Rich Greenfield on Streaming’s Road Ahead

Rich Greenfield, Partner and Media and Technology Analyst at LightShed Partners, joins Cross Screen Media CEO Michael Beach to share the bull/bear case for companies like Netflix, Roku, Disney, and Comcast, the future of news, and the challenges of launching an ad-supported streaming offering from scratch. Watch our latest Screen Wars Thought Leader Interview here and read the full transcript below!

MB: Rich Greenfield, welcome to Screen Wars.

RG: Thanks for having me.

MB: Why don’t you give our audience some background about how you ended up where you are today in your career?

RG: I’ve been looking at the broad world of media for 27 years. I started at Goldman Sachs in 1995 looking at media stocks. And here we are, 27 years later. After working at four firms, we created our own about two and a half years ago, called LightShed. It started off as a research business and a media platform, a weekly podcast/interview series of executives throughout the public and private media tech, and telecom world.

And then we also have LightShed Ventures, our $80 million early-stage tech media telecom venture fund. On the research, media platform, and venture fund, we do a little bit of everything.

MB: Who’s your core customer on the LightShed fund?

RG: Our research targets institutional investors. We don’t focus on retail, but we look at institutional investors, like hedge funds, mutual funds, and private equity firms around the world. Then, we have a robust readership around the world. From corporate executives from early-stage startups to the largest public companies in the world.

MB: Excellent. We are recording this in the middle of burning season. A big tranche of companies have gone last week, and several more will follow. I love your point of view on this. You don’t shy away from a strong opinion here. I’m looking for the bear and bull cases for the following four companies: Netflix, Roku, Disney, and Comcast.

RG: With Netflix, the bull case is that streaming isn’t going away. I think we’ve heard from virtually all the media companies that streaming is just getting started. Is it slower right now than it’s been in a long time? It is. But do you believe that 300 million homes are the top for worldwide subscribers to streaming services? The answer is No.

You’ve got, 700-800 million homes worldwide with broadband connections. That’s going to grow to over 1 billion. Jason Kilar, who started Hulu, and then most recently ran Warner Media, is on record saying that he thinks one of these companies will reach a billion subscribers.

Right now, there is pessimism. Growth has slowed. People are worried. The ceiling is a lot lower than they thought. The revenue per user (ARPU) is a lot lower than people had hoped for. Netflix has been talking for years about getting an average ARPU to $20-$25; they’re in the low teens. Global ARPU today looks very low and has a huge upside, but subscriber-wise, growth is slowing.

And I think people have panicked about the entire sector. The reality is, if you look at this, and you take a longer-term view, and go, “That transition is still alive and well.” We can debate whether advertising on Netflix is the right answer or not, but we can certainly say that there’s a lot of growth left in streaming.

The content, though, goes up and down. Probably, there have been periods of time when you’ve watched less HBO, and then more HBO. And more Showtime, and then less Showtime. The content goes in cycles.

And I think even Netflix, with a very diverse portfolio of content, has been a little colder than in the past. And that matters more now than it did in the past, because there is competition. You have other choices.

Having a lot of good enough content is no longer good enough. Now, you need enough hit-content, and really zeitgeist-y content that breaks through all the competitive noise. And one thing Netflix hasn’t done over the last 12 months is have breakout English language content.

Sure, Squid Game did great for some weeks in Q4 last year. But they haven’t had a steady stream of big breakout hits, given all their spending on content. The content just hasn’t been good enough.

The negative is that growth is slowing down in the whole space. Disney’s going out saying they have to do advertising now. So there’s a broad panic that this entire category is a lot smaller than people thought. That this is not a great business.

The bear thesis is that, unlike the cable bundle, where you had to take a day off from work to cancel, with HBO Max, Netflix, or Disney+, canceling is a two-second exercise on your smartphone. There’s that lack of friction to cancel, and so much choice. There are so many streaming services. Are these just not great businesses? I think that’s what spooks investors.

MB: I thought it was interesting because you always look for what’s the stickiness of the subscription model. Last week, you wrote an outline of what the password-sharing program would look like for Netflix. One of the things they highlighted was that you would be able to port your viewership history over to your new account when you create it.

