In early February, media moguls Brian Roberts, John Malone, and Barry Diller set sail on Mr. Diller’s 156-foot, two-masted yacht, Arriva, off the coast of Jupiter, Florida. While the seas were calm, their extensive entertainment enterprises faced turbulent times, reports the New York Times.
The trio, who occasionally convene to discuss industry trends—often engaging in spirited debates—had reached a consensus: the current unprofitable model of the streaming industry couldn’t continue, and the traditional cable framework was rapidly declining.
But the pressing question remained: What would replace it?
Reflecting on the past, Mr. Malone remarked in a rare interview, “There was a period of relative stability. Now, it’s quite chaotic.”
His sentiment might be an understatement. Paramount, once a dominant force owning the renowned Paramount studio, CBS, and several cable channels, recently changed its chief executive and unsuccessfully attempted to sell itself after prolonged negotiations. Warner Bros. Discovery is urgently working to reduce its $43 billion debt. Disney has laid off thousands, replaced its CEO amid mounting streaming losses, and faced a proxy battle from activist investor Nelson Peltz.
The stock values of traditional media giants have plummeted. Paramount’s shares hover around $10, and Warner Bros. Discovery’s around $7, both significantly down from peaks in the past year. Disney’s shares, at approximately $102, have declined over 16% since March.
The reasons are evident: Paramount, under Shari Redstone’s control, reported a $1.6 billion loss in streaming last year. Comcast’s Peacock streaming service lost $2.7 billion. Disney’s platforms, including Disney+, Hulu, and ESPN+, faced about $2.6 billion in losses. Warner Bros. Discovery claims a slight profit for its Max streaming service last year, but this includes HBO sales via cable distributors.
Conversely, stocks of disruptors like Netflix and Amazon are nearing record highs.
“Netflix doesn’t dominate entirely, but they currently lead the way,” said Barry Diller, chairman of IAC and a seasoned TV and film executive. “They essentially set the industry standards.”
Messrs. Malone, Roberts, and Diller rose during television’s golden era. John Malone, 83, amassed a multibillion-dollar fortune by building a cable empire and remains an influential shareholder in Warner Bros. Discovery, mentoring its CEO, David Zaslav. Brian Roberts, 64, took over from his father as chairman and CEO of Comcast, transforming it into a broadband and media powerhouse through acquisitions like NBCUniversal. Barry Diller, 82, chairs IAC and is a respected veteran in entertainment and media.
In contrast, leaders of disruptors like Netflix and Amazon are relatively younger and lack deep ties to Hollywood’s traditional era. Ted Sarandos, 59, Netflix’s co-CEO, transitioned from the DVD industry to Netflix when it still mailed DVDs. Mike Hopkins, 55, overseeing Prime Video and Amazon MGM Studios, previously led Hulu and Sony’s television division before joining Amazon in 2020. He reports to Andy Jassy, 56, Amazon’s CEO with no prior entertainment background.
Over the past five months, The New York Times interviewed these five executives and others to assess the industry’s challenges and future landscape. While they often disagreed, certain themes consistently emerged, impacting investors, advertisers, and audiences alike.
The Critical Subscriber Threshold
Streaming was once heralded as a promising venture, with the belief that additional subscribers incurred minimal extra costs. The idea was that more subscribers would spread out expenses, reducing the cost per user. Initially, industry leaders hoped that 100 million subscribers would suffice for profitability. Now, many executives believe the magic number is at least 200 million, possibly more.
“If you’re aiming to offer comprehensive entertainment with live sports and blockbuster hits, 200 million subscribers provide the necessary scale with growth potential,” said Mr. Hopkins of Amazon.
Bob Chapek, Disney’s CEO until 2022, concurred that reaching 200 million signifies competitiveness.
Netflix has surpassed this benchmark, boasting about 270 million paying subscribers who pay an industry-leading average of over $11 monthly. The company enjoys high profitability, with operating margins at 28%. In the first quarter of 2024, Netflix reported $9.4 billion in revenue and $2.3 billion in net income.
Disney and Amazon are the only other platforms exceeding 200 million subscribers. While Amazon hasn’t disclosed exact numbers, Mr. Hopkins confirmed their subscriber base is well over 200 million and growing. Combined, Disney+ and Hulu have just over 200 million subscribers. In May, Disney announced a slight profit from its entertainment streaming services. Amazon views Prime Video as a future “large and profitable business” on its own.
