Hollywood is paying a steep price for never really figuring out the streaming model
People carry signs as SAG-AFTRA members walk the picket line in solidarity with striking WGA workers outside Netflix offices in Los Angeles, July 11, 2023.
Mario Tama | Getty Images News | Getty Images
Picket signs have lined the gates of Hollywood’s studios for nearly five months, as the industry’s writers and actors rally for AI protections, better wages and a cut of streaming profits.
The problem is streaming isn’t yet profitable for many studios.
Sparked by the creation of Netflix’s direct-to-consumer platform in 2007, streaming has upended the economics of the media industry. Yet, it’s still unclear whether it’s a sustainable business model for the future.
“Without sounding hyperbolic, the change in the economics of the North American media industry in the last five years has been breathtaking,” said Steven Schiffman, an adjunct professor at Georgetown University.
Legacy media companies like Disney, Warner Bros. Discovery, Paramount and NBCUniversal scrambled to compete with Netflix when it began creating original content in 2013 and slowly pulled market share over the next five years. The studios padded their platforms with massive content libraries and the promise of new original shows and films for consumers.
However, the subscription-based streaming model proves vastly different than the ad-revenue-fueled traditional TV bundle. High licensing costs and low revenues per subscriber quickly caught up with studios, which had previously placated shareholders with massive subscription growth.
Netflix was the first streamer to report a loss in subscribers in 2022, sending its stock and other media companies spiraling. Disney has followed suit. Since then, both have set subscription numbers aside in favor of advertising, a password-sharing crackdown and raising prices.
Media companies also have begun slashing content spending budgets. Disney CEO Bob Iger has promised the company will focus on quality over quantity when it comes to both its streaming and theatrical businesses, pointing to Marvel as an example of too much content.
Yet streaming remains the focus for all of these companies as consumers rapidly cut the cord and opt for streaming. To make up for the losses, media organizations are now relying on methods that once made the traditional bundle so successful.
“What’s the fundamental solution? In some way, shape or form, it’s everything brought together,” said CEO Ken Solomon of the Tennis Channel, owned by Sinclair, of the various business models in media. “It’s about understanding where to put a little more resources and how they all are glued together to satisfy the consumer.”
A broken model
Two strategies media companies long relied upon — windowing content to various platforms and creating more cable channels to reap higher fees from the bundle — proved lucrative and still reap profits.
“This gun has been cocking itself for decades,” said Solomon, noting that the pay TV bundle was a good value proposition until it became too expensive for consumers. That gave Netflix an opening to upend how the entertainment industry makes and spends money.
Legacy media companies scrambled to follow suit, unsure if the model actually worked. But they were desperate to keep up with changing consumer demand, and in the process they depleted other revenue streams.
Now turmoil rules the industry. Companies like Disney and Warner Bros. Discovery are in the midst of reorganizations — slashing jobs and content costs while trying various ways to piece together profits.
An image from Netflix’s “Stranger Things.”
Source: Netflix
“All of these companies spent more money than they likely should have,” said Marc DeBevoise, CEO and board director of Brightcove, a streaming technology company.
Netflix, with a considerable head start, is the only company to make a profit off of streaming. “For everyone else, it’s still dictated by linear TV,” said UBS analyst John Hodulik. “That’s a problem as the decline in customers accelerates and streaming is not a big enough opportunity to offset that.”
Although subscriber growth initially ramped up streaming subscriber growth and bolstered many media stocks, it was short-lived. Fears of a recession, inflation and rising interest rates led Wall Street to reassess these companies and focus on profitability as subscriber growth slowed.
A content arms race
Netflix’s entrance into media signaled the beginning of a content arms race that, ultimately, hasn’t paid off for any media company.
Content spending ballooned across the industry, with each company spending tens of billions of dollars for new shows and films in an effort to lure in new subscribers — and keep the ones they already had.
“The networks had aligned with their streaming services and taken all the elasticity out of it. They were throwing money at a problem and hoping that it was going to solve itself,” said Solomon. “There was no economics behind it.”
