GOOGL - Streaming Reality Vs. Fantasy With Dan Rayburn

2023-11-14 13:30:00 ET

Summary

• Streaming expert Dan Rayburn discusses the reality of the industry and the slow process of technology disruption.
• Q3 earnings reports reveal the importance of defined methodology and the need for profitability in the streaming market.
• Rayburn criticizes the hype around Free Ad Supported Streaming TV (FAST), highlighting the lack of business metrics and transparency.

Listen above or on the go via Apple Podcasts or Spotify .

"It takes a really long time for one technology to disrupt another. In many cases, it's not disrupting it, it's a complement to it." Streaming expert Dan Rayburn on fantasy vs. reality of the industry (4:10) Q3 earnings and the importance of defined methodology (8:25) Hitting back on FAST hype (40:00).

Transcript

Rena Sherbill: Dan Rayburn , welcome to Investing Experts. It's great to have you on the podcast. So thanks for taking the time.

Dan Rayburn: Thanks very much for having me. I love talking about the streaming media industry. So there's always so much to talk about when it comes to online video.

RS: Yeah, there could not be more to talk about. I feel like we're in a ripe time in the continuum to be discussing this, and I don't think there's anybody better to be discussing it than you.

We can find your writing on Seeking Alpha, but you're out there in much bigger arenas. We just kind of steal your stuff and republish it.

DR: With permission, you steal it with permission.

RS: With permission, yes, yes, yes, yes. The right kind of stealing. Share with our audience for those that don't know you and even for those that do maybe kind of synthesize where you're coming from, what you talk and write about and kind of who your audience is.

DR: Yeah, sure. So, appreciate just being able to talk about this today. It's something I eat, sleep, and breathe with streaming media.

So I'm fortunate to have been in this industry almost 30 years. Many people don't know, but 2023 marks three decades of streaming media technology first being used on the Internet, audio only, dial-up only, of course.

And so I came right out of the Air Force, got a job doing Apple Systems Repair as a certified engineer. And in 1995, Apple had one of the first really large-scale music events ever on the Internet for streaming called the Macintosh New York Music Festival.

So I helped that in terms of getting that on the Internet. So that was kind of the future of music. At the time, there was no video. I went out, raised a little bit of money and started a company at 22, 23 years old. And we traveled the world with bands streaming content back to the record labels website, Virgin Atlantic Records, also to places like Pepsi.com and TV.

And so this was just before dot-com. And then I sold that company and then went to a little ISP in New York City. They went out and raised $600 million on a bond offering and did that entire dot-com life of just growing and seeing really what companies were doing wrong back then in terms of not being realistic where the market was going.

So I learned a ton and realized that once video came along, this was going to be the future of different types of video applications down the line. So I feel very fortunate 30 years – almost 30 years later to still be in this space.

And while I wear a lot of hats because I spend a lot of time on CNBC and doing a lot of media interviews and podcasts like this. I also have my own podcast . For about 20 years, I've been producing trade shows.

So I produced a trade show with the NAB Show called Streaming Summit by Dan Rayburn in Vegas every year, where I have the largest companies we're going to talk about today, their executives on stage talking about the latest and greatest.

I also spend a lot of time with institutional money managers who have a Netflix ( NFLX ) or whatnot in their portfolio, but don't really understand the competitive landscape. Congress and Senate have asked me to testify pertaining to things like net neutrality, other laws, because of course, our politicians don't understand how any of this works.

So I do a lot. My blog at StreamingMediaBlog.com has been around almost 20 years, but I'd like to wrap it up by saying my job is one thing and one thing only, and that is to inform, educate, and empower others when it comes to streaming media technology and business.

Sometimes it's media, sometimes it's vendors, sometimes it's suppliers, it's content owners, it's broadcasters, it's sports leagues, it's Wall Street, it's Congress and Senate, but I'm in the business of information.

RS: Yeah. I think that's a – I mean, if you had to sum it up in one line. There's so much going on in so many different lanes that are being kind of brought in under one roof.

I'm curious because you've been in it so long and because you've seen it kind of unwind the path as you've been traveling it, I'm curious how your thoughts on the space have evolved the time that you've been in it.

