There is no streaming war

0:09Dan Rayburn:Dan Rayburn, an expert, if there ever was one, in the streaming space, in the media space, which encompasses so many things right now. Dan has been on a few times before. He's been writing or we've been having his writing offered on Seeking Alpha for quite some time. He runs his own blog, streaming media blog. He makes copious media appearances on various mainstream networks. Dan, welcome to the show. If you would start us off, what do you feel like is top of mind? Netflix is obviously in the headlines a bunch vis-a-vis Warner Brothers, vis-a-vis the dance with Paramount, vis-a-vis sports. What is top of mind for you or what are the few things that you're thinking about that you feel most worthy of investors' attention?

1:02There sure is a lot. Netflix is always top of mind. And just thanks for having me again. We could do a podcast every single day based on the news that is put out in the industry just around sports streaming, let alone all the other types of streaming business models out there, bundling deals, pricing deals. Sports is always an interesting one, especially because we've got, in the last couple quarters, some new deals between Major League Baseball, Apple, naturally with the Formula One deal. Very interesting the fact that the NFL is really leveraging the streaming services and their global reach to expand their footprint as opposed to where the games always were, which were broadcasters, especially on Christmas when it has some of the highest viewing windows out there.

1:49All three games are going to be exclusively on Netflix and Prime Video except in local markets for teams. I would say also for investors, focusing on the financials and what the numbers actually show. And that can be hard to do when there's so much speculation about what will happen with WBD, Paramount, Netflix. It seems to change every day. It's incredible how many headlines are wrong. I'm constantly pointing out on LinkedIn, I can't believe how many people are reporting the deal's already done. Or they say phrases like, you know, Netflix has acquired WBD. Like what? How can you even create a graphic like that?

2:32It's mind boggling to me. So for investors, you also just have to understand what information is real and separate facts from opinions.

2:40Dan Rayburn:Let's get into the speculative deal between Warner Brothers and somebody. Maybe it's going to be Paramount. Maybe it's going to be Netflix. certainly some things that have developed since the the initial deal with Netflix and Warner Brothers has has happened with these hostile offers from from Paramount but as you said a lot of speculation you're you're you may not be a betting man but you're an expert in the field you've been around a long time 30 plus years perhaps I think what would you say may happen And what would you say, given the various scenarios, what would you expect investors should have in mind, given the various scenarios and possibilities?

3:27I think investors should only care about the deal if it happens. Not what could, should, might, would maybe happen, because there's too many different scenarios there. I would look at what the facts are of the deals, and there's two of them being discussed right now. Now, yes, they continue to change to some degree. They might change again based on what is offered. We already see where the money is coming from on the Paramount Skydance side. We see where Netflix has got the money. They've put out some regulatory filings already. I think if you're an investor, what you have to think about is what is the impact to consumers?

4:03And I find it fascinating that you have some large unions and others that have come out of the market and said that if Netflix acquires the portion of WBD they'd be acquiring, it's terrible because it takes a choice out of the market for consumers. And yet, isn't one of the biggest complaints we all have as consumers is that there's too many different streaming services? so i don't think it's a problem as far as removing choice in the market what we don't know is what would netflix do from a packaging standpoint would netflix roll that content into wbd content into netflix would they keep hbo max separate a lot of what investors are not realizing though is also what's being proposed in this deal because as part of this deal if it goes through with Netflix and WBD, Netflix would get live TV channels in the UK.

5:01They'd get TNT. They'd get sports rights. They'd get the Olympics in 2028. That's a very different business than what Netflix is in today. In addition, Netflix would be getting the platforms and systems internally that are currently providing the linear HBO channel to third-party partners. mvpds is that a business netflix wants to be in we don't know so they're getting a bunch of assets here providing the deal goes through that we really don't know what netflix take on that is however this idea that just netflix will acquire it and lay everybody off they can't afford to do that netflix is not a studio not like wbd is they're still going to have to rely on the people who produce this content distribute it netflix has already said they want to continue what WBD is doing as far as leasing movies and theaters.