Race to launch
- Netflix — launched streaming service in January 2007, first original content launched February 2013
- Hulu — launched streaming service in March 2008
- Paramount+ — launched as CBS All Access in October 2014, rebranded as Paramount+ in March 2021
- Disney+ — launched streaming service in November 2019
- Peacock — launched streaming service in April 2020
- Max — launched as HBO Max in May 2020, rebranded as Max in May 2023
There were also massive one-off licensing deals for shows like “The Office,” “Friends” and “Seinfeld,” which viewers were actively watching on repeat.
Studios even struck exclusive contracts with some of Hollywood’s biggest writer-producers — Ryan Murphy, Shonda Rhimes, J.J. Abrams, Kenya Barris and the duo of David Benioff and D.B. Weiss — in the hope that they could create new projects that could capture the attention of audiences.
Show budgets draw a lot of attention these days. But Jonathan Miller, a former Hulu board member and current CEO of Integrated Media, doesn’t recall that being a focus when it was just the four major broadcast networks creating all of the content.
DeBevoise, a former ViacomCBS (now Paramount) executive, said he doesn’t remember greenlighting a show, including “Star Trek Discovery,” in the mid-2010s at CBS for more than $10 million an episode, noting many were “much, much less expensive.”
Meanwhile, Solomon, who once ran Universal Studios Television, recalled when his budgets for top TV shows like “Law & Order” were below $2 million an episode. “I thought budgets were out of control back then,” he said.
Shonda Rhimes attends 2018 Vanity Fair Oscar Party on March 4, 2018 in Beverly Hills, CA.
Presley Ann | Patrick McMullan | Getty Images
Disney sought to capitalize on the success of its Marvel Cinematic Universe by developing more than a dozen superhero shows for its Disney+ platform. Although the seasons were shortened, often only six to 10 episodes, each episode cost around $25 million. Similar production budgets were seen for the company’s foray into the new live-action Star Wars TV series.
Netflix has poured money into multiple seasons of political drama “The Crown,” science fiction darling “Stranger Things” and a series based on The Witcher video game franchise. Production costs per episode for these series ranged from $11 million to $30 million.
And Warner Bros. Discovery is adding more Game of Thrones series to its catalog of direct-to-consumer offerings with “House of the Dragon,” which cost around $20 million per episode, and the upcoming “A Knight of the Seven Kingdoms: The Hedge Knight,” which has not begun filming.
Meanwhile, e-commerce giant Amazon shelled out a record $465 million on its first season of a Lord of the Rings prequel series, which was met with tepid responses from critics and fans alike.
“The price of content isn’t always determinant of success. ‘The Simpsons’ were crudely animated initially, right? So, it’s not necessarily that if you go spend a lot of money, it works,” Solomon said.
Bart Simpson plays esports in an episode of “The Simpsons” that aired on March 17, 2019.
Fox
At the same time the economics for actors, writers and the industry as a whole changed.
“The problem is that the cost increases don’t make sense given the revenue models. Something got broken in this part of the business if that kind of increase happened and actors and writers don’t feel like they got their fair share,” DeBevoise said.
A growing disconnect
While many of Hollywood’s biggest studios are publicly traded and must share quarterly financial reports, there are no rules about providing streaming-viewership data. This lack of transparency has made recent contract negotiations between studios and the industry’s writers and actors especially contentious.
“There’s a frustration about how these people can get together and share this information and come up with something that is reasonable for both sides,” said Schiffman, the Georgetown professor. “But until that happens, in my view, this thing goes on until next year.”
Streaming studios, in particular, have long been reluctant to share data around viewership and don’t want compensation to be tied to the popularity of shows, including those that have been licensed from other studios.
This is in stark contrast to how linear television has handled popular shows. Traditionally, studios pay residuals, long-term payments, to those who worked on film and television shows after their initial release. Actors and writers get paid every time an episode or film runs on broadcast or cable television or when someone buys a DVD or Blu-ray Disc.