I thought that was really interesting that they thought that that’s some kind of leverage, because you’re like, what’s going to keep you from churning out, seasonality-wise or anything else?

RG: The reality is, the best way to keep subscribers, is to have content that they can’t live without. And Netflix is certainly making enough content. Look at a service like HBO, pre-HBO Max. Millions of people left after the end of Game of Thrones, because they were in it for Game of Thrones.

So, the reason that they went and built HBO Max was, “We need a broader array of content. We can’t just have four or five big things a year. We need a lot more content that keeps people there all the time.”

There isn’t a lot for people our age on Disney+, but, you know what? Now that they have all the kids’ titles, that’s the glue that keeps people there, even when there isn’t much for adults to do.

I think it’s really important to find and cement that glue. That’s what HBO, Netflix, and a lot of these services are trying to build. They are trying to diversify enough so that they don’t have that churn that you just highlighted. It’s so easy to churn. It never used to be in the old world.

MB: What about Roku?

Roku, and the streaming TV wave, are similar in many ways to Netflix. We leapfrogged two years into the future. If you think about what the pandemic did, it turbocharged the growth of smart TVs and people’s adoption of internet television.

Now they’re dealing with the other side of that at the same time. There’s definitely more robust competition, like Google TV. Let me tell you a story. Five years ago, I would go to CES.

Brandon Ross, my partner at LightShed, and I would roam the floors. We would look at the TVs, and we would go up to them. We would pick up the remote controls, and look at the user interfaces, and we would laugh.

Whether it was Samsung, LG, or Vizio. You would walk up to these televisions, you would laugh, and go like, “Did they ever take a class in consumer interface?” It was embarrassing.

Then, you’d walk over to the Roku booth, and you’d be like, “Oh my God.” It’s almost stupidly simple how easy it is to use a purple remote with buttons up, down, left, right, and back. It was all very simple. It was clear why Roku was taking market share and really built this “Keep it simple” mentality.

Walk into a Best Buy today. Does it really matter whether you buy a Vizio, a Roku, a Samsung, an Amazon, or an Insignia? All these TVs are essentially great UIs. The bar has gotten really different. Differentiating, other than price has gotten really hard.

So the competitive dynamic for Roku is very different than it was just a few years ago. That’s part of the problem that they’re facing. The other piece is that, in order to really grow their advertising business, they’re being forced to go into content creation.

They’re actually spending on creating their own content, rather than just taking a small sliver from other people. Obviously, that’s expensive. It hurts margins. So there’s definitely a multitude of fears regarding Roku.

You could take the long-term, bold view: The world is going to streaming. They’re the market leader in the category. Someone’s going to want to own this, or they’re simply going to win on their own because they’re in the dominant position.

The bear case would be, every day you walk up and there’s more competition. Like Comcast and Charter; they announced they’re partnering to create a nationwide competitor to Roku. Not a good thing for Roku at the margin. Does it matter? Only if it’s really successful. But it certainly adds fuel to the fears around Roku stock.

MB: What’s the same bull/bear case for Disney? I know it’s a favorite of yours.

RG: The bull story on Disney is that they’re probably the most iconic producer of content in the world. They have some of the most recognizable brands. It’s the only content that is watched over, and over, and over again. It is reusable and repeatable content, which makes it a unique franchise.

Maybe most importantly, there is this flywheel of content they have. Whether it’s for a movie or a TV show, that content can go on and live in so many other parts of their business.

It can fuel their theme parks. It can fuel their consumer products. It can be characters on their cruise ships. There’s so much that Disney can do with IP. The entirety of the company has a unique position to exploit good content.

And they’ve certainly been pretty consistent with their ability to create great content. The flip side is, like many legacy media companies, they have a lot of legacy assets that are in trouble. The broadcast and cable network stories are not so good. As people watch more and more streaming, the amount of time and energy being devoted to linear television goes in the wrong direction.

Those old businesses tie up a lot of revenue and profitability which is problematic. Take a business-like ESPN. It was probably the most amazing part of the Capital Cities/ABC transaction in 1995. It’s a great asset. It generates lots of cash.

ESPN is not a great business anymore. It is a business facing real structural headwinds. More consumers are cutting the cord. Comcast has lost almost 9% of its entire subscriber base in the past 12 months.

