Why Streaming Media Companies Are Sacrificing Market Cap for Cash Flow
Back in 2013, Netflix Co-CEO Ted Sarandos famously said that “The goal is to become HBO faster than HBO can become us.”
No matter what you feel about the strides made at HBO Max over the past few years, it’s pretty clear that Netflix achieved Sarandos’ goal. It has become the world’s leading video subscription service and absolutely owns the same kind of premium content cachet that always separated HBO from everyone else.
Except for the very prescient work done at Hulu, most of the large media companies didn’t try to “become Netflix” until probably five years ago, as they started to lose real viewership to the service (and to Amazon Prime Video).
Of course, if these companies were totally transparent, most would admit that what they were really chasing in Netflix was its market cap. Netflix’s stock market valuation grew extraordinarily over that time period, culminating at just a shade under $700 billion.
That market cap number always came up when anyone in the press or at conferences discussed the big streaming launches by the major television and movie companies (HBO Max, Disney+, Paramount+, Discovery+, etc.).
Those media companies were trading on multiples of profits and cash flow -- and all of them wanted to be traded just like Netflix, at an enormous multiple to revenue and subscribers, with scant attention to profit. Of course, the potential that they each might be bought for a comparable multiple by one of the big tech/video players was a big driver as well.
How quickly times have changed. Today, Netflix has a market capitalization of $138 billion. The large TV media companies are each losing billions and billions investing in their platforms, massively cannibalizing their linear TV offerings and cinematic releases to ensure differentiation and focus for their streamers. Their market caps are also each just a fraction of where they were a few years before.
Netflix is now quite profitable, with annualized profits in the $6 billion to $8 billion range -- and, incredibly, has done that with only a single revenue stream: viewer subscriptions. With Netflix's recently launched advertising tier, we can only expect profits to go up if the Hulu model is any guide. Hulu makes more money on viewers who both pay a lower fee and take ads than those who pay premium subscription fees for an ad-free experience.
The shift of strategy at the big media companies from optimizing to being just like Netflix to achieving its stock market multiple to now being more like they used to be -- all about cash flow -- is having wrenching effects on the entire ecosystem.
The strategies of the large TV media companies of the past few years accelerated audience shifts to streaming, which meant that billions of dollars of distribution fees were lost. Now, there is a question of whether billions of dollars of advertising will be lost. For sure, many, many thousands of jobs have been lost, and that is likely to only accelerate.
I do believe that the best TV media companies will not only survive, but will thrive, as they make these shifts. But it won’t be easy, and it won’t be pretty.
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An earlier version of this blog was originally published by MediaPost.