Future Tense

Why It’s Been Such a Brutal Summer for Streaming

A person's thumb is on a TV remote that includes a Netflix button.
Netflix is even built into people’s TV remotes, but the entire streaming industry is now in trouble. Chris Delmas/Getty Images

If you open up HBO Max right now, you might notice something—or, rather, the lack of something. Thirty-six somethings to be exact. Thirty-six shows that are just gone, disappeared from the platform.

Over the past decade, the streaming industry trained consumers to think they could watch what they wanted when they wanted and it would never go away, even if it went to another streaming service. But now, thanks to Wall Street and corporate mergers and a lot of bottom-line business decisions, a lot of people’s favorite shows are suddenly going poof. On Sunday’s episode of What Next: TBD, Julia Alexander—a director of a strategy at Parrot Analytics who also writes about the TV industry for Puck News—unpacked a brutal summer in the streaming industry. Our conversation has been edited and condensed for clarity.

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Lizzie O’Leary:  Let’s start with a simple question. What is streaming?

Julia Alexander: The literal thing is: Can you watch this over a broadband connection? Colloquially, the vast majority of us refer to streaming as six or seven companies. We think of Netflix, Hulu, Disney+, Peacock, Starz. But for the purpose of the conversation that is happening and that has happened over the last half-decade, we’re really referring to a couple of giant streaming services that are owned by about four to five different conglomerates.

Just a few years ago, Wall Street investors loved the streaming business, especially Netflix. Then, other companies started getting into the streaming game and competing with Netflix.
Yes, there were a lot of subscribers to all those services, but attracting and keeping subscribers costs companies money.

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And guess what? Streaming is not a profitable business. It is a hard business for almost every single company. If you look at Disney, they’ve got $1.1 billion in operating income loss. If you look at Warner Bros. Discovery, they’ve got I believe $3 billion in operating income loss. They’re spending heavily on streaming, but streaming is not a profitable business for them. It’s not going to be profitable for another two, three years.

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Wall Street went from not caring about that because they understood that you have to invest in content, you have to invest in product to get to that point, to all of a sudden saying, “Ooh, we should maybe care about that revenue. That caused a huge shift in how these companies performed on the public stock market.

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For years, television made money on ad revenue, right? Can you explain why streaming’s business model is different, and where the money is supposed to come from?

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The whole economic structure is that you have to make more on your customer coming in on average than what you’re spending to acquire them and what you’re spending in general on the platform as a whole, from the tech side and from a content investment side. If you are a company like a Netflix, for a long time that meant relying on debt. But the cost of going into streaming is massive, and it’s a bet that this will pay off for them.

One of the central problems for streaming, at least from an investor’s standpoint, is bloat: A lot of that money being spent on content isn’t getting new viewers, isn’t hooking people into a certain company’s ecosystem.

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I think last year or two years ago, we had 550 scripted programs in the U.S. alone, and that doesn’t take into account like the 3,000 unscripted programs that were being released. It’s just too much. Streaming is still a game of content. You have to have the best content. If you look at something like an HBO, it’s less money being spent, but those shows and those movies from Warner Bros. and from HBO are really hitting that kind of cultural zeitgeist. It’s not a matter of who’s spending more, it’s who’s spending smartly.

You are leading me to two stories I want to zoom in on. I want to start with Netflix. Its share price has basically been in free fall, though it has recovered a little bit. But over the year, it’s down about 60 percent. It was at one point the worst performing stock in the S&P. What is happening there?

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A couple of things. The first is that Netflix started losing subscribers. Netflix went from losing 400,000 subscribers to 680,000 subscribers, to then eventually losing just under 1 million subscribers in the most recent quarter. If you’re the Street and you’re saying, “Everything that we bet on is that this incremental subscriber growth will lead to profitability,” all of a sudden, everything that you are investing on seems to go topsy-turvy. What really drags down stock is something called future guidance.  

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That’s what’s going to happen going forward, right?

Exactly. Netflix that comes out and says, “We had a rough quarter. Also, we think the next two quarters are not going to be great.” This is also what happened with Warner Bros. Discovery. They come out and they say, “Also, we’re going to lose $2 billion more than we thought we were going to lose.” If you are an analyst at a bank, or if you are an investor, that’s a huge red flag.

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Wall Street tends to move in herdlike patterns, so behavior can become contagious, right?

I always like to say the stock market is astrology for men. It’s like the CEO had a fight with his wife and now they’re like, “Oh God! We don’t know what this means.” Is the response to Netflix fair? I think it’s valid. What has happened is it has course corrected. The idea that Netflix was a $700 stock never made sense. The companies it was [lumped with] with had arms. Google’s an octopus head. It has a product arm. It has a search arm. It has the YouTube arm. It has all these different arms. That’s what makes its money. Amazon has arms. Apple has arms.

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Netflix doesn’t have arms. It’s one tentacle. But because it was an algorithm, because it was tech-focused, we valued it in a bull market as a tech company in the sense of like the biggest tech companies. And that’s just not fair. Is Netflix in a really troublesome position? I don’t think so. I think the market course-corrected. I think it was like, cool, this is where Netflix should have always been, closer to Disney than to Apple.

