Presentation

Eric Hanselman

Welcome to Next in Tech, an S&P Global Market Intelligence podcast where the world of emerging tech lives.

I'm your host, Eric Hanselman, chief analyst for technology, media and telecom at S&P Global Market Intelligence.

And today, we're going to be discussing a latest piece of research of Big Picture report that pulls together a whole set of different perspectives from across TMT. And joining me to talk about it are Seth Shafer and Michail Chandakas, analysts on the team.

Welcome to you both.

Seth Shafer

Thank you, Eric. And we're excited to be here today.

Michail Chandakas

Hi, Eric. Good to be here.

Eric Hanselman

And it's great to have you. I mentioned the Big Picture report is really something that pulls together a whole set of different perspectives, a lot of different pieces of what -- the full span of what exists across TMT. It's a lot of different angles on both technology, some of the markets, bits and pieces around that, different aspects of that, but both of you are working on the streaming media side of it, right?

Seth Shafer

Yes. We were excited to get tapped to kind of participate in this one. Sort of our mission was to quickly, without rambling on like we do sometimes with a lot of analysis and stats and models, just to give kind of a baseline big picture where are we with streaming. We focused mostly on sort of the big global streamers as far as Disney, Netflix, Paramount and then Warner Bros. Discovery, where -- these big media companies that are all sort of trying to make the shift from linear to streaming; where they sit; sort of what their ambitions are; really kind of what the future holds next year and then even sort of longer, 2, 3, 4, 5 years out, of where this market is going.

Eric Hanselman

Well, it was interesting to align both the streaming media pieces to some of the perspectives on payments, aspects about other pieces of the data center business. We really pulled together a whole set of different perspectives, all of which, I think, really bring to the table this perspective that there's a lot that you can potentially do to integrate data to be able to work with it and to be able to leverage it in what is, I think, a fairly complex market environment that we find ourselves in today and pretty specifically in what you've been seeing in streaming.

Seth Shafer

I think it's a really interesting point. I did a similar exercise with colleagues where we were in very different parts of the business. So fintech and then sort of workplace productivity and media. And even then, it seems like these days, no matter where you sit, there are common threads, common shifts going on. And it's definitely interesting. I always feel slightly blessed to be in TMT versus -- I don't think this is a bad thing to say but more kind of traditional commodities or metals and mining and things like that, that are a little, I'll say, stable and sort of volatile with current world situations. But I like working in the media part of TMT because it really seems like worlds are sort of colliding, where whichever angle sort of you examine and sit people together, you have common sort of threads to talk about.

Question and Answer

Eric Hanselman

Yes. And well, heck, across technology, we -- metals and mining is a pretty dynamic space right now. There are lots of different things that seem to be, I guess, more in play than they have been historically, but as far as streaming goes, what are the two of you seeing? And well, actually, I guess, to begin with, can you summarize some of what your pieces were in the report? And then we can sort of dive into some of the deeper perspectives.

Seth Shafer

Yes. I'll go and hand it off to Michail, as far as sort of my experience with sort of what we tackled and then his take on that too. From my point of view, within the streaming world is sort of a question of is this sort of a zero-sum game. Is there going to be sort of one winner sitting atop the streaming world with 1 billion subscribers globally? Or will this look like a lot of industries with 2 or 3 major players, sort of a second tier that a lot of households use when it comes to streaming and things like that? So we're really trying to bring sort of a Big Picture global perspective on where we thought some of the big contenders right now are, where they would be.

And then we're really sort of set geographically. So I focus more on sort of the North American market. Michail focuses more on the European market. So that looks very different. In the U.S., really sort of a mature subscription video -- kind of SVOD is our shortcut there to refer to that, but that market has been around a while and is extremely competitive, pretty saturated. A lot of the growth opportunities are outside of North America right now, so kind of my take of these companies butting heads is slightly different than Michail's take in Europe and then slightly different than our colleagues on the team that cover kind of Asia Pacific and other markets as well, but yes, for me it was really just trying to kind of quantify this world, where -- these big media companies that are investing billions on the streaming side. Where are they at? Where are they going? And how are they trying to get there? Whether that's investments in original content, layering on sports programming, consolidation, whatever kind of where these big media companies are going.

Michail, was your experience kind of the same sort of from the European lens? Do you feel like European households are the same as sort of my American households? What was your take in writing this?

