People carry signs as SAG-AFTRA members walk the picket line in solidarity with striking WGA workers outside Netflix offices in Los Angeles, July 11, 2023.
Mario Tama | Getty Images News | Getty Images
Picket signs have lined the gates of Hollywood’s studios for nearly five months, as the industry’s writers and actors rally for AI protections, better wages and a cut of streaming profits.
The problem is streaming isn’t yet profitable for many studios.
Sparked by the creation of Netflix’s direct-to-consumer platform in 2007, streaming has upended the economics of the media industry. Yet, it’s still unclear whether it’s a sustainable business model for the future.
“Without sounding hyperbolic, the change in the economics of the North American media industry in the last five years has been breathtaking,” said Steven Schiffman, an adjunct professor at Georgetown University.
Legacy media companies like Disney, Warner Bros. Discovery, Paramount and NBCUniversal scrambled to compete with Netflix when it began creating original content in 2013 and slowly pulled market share over the next five years. The studios padded their platforms with massive content libraries and the promise of new original shows and films for consumers.
However, the subscription-based streaming model proves vastly different than the ad-revenue-fueled traditional TV bundle. High licensing costs and low revenues per subscriber quickly caught up with studios, which had previously placated shareholders with massive subscription growth.
Netflix was the first streamer to report a loss in subscribers in 2022, sending its stock and other media companies spiraling. Disney followed suit. Media companies have also begun cutting content budgets. Disney CEO Bob Iger said the company would focus on quality rather than quantity in both its theatrical and streaming businesses. He cited Marvel as an example for too much content. To make up for the losses, media organizations are now relying on methods that once made the traditional bundle so successful.
“What’s the fundamental solution? In some way, shape or form, it’s everything brought together,” said CEO Ken Solomon of the Tennis Channel, owned by
, of the various business models in media. It’s all about knowing where to allocate more resources, and how to bind them together so that they satisfy the consumer. “A broken modelTwo strategies media companies long relied upon — windowing content to various platforms and creating more cable channels to reap higher fees from the bundle — proved lucrative and still reap profits.
“This gun has been cocking itself for decades,” said Solomon, noting that the pay TV bundle was a good value proposition until it became too expensive for consumers. Netflix was able to change the way the entertainment industry spends and makes money. They were trying to meet the changing demands of consumers, but in the process they drained other revenue streams. Disney and Warner Bros. “
“All of these companies spent more money than they likely should have,” said Marc DeBevoise, CEO and board director of Brightcove, a streaming technology company. “
“All of these companies spent more money than they likely should have,” said Marc DeBevoise, CEO and board director of Brightcove, a streaming technology company.
Netflix, with a considerable head start, is the only company to make a profit off of streaming. UBS analyst John Hodulik said that linear TV is still the dominant medium for everyone else. “That’s an issue as the decline of customers is accelerating and streaming does not offer a large enough opportunity to offset this. Wall Street reassessed these companies and focused on profitability as subscriber growth slowed. Fears of a recession, inflation and rising interest rates led to Wall Street reassessing the companies. Fears of a recession, inflation and rising interest rates led Wall Street to reassess these companies and focus on profitability as subscriber growth slowed.
A content arms race
Netflix’s entrance into media signaled the beginning of a content arms race that, ultimately, hasn’t paid off for any media company.
Content spending ballooned across the industry, with each company spending tens of billions of dollars for new shows and films in an effort to lure in new subscribers — and keep the ones they already had.
“The networks had aligned with their streaming services and taken all the elasticity out of it. Solomon said that they were “throwing money at the problem, hoping it would solve itself”. There was no economics to it. “
Race to launch
— launched streaming service in January 2007, first original content launched February 2013
— launched streaming service in March 2008
- Paramount+ — launched as CBS All Access in October 2014, rebranded as Paramount+ in March 2021
- Disney+ — launched streaming service in November 2019
- Peacock — launched streaming service in April 2020
- Max — launched as HBO Max in May 2020, rebranded as Max in May 2023
- There were also massive one-off licensing deals for shows like “The Office,” “Friends” and “Seinfeld,” which viewers were actively watching on repeat.Studios even struck exclusive contracts with some of Hollywood’s biggest writer-producers — Ryan Murphy, Shonda Rhimes, J.J. Abrams, Kenya Barris and the duo of David Benioff and D.B. Weiss — in the hope that they could create new projects that could capture the attention of audiences.