As people shift from linear cable bundles to streaming television, they’re cutting the cord and giving up. They focus on things like Netflix, Disney+, and Hulu. That’s all great. But the profitability is in the ESPNs, ABCs, and FXs of the world. You’re taking very high margin revenues out of the legacy business and pushing them into streaming, where you are still losing money.

That’s the existential crisis that these companies are facing. Their legacy businesses are in secular decline. Do they keep them, or do they harvest cash out of them? Think about it in sports. Disney is putting two and a half-billion dollars a year into Monday Night Football. That basically supports the future of ESPN, but they don’t own the NFL.

They can’t exploit that content outside the US. It only works for a few hours a week during the live game. No one’s watching it after. What could they spend two and a half billion dollars on if they weren’t buying NFL rights for ESPN? It just begs the question, should Disney be in the ESPN business?

Why do you want to be in a business where you are a “renter” or “licensor of content,” when what Disney does best is create great own content, control it globally, and exploit it all over the world? You can’t do that with the NFL. You can’t do that with the NBA. Can you use it as a way to get subscribers for ESPN+? Sure. It’s not a bad customer acquisition tool, because of its high-profile nature. The problem is, you don’t own and control it.

If you had a dollar of cash, where would you best want to put it? It’s hard for me not to believe that creating the next Avengers-type series isn’t a better use of capital if you can achieve it, than simply buying sports. And I know sports is a known entity. I get that aspect of it. But Disney is better than anyone else at creating content.

That’s where the bull/bear thesis sits. What is Disney going to do? Are they keeping ESPN? Are they selling ESPN? Are they buying the rest of Hulu? Are they selling Hulu? There are a bunch of big strategic decisions that Bob Chapek (CEO of Disney) hasn’t made yet.

And we’re all waiting. When Bob Iger came in, he bought Pixar very swiftly. It became very clear that the focus of Disney was on great IP creation. I don’t think we really know what the “story” is for the “Chapek era” that we’re in right now.

MB: You touched on the sports for a minute. For a long time, I’ve been wrong, and thought that the sports rights would start to flatten out, if not slightly decline. In the short-term, that’s been very incorrect. Three or four years from now, we’re going to look up the sports rights that these traditional media companies have paid during this period, and we’ll have the same conversation we’ve had about original streaming content. It’s no longer a good business to do. Increase in rates of over 40%, while you lose 9% of your customer base. It doesn’t seem like a good thing.

RG: The funny part is, all signs pointed to cable system subscribers, or multichannel video bundle subscribers, declining viewership. Advertising increased modestly because you were jacking the cost of the ad so much. Having fewer overall viewers meant that you paid a premium for the ones you could reach.

That reach is still very powerful, but the overall health of the linear TV business isn’t great. You would go in that environment, why wouldn’t sports rights costs go down? Why would you pay more for sports rights? The answer is, does it hurt the profitability to overspend on sports rights? It does. What’s the alternative? If you don’t buy the sports rights, these businesses literally collapse.

They’re willing to overspend on sports rights to keep their over-earning businesses alive and afloat. The part that we underestimated is how far they would go in overspending to protect their legacy profits. They need all of those legacy profits to invest in their future streaming. They’re using those strong cash flows because a lot of these companies are levered. They have a lot of debt, and they need to generate cash. So these legacy businesses throw off. Even with them going the wrong direction, they still throw off a ton of cash.

MB: Your team put out some research on the Charter-Comcast partnership on the TV OS. What’s the bull and bear case for that?

RG: I’m for the Charter JV. I don’t know if it’s a bull and a bear case. I guess the bear case would be when I tell you, “Hey, two cable companies walk into a restaurant, and they talk about, ‘Hey, we’re going to go do a joint venture.’” You’ve probably heard the joke before. “Oh great, you’re going to do it.”

You probably remember something called Canoe, which was their advertising JV. I’m old enough to remember. They did something called Spectrum Co., and they tried to collaborate for years on CableLabs. Look, the industry is a lot more consolidated now. Charter and Comcast are the vast majority of the industry. Maybe this will work better than it did before.

