How are streaming platforms reshaping entertainment?
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Jack Atherton: After watching the streaming wars play out over a number of years, there have been more signs of industry rationality of late with price increases, platform partnership and a potential consolidation. That said, competition for eyeballs remains high. So what are the latest trends shaping the streaming industry? Welcome to Research Recap on J.P. Morgan's Making Sense podcast channel. I'm Jack Atherton and I cover TMT specialist sales here at J.P. Morgan. Today I'm joined by two of my colleagues in research, Doug Anmuth, head of U.S. Internet Research, and David Karnovsky, head of the U.S. Media Entertainment Advertising Team. And we're here to discuss the key trends we're seeing in the streaming world today. Hi, Doug and David, thanks for joining me.
Doug Anmuth: Great to be here.
David Karnovsky: Thanks, Jack.
Jack Atherton: Doug, and I wanna come to you first, can you give us a broad overview of the state of the streaming industry today and who the key players are?
Doug Anmuth: Absolutely. In terms of the key players, there's really a handful that we really think about, certainly Netflix as the leader and having the most subscribers on a global basis. With Disney+, Amazon through Prime Video, Apple+, HBO with Max. And I'd also add, of course, Hulu, and probably Peacock as well. So probably those top seven, I would say. I think the key thing is we're kind of in the next phase of streaming, in my view, we probably had around 10 years or so of very strong secular growth. And that, of course, played into COVID, and a large degree of pull forward during that period as well, into this next phase of growth in streaming, there's certainly more growth to be had. But you're also seeing strategies shift somewhat, as companies look to evolve their strategies a little bit more toward page sharing, which is really cracking down, of course, on password sharing and advertising tiers as well, for example, and pricing, also just becoming a much bigger part of the strategy here.
Jack Atherton: Fantastic. David, you publish a quarterly consumer survey focused on streaming trends. What does that say about churn rates and the number of services that each household is taking? And within that, do you think the introduction of cheaper ad-funded services is having a positive effect on the number of subscriptions people can pay for?
David Karnovsky: Yeah, sure. So we've been doing survey work for a little over two years now, it's pretty consistent that the average household takes between four and five services that peaked close to five at the end of 2022, bottomed in 2023, around four, it's kinda back in the middle now. We have seen a little bit of a break in the typical seasonality recently, and I do think the increasing availability of ad tiers is playing into that. Our surveys recently show, at least for Netflix and Disney+ that a not insignificant portion of new subscribers to those services, I think it's something in like the 20 to 30% range are joining because of the ad tier. And I think you kinda have to remember too there's a portion of subs out there that are getting access to the services now, whether they like it or not. So if you get your pay TV through Charter, for instance, you likely now also have access to Disney+ with ads. With regards to churn, varies by service. In our survey work, usually 10 to 25% of respondents will express some likelihood of canceling a subscription over the near term. None of the public companies we look at ever disclosed churn, I think the legacy media companies have been pretty clear, it is a tremendous challenge. And we'll likely get to it later. But that is why they are looking to increasingly bundle their services.
Jack Atherton: Cool, I'm sure we'll get back to that bundling point and where it's heading. So, Doug, as you said, we're moving into the next phase for the streaming world, we're out of the low rates, growth or costs environment. And as companies have needed to pull back investment in order to drive margins and profitability, how do you think that's impacted content investment?
Doug Anmuth: I think it's still certainly very competitive around content, still for sure. But if we go back a few years and think about what we saw during COVID period, plus a lot of the traditional media companies really ramping up their streaming strategies and being more aggressive around content, that has certainly pulled back some more recently and just fits, of course, with the broader narrative across the space and really the market overall in terms of being increasingly disciplined. So right now, I think we're at a period where it's shifted a little bit more toward a buyers market in a lot of respects. And some of that, of course, will depend on what type of content we're talking about. But I do think we're seeing companies that are able to be more selective with the content that they're buying, certainly. And I think in some cases, shifting terms from what has been in the last few years, perhaps more upfront type of spending, toward more success based and toward the back end a little bit, as well.
Jack Atherton: So moving to sports. Sports content has been the final lifeline of linear. And we're seeing more and more content moved to streaming, driven by big tech. So Amazon Prime has taken Thursday Night Football, YouTube has taken the Sunday Tickets, both the NFL, Apple has taken the MLB and the MLS and even Netflix has started to dabble with sports with the WWE, and celebrity boxing. And just last night, there was news that Netflix is also in talks with the NFL to take two games on Christmas day starting this year. Doug, coming to you, do you expect this investment to continue? And how do you think about the economics of these investments?
