The State Of Streaming In 2021: A Fight For Content And Eyeballs

The now cliché expression “when one door closes, another opens” is attributed to Alexander Graham Bell, but this 19th century observation had uncommon resonance over the last 12 months in the entertainment industry.

The door that closed — actually, thousands of doors — belonged to film exhibitors that were forced to close their theaters at the start of the COVID-19 pandemic and could only reopen months later with severe new capacity restrictions. 

Not surprisingly, this slammed door wreaked havoc on the film world. The Motion Picture Association said this week that global box office revenues plummeted to $12 billion in 2020, a significant tumble from the record $42.3 billion generated in 2019.

As for the corresponding door that opened, that belonged to the streaming industry.

The MPA also said the worldwide number of subscriptions for online video streaming services reached 1.1 billion in 2020, a 26% year-over-year increase and a new record peak for a relatively young industry. In the U.S. alone, the MPA said streaming subscriptions increased 32% year-over-year to 308.6 million.

See Also: NFL Signs TV Deals Worth A Massive $110B: Amazon, ESPN/ABC Among The Big Winners

A Truly Captive Audience: As government edicts shut theaters and requested that people shelter at home during the early part of the pandemic, the streaming services offered a much-needed distraction for homebound people hungry for entertainment.

A survey conducted by the business process outsourcing firm Sykes found 71.7% of Americans have started new subscriptions to streaming services since the pandemic began, with 49% purchasing a new television for watching the streaming programs.

Another survey, conducted by Deloitte, found U.S. consumers paid for an average of five streaming subscriptions during the pandemic, up from three before the health crisis took root.

One of the big winners during this time was Walt Disney Co.’s DIS Disney+, which launched on Nov. 12, 2019, roughly four months before the pandemic shut down the American economy.

Disney initially predicted it would accumulate 90 million subscribers by 2024 — instead, it reached the 100-million-mark last week, three years ahead of its forecast.

Still, Disney+ is not the top streaming service. A February survey by HighSpeedInternet.com, an Internet service provider comparison site, found Netflix was the most used service, with 80% of survey respondents being subscribers.

Netflix was followed by Amazon Prime (67%), Hulu (57%), Disney+ (52%), HBO Max (35%) and Peacock (22%).

Some of the leading services were on the market for years before the pandemic. Netflix NFLX was founded in 1997, Amazon AMZN launched its Amazon Prime service in 2005 and Hulu began in 2007 and went through several owners during the years before becoming a wholly-owned Disney subsidiary in 2019. Lions Gate Entertainment Corporation (NYSE: LGF-A) spun off its cable television channel Starz into a streaming service in 2016.

A different approach was taken by AMC Networks Inc. AMCX, which built its streaming presence over the last half-dozen years through acquisitions and investments in smaller niche-focused services, including the British programming-focused Acorn TV and BritBox and the horror film service Shudder.

Others found themselves starting in the right place at the right time. Apple’s AAPL Apple TV+ debuted Nov. 1, 2019, while HBO Max, owned by AT&T T subsidiary WarnerMedia, launched on May 27, 2020. Comcast’s CMCSA NBCUniversal started Peacock on July 15, 2020.

Two of the newest services are Discovery Inc.’s DISCA Discovery+, which premiered Jan. 4, and Paramount+, which ViacomCBS VIAC rebranded and reconfigured out of CBS All Access for a March 4 unveiling.

See also: How to Buy Disney Stock

Wall Street Smiles: Pandemic-weary audiences weren’t the only ones captivated by the newfound popularity of streaming services. Investors also found the potential of this entertainment sector extremely invigorating.

Neil Begley, senior vice president at Moody’s Corporation, told Benzinga investors have been very happy with this sector’s leaders.

“For the companies that essentially earned their tier one badge, the market has definitely recognized those companies and are rewarding those stocks at higher valuations,” he said.

"You just have to look at Disney, which was probably the most harmed large cap media company by the pandemic, with nearly 40% of their revenues coming from theme parks and cruises and experiences — and those essentially were shut down."

Although the studio was essentially shut down for a time, the stock is at an all-time high, he said — and the reason is Disney+. 

ViacomCBS stock has “really performed terrifically – I think that suggests there's some confidence that Paramount+ could be a player here,” Begley said. 