DR: Well, that's a good question. So I live in reality, not fantasy land.

RS: How’s that?

DR: It's where you need to live when you're in any business. So I've known even early on that some of these predictions people were making back in ‘98 and ‘99, and then when web TV came out, this idea that one thing is going to replace another thing overnight, that's just never the case.

So I always say that the theory of a proposed replacement is always more appealing than the reality of a solution in use, but it takes a really long time for one technology to disrupt another. In many cases, it's not disrupting it, it's a complement to it.

So I just knew early on from watching what companies were doing wrong more than anything that the amount of money they were investing to think all of a sudden overnight, an entire industry would be disrupted in a year or two. That's not the way it works. It takes a long time. And for streaming, even though some of the technology was working great at the time, many of us didn't have broadband and then you had lack of hardware support.

So you had to put – as an industry, you had to put a lot of pieces in place end-to-end to really get this to work. But then the key is to get it to work at scale. Because scale and quality at the same time, and we consider Netflix the gold standard of both, that is hard to do. That is not easy.

So many people listening probably have no idea the technology was invented 30 years ago. Many think it's – and I hear people say all the time, “Oh, Netflix invented streaming.” They didn't invent the technology. What they really took was the technology and they created the first mass market application of the technology for movies and TV shows. But you also have to look at someone like Major League Baseball, which launched MLB.TV well before Netflix did. So they deserve credit as well.

So there's been a lot of companies and a lot of people over the last 30 years that are responsible for getting the industry to where it is today. It is not one company, it is not a handful of companies, it's a lot of very smart people getting streaming to the point today of where we no longer think about the technology as a consumer. When you play back your Netflix video, you are not stopping to think, well, what's the codec? What's the time to first frame? What bit rate is it using?

Now, on the back end, those nerds are thinking of all that because we need to improve upon it and make it more reliable. But consumers just now think of streaming as a means of content distribution like any else – like any other technology out there, and that's good. That's what they should focus on.

RS: So, broad picture, I'm torn between like four different ways that I can take this conversation because I feel like there's so much to unpack here and so much to dive into.

But for the sake of investors looking at the space, how would you give an overview of the space at this point? Who do you think - we're just coming off of Q3 earnings . There's a lot to look at in terms of the numbers and what companies are reporting. How would you kind of give an overview of the different lanes in the business and who's doing what and what you like and dislike about that?

DR: Yeah. So it's a great question. So the first thing I'll say is I don't provide stock advice or recommendations. A lot of the companies we'll talk about today, I can't legally own their stock. I’m not a Wall Street analyst and that I don't put out reports or projections of stock prices. The companies when I'm writing about them, whether the stock price goes up or down, I'm not compensated either way. So I'm very different in that regard.

There are some companies I cannot legally own because the relationship I have with the management team is I have an insight to the business. And as a result, I have at times information that is not yet out in the public realm, so – or it's under NDA, or one company is acquiring another company. So those are things that I do write about, but obviously could not purchase stock in those companies as a result.

So the biggest thing I would say for investors listening is the first thing you have to do is define methodology and you have to define terms in the industry. So I hear all the time people say things like quality. Well, how do you define quality? Well, we all define it differently. Or I hear people say, “Well, Dan, which company will be most successful?” Well, define success.

Are you looking at free cash flow, positive EBITDA? Are you looking at growth at all costs like Disney ( DIS ) was doing for a long time? We all have different definitions of what we're looking for from a success standpoint.

And what's really changed over the market in the last couple of years is Wall Street has changed their definition of how they define success for a lot of these companies with their D2C, direct-to-consumer streaming service. Because for a long time, it was grow at all costs. It was the Amazon ( AMZN ) model of Get Big Fast, and we saw Disney doing that.

Look how much money Disney was losing every quarter in a direct-to-consumer streaming business. And then after COVID hit, you have some macroeconomic issues in the market. You've got money that's now very hard to get, and when you can get it and you raise it, it's very expensive. You've got interest rates at 13% to 15% some of these companies are getting, coupon rates are high. Three years ago, it averaged about 1.5%.

