There's a seismic shift underway within the premium streaming arena. That is, recognizing there's not enough profitable business to go around, the market's key players are finally being forced to fight harder to win customers. It's too late to back down now, though, as billions and billions' worth of dollars have been sunk into several on-demand platforms. The studios and media outfits behind them have to make them work.
Wise investors will take a step back and study this shakeup, since its long-term consequences will be significant. Some familiar premium (ad-free and ad-subsidized) names will survive. Others won't...at least not as we know them.
Three red flags for the premium streaming business
Fans of the hit show Yellowstone can now watch the first four seasons of the popular program on Peacock. It's noteworthy simply because Peacock parent NBCUniversal -- a subsidiary of Comcast(NASDAQ: CMCSA) -- didn't originally produce the show. It was first filmed by competitor Paramount(NASDAQ: PARA), and first aired on the Paramount Network.
Were it a one-off it might not be all that remarkable. Indeed, it used to be quite common for studios to temporarily license content to a streaming service operated by a rival studio. In that most studios now own their own streaming services, however, most of them have been reserving their own content for their own streaming platforms.
Now they're increasingly not. In addition to Paramount's decision to monetize Yellowstone by renting it to NBCUniversal, Fox Corporation(NASDAQ: FOX)(NASDAQ: FOXA) recently renewed a deal putting some of its new primetime programs like The Simpsons and The Masked Singer on Walt Disney's (NYSE: DIS) Hulu the day after it first airs even though Fox is the name behind streaming platform Tubi. Tubi, in the meantime, will now be featuring a bunch of Warner Bros. Discovery(NASDAQ: WBD) content like Westworld and The Time Traveler's Wife even though that programming could be used exclusively to bolster the draw of Warner's HBO Max streaming service.
Simply put, studios are once again looking for multiple ways to monetize their intellectual property, even if it means letting competitors use it.
The second hint that premium streamers now realize their creation/distribution silos aren't financially productive enough comes from a recent consumer survey performed by Publishers Clearing House. In short, loyalty to a particular streaming service is practically nonexistent. The poll indicates only 7% of consumers intend to indefinitely stick with their existing services. The other 93% of them report they reevaluate their subscriptions every single month. Most of them don't sever ties that often. Still, the fact that so many of them are even thinking about cancelling or switching to a rival service is telling.
Finally, while at one point they were the hopeless "wannabes" of the streaming arena, the free ad-supported television (or FAST) services like Paramount's PlutoTV and Fox's Tubi are starting to make serious waves. Television media market research outfit Digital TV Research, in fact, forecasts the FAST market will grow from 2021's $31 billion to $70 billion by 2027, surpassing the more familiar ad-supported video-on-demand (or AVOD) industry's revenue. That outlook jibes with forecasts from Standard & Poor's as well as TVREV.
FAST's growing success is largely the result of subscription fatigue; consumers are weary of paying a premium for an ad-free experience when sitting through the occasional commercial can meaningfully lower their monthly bill.
Winners and losers
This slowing growth of the premium/ad-free sliver of the streaming market won't make or break any of the industry's key players. But it will impact them. Some of them are better suited for this shift than others.
Among the names with more to lose than win are Netflix(NASDAQ: NFLX), Disney's Hulu and Disney+, and NBCUniversal parent Comcast.
Netflix's early days relied on nothing but third-party content offered without commercials. It's now offering a lower-cost, ad-supported option and has been increasingly reliant on home-grown content. Both approaches come with a learning curve, though, and the company remains disinterested (so far) in letting other platforms use its own studios' programming. Ditto for Disney, which is arguably making Disney+ the almost-completely exclusive distributor of its beloved entertainment...especially with Disney-owned franchises like Star Wars and Marvel.
Comcast's challenge is at the other end of the spectrum. Neither Peacock nor NBCUniversal has enough recognition cache with consumers to be a strong draw, as evidenced by its mere 20 million paying subscribers and the platform's 2022 net loss of $2.5 billion. It may be too reliant on other studios' programming, and also too accustomed to other distribution venues.
On the winning side of the table you'll find Warner Bros. Discovery, Paramount, and Roku(NASDAQ: ROKU). These companies are far better prepared for the streaming industry's new paradigm.
Warner Bros. Discovery's roots are in the non-network piece of the television business. It's the name behind several lifestyle cable channels like HGTV, Food Network, and Animal Planet...programming that may not be centerpieces of a cable package, but channels that are relatively low-cost to manage and reliably marketable to a big-enough crowd. Warner Bros. Discovery also owns the powerful HBO brand, and HBO Max. The company currently serves a total of 92.1 million streaming subscribers, most of whom are regularly seeing ads already. That's enough scale to matter. Paramount, meanwhile, is serving 67 million paying streaming subscribers who also see the occasional commercial. The ad business is nothing new to either outfit.
As for Roku, it's leveraging its position as a middleman. Its televisions and set-top boxes readily steer consumers to its curated collection of free content, the vast majority of which is third-party programming, and all of which includes advertising. The company is quietly one of the market's most popular FAST services, in fact, and by some measures is the United States' most popular free-to-watch streaming platform.
Bottom line? Don't panic if you're holding a piece of one of the companies most vulnerable to the premium streaming slowdown. This is a slow-moving shift, and names like Netflix and Disney may well update their distribution and monetization strategies to reflect where demand is going. Do be aware of this shift, however, if you're a shareholder of any of these organizations. For better or worse, it will eventually make an impact on their bottom lines.
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James Brumley has positions in Warner Bros. Discovery. The Motley Fool has positions in and recommends Netflix, Roku, Walt Disney, and Warner Bros. Discovery. The Motley Fool recommends Comcast and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.