But the bull case is pretty simple. Being the operating system makes you a gatekeeper. You can keep HBO Max out. You can decide who gets in, and who gets out of the platform. That’s the power of being the operating system. Look at what Apple did with iOS as an operating system.

“Hey, you can’t track people the way you used to.” Look what that did to companies like Facebook and Snapchat. When you’re the operating system, you set the rules, and it is incredibly valuable. If you look at what Google and Apple do in mobile, and what Apple and Microsoft Windows can do for PCs, it’s not hard to see why Comcast and Charter want to be the TV OS.

You could almost imagine them sitting around, in a conference room, mad about Roku getting to a $60 billion valuation by creating an OS that either Comcast or Charter could have created years ago. Comcast has even had an OS called Flex for a while, that they’ve only used in footprint on their devices. But nothing would’ve stopped these companies from going national, or even global, a long time ago.

They were stuck in their video, and then broadband, footprints. And they didn’t like venturing out of it. I think what they’re recognizing is, “The cable world is slowing, broadband subscriber growth is slowing. That’s going to slow our revenue growth. How do we generate incremental revenues? I got it. We’ll be a gatekeeper to the broadband world. And we’ll take a cut of lots of things that happen.”

“If you watch Pluto TV, we’ll try to take a cut of ad revenue. If you sign up for Netflix, we’ll try to take a cut of that.” I joked in our piece today. You can’t take the gatekeeper out of the gatekeeper. They were the gatekeeper. You wanted to watch ESPN on Comcast? ESPN had to sign that deal with Comcast.

There was no other way to get to those consumers without going through Comcast in that market. Sure, there ended up being DirecTV, eventually. And there was some competition that changed the dynamics, but effectively, these were regional local monopolists that like using that power.

I think, in many ways, this venture is about recreating it. The flip side of this is, that they waited until 2022. It’s not like Roku is a new company. They waited an awfully long time, and they waited until the core broadband business had finally started to collapse before doing this. They didn’t do this proactively five years ago. More than anything, that’s just sad.

MB: What do you think the floor is for pay-TV subs?

RG: I’m going to answer it. But I do think it’s not a fair question to ask, because when you say something like that, is Sunday football still on Linear TV in 10 years, or is it on streaming TV? What’s left on Linear TV? Because if you were to say, “if you took what I saw on Linear TV today, what do I think the floor is?” If you look today, it’s probably sub-50 million subscribers, versus the 75 million we have today.

I don’t think there are more than 50 million households with a die-hard sports fan in them. So, I think that number is somewhere in that range. Now, I don’t know if there are 50 million subs for the entire year.

There might be 50 million subs for football season. Maybe there are only 35 million or 40 million outside of football season. To these channels, part of the problem with understanding subscribers, especially as you start to think about the MVPs, like Netflix or HBO Max, is that it takes one second to cancel. The floor is probably a lot lower than 50 million subs.

And if you keep taking more and more sports out of the bundle, the floor isn’t 40 or 50 million. The floor is probably 20 million, or less. If you take too much content, you get into this circular loop. One of the issues you’re seeing with the multichannel bundle right now is, as more and more content comes out and shifts over to streaming, it’s a red flag to consumers.

We’ve all had the “Wait, why are we paying for this? We never turn on the TV. Why are we paying for this?” experience. Especially with inflation kicking in, maybe a recession starting off in Europe, and maybe coming here as things get weaker. You’re going to look to cut the things that are overpriced, and you’re not using. It feels like a bad sign when you think about these legacy businesses, as you look out over the next couple of years.

MB: Just a couple more questions. You got into the TAM (Total Addressable Market) for streaming earlier. Have Netflix results changed your view on what that is? And, does the addition of ad-supported streaming change your view of the TAM?

People are freaking out about the negative sub growth, and the fact that they are growing slower. Obviously, the Russia thing is what causes it to go negative. You and Jason Kyle talked about a billion subs. Has anything recently happened that changed your view on that? Or is it just going to take potentially longer than we thought because there’s increased competition and other things happening, like the addition of advertising?

RG: When I look at this, I think it’s less about competition. It’s not like the competition has been so crazy. Name a huge hit in the last quarter on Peacock or HBO Max. Something that really sucked the life year-over-year out of Netflix.