So all of a sudden, companies realized they have to do more with less, which is why you saw so many layoffs . And Wall Street started looking at these companies and saying, “We'd rather you grow a little bit slower as far as the number of subscribers you have and get to profitability.”

And today in the market, it's incredible how many people even in my industry want to argue and can't separate facts versus opinions on numbers we have on public companies.

So Netflix has said that they expect at least $6.5 billion of free cash flow this year. And yet there are people in my industry who on LinkedIn will debate with one another whether or not Netflix is going out of business.

So they don't even know the numbers. And that's a big problem I see in the market every single day where I see people sharing information that's factually inaccurate. It's one thing to have an opinion, but these days everyone, it seems, uses their opinion and disguises it as a fact. And that's the problem I see with a lot of investors looking at articles on Seeking Alpha and other places and seeing the comments they make is, well, they're starting off with the wrong data.

So if you have the wrong data, you're going to come to the wrong conclusion. There's no way around that. So Wall Street changes how they define success and that's why you see Warner Bros. Discovery ( WBD ), Paramount ( PARA ), Disney ( DIS ), and many others changing their business model over the last two, two-and-a-half years, where the whole goal is, what are they now talking about profitability?

That is the number one thing they're talking about is profitability. And they have to get to that and they have to get to that sooner because look at Wall Street's reaction when they're spending a lot of money, losing a lot of money every quarter, look at what they're doing to their stock price.

So for those who don't maybe realize, these companies beholden to stockholders and their share price. And many times they change their business models based on what's going to make their stock price go up.

So it's an interesting time in the market post-COVID, how the streaming market has changed, consolidated. We've seen price increases from every single streaming service across the board, sometimes twice in a year. ARPU, what we call average revenue per user, all the companies are working to increase that. They're also looking at how do they rebundle or repackage some of their services.

So it's an interesting time in the market because they're really trying to figure out what do consumers want, how will they consume it, how much can we charge before they get really upset, how does advertising play a role in it because some are just now adding advertising as an option.

So it's a fascinating time to be covering it, but at the same time, you can just imagine how confusing it is for people who don't live this industry every single day because there's so much news that comes out every time.

RS: Do you feel that some of the things that we as investors or observers of this industry see as, why did a company do that? It seems like a big mistake, like a gross overspending when it was maybe pretty obvious that they should be more conservative? Do you feel like oftentimes that's not a case of mistakes being made, but as you said, it's playing with the market and seeing where they can get in this way, and then they realize that they have enough capital to pivot when they need to?

DR: It's a good question, but honestly, I think, it comes down to egos.

RS: I was afraid of that.

DR: Honestly, I think it's egos. Because here's what I can't figure out. During COVID, you had companies, let's just take companies out of the streaming space like Peloton ( PTON ), Carvana ( CVNA ), who invested so much money now in this idea that everything would stay digital forever post-COVID. And they came out and said things like, “Well, no one's going to go to the gym again. No one's going to go to movie theaters. No one's going to go to a showroom to buy a car. Nobody's going to travel again or get on an airplane.”

And what I couldn't figure out was, who are these executives hanging around with? Because none of my friends or anyone in my family was saying that, and yet look at how much they then invested. Peloton is a great use case. They're going to be studied in universities going forward and how not to operate your business.

Because they then decided, “Okay, we're going to double, double down, triple down, quadruple down on starting manufacturing, doing distribution, opening warehouses, and that wasn't their business. That's not what they were good at. And then what happened?

Well, COVID got better. People started going back to gyms, right? It changed. What makes us human, most of us, is the fact that we want to be around other people. And yet these executives during that time would preach as if we were in a completely new landscape as human beings that nobody's ever going to interact with anyone in person again.

And what were these Boards doing? Like, why would the Boards approve that and let these executives do that? So it's incredible, I think, just the egos and the arrogance of a lot of management teams during that period of time. Because if you talk to real people, which I guess they weren't doing, that's not what they were saying. I mean, jeez, all my friends were saying, I can't wait till we can go somewhere again.

And yet they're out there telling Wall Street that things will never recover, and this is the new norm, as everyone called it. And every single one of those companies that made that bet, what happened? They lost.