Doug Anmuth: I absolutely think it will increase from here. So I think that now it certainly may look like small investments. And I think really, you can go back over a number of years where there's been, perhaps a lot of trial. And it's really been on both sides, right? I think a lot of the leagues have wanted to make sure that they could have good experiences with some of the streaming platforms, both from a production and actual technology perspective to driving a strong audience, for example. And so I think the efforts here have certainly built, but I would expect going forward, as I think about the streaming platforms, and really two big things, one, their ability to have scale on a global basis, which I think will only become more important to the leagues over time. And second, the ability to pay for content and be very competitive on that front, which, of course brings up a lot of the issues as linear TV shrinks, and of course, the growth that we're seeing on the streaming side. So those two factors, I think will be very important, and I think will push the streaming players further into sports over time. And I do certainly think that we can start to see some of the leverage shifts a little bit in that relationship over time.
Jack Atherton: Great. And coming to you, David, with a follow up, how are the media companies responding and pivoting here? And then what are you hearing ahead of the MBA talks that are ongoing at the moment?
David Karnovsky: Yeah, it's definitely been a challenge for the legacy media firms in that I'm sure they would have preferred to have reduced their prices paid to sports leagues as the linear ecosystem has been under pressure. And having that digital entrance has kept pricing or in a lot of cases, created pricing pressure much to the happiness of the leagues. To what extent have they reacted? I think what you've seen largely is a pivot for them. Basically focusing on the properties that really move the needle for them in terms of distribution and advertising, and then maybe allowing certain things that are secondary or tertiary to move away. So I'll give you a good example. One is Fox, right? They maintain a core offering around the NFL, college football, MLB, NASCAR. They currently carry WWE, but they have decided to allow that property to go away. Netflix will take that starting in early 2025. And then some NASCAR inventory also moved away part of it to Amazon. Regarding your second question on the NBA, it's changing a lot. It's pretty fluid. The latest chatter we've heard in the trade press is that ESPN and I think Amazon have deals lined up with the league. I think Disney said as much on their earnings call or expressed a lot of confidence around it. At least the outstanding question now is, what happens with the third package of rights? Turner or WBD is an incumbent there. We have seen reports that NBC has put in a soft offer for a package around two and a half billion dollars, that would be around twice as much as what Warner Brothers pays right now. And those games could be potentially carried on some combination of the NBC broadcast network and Peacock. Now, the incumbent Warner, they do have matching rights as they pointed out on their earnings call last night. The question though is how much do those matching rights apply in the sense that if NBC is structuring their bid around broadcast and streaming, whereas Turner, their current coverage is around cable, if it's not apples to apples, do those matching rights really apply? So it's a relationship question, it's a legal question. And that's where things stand at this moment. And I'm sure in a day or two, or a week or two, it can look pretty different.
Doug Anmuth: I think another key point there, too, just around some of these sports rights deals. And it's certainly tying that to the ad tiers. And not just the fact of course, that you have big global audiences. But now that some of the streamers have these dual forms of monetization, and they're better able to distribute some of these costs, essentially, and increase the returns through advertising. It's still of course, very early on the ad tiers, basically, for all the companies but you can kind of see these ramping over time and that will drive, that will fuel more of the push to sports rights.
Jack Atherton: It's even more worrying for the linear guys because it just points out that big tech have so many other ways to monetize sports rights, content investments, whether it be advertising or just driving the overall ecosystem that could be Amazon pushing customers more towards their retail business or Apple just further locking in customers around the iPhone, which is just gonna make the world harder for the legacy guys.
David Karnovsky: That's a good point. And I remember someone in the industry once saying to me that sports never made money on a direct basis, meaning no one ever made money on sports advertising. It's always what you do with those sports and drive on an adjacent basis. And you kinda think back once upon a time, right? (laughs) Not even once upon a time, but currently, right? Sports are monetized through advertising. And then they're monetized by leveraging them in distribution deals. But then you also place content around sports, right? Use it as lead in, you launch a show after the Superbowl or after a playoff game. And obviously, the whole ecosystem now needs to find out how are you going to do that in the world of streaming and its e-commerce. Different types of possibilities are very interesting from here.
Jack Atherton: Yeah. And we're starting to see some of the legacy guys partner up with each other. So later on this year, we should see a sports JV which is between ESPN, Fox and Warner. It was announced recently that Disney and Warner are going to partner to bundle Disney+, Hulu and Max together later this year. David, can you just talk about why they're doing this, and if you think this could potentially be a precursor to more aggressive consolidation?
