Stream On

Instead of deploying a multinational force to Gaza or tanks to Ukraine … let’s have our troops descend on the Home Depot in Westlake, California. Let’s cosplay authoritarians so people look away from the speedballing wealth transfer from young to old, poor to rich, future to the past — the tax bill. Throw in tariffs that purposefully create market volatility to (insider) trade against and make billions. Exhausting …

I know: Let’s talk about streaming.

Living the Stream

The last streaming war was Netflix vs. Hollywood. Spoiler alert: Netflix won. It reduced production costs by globalizing production, leveraging broadband and cheap capital to make Amazon-like investments that nobody could compete with. The result was a transfer of value from Hollywood studios and talent to Netflix shareholders and subscribers. 

The next streaming war? A: YouTube takes on the world. This year, more people in the U.S. watched YouTube on TVs than on mobile devices — a first. YouTube is now the No. 1 distributor of TV content, according to Nielsen. And for the past three months, YouTube registered the largest share of TV viewing (12%) among media companies; Netflix accounted for 7.5%. As one anonymous streaming executive told Vulture, “[YouTube] already has the crown. Most networks have essentially thrown up their hands in response.” Last month, I asked the Prof G research team to calculate YouTube’s valuation independent of Google. They estimated YouTube’s market cap would be approximately $550 billion. Netflix, the most valuable streamer, currently has a market cap of $520 billion.

When I look at YouTube, I see public access television (Google it) at internet scale with exponentially better production values. According to my Markets co-host Ed Elson, Gen Z views YouTube as an algorithm-driven “pendulum swinging power away from brands and toward individuals.” The individual who’s levied the greatest damage on Hollywood is not Reed Hastings, but YouTuber MrBeast, who mastered the art of the parasocial relationships. In 2023 he racked up 1 billion-plus hours of viewing time, more than any of the top shows on Netflix. 

But just as individual content creators disrupted Hollywood, AI may disrupt content creators. Netflix will spend an estimated $18 billion on content this year. YouTube’s content budget is effectively zero, and it therefore splits revenue with creators. According to MrBeast, a typical video costs him $2.5 million to produce. This month, an AI muzak channel overtook him, becoming the fastest-growing channel on YouTube.

Metamorphosis

A handful of animals can change their appearance to defend against predators or stealthily hunt prey. The aptly-named mimic octopus, however, takes gold, silver, and bronze in the metamorphosis category, with shape-shifting capabilities that let it emulate 18 different species. Netflix is the mimic octopus of the media ecosystem. The company began life as a mail-order DVD startup and disrupted an 800-pound gorilla called Blockbuster. Later it shape-shifted into a streaming service and disrupted an 800,000-pound gorilla called Hollywood. Now, after its first redesign in a decade, Netflix is shape-shifting again, with AI-powered content recommendations, vertical video on mobile, and an updated aesthetic to compete with YouTube and TikTok. As Netflix chief of product Eunice Kim said, “Our current TV experience was built for streaming shows and movies. This one is designed to give us a more flexible canvas now and in the future.” Translation: Netflix is content-agnostic, attention-obsessed.

The latest iteration of Netflix isn’t a pure subscription service, but a hybrid subscription-advertising company. Around 94 million subscribers have opted for Netflix’s ad tier since it launched less than three years ago. Despite the growth, I believe ads are a mistake, breaking Netflix’s core brand promise of an uninterrupted alternative to legacy media and levying the time tax known as commercials. Last year, Netflix reported $1.4 billion in ad revenue, compared to $7.4 billion for Disney, spread across broadcast, cable, and two streaming services. But Netflix has always defined competition on an impossible scale — Hastings, the founder and former CEO, used to say the company’s real competition was sleep. Netflix’s attention economy rivals include Meta ($160 billion in ad revenue last year), YouTube ($36 billion), and TikTok ($18 billion). Digital media pits all against all, resulting in a winner-take-most/all scenario where ad dollars increasingly consolidate around the small number of companies that have captured nearly all of our attention. For its next act, Netflix is reportedly focused on reaching a trillion-dollar market cap. “In the previous five years, we have doubled our revenue, grew profits 10 times, and we grew our market cap three times,” co-CEO Ted Sarandos said. “So there’s a path.”  

Hyde

When a company has a profitable but declining business (cable) and a growth business (streaming), investors don’t know who they’re waking up next to — Jekyll or Hyde. Because they don’t know how to value the asset, they assign the multiple of the worst business to the entire company. The divestiture of assets in different life cycle stages provides greater investor clarity and ultimately creates a smaller whole greater than the sum of its parts. Last year, Comcast went good bank/bad bank, spinning its linear assets into a legacy portfolio called Versant, while consolidating the studio, theme parks, NBC, Bravo, and Peacock into a growth company. This week, Warner Bros. Discovery followed suit, announcing it would spin off its linear assets into a new company called Global Networks.

The key question, however, isn’t who controls which assets, but how much of WBD’s $35 billion debt will fall to Global Networks. Much of WBD’s debt is long-dated, low-interest, as it was issued when Fed rates were near zero. Now that rates are much higher, WBD bonds are trading at a discount. As part of the spinoff, WBD announced a $17.5 billion committed bridge facility from JPMorgan Chase that will allow it to capture the discount by buying its outstanding debt and retiring it for less than the face amount. If it assumes a serviceable debt load — business writer Bill Cohan puts the threshold at $27 billion —  Global Networks will be in a position to merge with Comcast’s Versant, and/or whatever linear assets Paramount and/or Disney ultimately spin off. (Note: Disney CEO Bob Iger told CNBC the spinoffs give Disney an advantage, as it plans to further integrate its linear assets.) 