- Show budgets draw a lot of attention these days. But Jonathan Miller, a former Hulu board member and current CEO of Integrated Media, doesn’t recall that being a focus when it was just the four major broadcast networks creating all of the content.DeBevoise, a former ViacomCBS (now Paramount) executive, said he doesn’t remember greenlighting a show, including “Star Trek Discovery,” in the mid-2010s at CBS for more than $10 million an episode, noting many were “much, much less expensive. Solomon, a former Universal Studios Television executive, recalled budgets of top TV shows such as “Law & Order”, which were less than $2 million per episode. He said, “I thought the budgets back then were out of hand.” Shonda Rhimes attended the 2018 Vanity Fair Oscar Party in Beverly Hills on March 4, 2018. Patrick McMullan / Getty Images
Disney wanted to capitalize on its Marvel Cinematic Universe’s success by creating more than a dozen shows about superheroes for its Disney+ platform. The episodes cost $25 million each, even though the seasons were often shortened to six or ten episodes. Similar production budgets were seen for the company’s foray into the new live-action Star Wars TV series.
Netflix has poured money into multiple seasons of political drama “The Crown,” science fiction darling “Stranger Things” and a series based on The Witcher video game franchise. Warner Bros. also added more Game of Thrones series to its catalog. “House of the Dragon” cost around $20 million per episode, and it is currently filming. Discovery is adding more Game of Thrones series to its catalog of direct-to-consumer offerings with “House of the Dragon,” which cost around $20 million per episode, and the upcoming “A Knight of the Seven Kingdoms: The Hedge Knight,” which has not begun filming.
Meanwhile, e-commerce giant
shelled out a record $465 million on its first season of a Lord of the Rings prequel series, which was met with tepid responses from critics and fans alike.
“The price of content isn’t always determinant of success. “The Simpsons” were crudely animated at first, right? So, it’s not necessarily that if you go spend a lot of money, it works,” Solomon said.
Bart Simpson plays esports in an episode of “The Simpsons” that aired on March 17, 2019.
At the same time the economics for actors, writers and the industry as a whole changed.
“The problem is that the cost increases don’t make sense given the revenue models. Something got broken in this part of the business if that kind of increase happened and actors and writers don’t feel like they got their fair share,” DeBevoise said.
A growing disconnectWhile many of Hollywood’s biggest studios are publicly traded and must share quarterly financial reports, there are no rules about providing streaming-viewership data. This lack of transparency has made recent contract negotiations between studios and the industry’s writers and actors especially contentious.“There’s a frustration about how these people can get together and share this information and come up with something that is reasonable for both sides,” said Schiffman, the Georgetown professor
“But until that happens, in my view, this thing goes on until next year. “
Streaming Studios, in particular have been reluctant to share viewership data and do not want compensation tied to popularity, even for shows that are licensed from other studios. Studio’s have traditionally paid residuals to people who worked on films and TV shows after the initial release. The actors and writers are paid each time an episode, film or television show is broadcast on cable or broadcast television, or when someone purchases a Blu-ray or DVD. The Street helped Netflix realize that subscriber numbers don’t matter if economics aren’t right. Actors, in particular, are looking to change this.
“Why I think the streaming model has been a difficult model for the actors and writers, and I was part of helping that model, is that there was a fundamental shift of long-term versus short-term economics that likely wasn’t properly understood or explained,” said DeBevoise.
Back to the future
Media companies’ effort to make streaming profitable is drawing out many of the old business models that were successful in the past.
The subscription streaming model is being subsidized now by tried and true models like advertising, licensing content to other platforms, cracking down on password sharing, and windowing content to different platforms with longer stretches of time in between.
“Netflix understood finally, because of the Street, that subscriber numbers don’t mean jack, if the economics don’t pencil out,” said Peter Csathy, founder and chair of advisory firm Creative Media.Even the pay TV bundle, despite rampant cord cutting by consumers, remains a reliable source of revenue.The recent dispute between
and Disney highlighted this fact, and led to Disney+ and ESPN+ being bundled with some pay TV subscriptions.
“We, the distributors, are funding the streaming experience. The Street helped Netflix realize that subscriber numbers don’t matter if the economics aren’t right. This led to Disney+ and ESPN+ being bundled with some pay TV subscriptions. These companies would cease to exist if distributor licensing fees were not paid. This may be a time of awakening. This is particularly true because free streaming services, like
, that are ad supported, have exploded. Tubi, Paramount’s Pluto and’s Tubi — both of which have been compared to broadcast networks — are also experiencing explosive growth. Warner Bros., for example, is not the only media company that relies on the advertising revenue generated by these platforms. Discovery is distributing content to these platforms for licensing fees.
DeBevoise said, “In terms of business models, all are successful.” DeBevoise noted that paid tiers would remain for more expensive and timely content, while options with ads and free content will be available to support older library shows and movies. There will be hybrid models which reincarnate cable TV’s dual-revenue model, with both subscription fees and advertisements. The consumer will be concerned with price-to value and time-to value. Comcast owns NBCUniversal, CNBC and NBCUniversal.