RS: Yeah. Careful the narratives were being pushed and at what time and to what end. So maybe get into, without stock advising, maybe get into the earnings numbers and what you saw from different companies and what kind of trends you're taking from that.

DR: Sure. Yeah. So I'm always looking at a couple of data points. Number of subscribers, net new subscribers is not the biggest data point I look at. Because what I always say is, would you rather have fewer subscribers and a higher ARPU and a profitable business and free cashflow, or would you rather have more subscribers and be losing money?

Most companies, especially today, actually not most, 100% of them would take fewer subscribers, lower churn, higher retention, higher ARPU, and be at least EBITDA positive.

So we are getting as an industry towards that bull's-eye. Netflix ( NFLX ) is already there. But Warner Bros. Discovery, Fubo ( FUBO ), Paramount, Disney , they're all working towards that really, really hard.

So if you look at, let's just take Warner Bros. Discovery for instance, Q3, they lost 700,000 direct-to-consumer subscribers. And yet their ARPU was $7.82, which was up 6% year-over-year. So they're making more money on fewer subscribers. Why? Because they're raising prices, bottom line.

At the same time, because they're cutting back on some content spend, and part of that was due to the strike between the writers and whatnot that impacted everyone's content spend, made their numbers look a little bit better.

But in Q3, Warner Bros. Discovery had positive EBITDA of $111 million in their direct-to-consumer business, positive. That's great to see. Now, that's only one quarter. They need to put a lot of those quarters together, right? That is really key. But at the same time, their TV network segment revenue fell 12% year-over-year.

So it's interesting how it seems almost everybody wants to compare all these companies one to the other when many of them are not comparable at all. Netflix does not have any legacy TV network business. Netflix is not doing live sports. Netflix is not doing live linear like YouTube TV or Hulu + Live TV or Sling TV or FuboTV.

So many at Wall Street are quick to look at Netflix's content spend versus others, and yet Netflix isn't doing sports, they're not doing live. So it's not comparable. And that's the first thing investors have to think about here is you have to look at the companies in terms of what you can compare, but more importantly, what you can't compare, and very few people do that.

And part of that reason is the media does an absolute terrible job of understanding the businesses of these companies. And a lot of them write for headlines, which is why we have the term war, right, streaming wars. That drives me nuts. As a former soldier, there's nothing good about war. There just isn't, right now. It's inevitable in the world we live in, but there's nothing good about it.

So what we have going on with these companies in the streaming space is competition. Competition is good, but we never hear the war – term war used when you think of like auto manufacturers selling against one another. You don't hear about that.

So the media loves playing that up. The media loves writing for headlines when it comes to streaming. And it's interesting how few of the people who are writing about this industry actually understand what is taking place just purely from a number standpoint.

So this morning, I put up on LinkedIn, eMarketer put out a report saying that Hulu + Live TV has 11.4 million subscribers. And it just – I look at that and I go, guys, “Disney had earnings last week. They reported 4.6 million. But you're saying it's 11.4 million? Like, where do you come up with that number?”

So these are numbers from public companies that many in the media just can't even get accurate. And in some cases, like eMarketer, they're asking companies to pay thousands of dollars for a report to have an inside view of what's really taking place with these businesses, and they don't even know themselves.

RS: And what's the cause of that? What do you put that on?

DR: Lack of pride in the accuracy of their work, hoping nobody notices, which many times they don't, or just the business of media reporting these days, which is push out as many articles as you can that are 800 words or less that don't tell a story because we have to sell ads against it. Yeah, that's been a problem in the media space for a long time.

Now Warner Bros., I find as an interesting sort of case study of what they're doing here because they're really trying to position themselves as an acquirer, somebody who can acquire somebody else when there's distressed assets in the market. So think of what they're doing. They're paying down debt and they're increasing cash flow.

So this year, Warner Bros. Discovery has paid down $12 billion and they expect to generate at least $5 billion in free cash flow this year. And part of the reason they're doing that is, and they've been pretty open about this, is they feel down the line. They don't say when, but at some point, some companies might be more distressed in this market and the government and the regulators, they won't look at monopolies the same when it's a distressed asset.

