Despite a strong push across the streaming industry toward profitability, Paramount Global's (PARA -2.22%) direct-to-consumer segment hasn't shown much improvement.
Through the first half of 2023, Paramount's adjusted operating income from streaming was relatively flat. While it has managed to grow its streaming subscribers as competitors fall, the cost of adding new subscribers is proving to be very expensive. In order for Paramount+ to start generating meaningful profits for the media company, it needs to solve one of its biggest problems.
Paramount needs to get a grip on its subscriber churn.
Filling a leaky bucket
Paramount boasted that it's seen more viewers sign up for its streaming service than any of its competitors since its launch. But with 60 million subscribers, that also means it's losing a lot of users every quarter.
Indeed, data from Antenna shows both Paramount+ and Showtime produce higher-than-average subscriber churn. In fact, both saw churn rise to new highs in June. That increased churn is reflected in one of Paramount's worst quarters for net subscriber additions since the launch of Paramount+, adding just 700,000 new subscribers.
Churn isn't a challenge unique to Paramount. The entire streaming industry has seen an increase in churn. The companies that can keep subscribers longer-term have the best potential to produce profits for investors.
There are a couple of major efforts Paramount is making to get a hold on churn.
Folding Showtime into Paramount+
Paramount combined Showtime and Paramount+ into a single streaming offering at the end of June. Based on internal data and a competitor's moves, it could push subscriber churn lower.
The most comparable move in the media industry is Warner Bros. Discovery (WBD -2.17%) offering Max subscribers HBO and Discovery content under a single umbrella. It launched the new offering at the end of May, and Antenna's data shows a notable dip in churn for June. The company still saw an overall decline in subscribers in the second quarter.
Of course, one month of data doesn't make a trend, but WBD management also made the move to integrate CNN into Max earlier this month. That suggests the bundled content across various verticals -- unscripted, prestige, and news -- is working well for the company. Paramount+ with Showtime offers a similar breadth of content as Max does.
Paramount's been offering a bundle of Paramount+ and its Showtime streaming service since last year. In September, it integrated Showtime content into the Paramount+ app, but required an additional subscription to access it. CEO Bob Bakish pointed out that customers that bundled consumed 40% more titles than those that didn't. And consuming more titles is a great indicator of customer satisfaction and retention.
But there's no guarantee simply putting Showtime content in front of Paramount+ subscribers will produce results similar to when customers were paying a fee to watch Showtime specifically. (Even if that fee was just a couple bucks.) What's more, Paramount is cannibalizing its Showtime subscriber base to grow Paramount+, so it needs to ensure Showtime customers will engage enough with Paramount+ content to make it worthwhile.
In other words, it'll take some time before Paramount can really see the benefits of the integration. In the interim, it's written down $2.4 billion in content expenses related to the combination.
Focusing on content for specific audiences
Paramount is shifting its content strategy. Instead of trying to serve more and more content, it's focusing its content on a few specific target audiences.
Management's goal is to lean into the audience segments it already sees on Paramount+ and ensure a steady flow of quality content for each of those segments. Going forward, that move should not only help reduce subscriber churn, but it can also curb the content spending on the platform as well.
But it's unfortunate timing to make a big content shift. The ongoing writers' and actors' strikes mean that it'll be hard to provide a continuous flow of content for its key audience segments. What's more, with much of that content coming from its cable and broadcast networks, Paramount's getting hit with a double whammy.
Paramount's certainly making moves to set up its direct-to-consumer segment for profits. It expects 2023 to be the peak of its losses as pricing changes and an improving ad market should help improve the top line in 2024. But investors may want to take a wait-and-see approach with the company. A few quarters of data showing improving churn and lower net customer acquisition costs would be a strong signal that profits are coming, but it's too hard to tell right now.
