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Streaming Video Is All About Making Hits

By Adam Levy – Nov 19, 2021 at 7:30AM

Key Points

  • 40% of consumers sign up for a new streaming service to watch a hit series.
  • A hit is better than a franchise because it can bring in new subscribers.
  • Making a hit can be really expensive.

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Those willing to spend big to find and create hit series will win the streaming wars.

"Franchises are good, but what you want are hits," Netflix (NFLX 0.21%) CEO Ted Sarandos told the audience at Recode's Code Conference in September.

The data back him up. Roughly 40% of streaming subscribers sign up for a service just to watch a single show, according to a recent survey from Hub Entertainment Research. That's up from 34% last year. More importantly, subscribers tend to stick around even after watching the show they signed up for and 77% keep their subscription.

That shows the true power of hits in streaming video.

A couple laying on the couch eating popcorn and looking at a laptop.

Image source: Getty Images.

Why franchises are good, but hits are better

Walt Disney (DIS 0.84%) may be the king of franchises. It builds films and series within a universe of interconnected storylines. It's able to produce sequels and remakes that offer a certain familiarity while also offering something new at the same time. Disney shows that a good franchise (or six) can be a hit-making factory.

But what franchises don't do is draw in new audiences. After almost 15 years of films, most people know by now whether they're into the Marvel Cinematic Universe or not. As a result, Disney saw millions of sign-ups early on for Disney+, but it's struggled to add subscribers more recently. It added just 2.1 million subscribers globally last quarter.

Meanwhile, Netflix continues to pump out hits every quarter. It released series like Bridgerton and Lupin at the start of the year. It found a global phenomenon in the Squid Game series in September. And there are likely many more surprise hits in the pipeline with its $19 billion annual content budget.

The impact can also be seen in smaller competitors. Comcast's (CMCSA 0.28%) Peacock has struggled to attract paid subscribers as it continues to search for a hit. It counted 20 million active accounts as of the end of the second quarter, but very few of them are paid subscribers.

For Apple (AAPL 0.90%), the increased popularity of Ted Lasso may finally give its Apple TV+ service the traction it needs. The company's actions indicate it's seeing stronger engagement and signups, as it reduced its free trial offer for new Apple device owners to 3 months (down from 12 months) earlier this year ahead of the season 2 premiere of its most popular show. Apple doesn't comment on Apple TV+ subscriber numbers.

Creating hits can be expensive, but worth it

A hit series or film in and of itself doesn't have to be very expensive to produce. And most media companies (or tech companies turned media companies) aren't going to hit it out of the park with every swing. Taking lots of swings and promoting the ones that find traction is the best way to create a hit.

That's why Netflix seems to have a lot of hits. What goes unnoticed are all the misses. With a $19 billion budget, it's releasing a new film every week and several new series. Apple TV+ didn't have much to show for its $6 billion content budget before Ted Lasso caught on. That's despite several big-name actors and producers it brought on board to launch the service.

That's why Disney investors should be encouraged by management's plans to increase its output and content budget beyond the $8 billion to $9 billion it projected for 2024 at its analysts day last year. It's taking more swings, and it's particularly looking to attract new audiences. Apple, likewise, plans to increase its output, according to a report from The Information.

And it's not just the cost of producing content to consider. It's hard to make a good series a bonafide hit if nobody knows about it. Marketing is a key consideration in making hits and driving new sign-ups. Netflix spends over $2 billion per year on marketing. Apple's reportedly increasing its marketing budget to $500 million per year.

A good marketing campaign can push a smaller series with traction into the limelight. For example, the promotional marketing Apple did to encourage Emmy voters for Ted Lasso helped win the show four Emmys and certainly played a role in the growing popularity of the series.

If a competitor wants to win big in the streaming wars, it needs to spend a lot. New subscribers come from hits, and they stick around for everything else on a streaming service. Without hits, new subscribers will be hard to find, especially given the growing number of options available to consumers. The companies willing to spend big are at a huge advantage.

Adam Levy owns shares of Apple, Netflix, and Walt Disney. The Motley Fool owns shares of and recommends Apple, Netflix, and Walt Disney. The Motley Fool recommends Comcast and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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