Streaming Wars

by Overheard Wall Street
  • Intro
  • Streaming Universe
  • Education
  • Disney
    • Recent Headlines
    • Bulls
    • Bears
    • Key Metrics
  • Conclusion/Recommendation

Intro

Instagram stories are blowing up this week with everyone’s Spotify Wrapped rollup.

Imagine if Netflix did something like that.

I would feel less proud if Netflix had a year-in-review analysis similar to what Spotify pumps out each year.

If it did, mine would look something like this:
  • 99,000 minutes streamed this year!
  • Your top episode was CoComelon Sing-Alongs: Fun Pack!
  • You watched this episode 248 times - that's more than 99.99% of people in the United States.
  • Most Watched TV Show this year?
  • Thomas and Friends!

I think you get the point:

My child controls my streaming habits.

But there is an interesting story here – how much time and effort do we spend on our different streaming services?

Do we allocate our time across multiple streaming services for other shows and movies, or does one streamer get all our attention?

This week we are digging into the streaming service industry and key metrics around those companies.

Universe

Streamers are constantly vying for our attention and subscription dollars.

We highlighted all the major players in the Daily Visual section of Monday’s newsletter:

What I found most interesting about this is that many streamers listed above do more than just stream TV shows and movies.

Apart from Netflix, whose entire business is streaming, each company listed above has another source of revenue or business operations.

Amazon, for example, is in the business of… everything. They happen to include a streaming service within the Prime Membership.

Which, for most of us, is purchased purely for the same-day delivery features. Prime Video is just an added bonus.

Disney, as the 3rd largest video streamer (excluding Spotify listed above), has three different streaming services: Disney+, ESPN+, and Hulu (67% owned by Disney).

Disney’s streaming revenue only makes up ~23% of its total revenue.

Let’s look at some top streamers and pull out the key data points:

There are two essential metrics when looking at streaming services as a business operation:
  1. How many subscribers do you currently have?
  2. How much revenue does each of those subscribers generate?

The number of subscribers and ARPU are the two areas we will focus on this week related to streaming services.

Education

The first is self-explanatory: The number of subscribers.

The more people pay for the streaming service, the more revenue is generated.

What logically follows is, how much does each subscriber pay for the service?

That is where ARPU comes in – Average Revenue Per User (or, Average Revenue per Unit).

ARPU is an indicator of profitability; it tells us how much money is generated from each user or subscriber over the prior period, generally the last month, quarter, or year.

When we compare companies by the number of subscribers, the answer shows who has a larger reach. This helps us see how much potential growth that company has within the streaming market.

Logically, there is a natural cap on subscribers. 

There are only 7 billion people in the world. The number of people with access to the internet across the globe is 4.9 billion. 

The population of the United States is about 365 million. 

Disney, Netflix, and Amazon all reach over 200 million subscribers. Is there a natural cap within subscribers, and are these companies nearing it?

It’s hard to answer that question, which is why ARPU is an important piece of this puzzle.

The key to unlocking information beyond just the number of subscribers is understanding how effectively these companies maximize revenues from the subscriber base.

As you can imagine, this is often a “give-and-take” because streamers can’t just increase revenue (and ARPU) and hope that the subscriber base continues to grow.

That is why we hear so much press about streamers raising prices… before they raise the price.

They don’t want to catch anyone off guard and push them off the subscription service. But they want to increase the revenue generated per user to continue growing the business.

Looking back at our table above, Netflix has the highest ARPU at $11.85 – this should make sense to most of us since the lowest subscription tier at Netflix has been $8.99/month vs. other streamers who start at $4.99/month or offer free versions (with adds).

While Disney has the lowest ARPU, they generate the most revenue from streaming services or the Direct-To-Consumer channel. And among these companies, the focus at Disney has recently shifted even more towards streaming services and pursuing growth in these channels.

And with recent news of Bob Iger returning to lead Disney, along with my obsession with Marvel, we decided to dig deeper into the streaming business of Disney this week.

Disney

Disney is a massive media conglomerate that operates in two main areas – parks & entertainment and digital media and entertainment distribution (DMED).

DMED encompasses the Company’s global film and episodic television content production and distribution activities. Content is distributed by a single organization across three significant lines of business: Linear Networks, Direct-to-Consumer, and Content Sales/Licensing.

Linear Networks would be your “old-school” TV channels like ABC, Disney, ESPN, Freeform, FX, and others.

