Media and entertainment corporations have been dead intent on demonstrating to Wall Street that they have a strong streaming video plan to battle traditional pay-TV declines for the past two years.

The theory was that taking more of a customer’s money directly, rather than collecting negotiated fees from a wholesale pay-TV model, would be a stronger business strategy in the long run than bundled cable TV. Or, if not better, good enough to keep you alive.

For a while, the thesis worked. As people sought entertainment options while trapped in their homes due to the epidemic, the drive for streaming video surged. According to sources, Netflix, Disney, AT&T’s WarnerMedia, NBCUniversal’s Peacock, ViacomCBS’s Paramount+, and other streaming services grew consistently quarter after quarter in 2020 and 2021.

Disney’s stock nearly doubled from a pandemic low of roughly $79 per share to $155 per share at the start of 2022. Netflix’s meteoric rise continued, with the stock up 71% from its March low to the start of the year.

However, investors appear to have soured on streaming, or at least tempered their enthusiasm, after Netflix forecasted first-quarter subscriber additions that fell short of analyst expectations.

Netflix now has 222 million subscribers worldwide. After adding 8.3 million new net additions in the fourth quarter, it expects only 2.5 million new net additions in the first quarter. Netflix’s stock has dropped 37% in the last month alone. Disney’s stock dropped 11 per cent in January and will announce profits on February 9.

On the surface, it appears strange that one poor Netflix quarterly projection would scare investors away from the entire sector. However, if Netflix’s growth slows, the world’s total addressable streaming market may be far smaller than previously estimated.

Rich Greenfield, a LightShed analyst, estimates the number is still “six, seven, or eight hundred million customers.” However, it’s feasible that the figure is far lower.

If that’s the case, the streaming industry’s value proposition shifts substantially. As investors approach Netflix more like a value stock, it may focus on boosting pricing and cutting back on content spending as a means of increasing profitability. Future subscriber growth may become less important than free cash flow.

Cutting content spending will likely stifle subscriber growth even further, especially as newer competitors increase their content spending and global reach to expand their subscriber bases. Peacock, a division of NBCUniversal, has said that it will double its content spending to $3 billion by 2022 and $5 billion “over the next couple of years.” According to WarnerMedia’s Jason Kilar, HBO Max will be expanded to numerous nations across the world in 2022. HBO Max is now available in 46 countries, compared to over 190 for Netflix.

“If you start slowing down content spending when everyone else is raising, by nature the risk is you’ll have less hits,” said Michael Nathanson, an equity analyst at MoffettNathanson.

Disney drastically increased their global forecast of Disney+ members by the end of 2024 from 230 million to 260 million in late 2020. (The previous range was 60 to 90 million.)

Given Netflix’s disappointing first-quarter membership prediction, there’s a chance Disney won’t meet its new goal. This might cause investors to become even more sceptical of streaming, making NBCUniversal’s choice to bear billions of dollars in near-term Peacock losses even more smart.

(Adapted from CNBC.com)

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