So if one large company in the streaming space wants to acquire another right now, that's going to have to go through all kinds of regulatory approval. There's no way around it. But when it's distressed assets and the company is having financial issues, it has a different level of regulatory scrutiny. It's much easier to do acquisitions.

So interesting if you look at their numbers and what they're talking to, where they're thinking this market goes down the line. So that's a thing to keep an eye on. Disney , we had some interesting numbers we haven't seen before because they recently broke out their numbers just for ESPN standalone.

We don't know if they're going to sell off their – sorry, their linear channels like ESPN, ABC. We don't know if they're going to exit out of India with Hotstar. There was a report that Reliance wants to buy that business.

What their CEO said on their last earnings call and he had a long, long interview on CNBC that day as well. And they said, they're still really looking at all the parts of their business. They also announced that they found another $2 billion that they felt they could cut cost-wise out of the business. I think that number goes up over time because they just announced also a new CFO.

So my guess is the CFO will see where they can cut costs even further. The big problem with Disney is that they've got to reduce their losses in the direct-to-consumer line of business because in Q3 they lost $420 million. And Wall Street was kind of excited by that because previously, a couple of quarters ago, they lost $1.1 billion for the quarter.

So I kind of laugh only when I'm like, wow, Wall Street’s excited, he only lost $420 million. That's still a lot of money. So they did say they expect their D2C business to reach profitability in Q4 fiscal 2024. That's going to be really key for them. That is what Wall Street wants to see.

The other interesting thing to note is in this quarter , in particular, they broke out a number for the first time ever and said, “ESPN+ was profitable generating $33 million. That had never happened before, at least, they'd never reported that. So interesting to see that. The other number that we got from them that's brand-new is they now have 5 million subscribers on their advertising plan. That is a number we previously had not had from them.

They also announced that they're going to launch their D2C ESPN offering, “no later than 2025”. I don't think that news surprises anybody, but we don't know what that offering is going to be. We don't know what it looks like. We don't know what content will be there. We don't know what's going to be priced. And then also what happens to the ESPN+ service when ESPN comes out? Not really sure how those two are tied in together.

But now that we also have some of the numbers on the ESPN side, everyone keeps talking about TV being dead and dying. That's not accurate. And ESPN is doing a lot better than people thought. So it had operating income of that was up 16% from a year ago to $987 million.

So do we all know that over time more content that is on Pay TV is going to go direct? We absolutely do. But this idea that, and a lot of analysts are putting out there, “Well, man, Disney better get out of the ESPN business in the next year or it's going to die off.”

Well, anyone who says that is not reading the numbers because we have the numbers and the numbers don't lie. So Disney right now for Wall Street, it's a cost-cutting story. That's all it is. But they have to be careful how much they cut because we also know what drives new subscribers to streaming services and keeps subscribers on there is what, content.

So if you cut too much from your content spend and now you don't have enough content for your subscribers, what's going to happen? Well, that's going to impact your churn or retention in some way. So Disney is an interesting one to watch.

If we jump over to Paramount , Paramount added 2.7 million subs for Paramount+, so that's good, but they lost $238 million in the quarter on their D2C business. And all they've told us is not when they're going to get the potential profitability, but they just say that their full year D2C losses for 2023 will be lower than 2022. So that's good. It shows progress, but they're also going to raise pricing in the New Year. Netflix also just recently raised pricing.

So everybody is raising pricing, which you have to watch here, whether you're in Wall Street or whether you're just a member of the media, whether you're in this industry, is there's a threshold of how much these companies can raise pricing to increase profits and get to at least EBITDA positive as quickly as they can. But if you raise pricing too much and too fast, what's going to happen? You and I and others are going to cancel certain services.

So you have to be very careful there in terms of how much you raise pricing by, how often you do it, how you're actually providing different levels of content, it's important. Warner Bros. Discovery right now allows you to watch sports at no cost. However, come next year, I forget the exact month, they're going to start charging more every month.