5:52Now, I understand when people say, well, that's not very specific. Maybe they shorten that window. They might. We don't know. But I think investors have to focus on this deal once it's actually done. And I should have just said in the beginning, too, to make this clear, I don't own stock in any of the companies we're talking about. I'm not a financial analyst in terms of making bets. I don't give out investment advice. I talk to a lot of companies involved. I'll talk to distribution partners, studios, movie theater chains, broadcaster, sports leagues. I look at the data and I try and make educated decisions based on that.

6:32And that's really what I think investors should be looking at. Now, flip side that to that, it's hard to only look at that because in the current U.S. political environment, we know that politics plays a part of these large potential acquisitions more so than they did five or 10 years ago. So part of this is also going to be tied to politics. There's just no way around that. So I don't hedge bets on which deal will go through or not go through, but it's very clear that WBD has assets that are extremely valuable from a content standpoint.

7:09Dan Rayburn:Does the hostile offer from Paramount surprise you? Does the trajectory of this deal slash deals, does that surprise you? Does it inform any of your opinion in this realm or slightly outside of this realm? No, it doesn't to me because now you have people leaking text chats between two different CEOs. You have insiders talking who shouldn't be naturally, which we always have in this deal, in any deal this size. You have rumors that are thrown out there that aren't actually based on facts or it's based on one person's opinion. So a deal of this size, it's really not surprising. We think about the industry tied to studios, streaming, sports.

7:53Yes, it all falls under media entertainment. We'd be hard-pressed to find a deal that's being proposed that is this large and this significant over the last, call it 10 years. Yes, Amazon, MGM Studios, different. That was just studios only. You could think of the AT &T deal, DirecTV, which obviously didn't go well, but that's, again, not quite the same here because AT &T is a carrier. So this is just a really, really big deal as far as size, but also just the impact to the industry overall.

8:26Dan Rayburn:I was going to say, is there any use to say like Netflix buys WD, would you put it at like a 70 % or there's truly no purpose in any of that? Let's all be patient. Nobody has an insight into any of that. And what happens if Paramount comes back and says, okay, we'll now offer$35 a share? Changes everything overnight. I don't know that they're going to do that. There's speculation out there, but yeah, I don't make guesses. I make educated bets based on data. And right now it's just too early. The other thing we don't know is, is this going to pass regulatory scrutiny? We can talk all day long as an industry or as investors about why it should happen or why it would be great or not great, but the deal has to get done.

9:10The European Union is going to have to look at this. The DOJ is going to look at it. Netflix own comments on the deal is 12 to 18 months to get done. They believe it will be. But remember, WBD is not splitting out into two entities until the latest they've now said is Q3 of 2026. And then you have to go through the regulatory process. This potentially, if it closes, this could be two plus years. Easy. So a lot's going to change in the industry in the next two years, two and a half years. I think it's just too early to speculate on any of it.

9:48Dan Rayburn:And why does the EU weigh in? Can you explain that? Yeah, the EU has to weigh in based on the percentage of your revenue that comes from Europe. And in this case, it's a large enough percentage to where the EU would have to approve the deal. Now, historically, for listeners that don't know, the EU doesn't most times try and stop deals. Yeah, they did with iRobot. There's been a couple of cases here and there. in many cases the EU simply says okay this we're not going to stop it or try to stop it but it comes with some sort of terms of some kind and that's that's not uncommon at all we saw that when Comcast acquired NBC and there were terms to that deal where it was approved by the DOJ but you have to adhere to certain terms so that tends to be how the EU does looks at mergers like this but it's still, it's another unknown of many unknowns.

10:45Dan Rayburn:Yes, many unknowns across the board. Do you think it's a value to go when we're talking about streaming company by company or sport by sport? Ooh, that's a hard one because some of these tie into multiple naturally. It's up to you. I don't know how you want to do it. Maybe sport is easier. Okay, there you go. Good. So what do you want to pick? Let's start NFL as we are December 23rd. Okay, NFL. Wow. Well, everybody who's a listener who's an NFL fan already knows just how fragmented NFL streaming is and viewership is. It's all over the place in terms of where you go to get what type of content, the quality of the content that it's in.