Michail Chandakas

No, I think Europe is a bit different. There is competition, of course. You have the U.S. media and tech groups competing with local streaming providers that -- in most cases, they're led by broadcasters and local pay TV operators, so the dynamic is different. Local players invest focused mostly on local programming and they supplement that with sports. The revenue models, they focus on subscriptions. And they also have a free, like, AVOD segment, whereas we see, with the U.S. groups and the likes of Netflix and Disney, their main focus has been the subscription model. There's been a talk recently, of course, with the implementation of advertising as well.

Eric Hanselman

Well, actually I'm curious. Is -- you're talking about sporting events as being sort of a supplemental piece. We've got, of course, a pretty important one coming up. The World Cup is looming. Is that something that augments the market, disrupts it? What's the impact?

Michail Chandakas

Yes. So traditionally it's been the multichannel operators owning the majority of sports rights. The last few years, we've seen streaming providers acquiring sports rights from -- like premium sports rights to even more niche like tennis and cricket, trying basically to boost up their offerings, so the landscape is changing there as well. One thing I've noticed this year was quite a few deals in Europe in the sports streaming segment. First example was the merger between BT Sport and Eurosport which is owned by Warner Bros. Discovery; the acquisition of Premier Sports by Viaplay just before its launch in the U.K.; the most recent one, the acquisition of ELEVEN sports by DAZN. So I think the -- like the sports streaming market is heading towards consolidation.

Eric Hanselman

Interesting. So is that something -- I guess that you both see broadly. Seth, you were talking about some level of consolidation, but is it -- does it wind up being one single player? Does it wind up being an oligopoly? What do you see? And what are the dynamics -- I guess, as we move past a lot of those pandemic-related forces, where do you see that going?

Seth Shafer

I think that's sort of the million dollar question when we were working on our models and exercises like these. It's...

Eric Hanselman

No crystal ball.

Seth Shafer

Yes. It's always tricky. To me, an interesting trend now is we seem to be -- we've had sort of a disruption phase in which streaming over the last 20 years sort of emerged and became viable. In the U.S. especially, every major media group that owns TV networks that's involved in kind of this whole TV business has launched a streaming service. And a lot of them have pulled back their content. They've made it exclusive to sort of their walled garden, their individual service, but while everyone was doing this, it was sort of implied that there would at some point be a consolidation phase. Like everyone realized our household is going to subscribe to 15 or 20 services, probably not.

Right now it's about 4.5 services per U.S. subscription video household, and definitely the trend seems to be -- to move towards consolidation. And we've seen that explicitly with Discovery sort of saying HBO Max and discovery+ are going to become one service. Paramount is doing the same, as far as more tightly bundling services into Paramount+, so it definitely seems to be moving in that direction from sort of an operational point of view, but then also from content, like Michail mentioned, the sports rights deals are hard because -- still linear TV, big media companies that paid billions of dollars to show sports on your television set at home, kind of an environment you're used to. And so that can't shift overnight to a streaming service like Netflix or to Disney+ or anything like that, but the streamers have been including more and more sports programming; and kind of chipping away at this hard divide between linear and streaming what you can get, sports, things like that. They're moving more news content into it, so the streaming services are looking a lot like pay TV services, as far as the breadth of content and the type of content.

With consolidation, do we end up back in a world like in the U.S. where for a time we had 3 or 4 major networks that produced most of the content that you wouldn't watch? And then cable TV came along and everything exploded. Are we sort of in a contracting universe where we go back to 3 or 4 companies? The crystal ball part, the fun discussion, is what does that look like. Is it a Comcast, a Paramount? Is it these old-school media companies that are the ones left standing? Or is it sort of Microsoft, Apple, Amazon, kind of this new breed of tech company that does some of the consolidation? So that to me is the really interesting 5-year-out question. What are the big 4 or 5 media companies? I'm not going to predict it, but they might look somewhat different. We might be looking at an Apple as like a diversified large media company with holdings, rights across sports and TV networks and everything like that; or a Microsoft; or a Amazon; or another player that we don't really put in that top tier of big media companies.

Eric Hanselman

Well, it's an interesting prospect because, when you cite somebody like Apple who's diversified into all sorts of things -- I mean we had Jordan McKee on just recently, talking about Apple's shift into payment services and starting to look a little bit more like a bank. It really starts to say that, hey, maybe there is this consolidation swing for many of these parts of the market for a certain set of large players. That's an interesting set of progressions. In terms of the traditional media players, where do you see that competition going? And how is that playing out? I guess the thing I'm pondering is we've been through that sort of pendulum swing, as we do with so many things in tech, of bundling, unbundling, integrating, disaggregating, moving these back and forth. Where do you see that going?

