Member Mailing #226: Netflix, Disney, & ViacomCBS Look to International for Streaming Growth

But, Is This Bullish Signal Actually a Bearish Signal From All Three?

As I hinted at last week, a recurring macro theme in Q2 earnings calls was international growth. Sara Fischer of Axios has a good summary of how “media giants are planning to launch new streaming services internationally to accrue more subscribers”. 

Fischer frames their challenges as “big media companies will still need to compete with massive tech companies like Netflix which have been investing in overseas expansions for years.” But, international growth requires the operational structure to do so. I believe that was the more important macro theme to emerge from Q2 earnings calls. How these media giants, and Netflix, are building out international growth reveals a lot about whether they are operationally set up to do so.

It was a sentence in the Netflix Q2 Letter to Investors about COO Greg Peters that first flagged the topic for me:

In addition, Greg Peters has been appointed COO adding to his Chief Product Officer role. “We want Greg to help us stay aligned and effective as we grow so quickly around the world,” said Hastings.

And it was Peters’ explanation of what this meant on the Netflix Q2 earnings call which turned that flag into a red one:

From my perspective, when I think about what our future is and I think it’s just a tremendous next stage of growth that we will see mostly coming from outside the United States. So think of more and more employees outside the United States, more productions, more operations happening outside the U.S. and hopefully, many, many more members outside the U.S.

This is an opportunity to lean in just a little bit more, be proactive and drive a little bit more alignment across those activities where we think alignment will benefit the business and push the optimization of those activities a little bit more. And Kannan, you might not know, but many years ago now it feels, I was able to spend a couple of years in Japan, launching the service there. And I got a chance to work with the local teams that we were hiring and growing there, as well as our global teams to really look at every aspect of the service and try and improve it for our Japanese members and grow our membership base there. So I think of that as sort of like a mini version or a trial or a test out for what I anticipate I’ll be doing more in this role.

Put simply, the story from Netflix is now about international growth, and it is now also about finding operational efficiencies. This suggests that buried in this bullish story about international growth there is also a bearish story of implied inefficiencies in operating income and a need for higher margins. 

That story of Netflix’s operational efficiencies contrasts with the evident operational inefficiencies of the international growth plays of Disney and ViacomCBS. The earnings calls of all three companies raise the question of the necessity of operational efficiencies for growing streaming services internationally.

Disney's Complex Operational Set-up

Disney announced in its recent Q2 earnings a Star-branded streaming service for international audiences. It will be built off of the same BAMTech marketing and technological back-end as Disney+, and according to Chapek, Star "will be rooted in content we own from the prolific and critically-acclaimed production engines and libraries of— ABC Studios, FOX Television, FX, Freeform, 20th Century Studios and Searchlight". 

The loud implication is that Hulu International will not launch. As CEO Bob Chapek said in May, “Hulu has no brand awareness outside of the US.” 

Operationally, this means that Disney now has two back-ends: for its International streaming services (Disney+, Star) it has a single back-end in BAMTech; and, its domestic streaming services (Disney+ and ESPN+ on BAMTech, Hulu on its own) it has two separate back-ends.  

I have written about this problem on the PARQOR blog, and what it means for new Disney DTCI CEO Rebecca Campbell:

The Information’s story about Disney+ treading uncertain waters is actually very much a story about Hulu treading uncertain waters. 

Hulu needs to grow, and it will need new content to grow. It will also need better resources for its back-end to grow internationally. 

Disney+ is beginning to plot out a future which bleeds into Hulu’s genre of content, inevitably making it a competitor. On top of that, Disney’s BAMTech engineering teams are trying to become the standard platform for Hulu’s back-end. 

And, then on top of all of this Disney’s DTCI division has a brand new Chairman in Rebecca Campbell. 

Ugly internal politics are the last thing Rebecca Campbell should be worrying about for Disney’s streaming future. And yet, it seems to be part of the package. On top of that, it comes at a heavy cost, too: in Q2, “operating losses were $427 million higher in the quarter driven by costs incurred to support the ongoing launch of Disney+ around the world and the consolidation of Hulu.”

Meaning, having two back-ends across four different streaming services is not just about technological complexity. It is also about navigating some difficult - and lately ugly - internal politics to reorient Disney's streaming strategy towards a post-Kevin Mayer future. It is also about Disney spending its way out of a difficult operational conundrum brought on partially by the acquisition of Fox.

ViacomCBS's Complex Operational Set-up

ViacomCBS appears to have more than two back-ends across seven SVOD applications: CBS AllAccess, Noggin+, BET+, and Showtime SVOD apps; and Comedy Central Now, MTV Hits and Nick Hits channels on Apple TV and Amazon Channels (NOTE: from my past experience at Viacom, it is reasonable to guess that (1) Comedy Central Now, MTV Hits and Nick Hits channels all share the same back-end, (2) Showtime and CBS AllAccess also have shared back-ends, and (3) BET+ and (4) Noggin+ each have their own back-ends). That list does not include Pluto TV which is AVOD, only, and has its own back-end. It is not clear whether ViacomCBS's proposed international rollout of CBS AllAccess means one fewer back-end, or an entirely new. 

