Variances in per-user revenues muddy the economics of streaming services – study

Scale is most certainly the name of the game in the new streaming era. OTT players of all sizes are tapping into promotions and discounts and leaning on distribution partnerships to shore up and expand their subscriber bases and drive up revenues.

At the same time, an over-reliance on these subscription-driving strategies and tactics threaten to undermine the underlying economics – particularly in the area of revenue per user (RPU) – for some of these major players. That, according to a new study, is shining a light on the critical difference between a service's "effective" RPU and its "reported" RPU. Reported RPU can be a somewhat misleading metric when held against an effective RPU that has been shrunk by a mix of promos and distribution partnerships with cable operators, telcos and content aggregators that end up spreading the wealth.

To get a fix on this market dynamic and to produce a more granular look at effective RPU for paid streaming services, the financial analysts at MoffettNathanson analyzed its data with that of measurement and analytics company Antenna. Antenna's data includes subscribers billed both directly from OTT services and via Amazon Channels, Amazon's Fire TV platform, the iTunes App Store and The Roku Channel, but does not include subscriber data from consumers on free promotions or those that are bundled with mobile/telecom operators or cable video service providers.

At a high level, platform streaming services that can rely on their own direct-to-consumer marketing for the bulk of their customers have the best chance to generate higher "effective-to-rate card" RPU. Netflix, with a recent effective average RPU of $14.88, and Hulu, with an effective average RPU of $10.87, are among the best examples of services that have gotten ahead of the recent wave of new "discounting entrants," Michael Nathanson, analyst with MoffettNathanson, explained in the report.

HBO Max, WarnerMedia's relatively new OTT service, has an effective RPU of $12.19, thanks to a combination of a "very high linear rate card" and its reliance on AT&T distribution partners, he added.

After that set of services, the effective RPU for the rest of the market ranges in mid- to high-single digits, "with a wide gap between reported rate card to effective RPU driven by reliance on bundled offers, special promotions and/or third party aggregators like Apple, Amazon or Roku," Nathanson noted. He estimates that the effective RPU among services such as Showtime, NBCU's Peacock, Discovery+, Disney+ and Paramount average between $6 to $8 per month.

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"Yet, there is no clear consistency on how streaming companies are reporting RPU given the various wholesale deal structures and third-party distribution agreements in place today," the analyst explained.

Is streaming a good business?

Nathanson noted that a flurry of distribution partnerships and promotional activity, whether it's a Paramount+ deal for Apple TV users or a steep, two-month discount for Discovery+ or AMC+ during Amazon's Prime Day 2021, also feeds into the ongoing question as to whether streaming is even a good business in the first place. Given the churn volatility, the added costs of subscriber acquisition and generally uncertain economics underpinning the market, "not yet" appears to be the answer for many.

"Elements of this shift in content distribution paths from a bundled, indirect approach via a MVPD to a direct or semi-direct over-the-top internet delivered model are inferior," Nathanson explained. "SVOD services that don't have the brand awareness or unique content offering to attract customers directly have to use greatly discounted offers and revenue share arrangements with a new crop of aggregators (e.g., Roku, Apple, Amazon) to build their businesses."

On top of that, churn in these distribution and aggregation models are typically much higher than the 1.5% to 2.5% monthly churn that traditional multichannel video programming distributors (MVPDs) enjoy.

"Putting it all together, media owners are trading in high recurring subscription revenue in the old linear world for a new model that offers both a higher degree of revenue volatility and the added cost of subscriber acquisitions," Nathanson wrote.

Netflix, Hulu tops in direct revenues

Based on MoffettNathanson's analysis, which includes Antenna's data, HBO Max appears to be the biggest beneficiary of the bundled approach, with more than half of its subs coming from an AT&T bundle, with Discovery+ getting about 20% of its subs from the service's deal with Verizon.

How those deals and bundles impact OTT service revenues vary. But Nathanson estimates that the revenue share from third-party aggregators such as Roku, Amazon or Apple is in the 20% range, and in the range of 30% to 50% for OTT services that are bundled with a mobile service.

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Per the analysis, Netflix and Hulu have the most revenue coming in directly, and other, newer services, such as HBO Max and Discovery+, "have had a tougher time building that one-to-one relationship."

This level of more granular RPU detail and a streamer's ability to establish a direct relationship with their subscribers matters, the analyst says, because investors have taken "the simplistic route" of using revenue multiples to value streaming assets/companies in their various stages of infancy, and embracing "a one size fits all approach to valuation."

The cost of distribution affiliated with third-party aggregators, Nathanson adds, are material and will effectively drive down the long-term profitability of platforms that are unable to build direct relationships with their customers. With that in mind, the analyst said he expects to monitor the effective RPU to reported RPU in the coming quarter to get a better understanding of the effects of promotions.

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— Jeff Baumgartner, Senior Editor, Light Reading