Inevitably, when any company goes through a course correction, there are always human costs. HBO Max reportedly laid off 70 people this month. The Daily Beast said that included 13 nonwhite executives. Netflix fired 150 people this spring, and many of them were women and people of color who were helping make an amplify content that was targeting more diverse audiences.

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I can’t speak to individuals that they have let go. What I can speak to is kind of strategic shifts in the areas that they’ve targeted. Animation is a key one. Certain types of film are another one. If you’re Netflix and you’re looking at cutting costs, really for almost the first time in a major way, one, you’re trying to help your balance sheet as a company, but two, you’re a publicly traded company. You’re trying to appease investors, especially as you have activist investors who come on board. They buy a whole chunk of stock, and then they think that they have the ear of the CEOs, or in Netflix, the co-CEOs.

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The reality is Netflix has to make decisions now. They were operating like a tech company, like an Apple, and now they have to operate like an NBC. Layoffs are never, ever a fun story, but Netflix is course-correcting in a way that it should have been doing years ago and is now being forced to do.

Does that mean when a company is course-correcting that it’s making bets that are more of a sure thing, or that have an audience built in? I’m thinking about House of the Dragon on HBO Max. There’s a huge audience that maybe misses Game of Thrones and is ready to watch something similar again, (no matter how violent it is in the first episode).

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House of the Dragon, which is a $200 million show—which is pretty much a guaranteed bet for HBO—happens, and then they use a bunch of other different shows that they think might be guaranteed bets, but might be a slightly cheaper cost, something like Sex Lives of College Girls, something like a Gossip Girl, which are like, “We think there’s an audience here for it, and it’s not going to cost as much.” Alongside House of the Dragon, this is going to allow them to create strong enough revenue that they can then invest in shows that they think might perform down the line, but they’re not sure on. They really need these guaranteed bets, both at the cheap level and at the expensive level, that bring audiences in. The thing that’s happening over the last decade, and we can thank Kevin Feige and the Marvel Studios team, is that intellectual property and franchises have just become the dominant thing. Everybody wants a franchise.

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But doesn’t that also risk, I don’t know, content becoming boring?

Absolutely. I say this as someone who really loves this company and loves the series, but I think if you ask people about Marvel now versus Marvel circa 2011-2012, I think you’d get a lot of people saying, ” I’m not as invested in it as I used to be.” I think part of that is an oversaturation and there’s only so much of it that you can do.

What does the Warner Bros. and Discovery merger mean for viewers? What are you going to see or not see because of this merger?

If we look at the 36 titles that they removed, it is for the most part kids’ animation. It’s really hard to tell creatives and fans who are right brain, who are very enthusiastic and are very obsessive with their shows because it’s their art, it’s their life’s work, “For accounting purposes, it makes more sense for us not to have this on the platform.” In streaming, these are referred to as intangible assets. Tangible asset: DVD. You can touch it. The value of that is pretty apparent. Intangible asset: Really hard to determine the value of that three years down the road. What the financial planning analysis teams at these companies do is they go through and they basically do a cost-to-value formula in Excel. They find out, what is the likelihood that this show in three to four years is going to be worth more than it is right now? Right now, if it’s worth the highest it’s ever going to be, they can choose to remove that show and take almost like a tax write-off on it. It’s a really boring way of saying these decisions are not just being made from a creative perspective. It’s also saying, we have this financial aspect that we can save tens of millions dollars a year. None of that matters to fans.

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None of that matters.

We came from an age where we told consumers over and over and over again via our actions taken as an industry that there was going to be more and more and more. Everything about how we think of television, and how we thought of it for 60 years, disappeared in a decade.

You can always protest a show being axed from a platform by canceling your subscription, but there isn’t much other recourse if you love something. There might be a chance that it’s gone forever, or at least really difficult to find. That’s alarming, both for consumers who have fallen out of the habit of, say, buying DVDs they’ll own forever and for the people who make these shows.

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But the big question right now is … I want it guaranteed that I’m going to have this show at least be available on iTunes. This show is going to be available on Amazon. Fans can at least spend 10 bucks and they can buy the season. It’s their quest for permanence in an increasingly ethereal moment. It’s their way of saying, “This will exist.” Over the last week, Infinity Train, all four seasons, shot up to the top 10 on the Apple TV or iTunes chart. People went out and bought it.

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But I think what is increasingly clear, both from a talent side and from a fan side, is that as the market continues to consolidate—and it’s not done, we’ll see way more consolidation happen at the major level—the power imbalance grows. It’s a divide. All of a sudden, if you’re a creator and you can only pitch three different companies … I mean, this is 1948 all over again. There’s not much you can do. You kind of just hope that what you like is something that the companies are also invested in. But I think there’s an acceptance that people have to have that they don’t have control over this, that the industry is no longer more and more and more. The industry is now back to basic show business. It is: We have to make money, and it is increasingly difficult to do that right now.

Future Tense is a partnership of Slate, New America, and Arizona State University that examines emerging technologies, public policy, and society.

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