The international CBS AllAccess service will be different from the domestic CBS AllAccess, as CEO Bob Bakish described in the Q2 earnings call:

On the pay side, we're targeting early 2021 for the launch of our international streaming service. The exact product details and pricing, which we haven't announced, will vary by individual markets. But broadly speaking, the new service will feature exclusive first-run premier. So we're going to get those from the slate we're using with CBS All Access in the U.S., from Showtime and from Viacom International Studios. 

And alongside that, we'll use Paramount movies, box sets from CBS and Viacom media networks. If you want to just compare it at a high level to what we're doing in the U.S., it will be a much more entertainment-focused product. It doesn't really have a sports a material sports lane to it. And it will have an output deal from Showtime because we don't operate Showtime networks outside the United States. We will be rolling it in multiple markets next year, including Australia, Latin America and the Nordics.

In other words, like Hulu, Showtime has no brand equity outside the U.S. and needs to be integrated under a new brand overseas to be successful.  

On top of this, ViacomCBS just announced a deal with Apple TV for the U.S., only: 

[Apple] said subscribers to its streaming service (which is priced at $4.99/month) can now get both CBS All Access (without ads) and Showtime for $9.99 per month. The offer represents a [52%] discount off the price for both services combined – CBS All Access commercial-free is $9.99/month and Showtime is $10.99/month. Through Apple’s Family Sharing feature, up to six family members can share the subscriptions to Apple TV+, CBS All Access, and Showtime via their personal Apple ID.

In short, with both its international rollout and its domestic Apple TV+ deal, ViacomCBS is creating simple, consumer-facing value propositions. That should be applauded. It even may have a fantastic win here in getting "more direct exposure to Apple users and the Apple ecosystem", or to hundreds of millions of Apple devices in the U.S. 

On the other hand, they have now effectively combined two of their apps to create an eighth service with Apple in the U.S. (that may be an unfair label for what is effectively a bundle), and a ninth service internationally (which may be named Paramount TV+, but it should not). But, notably, neither will require ViacomCBS building a fifth back-end. 

That all said, Showtime and CBS AllAccess apps still are stand-alone apps along with five other stand-alone apps across four to five back-ends. A recent, must-read interview with CBS Interactive CEO Marc Debevoise by Decider's Scott Porch made it clear that these five other apps are not being sunset anytime soon. This means consumers will still face a comparatively complicated set of streaming options from one company. Also, operationally for ViacomCBS, these four to five other back-ends will not be sunset anytime soon (and, I have not even touched upon the sensitive and complicated topic of how current affiliate distribution deals for these cable channels are a factor in this decision). 

ViacomCBS is making some smart moves in streaming for the long-term. But, with an audience less than 1/10th the size of Netflix's, and with $489M in streaming revenues last quarter (which includes PlutoTV ad revenues) - ~17% of Netflix's $2.8B in Q2 for U.S. and Canada, and less than that when accounting for SVOD revenues, only - the question remains why ViacomCBS continues to fund a complicated strategy and complicated operational setup while it focuses on the narrow goal of scaling its streaming audience base from a comparatively low 16MM.

Conclusion

The difference between Netflix versus Disney's and ViacomCBS's respective streaming operations can be boiled down to the difference to fine-tuning an existing model working at scale (Netflix) and solving for multiple back-end operations in order to achieve international growth and scale (Disney, ViacomCBS). Netflix COO Greg Peters told a story about his time in Japan that involved a single, centralized global back-end, and how Netflix found growth in Japan via local marketing efforts. Whereas, Disney will build its international growth story off of the BAMTech back-end while keeping two back-ends operating domestically. ViacomCBS's streaming story for international growth also involves a single back-end, which will be managed alongside at least three or four other back-ends. This is probably the simplest way to understand how these macro themes of operational complexity and international growth are playing out across all three companies.

The funny thing is, both approaches to operational complexity are actually bearish signals to a marketplace that is grasping for any bullish signals in streaming. 

Netflix's emphasis on efficiencies suggests can no longer rely solely on growth needs to improve operating margins. A need for higher operating margins might even suggest that Netflix expects lower growth than originally forecast. 

Disney's operational complexity for its Disney+, ESPN+, Star, and Hulu SVOD apps - on top of a delayed content pipeline resulting from COVID-related production shutdowns - suggests that its future is going to come with more execution risks than the original plan under former DTCI CEO Kevin Mayer had assumed. 

And, ViacomCBS's operational complexity suggests that despite recent smart moves for its streaming future domestically and internationally, it still is burdened with strategic and operational baggage from Viacom's pre-merger past. 