11:39And, you know, there's a lot there to break down. But I would say, you know, the biggest thing that's fascinating right now about the NFL, you know, we're recording this on Tuesday, December 23rd. And yesterday was an ESPN game, which brought additional data to the screen, which was kind of interesting, a data-enhanced game, as they called it. But the key thing here for listeners is between December 25th, 27th, there's five NFL games that are going to be played. none will be broadcast nationally on tv netflix has two games on christmas amazon has one it's a triple header peacock has an exclusive game on saturday the 27th and then the nfl network has one so four of the five games are streaming exclusively on three different platforms now of course the games are ota over the air all nfl games are and local nbc affiliates will show the exclusive game on that's going to be on Peacock.

12:37But it just goes to show how much the NFL is relying on streaming services to get their games international and how the distribution model has changed over the last couple of years. Because broadcasters used to have these games on the holidays, Christmas, Black Friday, wildcard games. They used to have all these. and they've been stripped out of their packages to sell to from the NFL to license I should say to streaming platforms because of what they're willing to pay for it you and I don't like that it makes consuming sports extremely difficult but what consumers don't really understand is the sports leagues are not doing what's best for us they're not doing what's easy for us they're doing what makes them the most money for the league and the NFL has always been the most fragmented out there compared to, say, the NBA or Major League Baseball, although Major League Baseball with their new deals are going to be fragmented as well.

13:36Dan Rayburn:And what are the numbers showing? Do we have that kind of data analysis to see if, well, for one, what are the numbers compared to regular broadcast games? Is that something that is an apples to apples comparison? Is that something that's done? And then B, what are, is the sports coverage? Is that leading to more subs? Is that leading to more revenue? Yeah, so you're asking the most important question here that we have in the industry, which is, what is the impact of sports content on direct-to-consumer streaming services? And we don't have an answer. And the reason we don't have an answer is because none of the sports streaming outlets and almost all the, or I should say leagues, and all of the direct-to-consumer streaming services, almost none of them break out viewership in any kind.

14:33And if they do, it's so high-level and vague where they don't define what a viewer is that we don't know what the impact is. They don't mention things on churn and retention. They don't even publicly disclose. Netflix as a company has never publicly disclosed its churn to Wall Street ever in its history. So things like churn, we don't know.

14:54Dan Rayburn:Sorry, is that by design? Like one would think that if they had something to brag about, they'd brag about it? I don't think it's that. It's definitions in the streaming industry are very difficult because unlike broadcast TV where we have standards, we don't have any standard in the streaming world. There's nothing. We have for live events, simultaneous streams, AMA, average minute audience. You have monthly active users. No one defies it the same. Netflix just came out with a new metric they're calling monthly active viewers. There's all, you have concurrent streams, you have concurrent devices, you have unique streams.

15:31There's all these different metrics and the companies don't use the same methodology. And then on top of that, when they are using Nielsen, which has some of the worst data out there, you have sports leagues calling out Nielsen publicly because they don't trust their data and yet they still use them. And then Nielsen decided to change their methodology from what they used in previous years to something they call the big data plus panel measurement. Which is not apples to apples, which everyone agrees. So how do you compare last year's viewership to this year's? You can't. So it makes it also very hard to figure out what has viewership been over a long period of time.

16:16That's an issue. And then you have some, you know, Netflix, they're monthly active viewers. The way they define a monthly active viewer on their platform is any person who watched at least one minute of ads monthly. One minute. That's it. And then they take that number and they multiply it by the estimated household of size. So basically how many people are on the couch? What's that reach? And that's their number. And that replaces their what they called MAU, monthly active viewers. So it's interesting to see how Netflix comes out with that metric, But then Amazon a month ago at their Unboxed event came out and said that Prime Video now reaches 315 monthly viewers globally.

17:03But it didn't define what a viewer is. So is a viewer, you watch two seconds, 10 seconds, one second? Thursday Night Football on Prime Video, you go to Amazon.com's homepage, it loads in the upper right-hand corner. If I don't click on it, if I don't engage with it, am I a viewer? Don't know. Nielsen won't say. So part of the problem we have here and part of the problem investors have is it's very difficult to know what's actually being viewed and which platforms for what period of time. Outside of a few services, for instance, NBC Sports has really good breaking out viewership specifically for Peacock when they do games for NFL.