So it also depends on what you want to watch. So Paramount is an interesting one. They also came out and said that password sharing, they don't see that as a meaningful profit sharing right now. They don't plan to roll out password sharing rules or crack down on it, where obviously other companies like Netflix and Disney have. Netflix has already done it and Disney says that they will.

So again, it just – it also shows a different level of some of the things that these companies are seeing in the market. So whether you're Comcast ( CMCSA ) where you have a traditional MVPD service and you're looking at how many Pay TV subscribers you're losing or you're Netflix where you're getting 100% of your revenue from a streaming-only service, if you're looking at these companies from a financial standpoint, you really have to understand the core business that they are in and you have to understand what their method is for being in that business and what their reason is for being in it. So I see people compare Apple TV+ to Netflix.

Why are those two being compared? Apple ( AAPL ) makes most of their business where? Not from streaming, it's where they make the least amount of their business. They're a whole ecosystem, an OS, a store, a credit card. We know what Apple is. They're a whole ecosystem. Netflix isn't. So just very different businesses.

RS: Like a year or so ago, the comic Jim Gaffigan put out this tweet, something like, why don't they just bundle all the streamers together and call it cable? And I thought that was really funny.

And I think insightful to a certain degree, but I think what I'm getting from you is it's not necessarily one big lane that everybody's trying to play in. There's different parts of the lane that different companies are more adept at than others, and it's a matter of figuring out what works best for that company.

DR: That's exactly right, because their business models are different.

And so the first thing you started off with is, well, who's doing on-demand versus live? Those are completely different business models. Second, who's doing sports and who isn't?

Fubo is very clear, very clear. They're not going after the average consumer. They're going after the consumer who's willing to pay more for a specific level of service for the type of content they have tied to sports. They're not trying to get to 20 million subscribers. They're realistic of what the market opportunity is for the specific content they're targeting.

So you see companies like Fubo thrown into Netflix and I just look at that and go, what are these people doing? There's two completely different businesses. Now you mentioned something about bundling all these into one service.

So in the industry we call that aggregation. For those that don't understand, these companies are not doing what is best for us as consumers. Let's just cut right to the chase. These are businesses. These are not nonprofits. They are doing what is best for their bottom line.

So you have some analysts and some people in the space, and keep in mind, this has been talked about for 20 years in my industry, more than that, that well, one day all these companies will just get together and they'll create one app and they'll put all their content and they'll charge one fee. Okay, that is the world of unicorns and glitter. That is not happening.

If you think Google ( GOOG ) and Microsoft ( MSFT ) and Apple and Netflix and Disney and all these companies are going to get together and be like, “Hey, let's just all work together. Let's all share customer data.” That's just not reality.

RS: For the good of humanity.

DR: For the good of consumers, we would love it. We would absolutely love it. But again, they're not doing what's best for us. Because if they were, let me give you the example. I live in New York. In order to watch every Mets game this previous season, I had to have six different services if I wanted to see every game. Now is that a good fan experience? No, it stinks. But why is Major League Baseball doing that? Because the amount of money they make from all of that licensing.

So these companies are looking at what's best for them as a business, not about what we really want as consumers. That said, yes, the services do want us to be happy. They're trying to make it services more personalized, more reliable, better quality video. No doubt they are working on all of that. But the amount of friends that reach out to me and say, Lord of the Rings was a great example. I remember when someone reached out and said, “oh, I want to watch the whole trilogy.”

So the first movie is on this service and the third movie is on this service, but the second movie isn't. So now I have to go get two different services to watch Lord of the Rings trilogy, and I'm like, yep, because that service somehow licensed the second movie as an exclusive only to their service for a period of time.

Now they're all in one service again. But Friends, Seinfeld, all of a sudden these things jump one year, another year, a couple of years later, they go to another service because someone got a different deal. The average consumer doesn't follow that. I do only because I have to, but the average consumer is really confused when they can't find the content they want on the service they want.

And is that good for us from a discoverability standpoint? No, but that's not what's driving these decisions. These decisions are being made off of licensing terms and business models. That's the bottom line.

RS: How do you see it evolving as the years go on? Do you see it developing into being more consumer-friendly as we would define it? Or do you see it evolving in different ways that we won't really understand at this moment in time?

