(Welcome to the “Most Important Story of the Week”, my bi-weekly strategy column analyzing the most important (but often not buzziest) news story of the last two weeks. I’m the Entertainment Strategy Guy, a former streaming executive who now analyzes business strategy in the entertainment industry. Please subscribe.)
Back at the height of the cable bundle, one of the biggest upsides for Netflix was simple:
You could watch TV and not have to PAY FOR SPORTS!
There was one prominent media journalist who repeated this point constantly. They didn’t like having to pay a subscription fee to ESPN. At all. They really, really, really wanted “a la carte” pricing for cable channels.
I do wonder: if that person doesn’t watch World Wrestling Entertainment/the WWE…will they be upset that, going forward, 3% of their monthly Netflix bill is going to pay for “sports entertainment”? I suspect not, and the reason is probably that they can cancel Netflix anytime they want, which wasn’t the case with the cable bundle. Back then, you either had the whole cable TV bundle or nothing. And that’s a fair point! Of course, at some point, it may seem like one HAS to have Netflix period to stay current with TV. I mean, a lot of people call Netflix the “default” streamer, don’t they? …which means you’re subsidizing sports viewership for everyone, right? You “have to” pay for sports still!
Netflix is getting into the sports biz is the most important story of the week, by far. Of course, it’s been a minute since my last traditional “strategy column”, so we have a lot to discuss, including Netflix’s big earnings report on Tuesday, the Paramount merger rumors, a famous character entering copyright, and more.
Let’s dive right in.
Most Important Story of the Week – Netflix Buys WWE Rights for Next Five (or Twenty!) Years
Every so often, you come across a strategic play that makes you say…
…Damn. That’s a good move.
Simply put, bravo to Netflix for their latest decision, a move I’ve been hoping they’d do for years now.
Specifically, Netflix will license the rights to one of the two WWE weekly broadcasts of professional wrestling for $500 million a year. The deal goes for ten years, but Netflix can opt out after five years if they want, or extend for ten more. (As for the value of the deal, is the $500 million per year at the five year mark? I will assume it is.) I know most people are focused on Netflix’s great earnings report this week, but this news overshadows that for me. (I’ll discuss earnings briefly in the next section, but I’m not doing a deep dive on it this week. Check out Sean McNulty breakdown if you want to read a great one of those.)
Since I started writing publicly, this might be my favorite move from the world’s biggest streamer. I thought adding advertising could hurt their brand, and their ad-tier still feels small. I thought dabbling in video games would be small potatoes, and nothing has changed my mind on that so far. They pulled off a password sharing crackdown, but again does that move the needle? I liked the Roald Dahl rights acquisition, but that’s small potatoes too. I also like how Netflix now splits many of their TV show releases into two parts now, albiet without them admitting they stopped binge releasing some of their big shows!
So yes, this is my favorite strategic move for Netflix. By far too. And for one main reason…
This Addresses The Biggest Ceiling to Netflix’s Growth
For a couple of years now, I’ve warned that Netflix needs to pull on their “PANTSS”, meaning lean into the scripted and non-scripted content that proliferates on linear TV but which hasn’t migrated to streaming yet. For scripted content, this means more procedurals and sitcoms, but the big growth is the unscripted content: sports, news, specials, talk shows and other “live” or nearly live content.
WWE fits the bill. It’s kind of sports and kind of not—I saw one person note that co-CEO Ted Sarandos kept referring to it as “sports entertainment” as if Netflix still isn’t ready to say they will stream sports—but you need to watch it live to stay current. Binge-worthy WWE is not, though it does have more “next day viewership” value than traditional sports.
And I like the price. On one hand, it’s pricey. I’ve sort of been going with the “Netflix spends $17.5 billion on content” per year based on their statements/ other analysis, and $500 million per year is a 2.85% of that. That’s not nothing. On the other hand, for live sports rights, this is a pretty good deal. Note: just last year Netflix was outbid on Formula One rights in the U.S. at a much lower price.
Netflix, after some quarters of flat subscriber growth, needed a new lever to pull in their traditional TV business, and I think they picked the right one. Of course, this meant veering off some of their traditional “never will do” strategic options.
Does This Deal “Save” Sports Media Rights?
If you’re the NBA, this is the best news you’ve heard in a while.
I mean, a few months ago, some warnings started leaking out that no one really wanted to triple the NBA media rights deal, which the NBA put out as their goal. Instead, it looked like more games would be divided up between multiple streamers so that the NBA would basically be on every night of the week. Would this offset the impending crash of regional sports networks? I’m not sure.
Now the NBA can hope Netflix will bid for basketball rights too. Netflix bidding for one live “sport” signals they are a legitimate bidder going forward for other sports too. Of course, I mentioned prices above and the NBA rights (or god forbid NFL in many years times) are even more expensive than WWE.
So in general, I wouldn’t say that this “saves” sports rights. For the near term, I expect increases along historical trend lines—remember, those actually average about 4-5% per year, ignore the “total value” hype of most headlines—but then the post-2030 deals could be at risk if the cable bundle has officially died by then.
Other Contender for Most Important Story – Am I Still a Netflix Bear?
Also happening two days ago:
Netflix had another great earnings report.
By my count, that means since the start of 2023, they’ve mostly delivered earnings reports that show either good subscriber growth, good revenue and profit growth or free cash flow growth. Or all three. Their Q4 and 2024 annual report delivered on all three.
Now, if you’ve been reading me for a while, you may also remember that historically I’ve been a “Netflix bear”—for those non-financial types, reminder a bear is “negative” or “pessimistic” on the stock price/prospects for a company; a good way to remember: a bear paw swipes down, a bull’s head rears up—and 2023 was a bad year for that thesis. Instead of getting more competitive, the streaming wars seem in mostly the same place as they started 2021.
So is it time for a rethink of this position?
Yes!
But not because of one earning’s report. One should always periodically update their assumptions. Netflix’s terrific 2023 provides a wealth of data to update my priors and assumptions. In particular, as I’ve written a few times now, I thought increased streaming competition would impact Netflix’s “churn rate”, one of the most important metrics in streaming. And it hasn’t. Figuring out why it has and hasn’t is crucial to understanding the streaming wars. Especially since, even in Q4, they didn’t have a run of great content, but still delivered good numbers. Indeed, the reason Netflix might have done so well in 2023 is because they have veered off the path so many Netflix boosters circa 2019 thought they’d be on (higher and higher content spend driven by sub growth, while binge-releasing everything).
I’d also caution that I’ll remain fairly nuanced, moderate and cautious in my analysis, adjectives that won’t describe most of the Netflix super-fans out there. (I’ve already seen more than one person state that “Netflix has won the streaming wars.”) I think both sides of the “bull versus bear” debate were right and wrong about Netflix, and often for the wrong reasons.
But…I’m not going to write that whole explanation today. I started to…and it went to like 2,000 words already. Trust me: this is my question of the year for 2024, so I’ll keep writing about Netflix, the streaming wars, aggregeddon, linear versus on-demand content and if/when someone can catch up with Netflix.
Almost Important Story of the Week – Paramount and Warner Bros Go on a Date?
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