Welcome back to What I’m Hearing+, my weekly deep dive into the data and dealmaking behind the entertainment business. Tonight, a conversation with streaming savant Matthew Ball, the author/investor/consultant/producer/metaverse guru and former head of strategy at Amazon Studios, about how the industry is getting squeezed, the future of gaming, and why the most valuable content to sell is the most valuable content to keep. But first…

It’s hard to talk about completion rates without good comparisons or a benchmark for success. Netflix’s Resident Evil had a 45 percent completion rate and was canceled after one season, for example, while the animated series Arcane, with a completion rate of 60 percent, was renewed. Of course, those are Netflix series, not a billion-dollar franchise play.

Other contextual factors are missing, too. How much did Rings of Power drive audiences to Prime Video versus other series? How much did it increase customer acquisition overseas, especially in emerging territories where the Prime e-commerce business isn’t as established? Are the new subscribers highly engaged with the service, or more likely to churn? Did people who watched Rings of Power go on to buy something on Prime?

Completion rates are important markers of engagement, of course, and especially valuable for advertisers. If you purchase a pre-roll ad on the sixth episode of a series and 63 percent of the initial audience doesn’t get that far, the impact is far lower. Not great! But as someone who spends every day in the data mines, I can say with authority that we don’t have enough information to declare Rings a flop. (The streamers have no reason to release better data, so why should they?) Yes, the headline number doesn’t look good for Amazon, but it’s actually a perfect example of why the economics of streaming are so complicated.

Among the most prophetic analysts of this new regime is Matthew Ball, an investor, former head of strategy for Amazon Studios, metaverse guru to executives around the world, and a renowned essayist and futurist. Ball recently published a mini-book detailing the three eras of streaming: the early adaptation era, in which Netflix and Hulu were first-movers, focused on educating consumers and stealing market share from cable; the present content era, in which film and TV costs have spiked as streamers compete for subscribers; and the dawning platform era, in which the market becomes oversaturated and companies focus on new formats, such as gaming or merchandising.

I caught up with Ball, who’s an investor and advisor to Parrot Analytics, where I work as director of strategy, as well as a fellow Canadian and friend, to talk a little more about this next era for streaming. Our conversation has been lightly edited for length and clarity.

Matthew Ball: The answer is different for each subset of the market. It’s worth highlighting that SVOD (subscription video-on-demand), FAST (free ad-supported TV), and user-generated content have not reverted to their pre-Covid trendlines, or even pulled back as the pandemic eased. E-commerce penetration in 2023 is almost exactly where we would have predicted back in 2019 (i.e. without Covid). In 2022, the U.S. gaming market experienced its first year-over-year decline since the dot-com crash, falling 6 percent despite 6.5 percent inflation. But over-the-top (OTT) video generates more revenue and has more subscribers than ever—and well more than it would have without the pandemic. The challenge with a sustained “pull forward” is that, by definition, it makes future growth more scarce—and this challenge is occuring at a time when streaming losses, debt loads, interest rates, and churn are all at their peaks.

Still, there is a lot in front of us. One thing I highlight in my mini-book is that we tend to use the wrong time horizon when talking about streaming video—we’re talking too narrowly. The first cable (i.e. Pay-TV) system launched in 1948, but it didn’t pass its predecessor, broadcast, until 2002. That’s more than half a century!

Some date the streaming wars as having started in 2019, or 2007 with Netflix and Hulu, or 2002 with MLB.TV/BAMTech (which provided the backend infrastructure for HBO Now, among other platforms, and is now owned by Disney). But streaming video is more than 30 years old now—it’s as old as the World Wide Web. And only last year did it pass cable TV networks for watch time, with a third, but it remains well short of Pay-TV delivery (i.e. broadcast and cable networks), which have 55 percent combined. A lot of time is left to shift.

This is particularly true internationally. There are about 800 million homes, not including China, which pay for video—but most of them don’t have an SVOD subscription, and those that do use only one or two services. Furthermore, this sum is growing by tens of millions a year. A decade ago, fewer than four in ten Japanese households paid for video; now eight in ten do.

Right—even as the streaming business pivots and adapts, it’s clear that audiences are moving inexorably away from cable and toward more direct-to-consumer options. In hindsight, what are some of the biggest challenges the industry has faced while making its ascent?

This decade was always going to be profit-light for the streamers in aggregate. For most of the past twenty years, U.S. network television EBITDA margins have been in the top decile of all industries in the U.S., alongside categories such as Oil & Gas and Renewable Energy, which needed those high margins to pay for extraordinarily capital-intensive facilities and infrastructure. That’s crazy and probably not sustainable (there’s a general business adage that over the long-run, margins go to 10 percent). Furthermore, at-home leisure has never been as competitive as it is today—and it will forever get more competitive.

The “streaming wars” narrative tends to obscure the fact that for nearly a century, TV had a near monopoly on at-home leisure. Now, of course, there’s social media, gaming, user-generated video, etcetera—all of which compete for time and user leisure dollars. Streaming has also brought an end to the bundle, while shifting each player to standalone competition with one another. This meant the glory days of guaranteed revenues and distribution were over, and at least for a while, acquisition costs would inevitably encroach upon a user’s lifetime value. Furthermore, the video business has never competed with entities that neither needed, nor necessarily sought direct profits (i.e. Amazon and Apple) because their video business was primarily in support of a core business that, well, generates more revenue than the entire paid video business globally.

