July 30, 2023

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Good morning and happy Sunday! If you're at home, there's a decent chance you watch something on TV today — an industry undergoing enormous change. We explore the rise of streaming, Netflix's economics, and why streaming is starting to look a lot more like good old fashioned cable.

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It’s arguably never been a better time to be a fan of sitting on your couch and watching TV.

The rise of streaming has brought with it a golden age of television, as more original scripted shows have been made in the last few years than ever before. But, if it’s the golden age for viewers, it’s been more bronze for many involved in the production of our favorite shows and movies.

Indeed, the cameras of Hollywood remain firmly shut, as two major unions, SAG-AFTRA, representing performers, and WGA, the writers' guild, are both striking — the first time that’s happened since the 1960s. Their aims aren’t particularly different from strikers in other industries, negotiating for better wages and working conditions, demands that were perhaps inevitable in the modern entertainment landscape.

Indeed, streaming hasn’t been the plucky upstart for a long time — overtaking cable as the main form of TV consumption last year, accounting for nearly 40% of total TV consumption in America, per data from analytics firm Nielsen.

While traditional TV, a combination of cable and broadcast networks, still commands the majority share, the trend is clear — streaming’s upward trajectory suggests it’s poised to overtake traditional TV viewing in the coming years. That inexorable rise has made Netflix, the early pioneer of the format, a titan. The company is worth some $190bn as of the latest count, making it the most valuable entertainment company on the planet, even more than the ~$160bn of the sprawling empire of Disney — which has theme parks, a thriving merchandise business, box office blockbusters and of course its own streaming effort.

Pivot, pivot… pivot!

Netflix’s journey to streaming domination began in 1998, with the company mailing shipments of new DVDs. But the big idea didn’t come to fruition until 2007 when the company announced it would launch ad-free video streaming via the internet, granting subscribers access through applet, a unique browser users had to install. On top of procuring content, the company knew that having a killer recommendation algorithm was going to be key, even running a competition from 2006-2009 with a $1m prize to any team who could beat the company’s own algorithm — known as Cinematch.

The company toyed with hardware with Project Griffin — a set-top box built to stream Netflix’s content, a project that was canceled by CEO Reed Hastings at the last minute, eventually becoming an early product for Roku. Around the same time, Netflix struck a groundbreaking deal with Cable TV channel Starz, obtaining the rights to stream its extensive library for a yearly fee of ~$30m. Other cable channels soon joined, and the Netflix juggernaut began to pick up steam, with every new subscriber giving them capital to acquire, license and eventually make content.


Netflix began to chart a new course with the production of its own original content, sensing that its novel distribution method would only be an advantage for so long, and that content would ultimately remain king. Leveraging its data on subscriber preferences, the streamer premiered its first original series, "House of Cards," in 2013. Since then, Netflix Originals have clinched 135 Emmy Awards. But, movies and shows have a short shelf-life, and replenishing the content bank remains Netflix’s biggest cost, with ~$9 from every $15.49 subscription going on content production or distribution of some kind.

Re-runs and residuals

The streaming model that Netflix pioneered has upended production in Hollywood and elsewhere. Netflix has reached a scale in which it seems to be sustainably profitable. The striking unions, however, aren’t so happy with the modern power dynamic — arguing that the new world is a much worse deal for actors and writers.

One core part of the strike negotiations revolves around residuals — the money earned by writers and actors when their work is reused, essentially a form of royalty payment. A classic example is how the stars of the iconic TV show "Friends" continued to rake in a staggering $20 million in 2015, over a decade after the show's final episode. In the heyday of cable TV reruns, this was the norm. However, streaming services have upended the traditional residuals model. Now, these earnings are often tied to more nebulous measures, like the streamer's number of subscribers, making it less dependent on whether a show becomes a flop or a cash cow.

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I’ve seen this one before

Consumers are also falling out of love with an increasingly crowded streaming market. Not too long ago, the streaming landscape was simple and cost-effective. Amazon Prime came with its speedy delivery bonus, Netflix had a lot of what you wanted to watch, and Disney+ offered good value at $6.99 — less than the cost of a tub of popcorn at most movie theaters.

But the market has become fragmented. Companies have retreated behind their content walls — sharing nothing with other distributors. With prices on the rise and the introduction of advertising to try and re-invigorate growth, streaming services are starting to resemble the traditional cable industry that they once disrupted.

The golden age of all-you-can-eat entertainment for less than $20 a month is dead, and it has been for a while. And, with the strike action showing no signs of slowing down, content is unlikely to come any cheaper in future if writers, actors and producers get what they believe is their fair share of your monthly subscription. Netflix’s crackdown on password sharing, and its introduction of an ad-tier, are the early signs of things to come, as the industry matures and content deals get renegotiated.

Bundle, unbundle, rebundle

Indeed, it’s not hard to imagine a world in which the joke goes full circle — with some hot new company negotiating deals with everyone and offering bundled access to all of your favorite streaming services for, let's say $50-100 a month. They might even offer live content that you have to tune in for at a specific time, to create a sense of community with other viewers. In sport, that’s already happening, with Amazon, Apple and others picking up deals to stream live games.

As a whole, the entertainment industry is at a crossroads, and not just in TV and film — the music industry is at a similar juncture. Who really holds the keys to the kingdom? It used to be the cable companies and radio stations — the distributors. The internet changed that. Now, with the problem of distribution somewhat “solved” the tides seem to be shifting, gently, towards the actual artists, makers and actors. But, when billions are at stake, transitions of power are rarely orderly.

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