How to tell who's winning — and who's losing — the streaming wars
- Every streaming service is different, with different business models and goals. That makes it hard to tell the winners from losers.
- Having clear paths to 50 million U.S. subscribers and 200 million global subscribers are two benchmarks streaming services are striving toward for long-term viability.
- ARPU, churn and total hours spent may be better performance metrics than simple subscriber numbers because they weed out promotions.
There are no rules to judge winners and losers in the streaming wars.
Let's try to fix that.
Disney's Disney+, AT&T's HBO Max, Comcast NBCUniversal's Peacock and the many other streaming services that have popped up in the last year or so will all be competing for eyeballs in 2021. A few will succeed on their own. Others will need to bundle for scale. Some, like Quibi, may shut down completely.
Each streaming service is different. Peacock has a free, advertising-supported version. Discovery's Discovery+ wants to be a "complement to other streaming services," according to CEO David Zaslav. Disney+ has already predicted it will have as many as 260 million global subscribers by 2024. That's much more aggressive than Peacock's forecast of 30 million to 35 million active users by 2024 or HBO Max's 50 million domestic subscribers by 2025.
Given so many different products with different goals, it will be easy for most media companies to declare victory on their own terms. That won't be helpful to investors trying to figure out which services are actually succeeding.
"Not every streaming service deserves to exist or win," Kevin Mayer, former head of Disney+ and ex-CEO of TikTok, told CNBC. "There will be winners and losers that evolve over the next several years."
Here are some basic guidelines to tell them apart.
The race to 50 million U.S. subscribers
Getting to 50 million U.S. subscribers is a good benchmark for viability, said Scott Purdy, who runs KPMG's media practice.
Last month, NBCUniversal said Peacock had 33 million sign-ups. HBO Max announced it had 37.7 million subscribers. Disney's Hulu has nearly 40 million U.S. subscribers. ViacomCBS' CBS All Access -- soon to be relaunched with more content as Paramount+ -- said it combined with Showtime's digital service to have about 18 million subscribers at the end of last year and will give an updated number during a "streaming event" on Feb. 24.
Whether those services can get to 50 million subscribers in 2021 or soon after will be a good test for their longevity, Purdy said.
"The real benchmark for the new entrants will be if they can get to the same amount of subscribers they have in the pay-TV bundle," said Purdy. About 75 million U.S. households subscribed to a bundle of linear programming in 2020. Media executives expect that number to fall to closer to 50 million in the next five years.
Have a global path to 200 million subscribers
Domestic success alone won't be enough for the "Tier A" services, as Starz CEO Jeff Hirsch defined them -- the products aiming to be cable bundle replacements on phones and TVs throughout the world. These are Netflix, Disney+ and Amazon Prime Video, and may also include HBO Max, Peacock, Paramount+ and Hulu.
Netflix already has 200 million global subscribers. Disney+ is well on its way, with about 95 million subscribers. Amazon announced last year it had more than 150 million global Prime subscribers, all of whom get access to video as part of a much larger bundle of services (including free fast shipping).
While Netflix, Disney+ and Prime Video are all ad-free services, HBO Max, Peacock, Paramount+ and Hulu all have — or plan to have — a lower-priced product with commercials. Other streamers, such as Fox's Tubi and ViacomCBS' Pluto, are free for consumers and rely entirely on advertising. Tubi said it had 33 million monthly active users (MAUs) in August 2020. Pluto said in November it had 28.4 million MAUs.
If products counting on ad dollars don't have a clear runway to at least 200 million global subscribers, they won't be able to compete against Google and Facebook, which dominate online advertising, Hirsch said in an interview.
"If you're ad-supported, you have to be very big and very broad to be successful," Hirsch said. Digital advertising rates are still pennies on the dollar compared with TV commercials. A global TV streaming service will need to have a much bigger reach to make up for the diminished ad sales that come with morphing from a TV service to an online product.
"You saw the power of TV advertising during the Super Bowl," Hirsch noted. "All of these media companies were running commercials for their streaming services on television."
Regardless, if HBO Max, Paramount+, Hulu or Peacock want to capture a global audience, that will require billions of dollars in further investment for international content.
ARPU, churn and total hours spent
As with subscriber numbers, streaming services should aim to have average revenue per user, or ARPU, equal what their parent companies take in from the cable bundle, Purdy said.
For subscription services, ARPU, churn — the number of customers canceling a service in a given time period — and total hours spent will be the three most important performance metrics beyond subscriber adds, said Ryan Steelberg, president of Veritone, an artificial intelligence company that works with media companies transitioning to digital businesses.
"ARPU and churn are basically classic software as a service metrics," Steelberg said. "Both indicators need to be looked at together. My churn rate may be 5%, but if my revenue increases on a user-by-user basis by, say, 20%, maybe that's OK."
Most companies don't disclose quarterly churn rates, though third-party organizations such as The NPD Group and Parks Associates track cancellations through research and surveys. Data from analytics firm Antenna has even tracked churn based on specific events, such as the end of "Game of Thrones" and and Netflix's "Cuties" controversy. Thus far, Netflix and Hulu have proven to be far stickier services than newer products such as Apple TV+ and Peacock. Investors should watch to see if that changes over the course of the year, said Steelberg.
ARPU and churn are also the easiest ways to figure out how many subscribers are actually willing to pay for a product. Nearly every streaming service has some version of a free trial or subsidized subscription, whether it's with a wireless company (Verizon and Disney+, Verizon and Discovery+, AT&T and HBO Max, T-Mobile and Netflix) or from the purchase of a device (Apple TV+, Peacock with Comcast's Flex). Figuring out which services are strong enough to keep customers beyond their free trials will be essential to figure out if they're viable, Steelberg said.
Total hours spent on a service may be a better metric for investors than subscribers because it's harder for companies to play games with the numbers, Steelberg said. The Information reported far fewer people regularly watch NBCUniversal's Peacock than the company's 33 million sign-ups (although the actual number is higher than the 11.3 million figure cited by The Information, according to a person familiar with the matter).
"You can't expect to survive if your total hours spent is decreasing," said Steelberg. "Even if it's for just two quarters in a row -- six months. That's a huge red flag."
If you can't be Tier A, define yourself
Deciding which race you're running is pivotal for investor reaction, said Hirsch.
The Tier A products, Hirsch said, will offer content to everyone -- kids, adults, sports fans, movie lovers and so on.
Instead of being all things to everyone, Hirsch instead is counting on Starz owning a specific target audience. He has focused Starz primarily on premium original series for women and African Americans. If the global streaming market is currently 200 million to 300 million, Hirsch said he wants 20% of that -- 40 million to 60 million global subscribers.
Discovery is trying a similar strategy, defining Discovery+ as nonfiction only. Zaslav hasn't given investors a benchmark for Discovery+ yet -- in part because he wants to leave room to set his own terms if the product doesn't pop initially.
"We didn't think it was a good idea to say we think we're going to be in five years in 100 million homes," Zaslav told CNBC last month. "Let's see how we do."
Still, Disney+ is both focused -- it's ignored news, sports and non-Disney owned content -- and also wildly popular. Building a niche strategy may simply be a prelude to combining with another, larger service.
In other words, it's possible the streaming wars may be over before they begin -- with the winners being Netflix, Prime Video and Disney, and everyone else playing a losing hand.
"Netflix spends more than $10 billion every year on content," Steelberg said. "This only works if you have a phenomenal monetization model. I think we already know who the winners are -- and I think the gap between the winners and losers is significantly greater than most people realize."
Disclosure: NBC and CNBC are owned by Comcast's NBCUniversal unit.