Mike Reynolds: Hi, I'm Mike Reynolds, a senior reporter covering the media industry with the S&P Global Market Intelligence tech, media and telecom news team. 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 doing good, Mike. Thanks for having me. Looking forward to chatting about video today.

Reynolds: All right. Seth is going to share some results from Kagan about US revenue for the top subscription video-on-demand players in '23, maybe some projections for '24 and beyond. So let's get to it. '23 was another year of double-digit revenue growth in the US for the major subscription video-on-demand players: Netflix; Comcast/NBCU's Peacock; Walt Disney with Hulu, Disney Plus and ESPN; Paramount Global with Paramount+; Warner Bros. Discovery with Max and Discovery+. How did the sector finish up overall in '23, Seth?

Shafer: For the last five years, I think, at Kagan, as we do these projections going into them, we always feel like, "Okay, the good run has to end at some point. How long can this crowded landscape keep growing?" And then we crunched the numbers. We do this bottom-up, top-down exercise. We account for everything. And, to answer your question, still another strong year of revenue growth for 2023. We had the entire industry for subscription video revenues only at just over $42 billion, which worked out to about 13.3% growth rate for 2023. Despite challenges, despite the talking points of, "it's got to end at some point," operators still were able to grow revenue at a pretty healthy clip.

Reynolds: So are more people still coming on board and/or are higher price points driving the revenue growth?

Shafer: For 2023, I think the story there is ARPUs being higher. Unfortunately for consumers, that really was down to price hikes. So there's been a lot of push over the last 12 months, 18 months from investors, shareholders for these big media companies — Disney, Comcast, Paramount, Warner Bros. Discovery — to be profitable on the streaming side. There's less patience for at some point down the road, they'll be profitable. It's a big push for profitability now, and the reaction that we saw really across the board was for price hikes in the US. So outside of Netflix, most other operators were pretty aggressive in price hikes. And, again, unfortunately for consumers, it seems like inflation with everything, but that trend will likely persist. I'm getting ahead of myself in the 2024 and beyond talk, but it does seem like more price hikes ahead are likely as these operators push for profitability. And honestly, as they raise prices, they're not seeing a lot of churn. Consumers still feel like they're getting good value. Until you see price hikes and then an immediate exodus of subscribers, it encourages this trend of operators to keep inching up pricing.

Reynolds: Yeah. Dollars and cents, as always. There was a lot of news about crackdowns on password sharing. This benefited Netflix, Seth, and Disney's about to implement a similar strategy?

Shafer: Yeah, for sure. That was another big driver in gains in 2023, as these markets get highly penetrated. So we're sitting at around 85% of US internet households are taking at least one SVOD service. There's not a lot of new growth to be had. There's not a lot of households that have been on the fence all these years about, "Oh, do I try this streaming stuff or not?" People are pretty much in if they're into video entertainment. If they're not, they're out, and there's not much bringing those people that are just out of that market in. And so where does growth come from as far as revenue, subscriptions, things like that? Netflix had a good year in the US as far as subscriber growth, revenue growth. A lot of that was from the crackdown sharing — "paid sharing" is their euphemistic term for it. But that really got underway mid-year in the US. It launched a little bit earlier, but really started kicking in midyear, second half of the year. And the company was pretty open about it, "Yeah, this is what's driving it as far as subscription growth perking up in the US, revenue as well." There was a lot of fear going into that. The fear is not so much that just password sharers would get grumpy and not sign up for their own subscription, but that existing subscribers might falsely get flagged as sharing. There might be other hoops. There just might be ill will towards the service as they're cracking down on it. That didn't materialize, so there wasn't any churn out of the service. Basically, it was additive without really many downsides.

Reynolds: They did it in a civil and delicate manner.

Shafer: That, or people were so fond of the service that they shrugged their shoulders. And that's an important point actually, because to your question, both Disney and Warner Bros. with their Max service have announced that late this year, fall of this year, they're really going to start their own initiatives. That probably will really kick in late this year, 2025, as far as seeing subscriber revenue gains from a crackdown on password sharing. It's still to be determined, though, if universally everyone has the same experience that Netflix did. So, obviously, how much you use a service every day, how much you lean onto it, that's going to impact — when you can't share a password anymore — do you immediately sign up for your own? Are you still on the fence? So, that's to be determined. Will other operators see the same boost to the same magnitude that Netflix did?

Reynolds: Interesting. You'd mentioned the 85% penetration levels — you're in or you're out. The providers are trying to get more people to come in perhaps with the lower-priced ad-supported offerings. Any traction that way or meaningful traction that way, Seth?

Shafer: Yeah, no, that's another area, obviously clients are super interested in. Everyone's trying to gauge what is that real upside? If you're looking at a Netflix and the revenue five years from now, what are they really going to be deriving from the ad side of things? I think what we're seeing is traction for Netflix. And I'm saying Netflix, all the operators either have in recent years or just this year with Amazon.com Inc. are really leaning into the ad-supported tier opportunity, so it's pretty universal. Just talking about Netflix here, but like Netflix executives keep cautioning, this is going to be a slow process for an operator like Netflix to go from zero ad-tier subscribers to I think their initial goal was 10% of revenue coming from advertising within five years or so. They seem to be on track to make that, but these early years, still pretty small audiences. As much as both Netflix and Disney have disclosed 40% of their new subscribers, 50% are taking these ad-tier plans, you have to keep in mind that they're really pretty far along the adoption curve. So if they're adding 2 million or 3 million or 4 million subscribers in a year — whatever your period — 40% of that is still a pretty small number as far as what they're actually tacking on. So, I'm not bearish on this push. I think really though, we still have to be patient to look at a Netflix and see, when does this ad revenue become meaningful? There's just a lot of subscribers that are used to Netflix with no ads and not as many new subscribers coming in. So even though that adoption rate's pretty high, it's still small numbers. They're growing — rapidly growing — that small base, but it's still a small base of subs on the ad tier.