DR: So people ask me all the time, what is the future of the stream media industry? And the first thing I always say is there is no future.

What we have today from a consumer experience is going to be what we have five years from now. A lot of options in the market with very good video quality, with many having very good user experiences, but with complexity and a lot of fragmentation.

So I think as consumers, we would probably, most of us would agree we love choice in our life. Food, entertainment, music, whatever it is, we like choice, we like options. But there are times where you provide so many options, it's so overwhelming to a consumer. And that's the case today with video services.

I track in an Excel spreadsheet by name over a thousand streaming services around the world. Just in the U.S. alone, there's easily over a hundred. And that includes niche smaller ones like Japanese animation, Crunchyroll, very specific services.

But going forward, consumers will have more choice at higher prices, and they're really going to have to decide what is most important to them in terms of how they spend their money. Does live really matter anymore, unless it's just for sports? Do I have to see it live or can I watch it on demand? So how they view content is going to change.

And I think the best example of this that I tend to find nobody really talks about or notices when Netflix came to the market with streaming and they had a certain amount of titles available for movies and TV shows.

At one point the way they marketed their services was you can pick from 80,000, I remember that number, 80,000 titles in Netflix. They were promoting depth and breadth of their catalog. And then what happened was Amazon came along adding video to Prime. Amazon started licensing a lot of the same content Netflix has.

And all of a sudden, what did Netflix do? All of a sudden, they came out and talked about how they're going to start creating original content and putting money into things like House of Cards, one of the first big series they did back then.

And what Netflix slowly did was they actually reduced the amount of content available in their catalog. And they told consumers, Well, we know you like choice, but we think over time, even though we're providing less choice, we're providing higher-quality content that you're going to like.

Netflix changed our viewing habits and patterns without most consumers knowing. Because today, what do consumers talk about? Original content. And Netflix was super smart in realizing that to control their own destiny if everybody else is licensing the same content they're licensing, then what makes Netflix different? And especially when it's a company like Amazon that has already so much information about us and has a larger reach than Netflix, it's very smart of them.

So what we've seen is we've seen consumer habits change of how content is consumed, and that's across music, it's across news, it's across video. And going forward, you and I and everyone else is just going to have to decide, how much money do we have a month? Where do we want to spend it? What's most important?

The good news is because these services are so easy to cancel and sign up to, nothing stops you from, and we see this all the time, keeping a service for three or four months, watching what you want, canceling, jumping onto a new service. Is that a little frustrating? Yes. Is it a little hard to manage depending how many services you have? Yes, it can be. But that's the reality going forward.

This idea that everything will be aggregated into one place. Some people say, well, that's what Apple TV+ does. And well, they aggregate it into all one screen, but when you're not aggregating billing across everything or logins, it's not truly an aggregated experience.

Amazon does have that to a degree because you can sign up for other streaming services through Amazon and just have one billing experience, but there's a lot of services you can't do that with because they're competitive to Amazon.

So going forward, the future is exactly what we have now, more choice, a lot of fragmentation, and a lot of confusion, and especially around sports because that's really changed over the last few years.

RS: Who would you say is the company or one or two or three companies that you feel like are the savviest at navigating these changes? And who do you think is the least or some of the least savvy companies?

DR: Well, Netflix is still considered the gold standard in our industry. And the reason for that is when was the last time your Netflix didn't work? Do you remember? I bet you don't.

RS: No.

DR: Right, there you go. It works. It looks good. They don't have outages now. They've had a some here and there over the last couple of years nothing too major. They did have an issue with one of their live events that they did, but Netflix for the most part just always works and always looks good. A lot of the other services are trying to get to that level of reliability.

The other thing with Netflix is since day one, what has it been called? Netflix with one app? Look at some of these other services. How many different brands has HBO had? HBO, HBO Go, HBO Max, now it's Max, Warner Bros. Discovery with Discovery+, which has been integrated into Max. Max was only on-demand content. Now they're adding sports. That's all just in a three-year period.