17:49Fox doesn't break it out, but Peacock does, which is nice. But what we don't get is, okay, that's how many AMA, average minute audience you had, but how long did people actually watch for? They won't say. So we have some pieces of data here and there, but ESPN won't break out what percentage is streaming versus pay TV. So that causes an issue as well. So we have some numbers, but we don't have enough details to truly know what's going on. And to your real question is, what is the impact? Is that making more people sign up? And if so, is it also making them stay longer?

18:30Dan Rayburn:I know you're not a financial analyst, but do you have an opinion on what metrics investors should be focused on for a company like Netflix, even Amazon, if you want to weigh in, or any other companies in the space? And then also how that dovetails with the metrics that you're focused on? Absolutely. So while I'm not a financial analyst, what I mean by that is I'm not giving out stock recommendations. I'm not putting out reports. I'm not a buyer, sell side, institutional money manager analyst, but I am looking at financial information all day. I'm looking at SEC filings every single day. There's about 50 companies in my industry tied to sports, media, entertainment, cloud infrastructure that I'm tracking that are public.

19:10And I'm reading every SEC filing that they put out. And the reason for that is there's a lot of really good information in the SEC filings that a lot of people just don't see because it's not in the press release. That includes cord cutting. Companies don't put how many cord cutters they had, you know, take Verizon. Verizon doesn't put in its press release how many pay TV subscribers it lost for residential customers because they don't want to highlight it. So you got to look at the SEC document. So I am constantly looking at financial information. Anybody who's looking at this space as an investor, by this space I mean DTC, direct to consumer streaming services knows that profitability is the biggest thing over the last 18, 24 months that the industry has moved to.

19:53The whole get big fast model that everybody had years ago and during COVID, that doesn't work anymore. There was a period of time where Disney's DTC service was losing$100 million a day. There was one quarter where they lost $1.1 billion. What happened over a couple of years was Wall Street then said, hey guys, forget growth at all costs you got to get to profitability everybody's burning through too much money and what happened wbd over time d2c that achieved that paramount it achieved it disney it achieved it now peacock is still losing money in terms of its d2c business but it's it's almost there in terms of profitability they also all define profitability different differently as well.

20:41So you have to look at their definition of that. But I would say the biggest thing investors want to look at, and one of the challenges is because it's being removed from most companies, is ARPU, average revenue per user. As an investor, would you rather have more subscribers that quarter at a lower ARPU or fewer subscribers at a higher ARPU? Naturally, the higher ARPU. it's making more money on the way to profitability what's interesting is that netflix disney and a couple of the others roku have stopped announcing arpu they're not giving investors that data anymore and part of the reasoning is well our business has changed so much because we now have subscription plus we have advertising we have blended we've got packages where we're bundling with other services where we're getting paid less in a wholesale rate.

21:38I understand that, but it makes it much harder to track these companies from a financial standpoint when you don't have average revenue per user. Because one of the things you have to think about is how does offering Black Friday deals impact ARPU when you can get 12 months at three or four or five dollars a month for that service? Is the company actually making money on that? Chances are they're not. And that is part of the reason why this year Peacock had no Black Friday deal. Smart. I know I saw online some consumers are like, man, that stinks. Like, where's the deal? It's smart for them because Peacock is still losing money.

22:30But it goes to show investors should watch how content is packaged, how it's bundled, the price increases, and then also how much money is spent on content. We do get from Netflix and a few others the total amount of money that they'll spend on content creation and licensing every year. So for Netflix, it was about 18, it'll be about$18 billion this year. What you want to do is watch how that changes over time. What we don't get from Disney is a breakdown of their total content spend specific to streaming only versus broadcast. They just lump it up into one large number, which really isn't too helpful.

23:12But investors should look at when they can, ARPU, they should look at content spend. They over time should look more at ad revenue. So very few companies right now break out the percentage of total DTC revenue that comes from subscription versus advertising, but a few do. And over time, the demand is going to come from Wall Street to where even someone like Netflix is going to have to break that out. Because we know that's where the growth of revenue is coming over the next couple years on the ad side, especially with Netflix with it being more targeted, owning their own ad stack. So I would just say as investors, you really have to look at those metrics as opposed to a lot of what I see people sharing online every day, which is, you know, this service is better than this because they have this piece of content.

24:00But we don't know that that piece of content you're referencing to actually keeps subscribers. Look how many shows get canceled after one season. Popularity doesn't always equal profitability. That is something I'm telling investors all the time.