Tim Nollen, senior media analyst at Macquarie Bank, observed that U.S. media stocks are up by 167% on average since Nov. 1, compared to the S&P 500's 20% rise in the same time period. In a March 17 note, Nollen separated the high-performers from the also-rans.

“This has brought stocks to an all-time high for DIS, DISCA, FOXA, and VIAC, and a 5-year high for AMCX. And it has returned EV/EBITDA multiples to 10-year historical averages and above – DIS, DISCA, FOXA and VIAC are now trading all well above this long-term average, while AMCX and LGF are just below their averages,” he wrote. “On average, they are currently trading at 13x EV/EBITDA FY1 (ex-Disney), above long-term average of 10x.”

Cracks In The Picture? While Begley and Nollen named a relative handful of services, the U.S. sector is actually clogged with hundreds of services — most of them smaller, privately owned and niche-oriented. The excess quantity of services was already overloading consumers before the pandemic. 

“There are over 300 streaming services in the United States right now, and the average household only subscribes to three or four, so there could be too many choices,” Deloitte Vice Chairman Kevin Westcott said in a June 2019 interview with the film industry trade journal IndieWire.

“Consumers are frustrated they have to subscribe to so many services to get what they want. I don’t think we’ll see the continuous launching of more streaming services in the years ahead.”

Of course, Westcott’s forecast was significantly off course, but there is still a concern that the domestic market cannot accommodate this quantity.

"Many video DTC services will never get to 100 million or even 50 million subs, and our work shows that profitability will be a future challenge at smaller scale," Wells Fargo analyst Steven Cahall said in a Feb. 19 note.  

“Competition is fierce: we think Netflix has defined consumer expectations with a 'golden ratio' of more than $1 billion in annual content spend for every $1 of monthly customer average revenue per user (ARPU). Only Disney looks set to match it, though Discovery+ and Paramount+ could if the price is right.”

Cahall questioned whether consolidation would be the best thing for the streaming sector.

“We wonder if smaller-scale services like Starz and AMC Networks' might be better off folded into larger platforms a la WWE Network into Peacock,” he said. 

Fighting For Content: Exclusive content has been a major selling point for these services, but this raises another problem: the need to constantly create new films, series and specials to retain audiences.

While Disney+ can tap into its parent company’s extensive library of popular franchises, the other services are competing for original material and jealously guarding the classic films and series that they own.

Seth Shafer, senior analyst at Kagan, the media research unit of S&P Global Market Intelligence, told Benzinga this became very obvious when some services “started pulling back content that they used to license to Netflix and Amazon and Hulu.”

These companies had a Pyrrhic victory of sorts in regaining valued content but also losing lucrative revenue.

“In some cases, that was a significant amount of money they gave up,” he said.

"AT&T’s WarnerMedia is giving up hundreds of millions of dollars in licensing revenues so they can bring all that to HBO Max — and the same with Comcast’s NBCUniversal Peacock. We've seen these companies circle the wagons to build their own little walled gardens."

It's a question of whether this is sustainable for public companies that answer to investors. 

“Will they be given the same leeway that Netflix was given for all those years to spend so much on content without having to be profitable in the next quarter? I think that's to be determined,” Shafer said. 

Streaming From The Investor Standpoint: Another factor yet to be determined is when the services can be held up as standalone profit generators. Shafer laughed and said this is “the $1 million question,” noting how “we're still looking at these services that have done really well but aren't yet making money from it.”

Yet he also acknowledged that a lack of immediate profits never hobbled the sector leader.

"Netflix is the model there,” he said. “Five years ago, there were people arguing that Netflix was doomed, saying they couldn't grow fast enough and would pile up more debt, and eventually people would be unwilling to lend them money."

Netflix scaled up and is now able to fund itself from its revenue, and is on a path to profitability, Shafer said. 

"So, there's a model there, and it usually involves losing money for years and losing billions of dollars for years. And then once you scale up, you grow to the point that it works out and becomes profitable." 

RIP Quibi: Still, there is at least one major debacle in the streaming sector currently an anomaly, but could serve as a warning for companies that go about business the wrong way.

“The only loser was the service Quibi,” said Shafer, referring to the service that launched April 20 and shut down eight months later. “That was kind of the notable flameout — they had raised billions of dollars, had big name people behind it, launched with some big stars making content, but within eight months it was basically done and their doors closed. I think it's a good example that you can't just throw up any service out there.”

Photo by Frankundfrie/Pixabay.