Reynolds: All right. For this sector overall what do we look like? What do you think in '24 is going to bring and maybe looking a little further out in terms of Kagan's longer-term projections?

Shafer: Yeah. 2024 maybe, touch wood — we do this again next year and I'll say I was wrong yet again — but for 2024, we have that revenue growth rate a little more than half what it was in 2023, so 7% or 8% growth in revenues. We again have a consistent story in that subscription additions are going to grow at a much lower rate. And that was true in 2023 as well. So we had revenue growing 13%. We had subscriptions, new additions, growing at about 4% or 5%. That story is the same one that we have. And, again, most of the revenue growth is going to be from price increases, as opposed to adding new subscribers. For the subscription side, 2028 in our forecast, we have in that five-year period from 2024 to 2028 about $10 billion in SVOD revenue tacked on. So we have it getting up to about $54 billion or $55 billion five years out. We're here talking SVOD — obviously that picture's a little different when you say total revenue. So I've made that distinction a bunch with SVOD revenue. Total revenue is going to be larger when you start factoring in the contribution from the advertising side and the ad tiers.

Reynolds: I got you. That'll be a conversation we'll have in more depth another day. Let's talk about some of the companies individually, like Leo DiCaprio's Jack Dawson and Titanic — Netflix is king in the US set?

Shafer: We're not supposed to pick favorites on the analyst side. I'll cautiously say that any metric you look at — subscribers, revenue, free cashflow, things like that — Netflix remains in a league of its own. So, you have a big jump from Netflix and all those metrics to this chasing pack of Disney, Warner Bros. Discovery, Paramount, Comcast — that's a much closer race when you get into that next tier after Netflix.

Reynolds: And they all did pretty well though, right? I think the growth percentage there for all of the players just mentioned were 20% or better.

Shafer: Yeah. For the US market, really the subscriber growth was powered last year by Paramount+ and Peacock — they had really good years. Max had a good year as far as subscription growth. The Disney services were a little bit flat. Disney focused more on price hikes, were willing to not chase subscriber additions and were more after ARPU. So their subscriber counts lagged a bit from some of those others.

Reynolds: How about Apple Inc.? Everybody wants to know about Apple. When you talk about in this space, they seem to be maybe lagging the others.

Shafer: Yeah. Apple's a really interesting operator. I think people keep wanting them to play Netflix's game, and Apple continues to not play that game. So they've been more selective, offered more of a curated service, leaned into things like sci-fi, some more family-friendly fare. They did have their first hit with Ted Lasso, which helped grab some growth. They've had some other pretty popular new series come out. But they've been pretty content. They offer basically the same catalog in all the markets they operate in globally. So they're not trying to go into a market like India and have local India content. They're rolling with what they feel resonates within an Apple ecosystem person and just focusing on a smaller catalog with high-quality content.

Reynolds: There's been some consolidation of sorts in the industry. Showtime OTT, I think, has been subsumed into Paramount+ and Discovery+ is part of Max.

Shafer: Yeah, the Showtime stand-alone is gone. Warner Bros. hasn't really mentioned Discovery+ in the US for it's long-term plan, but initially they were going to roll it into Max entirely and then they backed away from that. So I don't think it would be shocking if at some point the stand-alone Discovery+ offering goes away in the US. But yeah, consolidation, lots of stories about Paramount Global, that corporate entity and who it might pair up with, be acquired by, merge with. Really, the packaging trends of simplifying it — instead of multiple services, one service — probably expect that same momentum on the corporate level as well. We keep talking every year that it's going to be the year of mergers and consolidation in media and we keep being wrong, but it still seems like that's the path forward, as these companies need to get a bit bigger and compete more effectively with Netflix, Amazon and some of the larger operators with resources at their disposal.

Reynolds: We mentioned the ads a little bit earlier. The upfront season's here. I'm assuming the big media conglomerates and their ad-supported efforts are going to play a major role this year.

Shafer: Yeah, for sure. I was just reading an article this morning talking about the success of the new "Fallout" series on Prime Video as far as must-watch TV for some people. And, a lot of people are watching that with ads. And as the media ecosystem gets used to this new world order, I think a lot of the SVOD players will continue to play a bigger and bigger role in the upfront process. And just cementing the fact that everyone acknowledges that consumers spend a ton of time with streaming video across free video and subscription video, and there's still a bit of a gap. There's watch time there that's maybe not being monetized as fully as it should be. We have to get our heads around the idea that upfronts may be dominated by some of these names versus the traditional media names we're used to.

Reynolds: Seth, as we get to the end here, anything that we should be looking for in 2024 as you assess the industry?

Shafer: Unfortunately, I think price hikes are to stay for a lot of these operators. I think if you're sharing a password, you may lose that sooner rather than later. From an experience point of view, I think it's interesting a lot of these services are looking at the success of the FAST market for free TV and replicating that with Peacock and Paramount having a channel experience. So you don't have to hunt and pack and search and find — that'll probably continue, leaning into these different elements. But really, the battle is going to be keeping people engaged. The more these services lean into advertising, they're in a little bit of a different world in a non-ad world where you pay a subscription fee, they don't care how much you watch. But, suddenly now, engagement time is going to become really important. So crafting that experience, it may look a little bit different as a consumer as these services try to make it easier for you to find stuff and keep you plunked there on your couch, watching hour after hour.

Reynolds: That would be their hope. Anyway, that concludes this episode of "MediaTalk." I just wanted to thank Seth for spending a lot of time talking about Kagan's projections and the business at hand.

Shafer: Thanks Mike. That was fun.

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