Good afternoon from Los Angeles. During one week in Vietnam, all I missed was a proxy fight at Disney, the resignation of a co-CEO at WWE and Netflix buying its first awards show. We’re going to breeze through a bunch of topics this week, but first…
Streaming TV is only going to get more expensive from here.
If you are using someone else’s password for Netflix, please take out your credit card.
Netflix has been testing different strategies in Latin America for the past year, and the push to crack down on password sharing (or charge for sharing) will begin in earnest in the first half of this year, according to people familiar with the company’s plans.
Netflix has asked people to pay to add users or homes to their account. It turns out that most people would rather just set up their own account than pay to share, and the company will give them the option of doing both.
Netflix will need to roll out this plan gradually. It doesn’t want to alienate customers by forcing them to get a new plan right away. Instead, it will send them increasingly suggestive reminders. If Netflix can convert at least 10% of the moochers into paying customers, that is 10 million new subscribers.
The password sharing initiative is all part of a new era at Netflix — and a new phase in Hollywood’s transition to streaming. Analyst Michael Nathanson has dubbed it the third act of the Streaming Wars.
In the first phase, Netflix, Hulu and Amazon offered bottomless libraries of shows at a steep discount to cable. In the second phase, traditional media companies spent vast sums of money to sign up customers at below-market rates.
But demand for new streaming video entertainment has stopped growing in the US, according to Parrot Analytics, a third-party data firm that measures interest in programs using inputs like piracy and social media interactions.
Parrot says this means we’ve reached a saturation point in the market. That may be a stretch, depending on your definition of saturation. Every major streaming service is still adding new customers, and people are spending more time watching streaming services than ever before.
But almost 80% of people in the US already pay for at least one streaming service. The biggest streaming services in the world, Netflix and Disney+, have stopped adding customers in the US.
We got the first sign of this slowdown one year ago this week when Netflix warned investors its growth was moderating. That was the beginning of a brutal year for the industry, a fog that most expect will last for at least another six months.
Netflix will update us on the state of its business Thursday when it reports the results for its fourth quarter of 2022. In the previous phase, Netflix would be poised for a huge final quarter of the year. It released its third most popular TV show ever (Wednesday), its most popular foreign-language movie ever (Troll) and its third most popular movie ever (Glass Onion). It accounted for more than 80% of the most-watched streaming titles during the quarter, according to Nielsen.
And yet the company is forecasting an addition of about 4.5 million customers — its worst fourth quarter since 2014.
This slowdown is a big reason that investors now want these services to turn a profit. Netflix is happy for investors to stop fixating on subscriber growth and instead focus on sales and operating profit. While Netflix is already profitable, most of the other streaming services will need another couple of years. Netflix still generates less free cash flow than most of its peers, and will need several months for its new initiatives – advertising and paid sharing – to impact its bottom line.
While streaming services are all being more cautious about spending, they risk losing customers if they actually cut back in a big way. That’s why they are all trying to make more money from their existing customers. Netflix and Disney+ introduced advertising, while every major streaming service except Peacock has raised prices in the last 18 months.
HBO Max just rolled out its first price increase, and the forthcoming hybrid of HBO Max and Discovery+ will cost more than the current Max price of $16 a month. Netflix charges $6 for basic with ads and $10 for basic without ads. That’s a pretty small delta, which suggests basic will get more expensive (or go away).
The danger for all these companies is that higher prices will lead to more cancellations. Cancellation rates (or churn) are already at an all-time high, according to Antenna data. – Lucas Shaw
Two of the three biggest headliners at this year’s edition of Coachella, the most important music festival in the US, perform primarily in languages other than English. Blackpink is a pop group that sings in Korean and Bad Bunny is a genre-busting Puerto Rican who sings in Spanish.
This may not seem all that surprising; the globalization of the music industry – and really all content – is a common theme for readers of this newsletter. But it is a big, big deal.
Coachella started as a festival for rock music. Beck, Tool and Rage Against the Machine led the first bill while the Red Hot Chili Peppers and Radiohead have headlined three times. But, for the last decade, the top of the poster at Coachella has reflected the biggest trends in music; it is a rite of passage for acts like The Weeknd, Ariana Grande and Kendrick Lamar.
International acts have been inching their way up the bill, including Blackpink’s performance in 2019, but this is the first time they’ve been at the top.
Goldenvoice, which organizes Coachella, isn’t doing this out of altruism. Latin and world music were two of the fastest-growing genres of music in the US last year, according to Luminate. (World music is a catch-all category that includes both Afrobeats and K-Pop, but not Latin.)
Consumption of both genres spiked by more than 20%. Bad Bunny was the most popular act on Spotify and YouTube, while Korean pop accounted for seven of the 10 best-selling CDs in the US last year. The only genre that grew more was children’s music, and that is because of the Encanto soundtrack.
A crisis at Disney
As if Bob Iger didn’t have enough to worry about. The newly reinstated head of Disney is already trying to lift the company’s flagging stock price, restructure its streaming and studio operations, revive the movie business and clean up the mess left for him by his predecessor. Now he’s got to deal with Nelson Peltz.
Peltz, the head of Trian Partners, is demanding a seat on Disney’s board. Disney tried to reach a deal with Peltz to prevent a public dispute. But that effort failed and now Peltz is declaring that the company is in crisis. Here’s what long-time Disneyologist Chris Palmeri had to say:
The moves pit one of the most notorious activist investors in corporate America against one of the most revered CEOs in media. Peltz is known for working his way onto the board of companies such as Mondelez International and Procter & Gamble Co. with plans to make them more efficient, sometimes forcing his way in through bruising proxy battles.
Even when he’s unsuccessful, as with a campaign to put Trian nominees on the board of DuPont, his campaigns have led to changes in management and cost-cutting.
Trian said Disney’s issues include overpaying when it bought Fox’s entertainment assets in 2019 for $71 billion. While Trian sees the problems as self-inflicted, it isn’t looking to remove Iger or break up the company. Instead the firm is in favor of de-leveraging and restoring the company’s dividend by 2025. It launched a website, Restore the Magic, to get the message out.
Peak TV… again?
FX Networks chief John Landgraf has declared the peak of peak TV. Hollywood released 599 original series last year — a number that doesn’t include unscripted TV, most foreign-language TV, sports, news or user-generated programming.
Landgraf declared peak TV in 2015 (and was wrong). He and his peers now release almost two new scripted series a day.
Lucian Grainge takes on Spotify
Grainge, the head of the world’s largest music company, decried the current economic model for music streaming in a note to his staff. He said artists’ work is undervalued and the economic model needs to evolve.
The music industry used to fight with streaming services all the time. Those public contretemps subsided as the payouts got bigger and bigger. Grainge also didn’t want to rock the boat while he took his company public. But the head of Universal Music Group is back in fighting position.
Netflix’s first awards show
Netflix bought the rights to its first awards show, the Screen Actors’ Guild Awards. This is the second major US awards show to abandon TV for streaming (following the Academy of Country Music Awards).
Ratings for the SAG Awards have plummeted by more than 60% from their peak, and there is no way TNT and TBS wanted to pay a huge increase in rights. Netflix, which is starting to experiment with live programming, can use this as a low-cost test.
Deals, deals, deals
- T-Mobile has discussed buying Mint Mobile, the budget wireless provider backed by Ryan Reynolds.
- Warner Bros. Discovery has explored selling its music catalog and could fetch $1 billion, while Dr. Dre is selling his music catalog for about $200 million.
- Netflix has limited some executives’ ability to see their peers’ salaries.
- Universal is building two new amusement parks in the US.