are struggling to build up their streaming platforms, but are making progress. Tech behemoths have also entered the arena and streaming is already becoming a more important part of their business, albeit still not core.