Mike Reynolds: Hi, I'm Mike Reynolds, a senior reporter covering the media industry with S&P Global Market Intelligence. Welcome to "MediaTalk," a podcast hosted by S&P Global, wherein the news and research staff explore issues in the evolving media landscape. I'm joined by Kagan principal analyst Seth Shafer, who specializes in the streaming industry. How are you doing today, Seth?

Seth Shafer: I'm good, Mike. Happy to be here and chat today.

Reynolds: Thanks. Seth is going to share his thoughts on the streaming industry performance in 2023, about those who gained or may have lost ground. He'll also address why the media conglomerates must balance bolstering their streaming holdings while still deriving what at this point remains larger revenue contributions from their legacy business units. He will also discuss the burgeoning SVOD ad-supported world and if the players are going to focus more streaming attention beyond US shores in the years to come.

All right, let's get to it, Seth. What kind of year was 2023 for the streamers? Netflix rallied from a subscriber slowdown in 2022. Comcast's Peacock registered some growth. I think Paramount+ as well, but it seems as if Warner Bros. Discovery's Max and Disney+ may have leveled off a bit.

Shafer: Yeah, for sure and we can dig into bits as we go, but I think coming out of the pandemic, no surprise that subscriber growth has started to slow. The US market in particular is a pretty saturated, highly competitive streaming market.

Netflix really did rebound — a lot of that was tied to the paid sharing, is what they're referring to their password sharing crackdown as, but there were questions of would it be a net subscriber loss for a bit before they recover and get some of those sharing households back. But in fact, I think what we saw was it was a pretty strong subscriber driver for Netflix last year. Disney's following the same pathway and by the end of this year, we'll have kind of in place the same system for the Disney streaming services.

The big question: is this sort of a cash cow? Is this a way to boost subscriber growth for every service? Or does quality of content really matter? Was Netflix content sort of a must-have so that households that were borrowing it, sharing a password, just went ahead and signed up? And will that be true for all the other services?

It was a flat year for both Disney and Max. I think small growth in the end, but outside of Netflix and then Peacock and Paramount+, those two are still scaling up. So big gains there, but they still trail.

Reynolds: They're smaller players.

Shafer: Yeah. Easier to grow from a smaller base. Is that bad? A lot of the media companies are training investors and analysts in the world to stop obsessing over subscriber counts — that's really the mantra now: Don't stress over subscriber counts. Look at our bottom lines, look at EBITDA and free cash flow, and really treat the streaming services like we're used to treating the older school linear networks and media companies where subscribers don't matter. What matters is free cash flow and what these businesses are spinning off.

Reynolds: And, the media conglomerates, their legacy businesses still throw off lots of ad revenue, lots of affiliate fees. So they're in a tough position if the world is going all streaming yet you have these legacy operations that have carried your business for decades. Hard to let that go.

Shafer: No, exactly. And, I think that's a lot of the service we provide to clients is quantifying that shift and actual numbers — and not to get too deep into my spreadsheets — but putting numbers to what you mentioned there as much as it's a streaming future. And that's totally true. No one is envisioning a future where suddenly linear TV has a resurgence and streaming falls by the wayside. Everything's moving to streaming. But it's how these big companies get there.

2024, it's an interesting year. When you look at the numbers, we're estimating about $68 billion in the US on traditional TV advertising, about the same, about $68 billion, in traditional multichannel video revenue. Those two at parity is interesting. For years, it's been the multichannel revenue that's the huge individual piece of the pie; now that's at parity with traditional TV ad spend.

And then SVOD revenue and then streaming video ad revenue. Those are both at about $40 billion and rising pretty quickly. So it's interesting as all these streams converge at a more similar level, how these big media conglomerates balance all this — getting off the linear highway, exiting to a streaming highway, how they wring every penny out of that, especially as investors are really focused on the bottom line kind of profitability.

Reynolds: Yeah, that makes dollars and lots of sense. And yet the streaming guys, whether it's Netflix or the media conglomerates, are dipping back into that old pool of ad revenue. Disney and Netflix have been in the ad-supported game since the end of 2022. Amazon.com Inc. with Prime Video originals is now in the ad game. The other guys Paramount+, Peacock, Max and Discovery are already there. Your sensibility, Seth, for how big the streaming ad supporting market will become, and are these new dollars or are they just coming out of the old linear budgets?

Shafer: Yeah, and we quantify that streaming ad revenue in different ways. We look at what we call in-stream video ads. And those are traditional kind of pre-roll, mid-roll, in-roll ads. Then we also quantify video ads from stuff like YouTube, Facebook, TikTok — things like that, which are outside of that.

