Streaming wars: ‘Die has been cast as winners are’ Disney’s streaming bundle, analyst says

Needham & Company Senior Media & Internet Analyst Laura Martin joins Yahoo Finance Live to talk about where streaming platforms are seeing the most competition, as well as the outlook on bundling and acquisition trends.

Video Transcript

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DAVE BRIGGS: According to Nielsen, streaming has officially overtaken cable and overall television consumption. But among streamers, who will come out on top? Our next guest has an answer for us. Let's bring in Laura Martin, Needham senior media and internet analyst. Laura, nice to see you. Who is winning at this point? And where are we in the game? Are we in the third inning? Are we in the seventh inning?

LAURA MARTIN: So we're arguing that we're in the seventh inning, that the die is cast, that the winners are the Disney bundle, which is Disney Plus, Hulu, and ESPN Plus, as well as Amazon's bundle with Prime shipping on the subscriber side, and then YouTube on the, let's call it, advertising video on-demand free side. And that losers include Netflix, Peacock, Paramount Plus, which also has Showtime, and Discovery with HBO Max. We're saying all of them lose.

We're also-- we came out with a piece today saying that the winners can't be displaced, that the three winners will not be able to be unseated. And that 70% to 80% of the total economics will end up in those three companies, which is what we've seen in digital markets, this notion that digital markets are winner-take-all markets for economics. We're arguing that's going to happen here in streaming. And so those three companies are going to get like 70% of the total revenue.

SEANA SMITH: So Laura, when it comes to Netflix, specifically, because I think a lot of people, when they think about streaming, one of the first companies they think about is Netflix, what exactly are they doing that has them, I guess, as one of your "losers," quote, unquote, to put it, going forward in this space? And then what happens to the company down the road? Do you still think a possible takeover is in the cards?

LAURA MARTIN: Right. So what has to happen in 2023? So churn is going up, right? We've created this consumer behavior, where people churn out two to three times out of the typical streaming service, usually around content, like, for example, Netflix hit all-time high churn right after Stranger Things ended in July. So we're creating this consumer behavior where people are churning in and out of streaming services.

So churn is job one for 2023. You have to get your churn down because the customer acquisition costs means you have to have a subscriber for like nine months before you get a payback just on your customer acquisition cost. So churn has to go down. Well, Netflix starts with the lowest churn, so that's really hard for them to get their churn to go lower.

And then secondly, the other growth driver for revenue is rolling out into new countries. No one else is fully penetrated, so they're all going to report faster revenue growth, because they're going to roll out Saudi Arabia, or they're going to roll out Costa Rica, or they're going to roll out, Portugal. Guess what? Netflix is already in those countries. So it can't like, grow there. It's like a same store comp for them, which means they're going to lose subscribers, we think, to these other guys that are going to be more competitive with bundling, with their bundles with their theme parks, or with their bundles with their Prime shipping, or Apple with their devices. All those bundles are going to take share from Netflix, which can't bundle because it doesn't own anything else. And if you're rolling out new countries, that helps your revenue growth a lot.

DAVE BRIGGS: And in your note, you say Netflix has a competitive disadvantage. Is that why? And could they find a dance partner?

LAURA MARTIN: They could if they got bought, like, for example, I think it's widely-- it's a confusion why they picked Microsoft, which actually doesn't have very good ad tech for what they need it for. And there's plenty of established players that would have been a better choice. I think assuming that the Netflix guys really are thinking strategically rather than tactically, it maybe they just want to sell to Microsoft. So that would make sense to me. Then they would have a bundle, because now they have something bigger to offer with Microsoft.

But standalone? No, I don't think they can create a bundle-- too late. I mean, these other companies are competing with, whether it's Comcast or Paramount. They have parks. They have films. They have other streaming services that they-- all those are bundle opportunities for sort of everybody else other than them.

SEANA SMITH: Laura, one company we haven't mentioned yet that's in the streaming space is Apple. Where do they land in your thesis just in terms of the winners and losers? And what we can expect from the company going forward?

LAURA MARTIN: So Apple is the sleeping giant here. I would say they've done a bad job to date of actually the streaming content business. They're spending round numbers $2 billion a year. This is a game where you have to spend 15, or you're not serious. So the only thing I'd say is they make $90 billion a year of free cash flow, and they have a billion unique users.

So if they ever got serious, they would be a juggernaut. They could unseat everybody that I've said can't be unseated, because they have $90 billion cash flow and a billion unique users globally, like, on day one. So they're like the dark horse I think it is possible they never decide they need to be in the content business. I think near-term, they're going to be focusing on advertising revenue. And content is messy, and it's hard to manage the people, as we've seen from the Walt Disney company's CEO trader trading off. It's hard to manage creative people. So maybe Apple just stays away from content and just keeps doing $1 or $2 billion a year, exclusive to its platform, not really a major streaming player.

DAVE BRIGGS: Interesting contract with Major League Soccer, but other than Ted Lasso, not a lot of major buzz around their content. If we're in the seventh inning, that means it's almost game over for somebody. Will we see someone not survive this game? Who is it? And before you go, you got to tell me what you're watching right now, Laura. What are you streaming?

LAURA MARTIN: OK. "Wednesday" on Netflix. "Wednesday," I think, is a really interesting sort of pro-feminist point of view and very dark, you know? So I think very interesting on Netflix. And then gave me-- yeah, so I think, so loser-- losing can be winning here. So like, Curious-- the investable companies, Curiosity Stream, Chicken Soup for the Soul, WWE, all get bought, because they have IP. They own library. They own their own content. So that gets bought by a bigger player-- Comcast, or Paramount, or-- gets bought, right? Because they're too small to compete standalone. So I think all those get bought.

Paramount, I think, is interesting. If Shari Redstone, who is the controlling shareholder wants to sell, I think Paramount's a winner. I think somebody would pay a lot of money for those libraries. But if she doesn't sell and she overstays her welcome, it's way too small to compete. It's $12 billion market cap. And you're competing against Amazon and the Walt Disney Company, like, or Comcast. You know, what I'm saying, Comcast loses and Discovery, Warner Brothers loses. Like, Paramount can't compete with those companies.

So they have to sell. And if they sell, they'll get a nice big premium. And they'll be a winner in this world.

DAVE BRIGGS: Nice to hear you mentioned to WWE. That stock up 47% this year. It's been a remarkable performer and really an outlier. Highly recommend the "White Lotus." If you're not streaming it, Laura, please do. It's terrific. Season two just wrapped. Great to have you. Laura Martin, always a pleasure. Thanks so much.