I don’t buy it. I think the bigger issue is that a lot of these businesses did incredibly well during COVID. They built subscribers so much faster. The pace of smart TV installations was so much greater. Essentially, they did two years’ worth of growth in a year. On the other side of it, now you have supply chain issues.

COVID in China, hard to get smart TVs, costs are up a lot. Inflation is hitting the consumer, geopolitical uncertainty overseas, maybe a recession starting in Europe. We jumped too far up the curve, and we’re “catching up,” combined with the content being “uneven.”

The content hasn’t been crushingly great, or amazingly great. All of that is more of an explanation of why Netflix has struggled, versus suddenly having a robust competition that’s crushing them.

MB: Just to equalize that, let’s say you are running Netflix. Do you think that, if content improved and became more consistent, would the subscriptions continue to increase?

Or do you fall in the Hulu use case, with the addition of ad supported streaming? I’ve got my own perspective on it, so I’m really interested to hear how you’d look at that from a business model perspective.

RG: Advertising worries me only because I do believe that consumers, when given a choice, will downgrade to the lower tier. New consumers, especially, will take the lower tier. Not because they like advertising, but to save a few dollars. I think it’s just human behavior.

When the ads feel like content, like Instagram, that’s one thing. The problem when you introduce advertising is, that if ads are disruptive and annoying, these are bad experiences. If you’ve used Hulu ad-supported or TV everywhere, you know what I’m talking about.

And the idea of having a “bad experience” on Netflix seems very troubling. And yes, you can always rationalize it by saying, “People will upgrade if they’re really unhappy.” But I think people don’t do that.

They just sit with their discomfort, and they don’t actually spend more money. That’s a real fear that I have that. This is one of those moments in time. Is Netflix actually doing the right thing? Or they’re just embracing the flavor of the moment because people are so excited about ad-supported television?

MB: It’s interesting. I was talking to somebody not in the media space recently. They described Netflix as the rare media company that they love. And that they hate their cable company. They went through the litany of things, like, “I loved, and I felt some personal feelings for this company. And what does advertising mean?”

RG: You can cloak it in the idea of consumer choice. But if consumers are going to take something that they don’t really like, then you have a lot of consumers who don’t have that love and affection that you just talked about. That really worries me.

MB: One of the things we model is that viewership from linear to streaming reduces the total video ad impressions by 8%. Because it’s lower ad loads and a lot more ad-free.

Our thesis has always been that for this to work, you’re going to have to increase your ad rates. Because all these media companies have their revenue going up; no one has a projection of the revenue declining, The only way to do that is targeting a better experience, like making the ads feel like content. What do you see as the biggest challenges for launching ad-supported streaming?

RG: Remember: Everybody that has launched ad-supported streaming is in the advertising business. When Hulu launched it, all of its parent companies were in the advertising business. If you think about HBO Max, obviously Turner is. Disney, obviously, with Disney+. Now, Discovery.

One by one, they all are leveraging decades of advertising experience, existing workforce, ad tech, etc.

While there’s Freevee, which is Amazon’s free product, it is a totally separate product. But there are no ads on Prime. Apple TV+ doesn’t have ads. So the companies that are not legacy TV advertisers, haven’t done it. You’re starting from scratch. So, the biggest challenge is, how do you do it?

Remember Netflix’s content? The original programming wasn’t built with natural slots to do advertising. You’ve got to go back and figure out how you crack the content and make it suitable for advertising. How do you insert ads, all over the US, or globally, and not make it a bad experience? Do you do it in movies? Do you only do it in TV shows? Do you do it in kids’ content? How do you make it feel relevant?

We haven’t talked about it, but you have a lot of password sharing. Are you delivering the wrong ad to the wrong person because of password sharing? There are a lot of issues to deal with, and I’m still not convinced they actually need to do it. This feels a little reactionary, but we’ll see.

MB: Another quick one. There’s a lot written about the downfall of CNN+. We look at the framework for news a lot, and we operate primarily at the local level. Local news is still a big thing. The big private driver, national cable news, hasn’t gone fully into streaming.