When it comes to streaming, there are no residual payments. Studios that get a licensing fee pass on a small sum to actors and writers, but no additional compensation is given if the show performs well on the platform. Actors, in particular, are looking to change this.
“Why I think the streaming model has been a difficult model for the actors and writers, and I was part of helping that model, is that there was a fundamental shift of long-term versus short-term economics that likely wasn’t properly understood or explained,” said DeBevoise.
Back to the future
Media companies’ effort to make streaming profitable is drawing out many of the old business models that were successful in the past.
The subscription streaming model is being subsidized now by tried and true models like advertising, licensing content to other platforms, cracking down on password sharing, and windowing content to different platforms with longer stretches of time in between.
“Netflix understood finally, because of the Street, that subscriber numbers don’t mean jack, if the economics don’t pencil out,” said Peter Csathy, founder and chair of advisory firm Creative Media.
Even the pay TV bundle, despite rampant cord cutting by consumers, remains a reliable source of revenue.
The recent dispute between Charter Communications and Disney highlighted this fact, and led to Disney+ and ESPN+ being bundled with some pay TV subscriptions.
“We, the distributors, are funding the streaming experience. And it’s frankly a better content experience on streaming than what is provided to us on linear TV,” said Rob Thun, chief content officer at DirecTV. “These companies will cease to exist without the funding of distributors’ licensing fees. Perhaps this is a moment of awakening.”
Disney and even Netflix, which long resisted ads, are among the companies relying more on ad-supported offerings to boost subscriber growth and bring in another revenue stream, even as the ad market has been soft.
This is especially true as free, ad-supported streaming services like Fox Corp.’s Tubi and Paramount’s Pluto — which are likened to broadcast networks — have also exploded. Besides the parent companies leaning on the ad revenue from these platforms, other media companies, like Warner Bros. Discovery, are funneling content there for licensing fees.
“In terms of the business models, they all ‘work,'” said DeBevoise. He noted paid tiers for the more expensive, timely content will remain, while free and options with commercials will support the older library shows and movie. “There are going to be hybrid models that reincarnate the dual-revenue cable TV model with both a subscription fee and ads. It’s all going to be about price-to-value and time-to-value for the consumer.”
Disclosure: Comcast is the parent company of NBCUniversal and CNBC.
Jakub Porzycki | Nurphoto | Getty Images
Mark Zuckerberg’s announcement this week that Meta would pivot its moderation policies to allow more “free expression” was widely viewed as the company’s latest effort to appease President-elect Donald Trump.
More than any of its Silicon Valley peers, Meta has taken numerous public steps to make amends with Trump since his election victory in November.
That follows a highly contentious four years between the two during Trump’s first term in office, which ended with Facebook — similar to other social media companies — banning Trump from its platform.
As recently as March, Trump was using his preferred nickname of “Zuckerschmuck” when talking about Meta’s CEO and declaring that Facebook was an “enemy of the people.”
With Meta now positioning itself to be a key player in artificial intelligence, Zuckerberg recognizes the need for White House support as his company builds data centers and pursues policies that will allow it to fulfill its lofty ambitions, according to people familiar with the company’s plans who asked not to be named because they weren’t authorized to speak on the matter.
“Even though Facebook is as powerful as it is, it still had to bend the knee to Trump,” said Brian Boland, a former Facebook vice president, who left the company in 2020.
Meta declined to comment for this article.
In Tuesday’s announcement, Zuckerberg said Meta will end third-party fact-checking, remove restrictions on topics such as immigration and gender identity and bring political content back to users’ feeds. Zuckerberg pitched the sweeping policy changes as key to stabilizing Meta’s content-moderation apparatus, which he said had “reached a point where it’s just too many mistakes and too much censorship.”
The policy change was the latest strategic shift Meta has taken to buddy up with Trump and Republicans since Election Day.
A day earlier, Meta announced that UFC CEO Dana White, a longtime Trump friend, is joining the company’s board.
And last week, Meta announced that it was replacing Nick Clegg, its president of global affairs, with Joel Kaplan, who had been the company’s policy vice president. Clegg previously had a career in British politics with the Liberal Democrats party, including as a deputy prime minister, while Kaplan was a White House deputy chief of staff under former President George W. Bush.