As we are witnessing with Disney, solving for two different back-ends in order to scale is complicated enough. ViacomCBS is solving for at least four and maybe five (if we include PlutoTV) while trying to scale a single service (CBS AllAccess) in two different markets. That seems unusually ambitious and problematic when the company's attention is spread thin across multiple technology back-ends, marketing efforts, content production schedules, and target audiences. For a company significantly smaller than both Disney and Netlix the degree of difficulty in that execution just readsbrutally difficult for ViacomCBS management. 

Postscript: But what is the alternative to complexity?

A logical counterquestion to the points above is this: if the objective is international scale, what is the alternative to complexity for these legacy media streaming services? 

If you are a ViacomCBS or Disney pivoting off of a legacy media model, why not minimize operational risk with the Netflix approach investing in building a single, sophisticated but focused technological and operational back-ends for oneservice? And then, investing in local marketing efforts that help drive international scale? 

Funnily enough, Disney was focused on that very approach in 2019 with its bet on BAMTech as its streaming back-end... and then the Fox deal happened. The deal forced them to integrate Hulu, and rethink whether they would distribute family-friendly content or more adult fare like Lizzie McGuireand High Fidelity on Disney+, or whether it should live on Hulu. But, they are still pursuing this strategy 

On the downside, the integration of Hulu has created cultural tensions and some difficult operational decisions, as above. But, on the upside, initial data suggests the Disney+/ESPN+/Hulu bundle retains 80% of subscribers, almost 10% better at reducing churn than Disney+ on its own. So, integrating Hulu has created operational headaches. But, when bundling it with BAMTech-supported services, it also has helped to solve for a crucial business metric in streaming: it is helping to reduce churn.  

As for ViacomCBS, operational complexity was one result of the merger of Viacom and CBS. Operational complexity was not a strategy which pre-merger CBS Interactive pursued in streaming when it was building out both the CBS AllAccess and the Showtime apps. Both AVOD and ad-free experiences lived within the same CBS AllAccess application, and CBS Interactive was fine with Showtime getting 50-70% of its subscribers via Channels platforms like Amazon Prime Video. But, notably the total audience was sub-scale, less than 10MM pre-merger. 

By comparison, operational complexity was very much a pre-merger Viacom strategy, as the five applications (BET+ and Noggin+, and Comedy Central Now, MTV Hits and Nick Hits channels) reflect, and also its arms dealer model (it sold prime asset South Park to HBO Max!). There was not a single operational or strategic focus for Viacom's streaming efforts.  

Post-merger, ViacomCBS should be aiming to quickly streamline and sell off or eliminate all non-CBS AllAccess services (at this point, I would imagine Tyler Perry would prefer to own the BET+ service outright than in partnership with ViacomCBS). But, as per Debevoise, right now it is not doing so, and CEO Bakish has expressly ruled out the sale of non-core, video-related assets. On top of all this, it has existing affiliate relationships for its cable networks to which it has to be sensitive. 

Might the recent passing of ViacomCBS controlling shareholder Sumner Redstone make these outcomes more likely, and giving Shari Redstone more flexibility to make moves? It is certainly imaginable, but unlikely given Bakish's statements. Which means, the alternative to complexity at ViacomCBS is continued complexity. In turn, that continued complexity inevitably will create unnecessary operational risks, challenges, and obstacles as ViacomCBS attempts to shift to a streaming-first model and scale beyond its current base of 16MM. 

On a final note, it is worth also noting that WarnerMedia's recent restructuring and focusing of HBO Max's operations is another answer to the question of "What is the alternative to complexity?" But HBO Max's previous set-up was not complex operationally. Rather, it was loaded with expensive executive contracts and a flawed operational structure that favored HBO's legacy wholesale model. As WarnerMedia CEO Jason Kilar has said, it is now introducing an operational model that is super-focused on direct-to-consumer. Streamlined operations allow for them to focus more on "recommendation algorithms, machine learning, personalization, search, multiple devices."  

As I wrote back in April about the tension between Kilar and AT&T CEO John Stankey's different business objectives: 

Kilar himself, who defines his business objective as building the tech to scale the service globally: "There are 200 million paying customers that pay for video services in a 7-to-8 billion population world", and therefore "it’s very important to get that [tech] right". If WarnerMedia can get the HBO Max tech "right", the variable costs of distribution become so small "it allows [HBO Max] to go global.”

This means, WarnerMedia's alternative to complexity is building a technology for their streaming service that will engage its users more. In Kilar's eyes, that will allow them to reach 200MM paying consumers worldwide. This sounds a lot like the precedent Hulu and Netflix set for the market. Even though it is not growing internationally, yet, HBO Max's refined focus is laying a solid foundation for international growth. 

In doing so, HBO Max is pursuing a path similar to the model Netflix COO Greg Peters shared about his time in Japan: they are starting with a global team focused on every aspect of the service and trying and improve it for its members, and hire local teams to grow its membership base. In one sentence, that is how a singular operational focus with an eye to international scale as the objective should read for a legacy media streaming service.