Content companies have found the direct-to-consumer business challenging on both the cost and revenue sides of the business model. Compared to the linear video business, content spending has been higher. In 2023, for example, leading content firms will all spend more money on streaming content than linear content.
The reasons for the higher streaming need for content exclusiveness is not always obvious. Every linear channel also desires some degree of content exclusiveness.
But linear channel availability is a wholesale, business-to-business transaction, done only once a year or less, with high barriers to churn.
Direct-to-consumer services are fragmented retail transactions with low barriers to churn, and where consumer buying hinges largely on the amount of new and compelling content. In the linear business, though new and compelling content also is important, the danger of immediate churn is far less, as carriage agreements are longer term.
Even when a consumer might relatively less unique and fresh content (compared to the amount of catalog, or pre-existing content) on any single channel, the value of linear is predicated on the availability of all the content on all the channels.
Linear video consumers supposedly derive value from the accumulated total amount of new and fresh content from the whole package, not the unique content available on any single channel or streaming service.
Also, compared to the linear business, revenue sources are far more limited, at least to this point.
Where the linear model includes affiliate fees, advertising and subscription revenues, the direct-to-consumer business has been reliant on subscription revenues only, though this is starting to change, with the addition of advertising versions of the service.
We undoubtedly will see efforts to create additional revenue sources over time. Among the logical extensions are indirect volume growth by paying commissions to distributors who drive streaming subscription volume.
Though that revenue is directly earned by the distributors, and represents a cost of doing business for the streaming service owner, the content owners benefit from higher subscription counts.
So even if commissions for selling particular streaming services actually represents a commission payment by the content owner to the distributor, it might be considered a sort of indirect form of affiliate fee, which in the linear business is revenue earned by allowing a distributor access to content.
For the distributor, aside from the commission, streaming video becomes a feature of service that is intended to increase value, and therefore revenue upside, aiding with retention and customer acquisition.
The point is that the streaming business imposes higher costs and limits revenue, compared to the linear business. It is a challenge that eventually will be solved more on the revenue side than the cost side, one might argue.
Content costs already are being reduced, but cannot be entirely done away with. It is on the revenue side of the business model where the ultimate answers must be found. Addition of ad-supported subscriptions is one such innovation.
But there will be others.
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