David Karnovsky: Sure. Regarding the bundle that was just announced, so this will be at some point over the summer, consumers will have a way to purchase Disney+, Hulu and Max likely at a price point that would be attractive relative to buying those services individually. Or if you wanted to buy Max plus the Disney+ Hulu bundle. As far as the why, there's a few reasons WBD I thought actually ran through this pretty good on their call last night. The first would be sub growth, so there's not total overlap between each of these platforms now. So to the extent you're a Disney+ or a Max sub, and you don't have the other one, this would be a way for you to cost effectively add the other service. Secondly, there's definitely some marketing efficiency here in terms of having two separate companies advertise what would be one offering. The real reason though, is to limit churn, right? I talked about this earlier, the biggest challenge for the legacy services much more so than Netflix is managing churn, is managing people that come in to watch a single show or binge a show. And then as soon as they're done, they cancel the service. Now, if you offer a bundle, and that's what people are subscribed to, it makes it much harder to cancel the service and that you're engaged in multiple points. That's especially true if you're a household, right? So maybe in a household, you have the kids watching Disney+, and you have the adults watching Max. Previously, the kids might have been tired of watching some show on Disney and it would have been time to cancel it. But now the adults might say, well, you're not watching your Disney+ show, but I am watching House of the Dragon or something like that. So we're not gonna cancel the overall service. So it does serve to limit churn. Going to the question on consolidation, look, I think certainly there's a case to be made that for an industry that's under pressure, and there probably being more DTC services available than the four or five that people want to subscribe to. There's certainly a case for consolidation. But that's obviously very complicated by regulatory matters, the fact that you have a lot of controlling shareholders over these legacy media companies, probably a good cast topic for another point.
Jack Atherton: Yeah, [inaudible 00:13:29] that. Doug, coming back to you, you talked about scale and how relevant that is as the media companies debate with the sports leagues. How important do you think global is in that perspective these days? One of the COVID era ball cases for DTC versus linear media was the ease of taking USIP overseas, but it feels like that dynamic has shifted a little bit now. So what do you think there?
Doug Anmuth: I would still say, I think having global reach is very important, in my view. Certainly, there's just lots of examples where content has traveled beyond local countries, for example. So I mean, certainly with Netflix strategy, there's local content in every market. But we've seen if you take a piece of content like Squid Game, for example, which remains the most viewed, most popular piece of content ever for Netflix that traveled, of course, extremely well globally, somewhat of a surprise type of hit. There have been a lot of others out of Europe, for example, that have done very well on a global basis. So I would say I think it's still quite important. And there's also a lot of opportunities there where that content is where they can get really good return on content that in some cases may not really be that expensive to create and produce. So still quite important, in my view.
Jack Atherton: And to that point, David, you cover TKO who owned WWE, ly touched on it before, recently signed the deal with Netflix to take Raw early next year. How important was the global aspect of that as part of the negotiations?
David Karnovsky: Yeah, I think it was crucial for them, right? I mean, the way WWE had previously distributed its content around the globe was on a highly fragmented basis, individual partners for most markets rarely one of those partners would buy across multiple markets, that's complicated, both from the standpoint in that they need to go and negotiate all these individual deals, or sometimes they have to go to a wholesaler probably like IMG and not necessarily get the best rate and then rely on their expertise to distribute the content. I think one of the things that TKO has talked about, and I think it was attractive for them is by having a singular partner. It arguably increases the awareness of the product in many of these markets from the standpoint of sponsorship, from the standpoint of a lot of other ancillary businesses that fuel them, like licensing, like consumer products. And I think over time, that's gonna be what they point to as the most attractive part of the global piece of the Netflix deal even beyond the immediate media rights payment.
Jack Atherton: Maybe to wrap up, we'll do a quick poll ahead of the Mike Tyson, Jake Paul fight coming to summer. David, who do you think?
David Karnovsky: Tyson for sure.
Jack Atherton: Doug?
Doug Anmuth: Same. Have to go with Tyson.
Jack Atherton: I'll go the other side. I'll say Jake Paul. I think he'll wear him down for the first few rounds and then Tyson will, will struggle to keep up. I think he's 57 now, so...
David Karnovsky: Looks pretty young in the social media. (laughs)
Jack Atherton: It's pretty scary, the social media-
David Karnovsky: Yeah.
Jack Atherton: This been great. Thank you everyone for tuning in. And we hope to see you next time. Thanks, David. Thanks, Doug.
Doug Anmuth: Thanks for having us.
David Karnovsky: Thank you.
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