What if everything you thought you knew is a lie? People think that’s a line from The Matrix. It’s not, actually, but it sounds like it should be, so I’ll co-opt it to talk about this precarious moment in Hollywood.
It’s been about five years since The Walt Disney Co. first announced that it was developing its own Disney-branded streaming service, and in that short time the entertainment industry has fully transformed itself to chase Netflix, Amazon Prime Video, and the 1 billion households that, we’ve all been promised, are absolutely dying to pay for multiple subscription video services.
This was considered the TAM, the “total addressable market,” or the projected number of potential customers just sitting there for the taking. The leading minds at media companies (and the consulting firms that nudge them) have convinced the C-suite trigger-pullers that if you spend enough money streaming Ryan Reynolds time-travel dramas and bizarre dating competitions, the riches of global scale and pricing power await, thanks to that huge TAM. It’s true, because everyone says it’s true.
On March 8, Netflix C.F.O. Spencer Neumann, no doubt stung by all the new competition and the company’s recent slowdown in subscriber growth, reaffirmed the Gospel of Reed Hastings: Netflix is at 222 million subscribers, he noted, but its TAM is actually 700 million to 1 billion homes with internet-connected TVs, not counting China. (Some analysts actually say it’s more like 1.2 billion or even 1.6 billion potential customers, depending on connectivity forecasts.) So if Netflix can address about 60 percent of the TAM, which it has done in the U.S. and Canada, that’s 500 million subs easy. In other words, streaming is just getting started on growth, and anyone who dares suggest otherwise is stuck in the linear dark ages.
But what if that Gospel is in service of a false god? After all, those TAM numbers that Netflix and the others throw around assume that most broadband people, and a big chunk of mobile phone users, will eventually jump aboard the subscription video party bus like Americans have. Which may be true. But is it guaranteed? Of course not. (TAM, after all, computes the largest potential marketplace, not the likeliest.) And at what price point will these people participate, especially in the developing countries that are so key to global domination?
In a research note this week entitled Netflix: A Simple Question, What Is the TAM?, analyst Michael Nathanson spends 34 pages and many data points trying to figure out the answer. In truth, he writes, the size of the market “depends on a multiplicity of more common variables involving the effective price of Netflix’s service, affordability, ability to pay online, and a historical predilection to pay for premium video content.” In other words, who really knows??
One thing is clear, Nathanson writes: Developing territories will almost certainly pay much less for a streaming service than developed countries, and penetration will likely be much lower than in places like the U.S. and Canada. Hastings and co-C.E.O. Ted Sarandos sold the content industry on a massive pie of potential streaming customers, and no doubt that pie is indeed big. But Reed and Ted kinda have no idea how big, and now that the entire content industry is chasing their model, there are indications that the pie might not be nearly as big as they hoped, at least without making significant concessions.
For one thing, the stock market is skeptical. Netflix and the other streaming-first media companies have been pummeled so far this year, with Netflix stock down to about $370 a share from nearly $700 in November. Nathanson’s firm now puts the low end of TAM at more like 400 million households. The stock market represents investors’ best bet on the future, and if the number of potential subs is dramatically less than the premise on which every media company’s streaming ambitions have been determined, what does that mean for the entire media business?
Legacy media executives seem to be getting nervous. Most have stopped talking about taking on Netflix as a purely subscription video on demand competitor. Instead, companies like Disney, Comcast, WarnerMedia and Paramount are now redefining their goals to incorporate reduced spending, less ambitious growth metrics, and additional revenue streams like advertising, which allows for lower pricing. “Scale” has shifted to “sustainable business” as the dominant buzzword.
Consider the recent words and actions by leaders across the entertainment spectrum:
- Disney+ is adding an advertising tier, which is basically an admission that it needs a cheaper product to reach the 260 million subscribers that C.E.O. Bob Chapek has promised by 2024. (Disney+ is currently at 130 million.) The company’s C.F.O., Christine McCarthy, recently described the ad tier as “a win-win for the consumers who want it, the consumers who couldn’t afford it, otherwise.” But Disney+ is already among the cheapest of the major streamers, with a low average revenue per subscriber. So you gotta figure Chapek would have stayed the ad-free course if he thought the sub goal was attainable.
- HBO Max is experimenting with pre-roll ads before HBO films on its advertising tier. Another revenue stream, another way to lower subscription costs and build subs.
- Then there’s Neumann’s “never say never” comment regarding whether Netflix would explore ads, which sure seems like a shift from Hastings’ no-ad mantra of the past decade. Kevin Mayer, a Disney+ architect, speaking at SXSW this week, predicted that Netflix will offer an ad-supported tier within two years. “Mark my words,” he later tweeted. If Netflix expects to capture that lofty TAM, it will need big growth in hyper-price sensitive markets. That might require an ad-driven product. Moreover, Netflix is incentivized to signal to the market that it is willing to pull its other revenue levers.
- Incoming Discovery Warner Bros. C.E.O. David Zaslav is being “careful and judicious” in his content budget, he said on an earnings call, with a goal “to compete with the leading streaming services, not to win the spending war.” That certainly doesn’t sound like someone who’s willing to match Netflix penny-for-penny for every last subscriber.
- Paramount C.E.O. Bob Bakish walked back his ambitious movie-a-week strategy for Paramount+ in favor of a movie every other week. “We think that’s a better investment strategy,” he said. Probably, but it’s certainly a cheaper one.
- Kelly Campbell, Comcast’s new Peacock leader, downplayed the scale question in an interview with Vulture. “We have been focused on building a long-term, sustainable business,” she said. “We’re shifting our focus more and more to those quality subscribers, and we’re going to stay laser focused on building that quality while scaling.” Quality over quantity, sustainability over scale.
I could go on. Part of this is just savvy executives getting in front of the post-pandemic subscriber slowdown, moving the goalposts so their definition of success isn’t just whatever Netflix is doing. Plus, the legacy media companies are leaning back on what they know: The advertising business has been great for TV, and there’s no reason to think it won’t be great in streaming too. That’s why people are so bullish on ad-driven services like Paramount’s PlutoTV and Fox’s Tubi. Ad tiers also fit the “consumer choice” narrative that C.E.O.s like Chapek love so much.
But these moves are also an admission that nobody has any idea what the TAM for streaming will be. A few hundred million potential subscribers can be the difference between a thriving new business model and a dumpster fire that consumes several massive companies. Streaming isn’t some passing fad or a fake business, but it’s also not one size fits all. Wall Street is starting to figure that out.
What terrifies so many media companies is that, at least for the foreseeable future, the economics of streaming are far more challenging than those for cable television, with its lucrative bundles and high barriers to canceling. What those media companies were betting on was the ability to invest big, grow fast, and join the first mover in the space, Netflix, in the redefined TV hierarchy for the digital age. Now, increasingly, they seem to be asking: What if everything Netflix thought it knew turns out to be a lie?