Seth Shafer

Yes, it's a good question. I think in the short term, I mean, we're sort of seeing maybe not the grand consolidation I just rambled on about but more a little bit of a return to where we were a few years ago, part of that push I mentioned for media companies to launch their own sort of direct-to-consumer service to kind of control that experience. That did have a knock-on effect where a lot of the U.S. media companies were making substantial sums of money from licensing that content to Netflix and to Amazon and to Hulu and other services, so pulling that back into their walled gardens, they gave up a lot of revenue, just sort of pulled that off. I think short-term media strategies -- and Warner Bros. Discovery has signaled this, that they're really looking to maximize kind of their IP, their content catalog, their strengths. And it may not look like putting all of their eggs into one single service that they own and operate where all their content sits. They may sort of return to sort of a broader windowing strategy. Kind of in the history of media, you see a lot of these media companies have different windows through which they can move film and TV content and things like that, whether it's a theatrical release; or a free, ad-supported streaming service; or a paid service.

So to me maybe a little bit of a return to that world where they license content a little more willingly like they used to, to different streamers. A lot of the media companies -- I think of Fox here. Fox has taken great pains kind of in their public statements and their strategy to not give up on pay TV, not give up on that linear broadcast television side of their business, where there's still -- as much as we get wrapped up in streaming, there's millions and millions and millions of Americans that still watch broadcast television and cable TV. So as much as streaming has disrupted things, these media companies are still trying to balance 2 different businesses, kind of a linear and a streaming world; and not sacrificing one for the other. So that to me, strategy-wise -- we talked in our Big Picture section Michail and I both are sort of, I think, hopefully, still on the same page that globally, when we talk about huge streaming services that are in every market and are investing tens of billions of dollars every year in content, that may look more like sort of just Disney and Netflix competing at scale for huge global streaming audiences of 200 million, 300 million subscribers. But then market to market, there can still be sort of a really healthy sort of tier of companies, a little bit like I sketched out, that still have direct-to-consumer streaming services, still have ties kind of in the old-school world of media and television and play sort of a supporting role kind of in these sectors without necessarily bashing heads with kind of the 2 biggest top players that we have right now.

Michail Chandakas

And just to add to this. [ Like ] it's time for the industry to move away from focusing on counting subscribers and concentrate more on the financials. Like are their direct-to-consumer segments actually making a profit? And is their business sustainable?

Eric Hanselman

So this is -- well, I guess it's an interesting point because, so often, we see this laser focus on subscriber counts, but I think you're both identifying what is that issue on the back end, which is, okay, having certain volumes of eyeballs is great, but it all gets back to how much revenue you can generate out of it. And Seth, as you were saying, maybe that's a matter of licensed content. Maybe it's a matter of managing what that revenue relationship is with subscribers. That really takes it back to a much more fundamental viewpoint. Or is that really where we ought to be looking at this from a broader lens?

Seth Shafer

I think Michail is exactly correct. And I think Netflix especially is trying to take us there, in their recent earnings, of explicitly saying, "We're not going to focus on subscriber counts as much in these as we are on our free cash flow; on our operating income; and the fact that our business is making money, whereas some aren't." And I think we've seen that investors, however much faith you put into what the stock price does post earnings releases and things like that -- because those dynamics are not necessarily rooted in reality sometimes, but...

Eric Hanselman

What do you say, that the Street is not reality? Seth...

Seth Shafer

Yes. What we have seen, though, is especially -- and this has been going on for a while, for a year, 18 months, but the reactions, to me, are savvier, as far as going a bit deeper into did subscribers grow. Okay, yes, but what was your operating loss for your streaming division? Is this escalating to a point that seems too painful, too unsustainable? Or are we buying into your idea that you'll lose money for the next year, 18 months, 2 years; and then get it all back at 4 years, 5 years out?

So the reaction. Whatever you put -- whatever value you put and the reaction of the stock price, the market seems to be getting savvier about the streaming proposition; and looking, digging a little bit deeper into debt loads and what it's costing companies to build these businesses. And yes, I think long term, that's probably inevitable; healthy, I guess, to some extent; and still interesting. I think, when Michail and I sort of talked amongst ourselves what we wanted to talk here too -- I think it's really interesting when you step back and look at sort of the data we get back through surveys we run and then sort of just for modeling it out. For the U.S. at least, it's about $30 a month that streaming households are spending. And they're getting anywhere from 4 to 5, on average, services. Some of those are free. Some are paid. Some, they're stealing, they're borrowing log-ins, but for $30 a month, for $1 a day, consumers are getting a lot of entertainment.

