The Streaming TV Bloodbath

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Lizzie O’Leary: If you open up HBO, Max, right now, you might notice something. Or rather the lack of something. 36 somethings, to be exact. 36 shows that are just gone disappeared from the platform.

Speaker 2: I actually really do love Infinity Train.

Speaker 3: Well, I’m glad I was able to help you. Now, come on. We better keep moving forward. Pass. I spent my whole existence living your life. I’m going my own way now.

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Speaker 2: Which is own Dennis’s cartoon. It was a show that aired on Cartoon Network for two years, then moved to HBO Max for two years.

Lizzie O’Leary: That’s Julia Alexander. She’s a director of strategy at Parrot Analytics, a company that measures and studies audience demand. And she writes a newsletter about streaming for Puck News. Julia is like an encyclopedia, of all things, streaming. So she’s been watching closely as Warner Brothers Discovery, the new parent company of HBO, has taken an axe to a lot of beloved shows.

Speaker 2: And so that show disappeared with all the rest of them. And so that when I was a little upset about but for the most part, I think it’s been targeting series that are not necessarily in my wheelhouse of interest, but I definitely have seen the response online from fans who clearly are very upset about it all.

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Lizzie O’Leary: What are they saying?

Speaker 2: First of all, they’re saying, you know, how could this happen and how dare they, etc., etc.. You know, David Zaslav, who’s the new CEO of Warner Brothers Discovery, you know, how dare he do this thing? But I think if we take a step back and really think about what they’re saying, it is a really strange moment in our lives as TV consumers, as movie consumers, where for the last decade we were promised more and more and more. We were promised that if you signed up for a streaming service, you know, as you move away from cable, as a younger generation of people came into entertainment for the first time, that they could sign up for something. And the show may disappear from that platform, but it would go to another platform. It wasn’t necessarily it was disappearing, it was moving around. And so people got really used to this. You know, we call this generation, which is technically Gen Z. We call them the churn and return generation.

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Lizzie O’Leary: What does that mean?

Speaker 2: It basically, if you let’s say you love new girl and new girl moves from Netflix to Hulu, you might cancel Netflix to go to Hulu to watch New Girl. And then if that if it goes to Peacock, you might cancel Hulu to go to Peacock like you will follow your show. Churn just means cancel and return, of course, is you’ll return when there’s something interesting to you.

Lizzie O’Leary: Julia says that the streaming industry and the entertainment industry in general 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.

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Speaker 2: All of a sudden, when things shift like that, now we’re saying, okay, well, things are disappearing because of tax reason. Things are disappearing because of accounting surgery, boring things to tell consumers about. You know, for accounting purposes, we need to get rid of the show. And when you’ve told them nothing but more and more and more and all of a sudden you’re saying less and less and less. That’s something that gets really upsetting to deal with as a fan, because this is not something that you were ever you ever thought could happen because you were not told that it was going to happen.

Lizzie O’Leary: Now, streaming companies are slashing jobs, cutting spending and making shows simply disappear. Or in the case of Warner Brothers, just killing a $90 million movie, that girl, it was almost done. So today on the show, Julia unpacks a brutal summer in the streaming industry. What it means for the business and the shows you love. I’m Lizzie O’Leary and you’re listening to What Next TBD a show about technology, power and how the future will be determined. Stick around.

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Lizzie O’Leary: Before Julia explains how and why the streaming business is in trouble, I thought it might be helpful to ask a simple, maybe even simplistic question. What is streaming?

Speaker 2: The literal thing is, can you watch this basically over a broadband connection? Colloquially, I think the vast majority of us refer to streaming as six or seven companies. Right. We think of Netflix, Hulu, Disney Plus. I mean, that’s one company, Disney Plus and Hulu. But we think of Peacock, we think of stars. If you’re watching something on VOD and you’re streaming it and technically that’s streaming. But I think 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 really giant streaming services that are owned by about four different 4 to 5 different conglomerates.