If you zip all that up to that big universe, we have that pie getting to $60 billion, $70 billion in revenues within a few years. So that total pie will be bigger than any of these others we've talked about just within a few years. If you just look at, though, what these companies you mentioned are really competing for, that's more those in-stream video ad dollars, right? We have those getting to around $50 billion by 2027, okay? Long-winded way with numbers to answer your question: At the moment, a lot of these gains are coming at the expense of linear TV. We're not really necessarily projecting advertisers piling in with billions and billions of new additive dollars, right?

It's a bit more of a slow shift. But again, the ad-supported model, whether it's part of a subscription tier or a free service, obviously that's an easier pitch to far more households than a subscription model. So it makes a lot of sense that these companies are bending their ambitions that way to play more directly in the ad market.

Reynolds: The adage from all the years is you got to follow the eyeballs, and that's where a lot of the viewing is taking place. So we will see how it all figures out in the years ahead. A lot of the activity here that I focus on and Kagan has a broader view. Netflix aside, and maybe a little bit from Warner Bros. and Disney, much of the media conglomerates' streaming ambitions have been focused on the US. Do you see more activity going beyond American shores in the years to come?

Shafer: Yeah, it's interesting times. We were seeing the shift on the streaming side, of all of the major media services on the streaming side trying to compete in every market, and then really that being pulled back over the last 12 to 18 months, with the streamers outside of Netflix having to pick and choose more — investors not being willing to absorb billions and billions of losses for years on the streaming side.

I think when you really look opportunities outside the US — excluding China because China is a closed market — a lot of the markets, it's a pretty short list where a lot of these are going to continue to compete head to head. And that's Western Europe, UK, Germany, France, Italy; in APAC markets, probably Japan, Australia, obviously South Korea. The trick is that the emerging markets — the truly emerging markets, like India, Indonesia — they just monetize at such a low level. It's still an uphill struggle. For any service really competing there, you just have to resign yourself to losses for years as you build out these big libraries with localized content. Not to say that international ambitions are not there and that the big media companies are ignoring that — just the list is fairly narrow, a little more narrow than you would expect as far as the markets where we really see them competing.

Reynolds: Interesting, we're getting toward the end here. So I got a couple more for you. A lot of talk about Paramount Global being up for sale. Does it need a partner? Does Fox Corp. — which other than this JV thing, has largely remained outside the streaming realm — do they need partners in the current landscape?

Shafer: I think so. I think Paramount has been so much in the news, that it's safe to speculate there that it would be really difficult for management to pull back from all of this and say, no, they've chartered a course, trust us. Paramount for sure.

Fox, I think, has done a really good job as far as maximizing its linear assets. It hasn't been distracted on the streaming side. It didn't try to launch a general entertainment SVOD service, just a licensed partner. How far can an independent entity take that?

Reynolds: You just referred to Tubi. Now they're stepping into the sports game for the first time with this JV along with Disney and Warner Bros. Discovery. It's going to be 14 channels and ESPN+ available starting in the fall, I think. What's your thoughts about that? How big a deal, how big of an impact did that have on the current landscape?

Shafer: Yeah, super interesting. Obviously, we all were scrambling when that news came out because it touches on a lot of things. I think it's interesting in that it's an additive play for the companies — it's no exclusive content, they're bundling together a skinnier sports bundle trying to pitch it to not disrupt anything on the linear side, to keep all their partners and their assets on the linear ecosystem happy, dip into streaming. The big question obviously is pricing. Do you price it at a low level and then potentially cannibalize things on the linear side by encouraging more cord cutting? Do you price it at a high level but then not see much appetite for it? So I think it's threading that needle and really, how aggressively they want to go after it?

If you listen to all of the earnings calls, it was very much intended, I think, to reassure the linear world: "Hey, don't worry about this." If streaming is the future, I think it remains to be seen — with the pricing and if there is additional programming bolted on — whether this truly is an additive thing that won't cause too many waves in the industry or whether it turns into a more aggressive product that really could lure away some pay TV homes.

Reynolds: Yeah, it's going to be one of the more interesting stories for 2024. We've reached the end of this episode of "MediaTalk." I just wanted to thank Seth for spending a lot of time sharing his views on streaming and its ascendancy within the overall video world. We really appreciate it, Seth.

Shafer: Thanks, Mike. I enjoyed it.

Reynolds: Thank you. This is Mike Reynolds. Thanks to all of you for listening. We'll catch up soon on the next edition of "MediaTalk." Bye.