Regardless of all of these other issues, I think there's room to grow there. I think the media companies can definitely -- and we're seeing prices go up, but I still think there's still room to sort of increase the pricing on their side to sort of balance things, get closer to profitability or to actually make money without necessarily pinching consumers. We don't really see -- even with recession and economic headwinds, the streaming industry still seems to be a pretty good one to be and if you're a media company, as far as that base proposition of consumers still getting a good bit of entertainment, not paying that much money and a pretty vibrant landscape with a lot of -- it's hard to think back to when Netflix first started doing streaming stuff, but it's amazing. It seems like it's been 50 years in my head from being involved in all of this but not really that long in the grand scheme of things, as far as how quickly we've come; and what this looks like a year out, 5 years out.

Eric Hanselman

Well, I thought it was interesting, getting back to your part of the Big Picture report, that you bring up average revenue per user, which is something that we've been dealing with in the telecom world, a metric we've been dealing with in the telecom world, forever, or ARPU; and starting to shift some of those perspectives about how streamers get measured as well.

Seth Shafer

No, it's a good point. It's interesting too. More of the media companies are talking about it too in that way, of getting back to a -- one thing in the Kagan group that we've historically done is give clients like a quick glance. How much are TV networks making sort of on a per-viewer basis? And then rolling that up to the owner and very quickly enabling clients to get down to what is the ARPU for a media owner like Comcast or Fox or whatever from its audience. And more of these companies are talking that way now of trying to achieve on the streaming side ARPUs that match what they've traditionally gotten on the linear side. And they're really trying to -- just this shift of cord cutting and things like that. So reassuring people that they're not trading dollars for pennies when someone moves from linear pay TV to streaming, that it's at least the same amount or even more on the streaming side with advertising and targeting and stuff like that. So yes, I guess it's the industry growing up and getting to where telecom and other industries have been for years and years now, where you cut through a lot of the talk in subscriber growth and get down to metrics like ARPU and cash flow and EBITDA and these things that matter to a lot of sectors that are growing up, that streaming has kind of been given a pass on for a while as long as you're growing your subscriber count.

Eric Hanselman

So maybe the -- I guess the broader view of the market starts to come in. Or maybe it's just a natural process of maturing of and understanding the way how the market works.

Seth Shafer

Definitely or all of the above. Or again I think what makes me excited about doing my job is just you can make cases in a lot of different directions about where a lot of things are heading. And I think back to the Big Picture report. Whether you talk about cryptocurrency or metaverse or fiber deployments, all of these topics kind of discussed in there, they all play together to some extent. It seems hard to -- how do you tie like cryptocurrency to media stuff we cover? But a lot of these big media companies, Disney, Fox, they're all investing in FTEs based on their intellectual property. And it all -- whatever the metaverse ends up doing, everyone...

Eric Hanselman

Maybe that's the delivery angle for media in the future, yes.

Seth Shafer

Yes. It's easy. I'm kind of skeptical about -- I feel like it's so early with the metaverse to get very excited, but yes, it's not hard to sketch a path where -- especially from content delivery. And you start talking about exclusive metaverse originals that you can only go and watch this episode in this environment and...

Eric Hanselman

"Do you want to see it? Here is the place to see it, an immersive environment in which to watch." Sure. Lots of potential things...

Seth Shafer

Definitely.

Eric Hanselman

We just need all of the AR, VR gear to make it all happen.

Seth Shafer

Or we need to have implants or something. Like we talk about that amongst ourselves, of who wants to strap on like all of that gear, as far as are we waiting for another way to interact with it to really get mass adoption but not my -- that one is not my world to try to model out. We're busy enough trying to make sense of the streaming world.

Eric Hanselman

Sounding a little Neal Stephenson and Mirrorshades and starting to get all the body mods sort of stuff going on, but hey, who knows? Maybe we're not too far from that.

Well, this has been great. I want to thank you both for a set of great perspectives on this. It's been great having you on the podcast.

Michail Chandakas

Thank you.

Seth Shafer

Thank you very much. I enjoyed it.

Eric Hanselman

And thanks to our audience for staying with us. In the show notes, there is a link to the Big Picture report. I hope you'll give it a look, take a look at streaming information that's there as well as the rest of the broader tech perspectives.

And that is it for this episode of Next in Tech. I want to thank our production team, including [ Caroline Wright ] and [ Ethan Zimman ] on the marketing and events teams; and our studio lead, Kyle Cangialosi. Join us for our next episode, where we're going to be discussing inclusivity in technology. And I hope you'll join us then, for it's another important conversation around perspectives about tech and some of the aspects about the interaction with the broader world that technology sometimes doesn't dig into in a lot of depth. But I hope you'll join us then because there is always something Next in Tech.