24:12Dan Rayburn:And why not? Why isn't it a one-to-one because we just don't know enough of the specific numbers to extrapolate that correlation? We don't. But when Netflix comes out and says, even though that show was popular or that series was popular, it didn't drive the engagement that we're looking to get based on the money it costs to produce it. What does that tell us? It's not a good investment of their dollars. Now, we don't know the numbers exactly. but streaming services come out and made that very clear over the years in reference to very specific shows or series and what they're saying is the amount of money we spent on it simply doesn't warrant the feedback that we're getting as far as engagement however they define engagement maybe that's new signups maybe that's keeping people on the platform that could also be the number of ads or what the CPM is.

25:08You know, they measure it in a lot of different ways. But a lot of it is just based on viewership. And what a lot of people in the industry don't know is just what the actual viewership is for a lot of these events. Like World Cup, let's just use that for an instance. People talk about the World Cup and how big it is, and oh my God, it's this big streaming thing. It's not. In 2022, the World Cup streaming on Fox peaked at 1.28 million viewers. That's it. Now, is the World Cup huge on TV? Absolutely. It's one of the largest things in the world on broadcast TV. Streaming in the U.S. on Fox, 1.28 million.

25:51That's really, really small. All the talk about Apple and F1, we have numbers from ESPN. The largest U.S. television audience on record for Formula One was 1.5 million viewers AMA. Largest, 1.5. Races this year on ABC, ESPN, ESPN2 averaged 1.3 million viewers. That's it. so many don't know what is actually taking place as far as viewership goes they hear terms like f1 and apple nba right and they assume it's just huge huge numbers out there but the reality is a lot of these numbers are actually really really low and that's why you have to look at the numbers as an investor what is that viewership now again comparing it year over year can be difficult based on the metrics but i bet a lot of our listeners don't know that fox's stream of the world cup only did 1.2 million at peak it's a low number and then some companies don't put out anything now the numbers thing too super interesting here that we had a whole bunch of games during thanksgiving holiday none of the companies broke out who broadcast games during the Thanksgiving holiday.

27:17None of the companies broke out stats for streaming. None. And I thought that was really interesting this year that none of them wanted to give out any numbers whatsoever.

27:31Dan Rayburn:We had an analyst on a few months ago, Jack Bowman, talking about how Amazon Prime, everyone thinks that's a big money maker for Amazon, but it's actually a money loser, but a big brand amplifier for them. Is that this or is this that? Is like, let's say, YouTube TV and NBA, all of these things, F1 on Apple, are those brand amplifiers, but seems like not necessarily revenue boosters? Many cases it could be. I don't know the answer, neither does anybody else. You have to be at the company and be an insider to know. But I think the biggest question to ask cures why does that matter if you're apple does it matter whether you lose a billion dollars or two billion dollars a year off of the apple tv streaming service no it's irrelevant to your balance sheet you can afford to and you're not in the business of content that's that's not their core business so you have to look at their numbers very differently than netflix because netflix is in the business of content they're not in the streaming business everybody says are in a streaming business.

28:39They're not. Streaming is a technology. Netflix is a content business who's using streaming technology as the distribution mechanism to get it to you and me. Apple's core business is not content. Prime Video, their core business is not content. It's commerce and advertising. We would all love to know, industry analysts, Wall Street, everybody, we would love to know what is the actual cost to operate Prime Video and what does Amazon get in return either from advertising specifically inside prime video videos all the additional potential revenue they get from people being prime members that maybe keep the prime membership for the video do they order more products amazon has more data on us than i think anyone outside of google so they know exactly what's working and what's not i think wall street gets too caught up on some of the companies where it's somebody had a report out, I forget when, you know, saying that earlier in the year, well, Apple is losing$3 billion a year on Apple TV.

29:45So that's a one-sided story. What you're not saying is what are they getting for that$3 billion they're losing here? Are they selling more hardware? Are they getting more from the services business? So you have to look at these companies and the entire ecosystem they play in and some play in just one realm. Netflix does one thing. They're a content owner that distributes content via streaming technology. Now, okay, they're in the physical facilities business or whatever you want to call it because now they have a few, you know, physical locations you can go to. But that's a very different business than, say, Disney or Amazon.