For SVOD and its future fortunes, focusing on Total Addressable Market only tells us one part of the growth story

I don't think I'm alone in thinking there is no more fascinating category within the media industry that streaming video. It has all the big ticket items - growth, disruption, new economic models, big battles and a big prize for the winners. It influences real life drama (20th Century Fox selling to Disney, AT&T selling WarnerMedia) and even fictional drama in Succession (Logan Roy selling Waystar Royco to GoJo)

The piece in Puck below generated a lot of attention last week on this very issue. It was by Matthew Belloni and covered the area of Total Addressable Market (TAM) for streaming providers. "Nobody has any idea what the TAM for streaming will be" he mused.

I won't give the article away, but it's linked below. It's a level headed look into TAM and its implications on the valuation of the major players within the streaming category.

The question of TAM is key as its a window into the growth prospects of the more mature streaming players. TAM represents the volume of households that are likely to purchase one or more SVOD services.

It made me think about where Australia sits in terms of the TAM for SVOD here, and whether SVOD growth is likely to come at a category level from new households entering the category, or whether the category is relatively mature and growth for each player will come from households with SVOD already switching between services.

What is the Australian TAM for SVOD?

Roy Morgan data from the December 2021 quarter stated a 2.5% increase in total people with access to a SVOD service. For the same period this growth figure was 3.4%. At the end of December 2021, 15.76m people had access to at least 1 SVOD service.

Looking at the above chart, we can see growth has been relatively low over the past 2 years. When we look to transfer this figure from users to households (as subscription revenue is acquired at the household level rather than at the individual user level) we see right now there's around 7.5m households with one or more SVOD service. This means based on ABS figures, there's 1.69m households without any SVOD service.

This means 81.6% of Australian households have at least one SVOD service.

Based on this, it's hard to see the category growing any more than 8 to 9 percentage points (which would take it above 90% of all households). So it appears we are relatively close in Australia to topping out on TAM in terms of total households who have at least one SVOD service (this definition is important as you will see later on).

So if the market is mature (or as good as), has growth dropped off for everyone? Well, no.

SVOD service growth by provider over the last 24 months

Roy Morgan data shows that 3 streaming providers saw significant topline user growth in both 2020 and 2021 - Foxtel, Amazon and Disney+. Nine Entertainment Co financial reporting shows that Stan grew revenue 23% in H1 of F22. So whilst total households with at least one SVOD service is growing slowly, there is a lot of movement at the individual company level.

If we compare end of 2019 to the end of 2020, we can see these changes in action.

Netflix was in over 80% of households within the category in 2019, and that figure remains relatively unchanged in 2021. Stan is up during that 3 year period in terms of household penetration, and Amazon and Disney have significantly grown their penetration (both were single digits in 2019, now both are above 25%). Foxtel also has at least one of its services in many more homes than it did in 2019.

An increase in repertoire per household is driving this growth

Look at the below graph, it outlines average streaming services per SVOD household and is based on analysis I've done using Roy Morgan figures.

What it shows is that over the past 2 years, the average SVOD household has added 0.53 streaming services to its repertoire. This means there have been 3.75m subscriptions added by households that already had at least one SVOD service in that time period.

So whilst topline household volume is flat, households are adding more services. So the challenge on TAM is basically two pronged. The TAM is hard to determine as we are still not that clear on how many SVOD services each household can comfortable accommodate. Topline category households is flat, but subscriptions at a total level keep increasing.

For example, if subscriptions per household increased to an average of 3, this would create topline subscription number net growth across all competitors of 6.5m new accounts.

Growth for all players will come from SVOD HH's they aren't presently in

It seems obvious as a statement, but let me explain it.

When we look at the below we can see per service the amount of households they are not in. This figure represents potential growth for each.

We can see here that Netflix has the least to gain in terms of user volume. It's already in 81% of households with SVOD. So its major lever for growth is trying to grow the entire category (which is already pretty tapped out) and hope it maintains such a high share.

Everyone else has a lot of upside in terms of households that don't currently subscribe to their service. Stan, Amazon and Disney individually have 5 million households they can look to chip away on.

If we assume topline households in the SVOD category are likely to grow above low to mid single digits, but accept that there is likely strong growth in SVOD repertoire per household, then it is probably premature to believe that the category and those within it don't have some robust growth ahead.

So, what options are available to spark that growth?

Growth strategies

Last week I took a close look at how advertising supported SVOD could work economically, and evaluated the key elements (consumption time, ad load, ad CPM, sell through, ad sales COGS) that would give an ad supported tier the same yield per user as the non ad funded one.

But that is only one lever available, there are many more. Such as:

1/ Grow topline users via increased or improved programming - seek to attract more users by adding highly popular catalog programming, paying for new forms of content (fitness, sport, news) but keeping prices stable to demonstrate better value than competitors. Improving programming by removing sub optimal programming and re-investing these funds into better programs (with high recognition) is a better approach than incurring incremental costs to acquire new types of programming. Increased content costs will hurt the unit economics of the service. To date this has been the growth approach of most providers - more and more content. However, what was once novel is now expected, and users expect deep catalog and plenty of new news across all services. Having more content than anyone could possibly watch is table stakes.

2/ Grow users via advertising subsidised tier - this is the area I analysed last week. You can find it on my Linkedin page. On the assumption that growth for the category is likely to come from the volume of services per SVOD household rather than an increase in topline SVOD households, the ad subidised tier is strategically pretty sound (in my view). Reports are Disney is trying this approach later in the year.

3/ Grow ARPU via increasing price - increased ARPU grows revenue without an increase in cost. The challenge in a highly competitive category is any increase in price can put you at a disadvantage against similar competitors. It's tough to increase pricing in a category with so much supply.

4/ Grow ARPU through adding new categories/offerings - locally Stan has been the most assertive in this area. Their Stan Sport offering is aimed at bringing in new users to Stan, as well as increasing ARPU on existing users. Amazon are pursuing a similar approach with movies able to rent, offering a la carte titles that can be purchased with an existing account. Stan is also experimenting with PPV, with the Sonny Bill Williams and Barry Hall boxing match later this month. Disney+ could pursue this approach by adding ESPN+ to their existing platform.

5/ Grow ARPU through distribution - so far only Amazon Prime has dived into this approach, where it allows other streaming services to be 'carried' via its service. What this means is an Amazon Prime subscriber can subscribe to Hayu or Paramount Plus via Amazon Prime, and access all the content via Amazon Prime. Billing is via one account. This approach is similar to a flexible pay TV approach. Financially the provider would pay Amazon a cut of the monthly subscription cost. One could see a use for this approach on AVOD services too. Seven West for example could use 7Plus as a jump off for a US based service like Peacock, offering 7Plus users access to ad free or ad subsidised Peacock for a $6-8 a month price point.

As the above shows, there is still A LOT to shake out in this space. As it grows and matures its future strategic options continue to evolve. One thing we do know is, in a market like Australia TAM is only one part of a multi variable equation.