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Lizzie O’Leary: Just a few years ago, Wall Street investors loved the streaming business, especially Netflix. Its algorithm promised to target viewers and serve them what they wanted. You could also watch content from other places like Disney or NBC there. 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.

Speaker 2: And guess what? Streaming is not a profitable business. It is it is a hard business for almost every single company. If you look at Disney, you know, they’ve got $1.1 billion in operating income loss. If you look at Warner Brothers Discovery, they’ve got, I believe it was $3 billion in operating income loss. All of this because they’re spending heavily on streaming. But streaming is not a profitable business for them. And they know that it’s not going to be profitable for another two or three years. So Wall Street went from not caring about that because they understood that you have to invest in content, have to invest in product to get to that point to all of a sudden saying, oh, we should maybe care about that revenue. And then that caused a huge shift in how these companies performed on the on the public stock market.

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Lizzie O’Leary: For years, television made money on that revenue. Right. Big companies made money on ad revenue.

Lizzie O’Leary: And I wonder if you could explain for dummies why streaming business model is different where the money is supposed to come from.

Speaker 2: Let’s use an example. Let’s break it down. Jane Doe over here is paying, you know, $15 a month for Netflix on Jane Doe. Netflix is making $15.99 and making, you know, like a $0.50 profit on that customer. The cost of acquiring Jane Doe is maybe six, $7, whatever it might be. So Netflix has to kind of look at that discrepancy between how much they’re selling to bring that customer and how much profit they’re making.

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Speaker 2: Now, you times that over 220 million subscribers and this you know, we can get this huge semantics. But hypothetically, you look at that. You get to start to see how Netflix can hit profitability. The whole economic structure, though, is that you have to make more on your customer coming in on average than what you’re spending to acquire them and then what you’re spending in general on the platform as a whole from the tech side and from a content investment side. So if you are a company like a Netflix for a long time, that meant relying on debt. You carried a lot of debt with the promise that this would pay off again. But the cost of going into streaming is massive. It’s a massive cost and it’s a bet that this will pay off for them one and two years in LA literally hit profitability. And then beyond that, you know, in ten, 15, 20 years, they’ll get to a point where hopefully those profit margins become close again. But we don’t really know.

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Lizzie O’Leary: These high customer acquisition costs, by the way, are also the reason companies want to lock in people for all parts of their business. If you stream The Mandalorian on Disney plus, then Disney wants you to go to their parks, take a cruise, buy some baby Yoda lunchboxes, target you with everything your customer data says about you. But one of the central problems for streaming, at least from an investor standpoint, is bloat, that a lot of that money being spent on content isn’t getting. New viewers isn’t hooking people into a certain company’s ecosystem.

Speaker 2: I think last year, two years ago, we had 550 scripted programs in the US alone, and that doesn’t take into account like the 3000 unscripted programs that were being released. It’s just too much. It’s too much and it gets lost. And so you’re seeing a slowdown domestically streaming, still a game of content. You have to have the best content. And if you look at something like an HBO, it’s it’s less money being spent. But those shows and those movies from Warner Brothers and from HBO are really hitting that kind of cultural zeitgeist. So I think it’s not a matter of who’s spending more, it’s who’s spending smartly. And we’re really seeing that kind of emerge.

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Lizzie O’Leary: You are leading me to a story I want to zoom in on or two stories I want to zoom in on. I want to start with Netflix. Its share price has has basically been in freefall, though it’s recovered a little bit, but over the year, it’s down about 60%. Was at one point the worst performing stock. In the S&P. What is happening there.

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Speaker 2: A couple of things. The first is that Netflix started losing subscribers. Netflix went from losing 400,000 subscribers to 680,000 subscribers or something along those lines to then eventually losing, you know, 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, will lead to 100 million homes in the U.S. watching Netflix, whatever it might be. All of a sudden, everything that you were kind of investing on seems to go topsy turvy. You also have this, you know, really drags down stock and you’ll kind of see this sometimes happen where a company will report a decent quarter, but then their stock drops. There’s something called future guidance, right.

