How to Succeed Amid the Great Streaming Correction

Reed Hastings and Ted Sarandos
Netflix co-CEOs Reed Hastings and Ted Sarandos. Photo: Kevin Dietsch/Getty Images
Matthew Belloni
June 5, 2022

A few hours before investor-producer Jeff Sagansky went off on the streaming business model at last week’s NATPE conference, I had a great conversation about the transformation of the content business with a few people in the middle of it all: Kevin Mayer, the former Disney executive who co-founded the Blackstone-backed Candle Media, which has bought all or part of Reese Witherspoon’s Hello Sunshine, CocoMelon studio Moonbug Entertainment, Will Smith’s Westbrook (ouch), and the ATTN media company, among others; Jessica Reif Ehrlich, the longtime media analyst and managing director at Bank of America Merrill Lynch; and Kevin Beggs, chairman of Lionsgate Television Group. We talked about what the Great Netflix Correction means for content producers, how Hollywood would hold up in a recession, and whether the age of bidding wars is over. They agreed to let me run excerpts below that have been edited for length and clarity. 

Matt Belloni: This panel was supposed to happen in January in Miami. I basically threw out my outline because everything has changed in the past five months. We’ll get into that but Kevin, you’ve bought very disparate businesses. What’s the through line? Like, are there synergies or are they just silos that you’re going to package together?

Kevin Mayer: There are synergies. We’re going to keep the creative energies and the distinct creative approaches separate. But just like at Disney, you buy brands, and the monetization can be centralized—distribution, sales, some of the production facilities and production financing, H.R., all the back office stuff. But [creatively] there is some synergy between the two groups. Reese Witherspoon has a great idea for a kids book called Busy Betty. We’re going to make that into a series and she’s working directly with Moonbug to bring it out on YouTube. There is a tight integration between these companies.

Belloni: The market is really starting to question the trajectory of these global streaming companies. Kevin Beggs, would you say that’s a vindication of the arms dealer strategy? Lionsgate is spinning off Starz, and that will leave you a pure arms dealer. You think the current market is an opportunity for that approach or is this just a blip?

Kevin Beggs: I think it’s a little bit of a blip, in some ways. The pure arms dealer approach is proving to be really smart. Sony is sitting atop the smart list right now. We’ve had the best of both worlds with Starz as a partner and first mover, but we’re not obligated to only work there. We have shows on 25 different platforms.

But our job is to find hits. There’s a lot of conversations about the walled garden. They go up around these big companies, and, in general, they would prefer to keep everything in-house if they can. But the hits aren’t always there, despite 200 overall deals. We have Ghosts with CBS and it’s a fantastic, successful comedy coming from our partnership with the BBC, and underlining the importance of I.P.

Belloni: But the point of vertically integrated media companies is to not have to buy from studios like yours. Yet they do. Is it just talent, or what is it that a content studio can bring to the table that’s going to put it over the top?

Beggs: It’s talent, it’s timing. It’s no different than the broadcast world was, or the larger cable world was. Somebody’s winning, somebody’s struggling, somebody is trying to come back. We’re most interested in the challenger brands that are in comeback mode. They have huge needs. When we placed Weeds with Showtime, nobody would work at Showtime, including Paramount, which owned Showtime. That was an opportunity for little Lionsgate. I’m sure I was not the first call on that agent’s list. And I didn’t take his call for like three days because all I remember from that particular agent was that he yelled all the time. But it worked out because at that moment, they needed us.

Mayer: Walled gardens aren’t so much that the streaming services don’t buy outside of that ecosystem, it means they won’t sell outside. It guarantees access to the parent company’s product. It’s not sufficient, typically, to fill out the entire streaming service. Hulu was part of the portfolio that I ran at Disney. That was majority-licensed content; even Disney+ licenses content from third parties. That’s why independents are so valuable. It’s the only source to buy great product, because the big guys aren’t licensing. And that’s part of our thesis.

Belloni: Jessica, what are you hearing about the investor appetite for streaming businesses? There’s so much doom and gloom right now.  

Jessica Reif Ehrlich: We know what’s happened. Netflix came down from $700 [per share] to under $200. Disney’s down about 40 percent. The one that’s down the least of all the traditional media companies is Fox because they don’t have a streaming platform.

Belloni: How dare you! Fox Nation!

Ehrlich: They’re not losing billions of dollars in streaming, like the others are. The focus now is What’s the business of streaming? What are the margins going to be? It’s not just about subs at any cost. There’s no credit anymore, there’s no ‘sum of the parts,’ that’s just gone. And in that regard, Netflix is really at a disadvantage versus the traditional studios, because think about what the studios have: I.P. that consumers know; the platforms… so they can not only cross promote, but they can use the content in different places, which is amazing. They have advertising businesses. So it’s very easy for them to do either SVOD or AVOD. I don’t want to pick on Netflix—you could say the same for Amazon or Apple—but each show is a new shot. Each show has to be marketed. And I can’t think of a film on Netflix.

Belloni: Right, everyone in town always says, try to name three Netflix movies.

Beggs: Bird Cage. Red Notice.

Belloni: It was Bird Box. [Laughs.] You get my point. This issue of the total addressable market for streaming keeps coming up because the Netflix thesis depended upon these 700, 800 million, maybe a billion people out there that were going to subscribe to premium subscription services. What is the current thinking on TAM?

