The Broken Economics of Streaming Services: A Stats Explainer

🌈 Abstract

The article discusses the rise and fall of Paramount Pictures, a once-dominant Hollywood studio, and the challenges facing the streaming industry as it tries to achieve sustainable growth and profitability.

🙋 Q&A

[01] The Rise and Fall of Paramount Pictures

1. What was Paramount's golden decade in the 1970s?

• Paramount produced a remarkable slate of movie classics in the 1970s, including The Godfather, The Godfather Part II, Chinatown, Grease, Saturday Night Fever, and Apocalypse Now.
• This period of movie history became the stuff of Hollywood legend, with Robert Evans, Paramount's most visible executive, later releasing a best-selling memoir "The Kid Stays in the Picture" about his stewardship over the studio's unprecedented run.

2. What happened to Paramount in the 2020s?

• In 2021, Paramount launched Paramount Plus, becoming one of the last Hollywood studios to enter the streaming business.
• By 2024, Paramount's credit rating had been downgraded to junk bond status, and the studio faced a scramble to save itself from implosion.
• Paramount had discarded its lucrative cable TV and movie businesses to focus on streaming, a nascent industry with confusing economics and an unproven path to profitability.

[02] The Economics of Streaming

1. What are the challenges faced by streaming services in achieving sustainable growth?

• Streaming services must constantly engage and re-engage tens of millions of subscribers to avoid mass cancellations, requiring an eclectic mix of content to suit diverse user tastes.
• Content development is the primary driver of platform growth and user retention, but it comes at a high cost, with Netflix spending $18 billion on content in 2022 alone.
• Lagging services like Peacock and Apple TV must spend heavily on content and marketing to keep pace with Netflix, leading to a financial "death spiral" of inefficient spending.

2. What is the "diminishing returns" problem in the streaming industry?

• As streaming services expand their content libraries, each new addition becomes less valuable in terms of driving incremental watch time.
• This means that the cost of attaining incremental hours of watch time becomes increasingly inefficient, forcing streamers to either raise prices, reduce content spending, or shift toward cheaper, less prestigious programming.

3. How does the shift toward cheaper programming impact the streaming industry?

• Mature streamers like Netflix have shifted toward more low-cost, non-fiction programming like true crime documentaries and reality shows, as these genres tend to have broader appeal and lower production costs.
• This shift is seen as an inevitable response to the diminishing returns problem, as streamers prioritize efficiency and profitability over prestige content.

4. What is the comparison between the streaming industry and the app boom in San Francisco?

• The author draws a parallel between the streaming industry's focus on growth at all costs and the unsustainable business models of startups during the app boom in San Francisco in the 2010s.
• Just as those startups relied on venture capital funding and unsustainable marketing schemes, the streaming industry has cannibalized lucrative cable TV and moviegoing businesses to reinvent a less lucrative cable TV-like business model.