The High Cost of Content
Attracting and retaining millions of subscribers is expensive. Netflix plans to spend about $17 billion on programming this year, matching its pre-strike investments. This significant spending has attracted top-tier writers and actors. Recent high-cost productions include the series “3 Body Problem” and the film “The Gray Man,” starring Ryan Gosling.
“It’s a significant challenge to entertain a global audience,” Mr. Sarandos noted. “You need to deliver consistently and reliably.”
While Netflix’s $17 billion expenditure represents half its total revenue, few competitors can match this level of investment, except perhaps Amazon. Amazon has made substantial bets, like spending $300 million on the spy thriller “Citadel,” equating to $50 million per episode.
Not every investment yields success, but hits can be game-changers. Amazon spent $153 million on one season of “Fallout,” based on a popular video game. In April, “Fallout” topped streaming charts with over seven billion viewing minutes.
Mr. Sarandos emphasized the need for continuous content to prevent subscribers from leaving. “After finishing a show like ‘Baby Reindeer,’ viewers expect something equally compelling next,” he said. “Other services risk having a ‘nothing to watch’ problem, leading to higher churn rates.”
Data supports this concern. During cable TV’s peak, monthly subscriber turnover was around 1.5% to 2%. In contrast, streaming services experience an average churn rate exceeding 4%, with some, like Paramount+, reaching 7%. Only Netflix maintains a churn rate below 4%.
Some executives suggest reducing spending by focusing solely on hits, but predicting consistent successes has always been challenging in Hollywood.
The Rising Importance of Live Sports
Adding to cost pressures is the escalating expense of sports programming. Live sports have always attracted large audiences, making them valuable for both attracting new subscribers and reducing churn. They also appeal to advertisers as streaming services aim to expand their ad revenues.
It’s becoming increasingly evident that a streaming service may struggle to thrive without incorporating sports. Comcast’s Peacock achieved a milestone in January with its exclusive NFL playoff game, drawing about 32 million viewers—the largest livestreaming event to date.
“Sports seems like the most straightforward and engaging content,” Mr. Malone observed.
This has led to intense bidding wars for sports rights, exemplified by the ongoing negotiations for a new 10-year NBA contract. The current rights holders, ESPN and Warner Bros. Discovery’s Turner network, face competition from NBC and Amazon. The final deal is expected to more than triple the previous contract’s value.
However, executives grapple with whether the high costs of securing sports rights will translate into profitability or if marquee events will function as loss leaders to attract viewers to other content, mirroring strategies of traditional broadcast networks.
The Role of Advertising
Initially, streaming platforms prioritized subscriber numbers over profits, believing future price hikes would ensure profitability. This perspective shifted dramatically in early 2022 when Netflix reported a subscriber decline for the first time in a decade.
It’s now apparent that significant price increases aren’t the solution for most services. Netflix, leading in pricing, charges $15.49 monthly in the U.S. for its ad-free option, with few expecting prices to exceed $20 soon.
Embracing advertising, Netflix introduced a $6.99 monthly ad-supported tier in 2022. Other platforms like Disney+, Hulu, Amazon, Max, Peacock, and Paramount+ also offer cheaper, ad-supported subscriptions.
“It’s a smart way to attract price-sensitive consumers,” Mr. Chapek said. “Heavy users will still opt for the higher-priced, ad-free experience.”
Advertisers value streaming platforms for their ability to target specific demographics. The impact has been substantial. Netflix is projected to generate around $1 billion in ad revenue this year, while Disney has already reported $1.7 billion for its fiscal year.
This success indicates that advertising will remain integral to streaming. Some executives anticipate companies will aggressively raise prices on ad-free tiers to steer consumers toward ad-supported options.
A Consolidating Market
A pressing question remains: How many streaming services are consumers willing to pay for? The answer appears to be limited.
“Will your current business be a sustainable player generating long-term wealth, or will it become obsolete?” Mr. Malone pondered. “I think smaller players will have to downsize or disappear.”
A Deloitte study revealed that American households spend an average of $61 monthly on four streaming services, with many questioning the value.
This suggests that only a few streaming giants may survive: almost certainly Netflix and Amazon, likely Disney and Hulu combined, and possibly Apple as a niche player. This leaves uncertainty around platforms like Peacock, Max, and Paramount+.
