Lack of advertising revenue might seem to explain why video streaming services except for Netflix struggle with profitability, but many other issues also seem to matter as well.
Consider content rights. At least to this point, streaming services have made heavy investments to acquire or produce original content, compared to broadcast TV channels. That might not be the most-important comparison, though. Streaming services might be more accurately compared to cable TV services (channels).
Perhaps the “best” comparison is with the “premium” cable channels that are subscription-free, including HBO, Showtime or Starz. Those services have tended to spend between $15 billion and $20 billion annually on content acquisition. Sports rights tend to have the highest content rights costs, while all-news channels tend to have the lowest content rights burdens.
But there are additional issues. Though most TV broadcast and linear subscription video services operate in a single nation (primarily), the largest video streamers aim for global distribution and scale, bringing additional costs. That multiplies content acquisition costs.
Up to this point, it also has been very easy for customers to terminate their video streaming services, leading to high churn rates, which directly affect profitability and marketing costs.
Also, at least up to this point, video streaming providers have relied on exclusive, high-quality or original content that viewers can't find elsewhere. Linear channels have been better able to rely on content libraries, as the value proposition for each service in a linear bundle is its focus on a genre: childrens’ programming; news; reality TV; adventure; drama; comedy; music; sports; family-oriented programming and so forth.
In that sense, a subscription video streaming service such as Netflix is more analogous to a “premium, ad-free” linear channel such as HBO, and such channels long have emphasized original and exclusive content as a way of differentiating themselves from competitors.
Streaming services also, up to this point, have had fewer revenue sources than linear channels that are part of subscription bundles. Linear channels are paid by distributors for the rights to use content. Linear programmers also can rely on advertising revenues.
Up to this point, streaming services have had to rely on subscription fees alone. The “cost” of generating those subscription fees also varies. Linear channels negotiate multi-year contracts with distributors. That means fewer costs related to “customer acquisition.” There are a limited number of potential customers to deal with.
Retail streaming services, on the other hand, must compete for retail customers one by one, rather than being able to rely on wholesale distribution. For example, a linear channel gets paid a “carriage fee” on a “per subscriber” basis.
If a channel receives $1 per subscriber on a contract for 10 million subscribers, its annual customer acquisition cost is $0.10 per user. As generally is the case, “wholesale” distribution is relatively less costly than a retail approach.
If a streamer spends $100 million on marketing and acquires one million new subscribers, its annual customer acquisition cost is $100 per user.
In other words, customer acquisition in this case--wholesale versus retail--amounts to several orders of magnitude higher costs “per customer.”
On the other hand, a distributor in a linear framework will be negotiating multiple such contracts with content suppliers, so the distributor’s total content costs will be much higher than that.
Also, up to this point, streamers have relied on a subscription fees model, and have not generally relied on advertising support, though that is changing.
Operating costs also are higher for streamers, compared to linear channels. In the linear model, content providers rely on the distribution partner who supplies access infrastructure (cable TV, ISP, telco or satellite and terrestrial networks.
Streamers have some distribution costs related to use of content delivery networks, data center hardware, software and real estate, plus cloud computing infrastructure.
And where any single linear channel can rely on its distribution partners for significant marketing effort, a video streamer must undertake its own direct marketing activities, and cannot rely on the distribution partner.
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