Kaplan, who joined Meta in 2011 when it was still known as Facebook, has longstanding ties to the Republican Party and once worked as a law clerk for the late conservative Supreme Court Justice Antonin Scalia. In December, Kaplan posted photos on Facebook of himself with Vice President-elect JD Vance and Trump during their visit to the New York Stock Exchange.
Joel Kaplan, Facebook’s vice president of global policy, on April 17, 2018.
Niall Carson | PA Images | Getty Images
Many Meta employees criticized the policy change internally, with some saying the company is absolving itself of its responsibility to create a safe platform. Current and former employees also expressed concern that marginalized communities could face more online abuse due to the new policy, which is set to take effect over the coming weeks.
Despite the backlash from employees, people familiar with the company’s thinking said Meta is more willing to make these kinds of moves after laying off 21,000 employees, or nearly a quarter of its workforce, in 2022 and 2023.
Those cuts affected much of Meta’s civic integrity and trust and safety teams. The civic integrity group was the closest thing the company had to a white-collar union, with members willing to push back against certain policy decisions, former employees said. Since the job cuts, Zuckerberg faces less friction when making broad policy changes, the people said.
Zuckerberg’s overtures to Trump began in the months leading up to the election.
Following the first assassination attempt on Trump in July, Zuckerberg called the photo of Trump raising his fist with blood running down his face “one of the most badass things I’ve ever seen in my life.”
A month later, Zuckerberg penned a letter to the House Judiciary Committee alleging that the Biden administration had pressured Meta’s teams to censor certain Covid-19 content.
“I believe the government pressure was wrong, and I regret that we were not more outspoken about it,” he wrote.
After Trump’s presidential victory, Zuckerberg joined several other technology executives who visited the president-elect’s Mar-a-Lago resort in Florida. Meta also donated $1 million to Trump’s inaugural fund.
On Friday, Meta revealed to its workforce in a memo obtained by CNBC that it intends to shutter several internal programs related to diversity and inclusion in its hiring process, representing another Trump-friendly move.
The previous day, some details of the company’s new relaxed content-moderation guidelines were published by the news site The Intercept, showing the kind of offensive rhetoric that Meta’s new policy would now allow, including statements such as “Migrants are no better than vomit” and “I bet Jorge’s the one who stole my backpack after track practice today. Immigrants are all thieves.”
Recalibrating for Trump
Zuckerberg, who has been dragged to Washington eight times to testify before congressional committees during the last two administrations, wants to be perceived as someone who can work with Trump and the Republican Party, people familiar with the matter said.
Though Meta’s content-policy updates caught many of its employees and fact-checking partners by surprise, a small group of executives were formulating the plans in the aftermath of the U.S. election results. By New Year’s Day, leadership began planning the public announcements of its policy change, the people said.
Meta typically undergoes major “recalibrations” after prominent U.S. elections, said Katie Harbath, a former Facebook policy director and CEO of tech consulting firm Anchor Change. When the country undergoes a change in power, Meta adjusts its policies to best suit its business and reputational needs based on the political landscape, Harbath said.
“In 2028, they’ll recalibrate again,” she said.
After the 2016 election and Trump’s first victory, for example, Zuckerberg toured the U.S. to meet people in states he hadn’t previously visited. He published a 6,000-word manifesto emphasizing the need for Facebook to build more community.
The social media company faced harsh criticism about fake news and Russian election interference on its platforms after the 2016 election.
Following the 2020 election, during the heart of the pandemic, Meta took a harder stand on Covid-19 content, with a policy executive saying in 2021 that the “amount of COVID-19 vaccine misinformation that violates our policies is too much by our standards.” Those efforts may have appeased the Biden administration, but it drew the ire of Republicans.
Meta is once again reacting to the moment, Harbath said.
“There wasn’t a business risk here in Silicon Valley to be more right-leaning,” Harbath said.
While Trump has offered few specific policy proposals for his second administration, Meta has plenty at stake.
