In 2022, there is no winner in the streaming war

Wen 丨 lai coffee think tank, compilation 丨 doudou, editor 丨 Gong Yan

In Disney's youth movie "Turning Red," which will be released next month, the star turns out to be a teenage girl who often turns into a giant panda. The world's largest media company is long out of adolescence and is about to celebrate its 100th birthday next year. But Disney is undergoing some awkward changes and is restructuring its $260 billion business around its two-year-old streaming business.

So far, this attempt has been successful. Streaming platform Disney+ originally planned to reach at least 60 million subscribers by 2024 in five years, but in fact it took less than a year. Its new target now is 260 million users. Bob Chapek, who first started at the helm of Disney before the pandemic, is convinced that the key to the company's future is to push the flow directly to consumers, which is also the "North Star" that helps him point the way. On Feb. 9, Disney+ announced that it had seen a sharp increase of 11.8 million subscribers in the most recent quarter, cementing its position as the ultimate survivor in a brutal competition known as the streaming war.

But the winners were able to win more prizes, and it began to cause anxiety in the industry. Every year, Disney and its rivals have pledged to increase their investment in content. But even as costs rise, subscriber growth is beginning to show signs of slowing. There is a final recognition that established media companies are moving from high-margin cable businesses to alternative businesses with weaker returns.

Last month, when Netflix, the leading streaming platform, predicted that it would add just 2.5 million new members in the first quarter of this year, panic broke out in the market, and the company's stock fell more than 25 percent. It will be Netflix's weakest quarter since 2010, when most subscribers are still getting DVDs by mail. Disney's stock price rebounded after the release of this week's earnings report, which significantly exceeded expectations. In the last quarter, however, Disney+ added only 2.1 million users, the fewest since its inception. The growth of streaming subscribers is expected to slow overall.

Companies complain about short-term bad business: COVID-19 is still in place, content releases are being delayed, and free trials are expiring (such as Apple TV+). But some analysts believe that the ceiling of the paid subscription business scale is lower than originally expected. Morgan Stanley believes Netflix will have 260 million global memberships by the end of 2024, down from the 300 million previously estimated by the investment bank. Moreover, while streaming platforms have the potential to raise prices in rich countries, they are difficult in the markets of fast-growing poor countries. Netflix recently lowered its base price in India from $6.60 per month to $2.60. Morgan Stanley now expects Netflix's total revenue to grow at about 10 percent a year, rather than the 15 percent previously forecast.

As revenue growth slows, costs expand. Research firm Ampere Analysis predicts that media companies will spend $230 billion on video content this year, nearly double what it did a decade ago.

Netflix's weak financial results are set against what it claims to be "the most powerful content platform ever", including the most popular series "The Squid Game", as well as the movie "Don't Look Up" (nominated for the Academy Award for Best Picture on Feb. 8, bringing Netflix's cumulative 27 Oscar nominations, the highest of any studio). Disney+ is far more than its parent company could have imagined, but it also costs more. Three years ago, Disney expected to spend $2 billion on streaming content in 2024. Mr Chapek recently said the figure would exceed $9 billion.

Part of the reason for the increase in costs is the rising cost of filming. In 2019, Warner's final season of Game of Thrones cost $15 million per episode, which was already high by then. Amazon's Lord of the Rings series, which will be released in September, will reportedly quadruple. Audience demands are also getting higher and higher. Doug Shapiro, former planning director at the TV company Turner Broadcasting System, said that in the past, most people would only cancel their cable subscriptions when they moved, but now they have "become accustomed to turning on or unsubscribing based on the quality of the content", signing up to watch the hottest content, and then canceling their membership. According to data company Antenna statistics, Apple TV+ user retention problem is the most serious, losing one-tenth of customers every month, which is equivalent to all members updated once a year.

Analyst firm Moffett Nathanson argues that the combination of rising prices and slowing revenues "calls into question the ultimate economics of these companies." The most successful Netflix expects operating margins to drop to 19 percent in 2022, the first reduction in the past 6 years, which the company attributes to high spending on shows. Moffett Nathanson added that the company's performance has been somewhat glorified. Netflix spreads the cost of content over several years, arguing that this allocation arrangement is based on the viewing model, but in fact many showgoers are exhausted in a few weeks.

For established media companies such as Disney, which is accustomed to much higher profit margins, the tight economic model of streaming is extremely painful. Last year, Disney reported an operating margin of 30 percent for its cable network, which is common in the industry. U.S. cable bills average close to $100 a month, and viewers are generally forced to watch boot ads. By moving their best-in-class content to streaming, media companies have accelerated the decline of cable television, a highly profitable business. They also released the film directly on streaming media, giving up the film's box office revenue (of course, the closure of theaters brought about by the epidemic is also a constraint). Animators at Disney-owned Pixar are said to be annoyed that "Turning Red" cannot be released in theaters in most countries.

But media companies have no choice but to stick to that strategy. By 2024, streaming will account for half of U.S. TV viewings, and cable TV will never come back. The focus is on how to make new business more profitable. Streaming platforms began to release more and more new episodes episode by episode, rather than releasing them throughout the season. Bundling is also becoming more common: Disney bundles Disney+ with ESPN+ (a sports streaming platform) and Hulu (a general entertainment services platform shared with cable giant Comcast). Both Apple and Amazon sell TVs and other services in packs. WarnerMedia and Discovery announced on Feb. 9 that the two companies plan to merge and have received regulatory consent. There may be more similar phenomena later. Morgan Stanley's Benjamin Swinburne wrote: "If Netflix slows down faster than expected, the sooner the streaming reloads, the better." ”

Big media companies hope that the streaming war will eventually lead to casualties, giving survivors the freedom to raise prices and reduce content spending. Comcast's streaming outlet Peacock has fallen behind. Viacom CBS, which owns Paramount+, has always been in the midst of acquisition rumors. But even if these are withdrawn, there will still be some staunch opponents staying. Warner and Discovery put the future on streaming. Apple and Amazon are also getting better at making blockbusters, and they have money and willfulness, and they can lose as long as they want. Disney and Netflix will also hold their ground. Future wars will last a long time, and there will be no loot.