Peacock, with 34 million subscribers, isn’t attempting to rival Netflix. By concentrating on North America and not trying to cater to all audiences, Mr. Roberts believes Peacock can succeed on its terms. Being part of Comcast, with its steady cash flow, provides additional support.
“We each have our own criteria for defining streaming success,” Mr. Roberts stated. “As online viewing and internet usage surge, our unique assets position us to monetize and innovate during this transition.”
The Bundling Strategy
With independent strategies proving challenging, “bundling” has emerged as a potential path to profitability. Bundling involves offering multiple streaming services together for a single fee.
In May, Comcast began offering its broadband customers a bundle of Peacock, Netflix, and Apple TV+ for $15 monthly. Disney has bundled Disney+ and Hulu, with plans to add Max. A new sports streaming venture, Venu, from Disney, Fox, and Warner Bros. Discovery, is set to launch this fall.
However, bundling economics are complex. It requires attracting consumers who wouldn’t subscribe to individual services at full price. Determining revenue splits among unequal partners adds to the challenge.
Moreover, the effectiveness of bundling in achieving desired scale is uncertain. Many consumers already subscribe to one or more services in a bundle, and discounts may reduce average revenue per user.
Some industry figures, like Jason Kilar, former CEO of WarnerMedia, advocate for an even more radical approach: creating a new company to license content from major studios, sharing significant revenue back to them.
Media companies are beginning to reconsider licensing deals after previously avoiding them to prioritize their platforms. Both Disney and Warner Bros. Discovery are again licensing content to rivals like Netflix and Amazon.
Sony’s Alternative Path
Sony Pictures Entertainment embodies the licensing strategy, having rejected the general streaming model years ago. CEO Tony Vinciquerra adopted an “arms dealer” approach, selling content to platforms like Disney and Netflix.
Sony operates a niche streaming service, Crunchyroll, focusing on anime. Its success indicates that small, cost-effective operations can be profitable without competing directly with giants like Netflix.
Mr. Vinciquerra pointed out that competitors are losing money on streaming while their traditional cable revenues decline. “I’m still wondering how these companies will navigate this,” he said, referring to the challenges faced by those with legacy cable networks.
Sony’s strategy appears successful. In 2023, Sony Pictures Entertainment generated nearly $11 billion in revenue, a slight increase from the previous year. Profits were around $1.2 billion, slightly down due to industry strikes.
An Evolving Industry
Despite the challenges, viewers have benefited from an abundance of content. “It’s been a golden age, even with rising prices,” Mr. Chapek remarked. “You have access to extensive libraries and new content, all on your schedule.”
However, he acknowledged a shift: “Now we need to make it viable for shareholders.”
This transition means higher prices, more advertising, and less—possibly lower-budget—content. Consumers already spend 27% more on streaming than a year ago, according to Deloitte, while satisfaction has decreased. Many companies, except Netflix and Amazon, plan to reduce spending and produce less new content.
The increasing emphasis on advertising may drive platforms to prioritize content with mass appeal, potentially leading to a landscape filled with familiar genres like police dramas and medical shows, interspersed with major sports and event programming—reminiscent of traditional broadcast TV.
Netflix and Amazon acknowledge these risks but promise to maintain high-quality programming. They believe their scale allows them to produce prestige content profitably, even if it appeals to a smaller segment of their audience.
“We can deliver high-caliber TV at scale,” Mr. Sarandos said. “But we don’t exclusively focus on prestige content.”
Mr. Hopkins of Amazon added, “While procedurals and established formats perform well, we also aim for bold projects that captivate audiences and generate buzz.”
Bryan Lourd, CEO and co-chairman of Creative Artists Agency, emphasized the importance of creativity over financial maneuvering. “The priority should be keeping the customer foremost in your mind,” he said. “Neglecting that is where problems arise.”
A Glimpse Ahead
During the yacht meeting in February, Mr. Malone advised Mr. Roberts to continue investing in areas like theme parks, given the industry’s challenges.
Mr. Diller, reflecting on streaming services beyond Netflix, commented, “They won’t be the biggest—that opportunity was missed years ago. Netflix currently leads and sets industry policies.”
Yet, like many executives, Mr. Diller sees a path forward by not trying to emulate Netflix. The focus should return to what has always been essential: creating compelling content.
“The business relies on producing hit programming—shows and movies that people are eager to watch,” he concluded.