Still, I think timing made things worse. Nearly every pre-streaming player, plus Roku and Apple with their originals, came to market during a 16 month period starting in November 2019. This escalated acquisition costs, while forcing down prices and eradicating profit hopes. When Comcast unveiled Peacock, in January 2020, it promised that annual losses would never exceed $1 billion and that cumulative losses would never exceed $2 billion. And yet market forces had other ideas: Peacock lost $663 million in its first six months, $1.7 billion in 2021, $2.5 billion in 2022, and forecasts $3 billion in 2023, for a cumulative loss of more than $10 billion.

This is an extreme example, but it’s not that atypical (see Paramount, WarnerMedia, etcetera). Making matters worse, competitive intensity led the major “legacy” players to speed up their cannibalization of linear revenues, and to a lesser extent, theatrical channels, reducing consolidated profits. If everyone burns the boats, you gotta burn your boats, and thus everyone burns them faster.

Virtually every streamer is now in some form of strategic retreat—paying less, focusing more on average revenue per user, and capital efficiency. As you’ve pointed out, it’s difficult to add consumer value when pulling back on content spend, even if that’s the rational thing for streamers to do now. One solution we’re seeing right now, as the streamers focus on monetization, is a shift back toward licensing content after a years-long focus on exclusivity. How do you see this playing out? Is it smart business or will it further blur brand distinctiveness?

The return to licensing, and the enormity of these deals, have different drivers by company, and I think it’s important to differentiate them. Warner Bros. Discovery, for example, needs licensing revenues in order to pay down its $45 billion-ish debt load. Lionsgate is licensing because its D2C platform, Starz, can’t adequately monetize most of Lionsgate’s top properties. After flipping the John Wick spinoff series The Continental from Starz to Peacock, Starz C.E.O. Jeff Hirsh said the move was 7-8x more valuable to Lionsgate’s shareholders. (At least for now.) Disney finds that it has extraordinary unused capacity that its streaming services don’t need. Disney’s streamers also aren’t great fits for huge portions of the company’s decades of adult-focused dramas, especially those inherited from the 21st Century Fox deal.

There is also the distinction between the sale of new content in a franchise (e.g. the J.J. Abrams and Matt Reeves Batman animated series), sale of old content in a franchise (e.g. licensing of The Dark Knight) and selling content with no particular corporate alignment (the recent last minute license of Disney’s Arrested Development to Netflix after Netflix announced it was leaving). All of these have different implications for a service’s economics, attractiveness to consumers, and brand confusion. It’s also worth noting that there’s a bit of a Catch-22: the most valuable content to sell is the most valuable content to keep!

Something I’ve been thinking quite a bit about is the future role of the smaller community-driven subscription services, like Crunchyroll, Criterion, or Shudder. In a world of bundling and consolidation, do these niche players have an advantage as standalone platforms or do they just become irresistible acquisition targets, as Crunchyroll was for Sony.

Honestly, I’m not convinced there’s a lane for “niche” SVODs beyond Crunchyroll. This isn’t a new position for me, but there was certainly a time when it looked otherwise. But both anime and Crunchyroll are so extraordinarily unique. The latter, especially alongside Sony Japan and Funimation, which Sony also owns, have a corner on the anime market in a way that isn’t possible in other genres (mystery, horror, indie film, etc). Crunchyroll is also 17 years old, and was once the third largest SVOD in the world. And anime extends into other categories, such as commerce, theatrical, video games, podcasts, conventions, etc, in a unique way, too.

A good example is Demon Slayer, a seven-year-old manga franchise developed by Sony Music Entertainment Japan. Since 2016, Demon Slayer has amassed nearly $9 billion in gross revenues—making it the youngest franchise to reach that mark, while also passing tentpoles such as Sesame Street, Minions, The Simpsons, and Power Rangers. In 2019, a Demon Slayer anime series debuted, while the 2020 anime film won the global box office crown with over $500 million in grosses—even though it was released in October of that year, rather than during the pre-pandemic window that included Sonic the Hedgehog and Bad Boys 3. The film also has Japan’s all-time box office record, beating Frozen, Spirited Away, Avengers: Endgame, Your Name and more. The Demon Slayer I.P. has also been adapted to hit video games, stage plays, and novels and has appeared on several national music charts.

The last chapter of your book focuses a lot on how gaming will become even more integrated with traditional entertainment. Sony, for example, has a really exciting path ahead of them. Same with Microsoft. That’s in contrast to Disney, for example, which has had more success partnering with publishers, like EA. Do you think that companies with in-demand I.P. can reach this next platform by continuing to license out and build games outside of their core platforms, or will they need to bring gaming in-house?

Certainly, companies such as Warner Bros Discovery and Sony are unique—outstanding at film, TV, direct-to-consumer distribution, and interactive. But I don’t believe you need to own the end-to-end interactive product to achieve platform status, it’s just trickier without it. But the rise of cloud game streaming and “metaverse platforms,” such as Roblox and Fortnite—not to mention shared technology stacks across both (i.e. real-time 3D engines)—will provide more flexibility. I also suspect that collaborations with licensees will grow, as will cross-account authentication.

Thanks, Matt. It’s increasingly clear that everything we thought we knew about the evolution of entertainment is cloudier than even the sharpest minds could anticipate—which is exactly what makes watching, analyzing, and writing about the streaming wars so compelling. Streaming, as we currently define it, is going through a series of shifts, rapidly sped up by technological advancements. I’ll check in with you later this year to see where we stand—I’m certain the landscape will be meaningfully different.