Lizzie O’Leary: What’s going to happen going forward?

Speaker 2: Exactly. Netflix that comes out and says, you know, we had a rough quarter also. We think the next two quarters are not going to be great. And this is also what happened with Warner Brothers. Discovery’s why their stock drank. So they come out and they say, also, we’re going to lose $2 billion more than we thought we were going to lose. And so if you are an analyst at a bank or if you’re an investor, that’s a huge red flag. And all of a sudden they’re like, well, I can put my money elsewhere. I don’t know about this company. So Netflix kind of gone to this trajectory where they were losing customers. They were finally acknowledging, like, okay, competition is really eating into us. Netflix acknowledges that they have to be better about spending. Netflix acknowledges that they have to bring ads in because they’re trying to create another route for customers to kind of come into the into the platform, which is smart but can be it can look like a sign of weakness to certain investors. So they start doing all these things. And all of a sudden, the idea that Netflix is the dominant future of entertainment is in question.

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Lizzie O’Leary: And when investors saw that and looked around at the crowded streaming landscape, they said, okay, maybe this company isn’t worth what we thought it was. And the stock dropped. Also, Wall Street tends to move in herd like patterns so behavior can become contagious.

Speaker 2: I always like to say the stock market is like astrology for men, right? They’re kind of they they they it’s like the CEO had like a fight with his wife. Now they’re like, oh, god, you know what this means effectively? What? What it is in a lot of ways, you know, is is the response to Netflix fare? I think it’s valid. I think what has happened, in my opinion, is it’s course corrected. The idea that Netflix was a $700 stock never made sense. The companies it was with had arms. Think of them like an octopus Googles an octopus. And it has a bunch of different arms and it has a product arm, it has a search arm, and the YouTube arm has all these different arms. That’s what makes its money. Amazon has arms. Apple has arms. Netflix is unarmed. Netflix doesn’t have arms. It’s one tentacle that’s kind of like we have this business.

Speaker 2: But because it was an algorithm, because it was tech focused, we we valued it in a bull market, which basically means that a really strong 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.

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Lizzie O’Leary: When we come back, what do you do if the show you love is going away? 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 non-white executives. Netflix fired 150 people this spring, and many of them were women and people of color who were helping make and amplify content that was targeting more diverse audiences.

Speaker 2: I can’t speak to the individuals that they have let go. What I can speak to is kind of strategic shifts in the areas that they’ve targeted. And so animation is a key one. Certain types of film is another one. And if you’re Netflix and you’re looking at cutting costs really for kind of almost the first time in a major way, you’re really trying to appease, well, one, you’re trying to help balance your balance sheet as a company. But two, you’re a publicly traded company. You’re really trying to appease investors, especially as you have activist investors who come on board and they come on, they buy a whole chunk of stock, and then they think that they can have the ear they have the ear of the CEOs or in Netflix, the co-CEOs. Netflix is teams are massive. They’re massive teams. And so you’re looking at what’s working with them, what’s not, and you’re going to maybe target one that’s not.

Speaker 2: So if you’re saying, you know, independent films at the 15 to $20 million level that don’t really do anything for us prestige wise, they don’t do anything for us revenue wise, they don’t do anything for us. You know, franchise level wise, we don’t really need those teams. So we can kind of those teams go, especially if they’re us focused. We feel like we’ve kind of tapped out in the U.S. a little bit.

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Speaker 2: So now we need to really be figuring out how to reach international markets. But the reality is Netflix has to make decisions now. They were working like they were operating like a tech company, like an apple. And now they have to operate like an NBC, right? Like they have to look at their expenses. They have the cost of labor that they have and find a way to balance that. And layoffs are never, ever a fun story. But Netflix is course correcting in the way that it should have been doing years ago and is now being forced to do now.

Lizzie O’Leary: Does that mean when a company is course correcting or figuring out what it’s doing now, 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. Maybe no matter how violent it is. In the first episode.

