Subscription video-on-demand (SVOD) companies may not be growing as quickly as they were a few years ago, but that doesn't mean investors should ignore them. As the streaming industry has matured, SVOD companies have begun to focus on the economics of their services rather than simply spending heavily to gain market share. This could lead to potential returns for stakeholders as streaming operators think outside the box to find new growth opportunities.
Netflix (NFLX -0.47%), Walt Disney (DIS -0.29%), and Warner Bros. Discovery (WBD 1.77%) have all been making adjustments as they adapt to a more saturated marketplace, and there are some key reasons why these changes could make them all solid bets. Let's break it down.
Netflix retains its leadership status
Netflix, the world's largest streaming company by subscriber count, has perhaps painted itself into a corner with its success. Simply put, once you've captured a large portion of the available market, it becomes harder to grow. Netflix has tried to address this issue head-on by extracting more money from existing customers.
According to Netflix's own estimations, some 100 million customers have shared their passwords with people living at other addresses. In an effort to monetize those non-paying viewers, Netflix has rolled out extra charges around the world. Most recently the streamer introduced a $7.99 fee for U.S. password-sharers, which is more expensive than Netflix's lowest entry-level tier.
Netflix's move to derive additional income from its users is not without risks; during the company's most recent earnings interview, Netflix co-CEO Greg Peters noted the streamer has seen an "initial cancel reaction" in markets where it has introduced sub-account fees. But, as the executive sees it, the charges help create an incentive for non-paying viewers to ultimately become stand-alone subscribers.
Still, more recently there are reports that indicate Netflix has actually seen an uptick in new users in the U.S. since introducing the charges, suggesting it may have bucked the trend. If that ultimately proves true, Netflix may well have overcome one of its biggest obstacles to growth.
Walt Disney is revaluating its approach to content
Walt Disney's direct-to-consumer (DTC) streaming division has never made profit, losing some $4 billion in fiscal 2022. The loss is somewhat exacerbated by the fact the company spent $30 billion on content last year, with much of it making its way to Disney+ and Hulu. However, over the past two quarters, Walt Disney has been on a mission to reduce non-sports content costs by $3 billion, while also setting a break-even goal for 2024.
Part of that cost-cutting exercise has included stripping out content from Disney+ and Hulu, thereby allowing the company to avoid paying residuals to creators. The company is taking an impairment charge to the tune of at least $1.5 billion, but the move will also lower its tax bill.
Speaking on Walt Disney's fiscal second-quarter earnings call, CEO Bob Iger suggested it was important for the company to "rationalize the volume of content" it produces, suggesting the industry has overspent in previous years.
Even so, some may question the tactic of scaling back programming, particularly if subscribers don't find what they want on Disney+ and Hulu. Nonetheless, Iger's more conservative approach to content spending will likely appeal to many investors.
Warner Bros. Discovery is finding its way
Warner Bros. Discovery lags Netflix and Walt Disney when it comes to SVOD subscriber numbers, but the company has identified an area in streaming where it can make real headway -- free ad-supported television (FAST). As the name suggests, FAST is a cost-free option for consumers to enjoy streaming programming, much of it typically comprised of previously aired movies and TV shows.
Warner Bros. Discovery has partnerships with Roku and Fox's Tubi, licensing some of its content library for streaming on their FAST platforms. Speaking with investors earlier this year, Warner Bros. Discovery executive JB Perrette noted the company was "very pleased" with how the arrangements were going, suggesting it is exploring ways to get more of its shows and movies onto third-party channels.
As well as partnering with FAST providers, Warner Bros. Discovery has also outlined plans to launch its own service. CEO David Zaslav explained to investors during Warner Bros. Discovery's fiscal Q4 2022 earnings call that the company has the "largest TV and motion picture library in the world," and suggested it could "create a Tubi or a Pluto without buying content from anybody."
Some investors may be skeptical of Warner Bros. Discovery's push into the FAST arena -- particularly as it runs the risk of undermining its SVOD and ad-supported video-on-demand efforts. But if the company can play in all areas of streaming, then it could give Warner Bros. Discovery an advantage over its competitors.
The long view
Investors considering Netflix, Walt Disney, and Warner Bros. Discovery would do well to monitor each company's earnings over the coming quarters. With all three companies making significant moves in streaming, market-watchers will surely react positively should the fruits of their endeavors begin to show in their earnings results.