Do you think anyone else will try the high-end direct-to-consumer model on news, or are these cable news going to run their course, and in the future it’s all going to be social media and companies built for that environment?

RG: The New York Times has done a very good job transitioning from print to digital subscriptions. It can be done. They really enforce the paywall and force their diehards into it one by one. They built that perception of paying. The Wall Street Journal and FT have done the same.

Cable news is hard because you’ve got things like CNN.com that have been free forever. So, transitioning from free to paid, when you give so much away, every single day is really difficult.

If CNN.com disappeared, and it was just CNN, if you have a cable subscription, or CNN+, that would be a very different story. But when you give away so much every day, and there’s so much news content available for free every day, can news be an additive piece of a streaming offering? Sure. Can news be a standalone, meaningful driver of these companies in a streaming world? I find it hard to believe.

I don’t think it’s a big enough business on its own. News has to be a feature of a larger business, rather than a standalone. I don’t think these things can really stand on their own. People will say, “Why couldn’t CNN+ have been The New York Times?” The problem is that there’s too much similar content available for free. Even on CNN.

MB: All right. I get you in the final two here. Looking at this more with your investor hat. What’s your overall investor thesis for this space? And, are you currently looking at private and public companies with a different viewpoint, for instance?

RG: We always look at the disruption of private companies. What makes Lightshed unique is that we’ve always spent a tremendous amount of our time on the early-stage, disruptive startups, even before the venture fund launch.

We were looking at Twitter and Snapchat in the early days, trying to understand their impacts on things like Netflix. And we were spending time on TikTok when it was called Musical.ly, trying to figure out its disruptive impact and why people were using it and what it meant. In many ways, we understand disruption. Better than anyone.

And we’re looking at how early-stage private companies can disrupt even the largest mega-companies that exist. The overarching thesis, right now, is that legacy media businesses are clearly getting worse. On top of the fact that the global economy looks like it’s slowing.

The scary thing for media is that now that the future, streaming, is slowing down and it may not be as large as we had hoped. Forget about being large, it may not be as profitable as we had hoped, nor as the companies thought.

And the unknown question is, is there a choice or door #3? Where to go next? I don’t think we know.

People talk a lot about web3, Crypto, and Blockchain, and it’s not clear how those are “fixes” for the challenges these companies are facing. I think they’re just in, for a rougher next few years, as profitability gets squeezed. As they shift from over earning in the legacy world, to the harsh realities of operating in the new direct-to-consumer world.

MB: All right. Last one. What is on your reading list that should be on our audiences’?

RG: I’d say There are two newsletters that I love reading and that stand out. One is Puck.news. I’m a huge fan of what Matt Belloni and his team are building over there. And I love Richard Rushfield over at The Ankler.

I think they do an incredible job. I live on Twitter, it’s @RichLightShed on Twitter. I spend a lot of time there. Twitter’s essential for me from a learning tool, at least for now, hopefully, Elon doesn’t screw it up, but newsletter-wise, those are two that really stand out.

MB: Rich. I’m grateful for your time. And I know our audience is going to love the conversation. Thank you.

See the rest of the Screen Wars Thought Leader Interviews here!

Rich Greenfield is a Partner and Media and Technology Analyst at LightShed Partners and a General Partner at LightShed Ventures.  Prior to LightShed, Rich was a Managing Director and TMT Analyst at BTIG and the co-creator of the BTIG Research blog.  Prior to joining BTIG in 2010, Rich was a managing director, media analyst, covering media and cable/satellite industries at Pali Capital for four years.   Prior to that, he spent two years at Fulcrum Global Partners as a media analyst.  Rich started his career at Goldman Sachs & Co. in 1995, where he spent eight years covering entertainment, cable system and leisure industries.  Rich is an active angel investor focused on the convergence of media, communications and commerce. He loves meeting new start-ups, demo’ing new technologies and trying to figure out the future.  Rich has been a New Yorker his entire life, with a stop in Boston to attend Brandeis. 

Cross Screen Media is a marketing analytics and software company empowering marketers to plan, activate, and measure Connected TV and audience-driven Linear TV advertising at the local level. Our closed-loop solutions help brands, agencies, and networks succeed in the Convergent TV space. For more information, visit CrossScreenMedia.com.