Video’s Fundamental Problem: It Over-Monetizes

Streaming Won’t Fill the Pay TV “Hole.” Let’s Move On.

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The TV business is going through a difficult transition, even putting aside near-term challenges like the writers’ strike and the effect of macroeconomic uncertainty on ad spending. Over the past year or so, the consensus expectations for both linear TV and streaming have gotten worse. Linear pay TV revenue is (finally) starting to decline (as affiliate fee price increases are no longer enough to offset the accelerating pace of pay TV subscriber losses) and streaming, while growing, isn’t growing as fast as many hoped or expected. I’ve explored those dynamics in several pieces over the last few years, including One Clear Casualty of the Streaming Wars: Profit, Is Streaming a Good Business?, Media’s Shift from Growth to Optimization and To Everything, Churn, Churn, Churn.

In the midst of this somewhat bleak backdrop, there is apparently still a question in the market whether streaming will ever make up for lost pay TV profits.

A few months ago, AMC Networks Executive Chairman James Dolan made headlines when he wrote in an internal memo that:

It was our belief that cord-cutting losses would be offset by gains in streaming. This has not been the case.

Tom Rogers, a longtime media executive, recently encapsulated the industry’s challenge on CNBC:

…where all the media companies need to be pressed is: Is the growth of streaming as it moves toward profitability ever going to make up for the decline in the traditional television business? No one has really demonstrated yet how they believe the hole left by the decline of legacy media is going to be made up by streaming. And until that happens, it’s really hard to get too excited about anything on the streaming side, because that’s the essential question.

The short answer to this essential question: streaming won’t offset linear declines. Failure to acknowledge that is hurting the industry. It’s time to move on.

Tl;dr:

• There is still a question in the market whether streaming TV profits will ever replace the declining profits of traditional pay TV.
• This is partially due to the generally optimistic narrative from the big media companies and some recent positive developments in streaming, such as price increases, new ad tiers, sequential improvement in operating losses and moderation in content spend.
• But there is a very basic question that cuts through the noise: as the transition to streaming from linear continues, will there be more revenue or less?
• The answer is less, because historically video over-monetizes.
• This can be illustrated in two ways: 1) traditional TV monetizes at about twice the rate of streaming TV per hour of consumption; and 2) video overall monetizes about 50% higher than gaming and 3X audio per hour of consumption. The transition from linear to streaming is effectively wringing out this excess monetization.
• Whether streaming profits will replace linear profits is no longer relevant. Even this high-level analysis shows why they won’t. The media companies need to optimize the value of their existing portfolios of assets — linear networks, streaming services, film and TV production studios, libraries — and create new businesses that leverage their IP, brands, audiences and capabilities.
• Nostalgia for a declining business model only impedes that process.

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