Streaming Services Continue to Battle

As I reported back in November, strong competition between streaming services has forced innovation. The proliferation of streaming platforms in recent years and the glut of content produced for those platforms spoiled consumers for choice. It had essentially turned the marketplace into a buyer’s market.

However, streaming services began coming around to the revelation that they could not spend endless piles of cash on content creation indefinitely. They would have to innovate to grow their subscriber base. And some of them would have to innovate just to maintain their subscribers.

Some of those innovations, like ad-supported subscriptions from Netflix and others, have been successfully launched. Other innovations, like new ad software and services at Amazon and others, are still in progress. And some companies have had to change their game plans, or even their head coaches.

New leadership at Disney

Disney had a change at the top last November when Robert Iger returned to Disney as CEO. Based on recent statements, it seems that Mr. Iger is intentionally choosing profit over subscribers and market share. In a nutshell, he would rather have high-value subscriptions than low-value subscriptions, even if the growth in subscribers plateaus or decreases.

Disney is reducing their prior emphasis on subscriber growth after several years of aggressive investment. Disney is now emphatically attempting to turn a profit. Mr. Iger supports company efforts to achieve profitability for Disney’s streaming business by the end of fiscal 2024. (Since its launch in 2019, Disney+ has lost nearly $10 billion.)

Mr. Iger appears to be very aware of the reality of his competitive situation. As reported in The Wall Street Journal’s March 10, 2023 print edition, Mr. Iger said, “Every one of [Disney’s competitors in streaming is saying that they are] going to be highly profitable in a couple of years and grow subs by the tens of millions. It can’t possibly happen,” Mr. Iger said. “There are six or seven basically well-funded progressive streaming businesses out there, all seeking the same subscribers and in many cases all competing for the same content. Not everybody’s going to win.”

Mr. Iger is right. Competition among streaming services is fierce right now. Over the last several years, production studios have poured billions and billions of dollars into content creation, and now consumers are awash in it. There are more streaming options than there are hours in the day to stream it all. Not every company can win.

Instead, companies will compete for customers. The companies with a clearly defined value proposition and a thoughtful pricing strategy will win over the customers who lack those things. The companies that provide their customer with the offer that best aligns with the customer’s needs and willingness-to-pay will emerge victorious.

Primary profit factors

In a basic profit equation, to increase profit you must either increase volume, increase price, or decrease costs (fixed or variable). Or you can choose some combination of these profit levers.

However, whenever you deal with any type of subscription, you must also factor in the churn rate. The churn rate is simply how many customers you lose each month. Decreasing the churn rate will increase profit. And if you do not replace the subscribers that you lose each month, then your profits will decrease month-to-month.

If your goal is to increase profits, then you do not want a rising churn rate. And for those in the streaming industry that are not aware, I have some bad news for you…

Customer churn rates are rising

As their streaming options increased, customers weighed their options and prioritized their purchases. Subscribers began to cancel streaming services that they were not watching. Companies have noticed that their brands are becoming less “sticky” in the minds of customers.

Streaming companies have also faced headwinds from the end of the pandemic and economic anxieties. The end of the pandemic has meant less time streaming for some subscribers. And economic anxieties can force consumers to find costs to cut from the household budget. Companies must ensure that there is a good fit between their offerings and their target markets to navigate these difficulties.

Different companies are navigating these challenges differently. Some streaming services are focusing on increasing price, generally by raising the cost of subscriptions. However, they are also trying to crack down on password sharing, which would effectively increase the subscription price per user. Ad-supported subscription tiers can also bring in extra revenue, provided that there is not too much cannibalization from ad-free tiers. Other companies are focusing on the cost side of the equation, by making or considering drastic cuts to marketing and content budgets.

Regardless of their ultimate success, streaming companies have strategic tradeoffs to consider as they deal with a intensely competitive market that looks to remain competitive for the foreseeable future.

References

Rattner, Nate, and Sarah Krouse. “Disney, Other Streaming Giants Confront Era of Slowing Subscriber Growth.” The Wall Street Journal. Dow Jones & Company, November 21, 2022. https://www.wsj.com/articles/disney-other-streaming-giants-confront-era-of-slowing-subscriber-growth-11669054555.

Vranica, Suzanne, Joe Flint, and Sarah Krouse. “Netflix with Ads Launching as Talks Continue with Studios over Content.” The Wall Street Journal. Dow Jones & Company, November 3, 2022. https://www.wsj.com/articles/netflix-with-ads-launching-as-talks-continue-with-studios-over-content-11667381403.

Whelan, Robbie. “Disney’s Robert Iger Hints at Raising Streaming Prices.” The Wall Street Journal. Dow Jones & Company, March 9, 2023. https://www.wsj.com/articles/disney-ceo-iger-need-to-figure-out-disney-pricing-strategy-aa470a0a.