Ehrlich: It’s not a number. The ARPU [average revenue per user] in each country is so different. Like India, with 50 cents ARPU, the economics of that vs. the U.S. is so different.

Belloni: But the Street didn’t think so. The Street wanted a global sub number.   

Ehrlich: But that was so backward looking.

Belloni: And now the correction. These services are talking about not winning the spending war. We’re not going to spend like Netflix has spent. Does that worry you guys as content creators?

Beggs: It does. First of all. I think what you’re seeing with some of the pruning, if you will, at Netflix, it’s things that don’t have the utility.

Belloni: Like, maybe, Harry and Meghan as creators?

Beggs: I won’t comment on that. But the things that matter, they are going to continue to spend on. Netflix is the incumbent, everyone is coming after them. I don’t see a slowdown in the spend. It will be judicious. Fewer things will just be vanity.

Belloni: But are we gonna see fewer bidding wars?

Mayer: I don’t think so. You need to have very of-the-moment content to acquire subscribers, and then you need to have a lot of content to keep subscribers. Moonbug, for instance, is massive retention programming. Kids watch and watch and watch. So for the good stuff that really drives and keeps subscribers, that is going to become more and more valuable over time. At Disney, we were always a believer in doing fewer things better. That’s a good mantra for all of us.

Belloni: What should Disney do in India? Bob Chapek keeps saying Disney will get to 230 to 260 million subscribers in two years, yet about a third of the current 138 million subs come from India, where they pay almost nothing, mostly to watch cricket. Do you think Disney should spend big to renew cricket or be realistic about getting to that sub number without it?

Ehrlich: There’s a set of games before the championship, and then there’s the championship. They want to get one of those packages, and there’s a lot of competition. But I don’t see Disney paying at any price. It just doesn’t make sense.

Belloni: They’ve telegraphed that, but Chapek isn’t backing away from that 260 number, which will probably be impossible if they don’t have those rights.

Ehrlich: You may be correct on that. If they have to back away from that number, great, so what? We’ll see how that market develops. Look at Warner Bros. Discovery. They still haven’t rolled out globally. They are spending rationally. They have great content, great I.P., some of it’s never been developed. If they really focus on the brands and develop their key properties, this could be explosive.

Belloni: I think [W.B.D. C.E.O.] David Zaslav agrees with you.

Ehrlich: But he has to execute.

Belloni: We’ve seen over the past five years, an incredible level of investment by private equity in the content business. A lot of that was dry powder sitting around. But now, in this new environment, do you guys see the same appetite for outside investors?

Mayer: If our case is any indication, I guess the answer would be yes.

Belloni: Blackstone would do that deal now?

Mayer: Yeah, I’m sure they would. They are very thesis-driven investors. One of the things that we saw eye-to-eye on is the underlying growth in content and the profitability. We’re still out there looking for great deals. Probably a bit of a repricing, given the marketplace.

Belloni: How so?

Mayer: Well, the market has come down. So the public comps and multiples, which you can point to in a private deal, have moderated. As a buyer, that’s a good thing. We still have a lot of dry powder.

Beggs: The content business historically has always been really sexy, and there’s been waves of investors. There’s some smart money and then there’s sometimes some dumb money.

Belloni: There’s so much debate over whether companies should offer one global, unified streaming service or continue to offer multiple brands, like combining Disney+, Hulu and ESPN+ in the U.S. Which is the right approach?

Mayer: At Disney, we always thought brands matter. The old bundling [via cable and satellite] is, you have to buy everything. I think that’s done, and thankfully so. But the new bundling, where you offer people the opportunity for a lower price or convenience to take different brands, at their choosing, there’s a lot of wisdom in that approach, and I think it’s worked well for Disney. I don’t think there’s any overriding need to take those services and make them into one.

Belloni: This is all heading toward a re-bundling, right? Apple or Amazon will say, Give us a hundred bucks and you get everything.

Mayer: At your option, yes. It’s not a forced bundle, it’s an optional bundle. There has to be a difference between what cable was.

Belloni: Seems like we’re headed for a recession. How do you think that will play out across the content universe?

Ehrlich: Usually there’s an opportunity in a recession for those who can be a little bit more aggressive, but this is an unusual economic period because you have so much pent up demand. Disney’s per capita [revenue in the parks] is up 40 percent. I haven’t seen that in my decades following the company. And they’re going to raise prices. The demand is insane.

Belloni: The traditional thinking on how recessions impact Hollywood is that people still need to entertain themselves. But these companies have become so wrapped up in streaming, and inflation or a recession might hit the number of subscriptions people have and their price sensitivity. So is this recession perhaps different?

Ehrlich: We’re seeing [subscriber] churn pick up, so whether it’s HBO or Disney, the strategy of releasing one [episode] per week, I think that’s really smart. It keeps consumers engaged and on the platform. There will be a handful of streaming services that people will subscribe to, and now we have the onslaught of AVOD and FAST [free, ad-supported, streaming TV] services.

Mayer: In recessions, we didn’t see a massive decrease in subscribers to pay TV. So I expect it to be a moderate effect. It will be noticeable, but will pass.