The White House could create more relaxed AI regulations compared with those in the European Union, where Meta says harsh restrictions have resulted in the company not releasing some of its more advanced AI technologies. Meta, like other tech giants, also needs more massive data centers and cutting-edge computer chips to help train and run their advanced AI models.
“There’s a business benefit to having Republicans win, because they are traditionally less regulatory,” Harbath said.
Meta’s CEO Mark Zuckerberg reacts as he testifies during the Senate Judiciary Committee hearing on online child sexual exploitation at the U.S. Capitol in Washington, U.S., January 31, 2024.
Evelyn Hockstein | Reuters
Meta isn’t alone in trying to cozy up to Trump. But the extreme measures the company is taking reflects a particular level of animus expressed by Trump over the years.
Trump has accused Meta of censorship and has expressed resentment over the company’s two-year suspension of his Facebook and Instagram accounts following the Jan. 6 attack on the Capitol.
In July 2024, Trump posted on Truth Social that he intended to “pursue Election Fraudsters at levels never seen before, and they will be sent to prison for long periods of time,” adding “ZUCKERBUCKS, be careful!” Trump reiterated that statement in his book, “Save America,” writing that Zuckerberg plotted against him during the 2020 election and that the Meta CEO would “spend the rest of his life in prison” if it happened again.
Meta spends $14 million annually on providing personal security for Zuckerberg and his family, according to the company’s 2024 proxy statement. As part of that security, the company analyzes any threats or perceived threats against its CEO, according to a person familiar with the matter. Those threats are cataloged, analyzed and dissected by Meta’s multitude of security teams.
After Trump’s comments, Meta’s security teams analyzed how Trump could weaponize the Justice Department and the country’s intelligence agencies against Zuckerberg and what it would cost the company to defend its CEO against a sitting president, said the person, who asked not to be named because of confidentiality.
Meta’s efforts to appease the incoming president bring their own risks.
After Zuckerberg announced the new speech policy Tuesday, Boland, the former executive, was among a number of users who took to Meta’s Threads service to tell their followers that they were quitting Facebook.
“Last post before deleting,” Boland wrote in his post.
Before the post could be seen by any of his Threads followers, Meta’s content moderation system had taken it down, citing cybersecurity reasons.
Boland told CNBC in an interview that he couldn’t help but chuckle at the situation.
“It’s deeply ironic,” Boland said.
— CNBC’s Salvador Rodriguez contributed to this report.
WATCH: Meta is returning to free speech tradition, says Facebook’s former chief privacy officer Chris Kelly
Jaap Arriens | Nurphoto | Getty Images
Apple is losing market share in China due to declining iPhone shipments, supply chain analyst Ming-Chi Kuo wrote in a report on Friday. The stock slid 2.4%.
“Apple has adopted a cautious stance when discussing 2025 iPhone production plans with key suppliers,” Kuo, an analyst at TF Securities, wrote in the post. He added that despite the expected launch of the new iPhone SE 4, shipments are expected to decline 6% year over year for the first half of 2025.
Kuo expects Apple’s market share to continue to slide, as two of the coming iPhones are so thin that they likely will only support eSIM, which the Chinese market currently does not promote.
“These two models could face shipping momentum challenges unless their design is modified,” he wrote.
Kuo wrote that in December, overall smartphone shipments in China were flat from a year earlier, but iPhone shipments dropped 10% to 12%.
There is also “no evidence” that Apple Intelligence, the company’s on-device artificial intelligence offering, is driving hardware upgrades or services revenue, according to Kuo. He wrote that the feature “has not boosted iPhone replacement demand,” according to a supply chain survey he conducted, and added that in his view, the feature’s appeal “has significantly declined compared to cloud-based AI services, which have advanced rapidly in subsequent months.”
Apple’s estimated iPhone shipments total about 220 million units for 2024 and between about 220 million and 225 million for this year, Kuo wrote. That is “below the market consensus of 240 million or more,” he wrote.
Apple did not immediately respond to CNBC’s request for comment.
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