The Streaming Video Services Doom Loop

Executive Summary

• A shakeout among streaming video services is coming.
• Companies are struggling to become profitable. Running a streaming service is expensive, and there are too many services competing for a finite amount of revenue that can be gained.
• Services are trying to come out on top by increasing revenue while cutting costs; but there are limits to both.
• So far, most have not cut back on expenses for original content production. But eventually, that will need to happen to become profitable.
• But this and rising subscription fees will make services less attractive to consumers, leading to even more need for saving money and increasing prices.
• This will create a doom loop that will only leave a handful of services standing.

Everybody Is Getting Into Streaming Video – And Nobody Is Making Any Money

Running a streaming service is expensive, and the amount of revenue that can be gained is limited. On the cost side, the streaming itself is expensive, and so is the production of movies and TV shows. Nearly every streaming service has gotten into producing their own, original content. In 2009, two years after Netflix launched its streaming video offer, there were 210 original scripted programs on traditional TV according to FX Networks Research. In 2015, John Landgraf, Chairman of FX Networks, said he expected that there would be more than 400 original shows on TV that year, declaring “peak TV”. But by 2022, there were 599 scripted programs between streaming services and traditional TV. Let’s assume each show has an average of 10 episodes a year – then there were a staggering 6,000 episodes of original content vying for consumers’ attention last year.

Fools Rush In Where Angels Fear To Tread

In recent years, most of this growth was driven by streaming services’ production departments, which spent billions on creating original content. The reason: Fierce competition with other streaming services and with traditional TV for consumers’ favor – and ultra-low interest rates that made debt cheap.

The question is: Do these huge expenses for production pay off? Many of these shows aren’t all that popular. For example, Netflix took on billions of dollars in debt to produce content. This year, it will spend $17B on production according to Ampere Analysis. But the number 1 show on its service is “Suits”, the rerun of a 2011 show produced for USA Network. Amazon is on track to spend $12B this year on content, the second biggest spender, but its shows likewise have had limited popular and critical success except for a couple of shows.

In defense of streaming services, 15 years ago, in-house production made sense. YouTube and Netflix found that traditional content providers were unwilling to let them distribute their premium content in return for a cut of the revenue. In the view of TV companies and movie studios, they would rather distribute their best content themselves and keep all the revenue. That’s why streamers like Netflix and YouTube decided to make their own shows and movies. Yet, there seems to be a puzzling lack of accountability for the performance of these efforts. Instead of a professional approach, it seems to be more of a case of ‘fools rush in where angels fear to tread’.

Too Few Dollars To Go Around For Too Many Offers

The core problem: While the number of streaming services, and the content available to viewers, has proliferated, the number of subscription and advertising dollars that could be gained is limited. Total streaming video subscriber numbers do increase (they are currently at just shy of 800M viewers worldwide according to Ampere Analysis), but the days of the heady growth during the 2020 pandemic are over, and growth rates are now much more moderate. And inflation has greatly reduced the income that consumers can devote to subscribing to entertainment services. That is one reason why we see a trend towards ad-supported subscriptions.

Then there is advertising. Ad spending is a function of GDP – the faster GDP grows, the faster advertising does. However, GDP growth has been anemic, meaning that most increase in streaming advertising must come from TV budgets shifted into video. Yet even at an annual market share loss of 4 percentage points for traditional TV, that’s just little more than a dozen billion dollars going into digital, not all of which go into video, and those that do are being fought over by about a dozen services.

The result: a knives-out competition in the face of skyrocketing costs, limited revenues and mounting losses.

The Writers’ Strike Comes At The Worst Moment

As an aside, that’s also why the writers’ and actors’ strike, now entering its fourth month (as of September 2023), couldn’t have come at a worse time. Strikers point to billions of dollars made in revenue by the big streamers; however, those streamers can’t turn a profit. There is no money that could be given to the strikers. Disney CEO Bob Iger’s compensation, another target of strikers’ scorn, no doubt rather lavish at $22M in 2022, wouldn’t go far in giving raises to more than 170,000 strikers. So likely, the walkout will not yield much for them. But it does make streaming services’ life even harder because it affects content production, and indirectly, revenue. Already several streamers have issued warnings for Q3 and Q4 revenue.

What makes streamers’ outlook even more gloomy is that labor is not the only group pressuring streamers: so are investors. To the extent that they are public companies, they are under the watchful eye of the market – how long will it tolerate a lack of profits? And the top four services - Netflix, YouTube/Alphabet, Disney and Amazon - are all public companies.

Layoffs And Price Increases Will Not Be Enough

Services are trying to come out on top of this streaming deathmatch by increasing revenue while cutting costs in the hope of finally hitting paydirt.

On the income side, they are trying try to increase revenue by selling more subscriptions, and by selling them more expensively. Price increases are especially high for ad-free premium subscriptions. This is designed to drive consumers to sign up to ad-funded subscription tiers. For good reason: While ad-free subscribers only yield a fixed amount of money once a month, ad-funded subscribers also generate ad revenue beyond that – and the more ad revenue the more they watch.

There is a general trend towards ad-funded subscriptions. More U.S. households are subscribed to ad-funded offers than to ad-free ones for the first time this year, and they grow faster, too (Comscore). But services that until recently were exclusively paid-for, ad-free offers seem to struggle nudging users to adopt ad-free subs. Disney has now increased subscription fees for the second time in the last twelve months, yet subscriber numbers to the ad-funded tier have hardly budged. Netflix, after launching an ad-supported subscription tier, found that it did not have enough subscribers to that offer to drum up the inventory necessary to run big national campaigns. It also increased subscription fees to the ad-free premium tier, and the jury is still out if that measure will drive a significant number of users to accept advertising.

On the cost side, services are trying to save money by laying off employees and by reducing the amount of sub-premium content that costs money to keep but doesn’t provide much lift in terms of attractiveness for subscribers and available advertising inventory. But there is only so much money streamers can save via layoffs and reducing overhead.

Production Cuts Are Coming

Next stop for most services: Cutting back on production to save money. So far, most streamers have not reduced spending on creating original content save Hulu and YouTube (which has stopped production altogether in early 2022, instead relying completely on creator content). But the writing is on the wall. We may see a race to the bottom in which content gets worse and worse. Who knows? Eventually, we may be stuck with a lot of trashy reality shows just as we were on cable. The end of this our Golden Age of TV, with more and higher-quality content than ever before, will come to an end.

Yet even without actual cuts to production budgets, creating original content has gotten harder. Interest rates for debt are not close to zero anymore, but around 7%. Debt service will reduce the amount of money available for production. On top of that, high inflation rates have also made production dollars go less far. Streamers will not only have to cut back on production costs eventually but can also produce less content for the same amount of money.

The Streaming Services Doom Loop

At first glance, rationalizing the streaming business is a straightforward effort. But cutting back on content production and increasing subscription prices also make a service less attractive to consumers. And if there are fewer viewers, then there is also less subscription and advertising revenue. And less revenue means there is even more need to cut back on content and to increase subscription fees. And so the doom loop continues.

A shakeout is coming. Likely, the top four – YouTube, Netflix, Amazon and Disney+ – will be the last services standing, perhaps with a few smaller ones thrown in. Ironically, this will reproduce the latter days of cable – a handful of networks, expensive, with lots of ads and worsening content quality.

The good news: A smaller industry, with fewer services employing fewer people, will make services profitable and allow for decent salaries. Certainly, an outcome that is more bitter than sweet for the strikers.