Checking in on a Developing Front in the Streaming Wars

As the streaming wars heat up, so does the battle for content... For more than a year here at Empire Financial Daily, I've been chronicling the proliferation of streaming entertainment services and the battle to grab share in an increasingly crowded market. It's a fight for subscribers, because it's pretty much consensus at this point […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Checking in on a Developing Front in the Streaming Wars By Berna Barshay As the streaming wars heat up, so does the battle for content... For more than a year here at Empire Financial Daily, I've been chronicling [the proliferation of streaming entertainment services]( and the battle to grab share in an increasingly crowded market. It's a fight for subscribers, because it's pretty much consensus at this point that not all these services can survive. The quest for subscribers is costly, and we've already seen telecom giant and once-aspiring entertainment player AT&T (T) [capitulate on Time Warner and strike a deal to sell that asset]( to media company Discovery (DISCA). Scrapping Time Warner eliminates the substantial content investment that HBO Max was going to demand from AT&T and allows the bloated parent to pay down debt... But combining HBO Max with Discovery will also bring the new combined entity more scale on content. The architects of this deal were clearly hoping one plus one will equal three when creating a compelling offering for subscribers. While streaming giant Netflix (NFLX) is a consensus streaming wars survivor because of its first mover advantage and large subscriber base, equally key is the enormous amount it spends on new content – around $17 billion this year. Disney's (DIS) Disney+ service is also a presumed survivor due to its quick subscriber ramp up as well as key properties like the Star Wars and Marvel franchises, which fall into the realm of "must see" for many potential subscribers. Disney+ is also viewed as the axe in children's content. This is an attractive category... because unlike most adults, kids will watch the same thing over and over and remain loyal even in the absence of fresh shows if the library content is strong enough. Most observers think Amazon's (AMZN) Prime Video service is here to stay as well, since the tech giant treats its studio and streaming service like a loss leader – not demanding it turn a profit but instead treating it like a cost center that provides a benefit to Prime members, hopefully building loyalty. Amazon's recent aggressive [$8.5 billion deal for the MGM Studios]( proves the company is willing to spend the dollars to stay in this increasingly competitive streaming game. The battle for longevity in the streaming space will be won by subscriber counts, but subscriber recruitment and retention in turn depends on content... Ad campaigns and pricing promotions can help, but ultimately subscribers will pull the trigger on a new service when it has a show or movie that is "must see" to them. I currently subscribe to four streaming services – and get Amazon Prime Video and Apple's (AAPL) TV+ for free – so I had decided not to pay for any more services... that is until I watched the first three episodes of Girls5eva for free on Comcast's (CMCSA) Peacock and got suckered into yet another subscription. But unfortunately for Peacock, I've almost finished the sitcom's first season and the Olympics are over... so I will soon cancel my Peacock subscription. And this is the problem with content... you need to have a lot of it. If you aren't an early leader like Netflix or Disney+, you really need that one show that will hook people in. And you need different shows to hook different demographics... While I fell hook, line, and sinker for Girls5eva, the show probably isn't going to pull in a 25-year-old man. Once you hook a new sub, there also has to be enough content so they stick around. This is a bar every service has to clear – even Netflix and Disney+. It has been well documented that over at Disney+, for example, there was a whole cohort of users who signed on for the first season of The Mandalorian, canceled when it was finished, and then re-subscribed for the second season. It's good they came back... but Disney wants them to stay all the time, which is one reason why the service has 10 Star Wars-themed shows in various stages of development right now. The content war means that it has never been a better time to be an owner of content, or of a production company with a strong track record of success... Anchorage Capital and its fellow owners of MGM Studios would agree, as they look forward to collecting almost $9 billion from Amazon. Another person who would probably agree is actress Reese Witherspoon, who recently sold a majority stake in her Hello Sunshine production company to a new firm led by former Disney executives, financially backed by private-equity giant Blackstone (BX). The deal valued Hello Sunshine at $900 million. Hello Sunshine was founded in 2016 and has since been on a roll churning out several TV hits, including Big Little Lies for HBO, The Morning Show for Apple TV+, and Little Fires Everywhere for Hulu, all of which starred Witherspoon. Hello Sunshine's predecessor company also produced a pair of Academy Award-nominated films, including the Witherspoon-helmed Wild, and Gone Girl, which was a big financial success, the only one at Hello Sunshine so far that did not feature the actress-producer. Witherspoon and Hello Sunshine are clearly on a streak... But $900 million is a lot of value to assign to a company that has released just six TV shows and four films, with three more films and five more shows in various stages of development. It's an especially hefty price when you consider that four of six shows and two of four movies starred Witherspoon. The producer-actress will join the new company and remain a significant minority equity holder... But for this company to be worth $900 million, it will have to be able to crank out hits even when Witherspoon isn't on-screen. Hello Sunshine reportedly received interest from several private-equity companies as well as several streaming services when it put itself up for sale, with Apple rumored to be one of the companies that took a hard look. With Witherspoon's big payday, industry rag Variety reports other content producers are out exploring the possibility of a partial sale, including basketball star Lebron James' SpringHill Entertainment and actor-director Ron Howard and producer Brian Grazer's Imagine Entertainment. Imagine has recently produced content for Netflix, Hulu, and Apple TV+, and earlier in its history had teamed up with traditional media companies to churn out TV shows that ended up having long second lives on streaming, such as Friday Night Lights and Arrested Development. --------------------------------------------------------------- Recommended Links: [Legend Who Bought Apple at $0.35 Says Buy 'Citizen IPOs' Now]( Wall Street legend Whitney Tilson says there's