Speaker 2: House of the Dragon, which is a $200 million show, which is pretty much a guaranteed bet, you know, for HBO, but is still a costly bet, happens. And then they use a bunch of other different shows that they think might be guaranteed best but might be a slightly cheaper cost. Something like sex lies with college girls, something like a Gossip Girl, which, like we think there’s an audience here for it’s not going to cost as much. And alongside House the Dragon, this is going to allow us to create strong enough revenue that we can then invest in shows that we think might perform down the line. But we’re not sure. And we really need these guaranteed bets both at the cheap level, at the expensive level to bring audiences in. The thing that’s happening over the last decade and we can think, you know, whether you love or hate this Kevin Fire in the Marvel Studios team is that IP intellectual property franchises have just become the dominant thing. Everybody wants a franchise.

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Lizzie O’Leary: Marvel after Marvel, after Marvel after Marvel.

Speaker 2: And if you are Warner Brothers and if you are Disney, you are looking out because you have them to the moon and back. Disney has Star Wars, Marvel, Warner Brothers has DC, Game of Thrones, Harry Potter. They’ve got all the ones over there. And so you’re seeing a lot of investment in that space because, one, it’s guaranteed two. If you think about how these companies are built, it’s really easy to siphon them into like into one category. Like this is movies and this is TV. If you look at a DC or if you look at a Game of Thrones, you can make games on that, which is an entry way for people to come in. You can make merge, you can do experiences, all this type of stuff that’s really hard to do with a, you know, drama or a comedy that does not have that same kind of audience built in. So when you see them putting their but, you know, Netflix doing 200 Million Angry Men, it’s this idea of like getting to a point where everyone has franchise that then acts as a revenue or a borrow. It should pay for itself eventually.

Lizzie O’Leary: But doesn’t that also risk, I don’t know, content becoming boring.

Speaker 2: Yeah. I mean, absolutely. I think again, I think if you asked people about there and I said this is when he really loves this company and loves the series. But I think if you ask people about Marvel now versus Marvel circa 2000 and 11,012, I think you’d get a lot of people saying like, oh, I don’t know, like I’m not as invested in it as I used to be. And I think part of that is an oversaturation, and there’s only so much of it that you can do.

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Lizzie O’Leary: Warner Brothers and Discovery. In this merger, it means so much for investors. It means so much for people who write about this industry. What does it mean for viewers like what are you going to see or not see because of this merger?

Speaker 2: Yeah. You know, I think I was talking to a friend about this yesterday and they are specifically focusing on titles. Right. And they said, okay, Infinity Train gone. Okay, was gone. 200 episodes of Sesame Street are gone.

Lizzie O’Leary: That’s a big concern in my house, by the way.

Speaker 2: And that’s really devastating. As someone who like desperately loves something like a succession or what we do in the shadows, if that was gone forever, I’d be very, very upset. If we look at the 36 titles that they removed. It is all for the most part, kids animation, right? It’s kids programming, kids animation. Some other animation thrown in there. But it’s really that. So if I’m a fan of something and I’m looking at it, my immediate takeaway is they’re not investing in kids and they’re not investing in animation. Like, they’re they’re backing away from it. It’s really hard to tell creatives and fans who are, you know, right brain who are very enthusiastic and are very like obsessive with their shows because it’s their art really gets their life’s work. It’s really hard to tell them for accounting purposes.

Speaker 2: It makes more sense for us not to have this on the platform and people kind of, you know, don’t understand what that means and what happens with something like streaming, where these are referred to as intangible assets, tangible assets, DVD, you can touch it. It’s a tangible asset. You can. The value of that is pretty apparent. Intangible asset, really hard to determine the value of that three years down the road. We don’t know. It’s really hard to do.

