Disney+ from Disney (DIS 1.94%), Apple TV+ from Apple (AAPL 2.20%), Hulu, Paramount+ (PARA 13.05%), HBO Max from Warner Bros Discovery (WBD 4.33%), ESPN+, Peacock from Comcast (CMCSA 0.42%), YouTube TV from Alphabet (GOOG 1.75%), and Netflix (NFLX 2.44%). These are the streaming services I've subscribed to at one point or another in the last year, and it's become exhausting.
Yesterday, I unsubscribed from four of the streaming services, leaving the bare minimum for our family of four, which cut the cable cord nearly a decade ago. I'm sure I'll resubscribe to some in time, but I'm now in the habit of subscribing and unsubscribing from streaming services on the fly.
My experience can't be unique, as the streaming landscape has become more crowded. The challenge for investors is that there may not be 10 winners in streaming -- there may only be a few. And the content, business model, and strategy companies are building will matter in the long term.
Streaming's business problem
The issue with streaming is that it's still not a mature business model. With cable, there wasn't a lot of growth, but companies knew what they could expect from carriage fees and advertising. That allowed them to plan content costs that would make the business profitable.
Streaming companies are in growth mode, but their cash flow is negative as they emphasized building scale over profitability. Just look at how much debt Netflix has taken on over the last decade, with negative free cash flow in all but a few quarters during the pandemic. In 2022, can it turn this trend around with subscriber numbers on the decline?
NFLX Free Cash Flow data by YCharts.
Disney also expects to lose money as it builds content for Disney+ and seeks to grow its subscriber base. And these are the leaders. Late-comer services like Peacock must be burning a tremendous amount of cash.
We're now at a point where everyone is chasing growth, but very few will reach the scale needed to be profitable. Consolidation is one answer to the current financial challenge, but the simple answer may be a new bundle of streaming services for customers.
What we need is a bundle
There's an easy answer for the current predicament, and it's a bundle. Yes, the business model cable companies have used for decades is likely to be a great business model for streamers as well.
Content companies are trying to gather as much content as possible within their streaming services, but the reality is that no company can control all types of content. Not only would that be a monopoly, but it would also be prohibitively expensive. So, giving viewers an option to bundle multiple streaming services together will likely be a winning strategy.
The question is: Who builds the bundle?
I think it's clear Disney, Warner Bros Discovery, Paramount Global, Netflix, and other streamers themselves aren't likely the answer. They're pulling together content in order to have a service that would be part of the larger bundle.
A more natural bundle would come from platform providers such as Apple and Roku, who make TV operating systems and are already in millions of homes. Verizon (VZ -0.69%) is another possibility if it bundles streaming services with smartphone and home cellular service. And Verizon doesn't have a streaming service that would compete with other providers.
Notice that I left out Amazon (AMZN 3.20%). I'm not sure whether Amazon has an incentive to be part of someone else's bundle or has the ability to bundle expensive streaming services within its Amazon Prime package. So far, Amazon has used streaming as a way to get people into Prime, not as a stand-alone service. As big as it is, Amazon is in a tough strategic position if re-bundling happens.
The current state of the market is unsustainable
The media industry can't continue on its current path. Netflix is losing subscribers, Disney is losing money in search of more subscribers, and no one has found a good balance between growth and profits. Something's got to give.
I think the natural answer is a bundle that will make streaming more predictable and gives consumers an incentive to reduce churn overall, rather than to cancel a specific service from time to time, as I did this week. As it turns out, bundles may be good after all. It's now just a question of who builds a compelling bundle of streamers first.