a huge an opportunity to invest in valuable private companies before they go public - and [he's revealing the No. 1 company to buy ASAP](. --------------------------------------------------------------- [Read this before you buy another stock]( Dr. Steve Sjuggerud is finally revealing the secret system behind his most stunning predictions, which has led to gains like 324%, 709%, and 995%. Find out how his secret system works and what he's saying to buy now [right here](. --------------------------------------------------------------- Witherspoon isn't the only Hollywood talent collecting a windfall this month... South Park creators Matt Stone and Trey Parker just closed a massive $900 million deal with ViacomCBS (VIAC) in exchange for the next six seasons of the show to air on Comedy Central along with 14 movies set in the South Park universe for Paramount+. The deal also represents an advance against funds that ViacomCBS will be collecting from HBO Max in exchange for licensing South Park to the rival streamer. In a world where every service is fighting for subscribers, it seems strange that Viacom (when it was already set to re-merge with CBS) would have handed over the rights to such a valuable property to a competitor like HBO Max. One factor in South Park streaming on HBO Max and not Paramount+ was that Viacom only owns half of South Park's streaming rights, having given the other half back to the creators before streaming was really a thing. As Bloomberg remarked... Business savvy might not be the first thing that comes to mind when you watch South Park, a show about foul-mouthed elementary school kids. But Parker, Stone, and their lawyer Kevin Morris made the deal of the century when they snagged a 50% stake in all non-TV rights to South Park in 2007. Stone and Parker re-invested some of the windfall from those digital rights into another developing empire, Broadway show The Book of Mormon, which they co-penned with Robert Lopez. The show has gone on to gross more than $500 million and is one of the most successful musicals of all time. While HBO Max has exclusive streaming rights on the South Park show for now, having paid roughly $500 million for them back in 2019, ViacomCBS hopes to bolster [its struggling Paramount+ service]( with longer-form, high concept South Park movies. For the creators, this is a win creatively, as Stone explained to Bloomberg... The show is 22 minutes. It's a sitcom. It is ancient, in a way. But we still really love that. At the same time, you come up with an idea and realize it's longer than 22 minutes. There are South Park episodes that are high concept enough where if you wanted to make a movie you could. We wanna scratch both itches. We feel like we can. Unfortunately for ViacomCBS, the success of South Park movies on Paramount+ may end up bolstering demand for rival HBO Max, if the movies end up growing the South Park fan base. It was surprising to me just how much money 24-year-old South Park is worth... One piece of the Bloomberg interview with Stone was pretty telling as to the current state of the content war, both from the perspective of costs and risk... You can make a show for HBO... And you get $15 million or $20 million. Who will argue with that? It's great. South Park... it's like the same reason all the bands who can fill arenas are like 70 years old. We are part of a common culture that is on the wane. It's hard to break through. What Stone is saying is that it's hard for content to rise above being either niche-y or temporary, and to enter the collective conscious in an enduring way. As one entertainment insider explained to me last week, Netflix has produced a slew of content and even had a ton of hits... but none of them have had the endurance or cumulative viewing of mega-hits like Friends or The Office, both of which debuted on the NBC broadcast network. To that list, I would probably now add the billion-dollar South Park franchise. But even as all these traditional media and tech firms battle it out to win as streaming distributors, content is still clearly king when it comes to pulling in – and retaining – subscribers. The current land grab stage of the streaming wars is great business for owners of proven content – just ask Reese Witherspoon or Matt Stone and Trey Parker... or the private-equity companies that are throwing capital at the space, hoping to benefit from the ever-growing content budgets at all the streamers. One consequence of this is content inflation – not only are streamers buying more content, but they're also paying more per episode. And as the amount of content proliferates, it becomes harder and harder for any individual show to break through. The takeaway from these recent deals is that the streaming war for subscribers is really a war for content... and the rush of recent content deals indicates that this inflationary environment for content is likely to continue. Rising content costs could push out the timeline for profitability for all these new services. And while Netflix has done a spectacular job expanding its margins over the past several years, further gains in profitability will be harder to come by... which is another reason I remain uninterested in owning NFLX shares, as [I have outlined many times here at Empire Financial Daily](. In the mailbag, a couple more reader letters weighing in on streaming services... Do you ever turn on a streaming service to see just one show and turn it off when the season is finished? What shows do you consider "must see"? Share your thoughts in an e-mail to feedback@empirefinancialresearch.com. "Hi Berna, I continue to stream a lot, as I have found everything on TV seems to be re-runs and haven't found much new programming of interest to me. I've had Amazon Prime for mailing reasons, but now watch that, and started a Netflix subscription in January 2021 when Amazon content wasn't keeping up with my desire for something new to watch." – Stacey G. Berna comment: Stacey, you just reinforced my point about content being king when attracting new subscribers! "By following reviews & checking content, I found MHz. All foreign movies, all in native language with subtitles. Most are mysteries. All are so very much better than the pap on American TV. The first thing I did after MHz was to cancel my Satellite TV service. Then I stopped watching Netflix. "Now TV is enjoyable. I can watch a program from Israel or Estonia or Iceland or Wales; I can watch programs from England, France, Germany, Russia, or Japan. No commercials. Sports programs on New Zealand's All Black, soccer, cricket. Beautiful travelogues and documentaries. TV is enjoyable, informative, entertaining & suspenseful. "The last straw for me in American TV was Ann Margaret at age 70 all gussied up in Old Man 2. Lowest of the low. Pathetic." – Judith C. Berna comment: I've never heard of MHz. Thanks for the tip, Judith. Regards, Berna Barshay August 9, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2021 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](