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Speaker 2: So what the teams at these companies do, the financial planning analysis teams they go through and they basically do a cost to value formula in Excel. Their whole thing is what is the likelihood that this show in 3 to 4 years is going to be worth more than it is right now? And 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 down, tax write off on it. Really boring way of saying these these decisions are not just being made from a creative perspective where they’re saying, okay, we’re going to move away from kids. And an animation like that’s a creative decision. It’s also saying we have this financial aspect that we can save high tens of millions dollars a year. None of that matters to fans. None of that matters.

Lizzie O’Leary: None of that matters.

Speaker 2: And especially, again, we came from an age where we told consumer, we told fans 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 we thought of it for 60 years, disappeared in a decade. And now it’s like I have these expectations. A show will come out in 13 episodes all at once, and then I might get a second season in the like in a year later. And that’s kind of how television works. My shows are going to be there in some capacity. On some service, I’ll be able to access this. It’s really hard to change fundamental, irrevocable human behavior, and that is where fans are coming in and saying like, what is happening?

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Lizzie O’Leary: Sure, 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.

Speaker 2: But the big question right now is I want guarantees or guaranteed whatever that I’m going to have this show at least be available on iTunes. This show is going to be available on Amazon. These people are going at least fans can’t spend ten bucks and they can buy the season and they.

Lizzie O’Leary: Can buy.

Speaker 2: It. You’re right. It’s their quest for permanence in an increasingly ethereal moment. It’s their way of saying this all exist. Now, these companies are not going to put out DVDs necessarily, because why would they do that? It’s declining business. They don’t even have a business unit really for it anymore. Their home video entertainment is not DVD focused, it’s VOD focused. And so you’re not going to get physical, but you see that fans are doing this, you know, blasts. And over the last week, Infinity Train all four seasons shot up to like the top ten on the Apple TV or iTunes chart that people went out and bought it. Wow.

Speaker 2: We also saw, though, that that’s not permanent. If we remember last year, I believe it was maybe two years ago, Kobe time, I don’t remember, but I think it was last year. And there was all this, the episodes that were deemed either outright racist or problematic. There was episodes like 30 Rock. I think there was an episode of like Golden Girls or something. And what we saw happen was episodes of those episodes disappear from iTunes, it disappeared from Amazon. And on the one hand you’re like, okay, I mean, I get what they’re trying to do. Like they’re very much saying, like, we were wrong about this and we’re going to remove it. On the other hand, if you are someone who is deeply worried, like I am, about things just disappearing because that is what happens when we’re in an increasingly. It’ll age. This is where the creators come in and they’re saying, we don’t even know if Warner Brothers Discovery is going to do this for us. We don’t even know if we’re going to have guaranteed Amazon, iTunes or if this disappears.

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Speaker 2: And then at that point, all you can do really as a creator and this is what Owen Dennis said is like not promote piracy. But you’re like, I also I get it. If you remove availability and accessibility, this is what happens. 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 that it’s a divide. And all of a sudden, if you’re a creator and you can only pitch three different companies, I mean, this is, you know, 1948 all over again. You only pitched this many companies to.

Lizzie O’Leary: The studio system.

Speaker 2: But the studio system, you know, you’re basically like, well, this is they hold all the power and now we’re kind of moving back towards that. There’s not much you can do. It’s it’s 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, you know, show business. It is we have to make money. And it is increasingly difficult to do that right now.

Lizzie O’Leary: Julia Alexander, thank you so much for talking with me.

Speaker 2: Thank you for having me. This was great.

Lizzie O’Leary: Julia Alexander is a director of strategy at Parrot Analytics and writes about the TV industry for Puck News. And that is it for our show today. What next? TBD is produced by Evan Campbell. Our show is edited by Jonathan Fisher. Joanne Levine is the executive producer for What next? Alicia montgomery is vice president of Audio for Slate. TBD is part of the larger what next family, and we’re also part of Future Tense, a partnership of Slate, Arizona State University and New America. And if you’re a fan of the show, I have a request for you. Please become a sleep plus member. Just head on over to Slate.com. Slash, what next? Plus to sign up. All right. We will be back next week with more episodes. I’m Lizzie O’Leary. Thanks for listening.