As for Warner Bros., the stock popped 13% on the news of the spinoffs, but ended the day down 3%, as investors realized the company remains in CEO David Zaslav’s hands. Since merging Warner Bros. with Discovery three years ago, Zaslav has presided over a 60% collapse in share price, committed brand malpractice against HBO, and gone full mogul, purchasing the Beverly Hills mansion owned by legendary producer Robert Evans. If the president hadn’t become the biggest grifter in modern history, people might notice a CEO paying himself a third of a billion dollars over five years in exchange for halving shareholder value. But alas … we have a president engaged in the largest grift in modern history. Small consolation: Last week, shareholders rejected Zaslav’s $51.9 million 2024 pay package — 3x the average comp for an S&P 500 CEO — in a nonbinding “say on pay” vote. 

Go for Broke 

In Succession, the HBO show loosely based on Rupert Murdoch’s family and media empire, Logan Roy tells his kids, “I love you, but you’re not serious people.” Looking at Paramount’s real-life succession shit show, Sumner Redstone’s ghost might say to his daughter, Shari, “I love you, but we are seriously fucked.” In a Puck column this week, Cohan pointed out that if Shari Redstone doesn’t close the deal to sell Paramount to Skydance and RedBird Capital soon, it could bankrupt National Amusements, the family’s holding company. To close, Redstone needs FTC approval, but a $20 billion lawsuit filed by President Trump over the editing of a 60 Minutes interview with Kamala Harris stands in the way. If the lawsuit, i.e. shakedown, can’t be settled and the deal doesn’t close, former FCC Commissioner Rob McDowell said Paramount Global would be “a melting ice cube.” 

Feel the Churn

A decade ago, consumers were eager to cut the cord, as local cable monopolies, contracts, equipment rentals, and service windows that made it feel like autonomous Teslas would show up before the cable guy paved the way for streaming. But now that U.S. streaming households have an average of five subscriptions, the bundle looks attractive again. Bundling may also be a lifeline for legacy media’s streaming platforms. According to analytics firm Antenna, the Disney+/Hulu/Max bundle has an 80% retention rate — compared to 74% for Netflix. A Netflix subscription ranges from $7.99 to $24.99 a month, depending on the plan, while the Disney+/Hulu/Max bundle, i.e. cable without the cord, costs between $16.99 and $29.99. 

Still, churn is the Achilles’ heel of any subscription business, and streaming is no exception. As Antenna CEO Jonathan Carson told the Wall Street Journal, “The consumer experience around managing subscriptions is one of the areas that still needs a lot of settling.” That settling is likely years away, as there are nearly two-dozen U.S. streaming services with at least 500,000 subscribers, and more streamers are on the way, including Fox’s direct-to-consumer offering, CNN’s second swing at a subscription service, and a new ESPN streamer. Meanwhile, consumers have become accustomed to “churn and return” — the practice of timing a subscription for a specific content offering, then canceling before moving on to the next streamer. Put simply, there are too many players and too few chairs. When the music stops, streamers will face a choice: consolidate via mergers and acquisitions or bundle up.

A Sporting Chance

Last year, Netflix paid $150 million for the right to air two NFL games on Christmas Day and at least one Christmas Day game in 2025 and 2026. The first two games averaged 24 million domestic viewers — a streaming record. Netflix also struck a 10-year $5 billion deal with WWE to stream its weekly wrestling show, Raw. The beauty of live sports is they’re a content offering that drives subscriptions, plus a coveted advertising product, i.e., their audience can’t skip the commercials. The challenge of live sports is that the leagues lock up rights in expensive, long-term contracts that are staggered so that no single media company can achieve a monopoly. For Netflix, sports is a foothold in the ad business, but for legacy media companies, especially Disney, Comcast, and Fox, sports is a moat. 

Angry/Alone

We lost something in the streaming wars: a shared culture. Neil Postman warned in his 1985 book Amusing Ourselves to Death that we were becoming a society obsessed with entertainment over enlightenment. He was right, but only glimpsed half the problem — we’re still amusing ourselves to death, but we’re doing it alone. In 1983, 106 million Americans — nearly half the country — watched the final episode of M.A.S.H. Last year’s most-watched scripted television finale, Yellowstone, drew 13 million viewers, or 4% of the nation. We’ve traded appointment television for on-demand everything, and in the process, atomized the American experience. This isn’t nostalgia, but a recognition that America has lost two pillars of society: shared experiences and a collective. 

Without shared stories, we don’t laugh together, love/hate the same heroes/villains, or believe in the same facts when we argue. We lose our empathy, our ability to see each other as human. It’s hard to demonize someone you watched Cheers with every Thursday night; it’s easy to hate someone whose cultural references are completely foreign to your feed. Living in the U.K., I’m struck by how angry Americans are. Our rage obviously goes deeper than what we watch, but shared stories are how we might come together again. That’s the optimistic take on the tsunami of on-demand content washing over us.

Bread & Circuses

Another take is that the key to a slow burn into authoritarianism is distraction from … the slow burn into fascism. In America, we’ve been trained to stay docile and distracted with cheap calories, manufactured chaos, and fear-mongering about the “enemy within”: immigrants, academics, media, the deep state. There’s multiple big tents, endless distractions, and less fellowship.  

Life’s so rich,

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