Content Sales/Licensing is the theatrical distribution of movies, DVDs, and video sales & licensing, along with licensing to video-on-demand services.

Direct-to-Consumer is the streaming services Disney controls: Disney+, ESPN+, Hulu, and Star+.

DMED accounts for 65% of Disney’s revenue, with parks filling the remaining 35%.

As you can imagine, with brand names like Disney, Mickey Mouse, Marvel, and, more recently, Star Wars, there is a large asset base within DMED.

This IP is driving the future potential for Disney – we have already seen how deep and complex Disney is willing to take the Marvel Universe.

Recent Headlines

This last week, news broke that former CEO Bob Iger was returning to run the company, and Bob Chapek would step down immediately.

Iger has been actively involved over the last two years as a paid consultant to Chapek (paid $2M a year not to be CEO, actually), and it was common knowledge that the two butted heads often.

Iger had previously served as CEO from 2005-2020 and only stepped down as CEO recently.

Iger has a different focus than Chapek, who was concerned more about building out Disney Parks and the experiences side of the business over streaming.

Iger is more focused on DMED and utilizing the solid brand base for content that Disney controls today.

Bulls
  • Disney has an unmatched ability to squeeze phenomenal profits from decades-old intellectual property.
    • This article highlights just three unique pieces of Intellectual Property that have been instrumental in driving revenue for Disney.
    • For example, Disney acquired Lucasfilm for $4.1 billion in 2012. The Star Wars movies released since 2012 have generated over $5 billion in revenue from box office sales alone. 
      • The Millennium Falcon release in 2019 increased park revenue by 8% that year.
    • I haven’t even mentioned Disney’s frontrunner, Mickey Mouse, yet…

Bears
  • Disney’s streaming service has yet to reach profitability and is being sustained by other business segments.
    • As the streaming wars continue to expand and develop, Disney faces a competitive landscape and must rely on media affiliate fees to cover the losses from DTC.
    • As paid television subscriptions decline within the Linear Network segment, affiliate fees are also at risk of declining.
  • Chapek had previously streamlined the internal decision-making process at Disney. Removing the decentralized authority held by many executives and putting himself and his secondary, Kareem Daniel, as final decision-makers.
    • This streamlined process is ideal for the fast-moving world of streaming services. There are concerns around Iger returning decision-making and P&L responsibilities to division heads as it may slow down Disney’s ability to generate streaming content promptly.

Key Metrics as of 12.1.22:
  • Market Cap: $179.8 Billion
  • LTM:
    • Revenue: $82.5 Billion
    • Streaming Revenue: $19.6 Billion
    • Streaming Operating Margin: (20.5%)
    • EBITDA Margin: 14.5%
  • 2-year forward Revenue Growth: 18.3%
  • 2-year forward Streaming Revenue Growth: 47.5%
  • Number of Subscribers: 235.7M
  • ARPU: $4.3
  • Valuation (NTM):
    • EV/EBITDA: 14.9x
    • EV/Revenue: 2.6x
    • P/E: 23.5x

Conclusion/Recommendation:

It is no secret that streaming services have been decimated this year in the markets:

Market euphoria in 2021 inaccurately interpreted the future as having a strong and prolonged demand for streaming services. But once the world returned to normal, many subscribers dumped their subscriptions and went outside for the first time in 2 years.

Because of this sudden about-face, streamers have been punished.

Netflix, which had consistently grown its subscriber base each quarter since its founding in 2011, saw its first drop in 2022.

Since so many of these streamers have been punished already, we might be entering a period where they can be scooped up at a significant discount.

Streaming services are not going away – even if more people decide to go outside and get away from the screens, the media world has changed so much in the last few years that we are more concerned about movie theaters shutting down than streaming services.

Disney has a strong foothold in this space, mainly revolving around the almost endless possibilities surrounding its content library.

In 2008, when the first Iron Man movie dropped, did any of us expect 10+ more films over the next ten years culminating in $2.8 billion in sales from Avengers: Endgame alone?

The breadth and depth that Disney has taken the Marvel universe are staggering. And it appears Disney is also following the same strategy within the Star Wars universe but focusing on the streaming service.

As far as streamers go, Disney has the most robust library of content to pull from and build off of, which gives us much confidence in its ability to continue growing within the streaming space.

And, with Bob Iger again at the helm and focusing his efforts within the streaming world, this is the right place to bet on the streaming industry.

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