So part of this too is consumers think of a service for the following type of content, and then all of a sudden it's like, oh wait, now it's being combined or there's a different app or it's a different brand. Disney just announced they're going to come out with a new app just for Hulu and Disney+ combined with all the content, which they're going to beta test in December.

So a lot of these competitors to Netflix have also just completely changed their brands, they've done acquisitions in the market. That makes it a bit confusing as well. So Netflix is still considered the standard – gold standard. Everybody's trying to get to Netflix from a reliability, quality standpoint.

And yet, look at Netflix. They made the mistake of getting into the advertising supported market too late. Now there's still plenty of time, but their arrogance there was, look, consumers don't want ads on Netflix and are not willing to pay for it. Well, they learned the hard way, that's not the case. Hence, why they've come out with an AVOD model that now has 15 million subscribers.

So I don't really rank them based on who's doing well and who isn't. I think it's important for investors to look at that from a financial standpoint. Also, are you looking at this from a short-term or long-term gain? But we are going to have major players in the space that are not leaving. Apple's not going away. Google's not going away. Disney's not going away. Comcast isn't going away.

So this idea in the next year or two, like three, five years, I hear some people say, “Well, everything will be condensed down to two players.” That's just not reality.

RS: What do you think about the FAST TV part of the business?

DR: Oh God, the fast hype. Yeah, so…

RS: So much hype, so much hype. So little time.

DR: I love hitting back on FAST because here's the thing. We have no – excuse me, we have no business metrics tied to FAST. What do I mean by that? Well, companies don't break out how much revenue they're getting from FAST streaming. Companies like Tubi, their entire business is FAST, don't even define what a monthly active user, MAU, is.

So they love putting out every quarter, like, we grew to 70 million MAUs. For some of these companies, an MAU is defined as you opened your app that month, but you never viewed anything. Would you or I view that as a user? No, but they do.

So they don't break out revenue, they don't break out profitability, they don't break out CPM, which is advertising, what they're getting paid for advertising. They don't break out what percentage of their entire content is viewed from what portion of their inventory.

So you have some streaming services now that have hundreds of FAST channels, but some FAST services tell me off the record that 90% of our viewership comes from 10% or less of our channels. I'm not surprised.

How many channels do you need for your dog to watch when you leave for the day, like, there's dog channels, which is actually kind of cool. But point is, like, who's buying advertising on this?

So FAST has a huge amount of hype right now. And part of the reason for that is you have so many research firms out there using words like growing. So one I saw the other day is they said FAST is growing. Define how? Revenue? Subscribers? Engagement? Viewership? Personally? Well, they don't say. And then the same report said, they're taking share. Taking share of what and from whom? They don't say.

This report also said 47% of households use a FAST service each week. Okay, define what use means. Because Netflix, for instance, changed their definition of what a viewer is. If you watch at least two minutes of a video, even if that video is a two-hour long movie, you're considered a viewer, two minutes.

Well, what is Tubi and Pluto TV and others define as user? Well, they won't tell us. So we have no business metrics to look at the FAST business, to have a better understanding of where is there an opportunity from a profitability standpoint, from a revenue standpoint. That is really, really important.

So to me, FAST is overhyped and unqualified because with no business metrics behind it, we have no actual methodology to know the success or failure of these services. Now does FAST fit a place in the market? Does it help solve maybe what some consumers want? I just want to put something on and it's free and I don't care if it has ads. Sure, it does, but FAST services are never going to be your local sports teams live game because that content is too valuable.

So you have to look at what FAST channels really are. And also the whole term FAST is ridiculous, Free Ad Supported Streaming TV. Like, this stuff is not live. The vast majority of content on FAST channels are just playlists. It's on-demand content that is just turned into a channel. It's not live. And yet the term FAST is referencing TV. A lot on TV is actually live.

So even the terminology to me is not accurate, but there's a lot of hype around it. And the fact that none of these companies involved with FAST want to break out any segment of their revenue or costs or profitability around it.

What does that mean to you as an investor? Well, it means there's a problem with the data right now. It's smaller than people really think it is. At some point for some of these companies, Roku ( ROKU ) and others, will they show some good success in terms of profitability with FAST businesses? Yeah, they absolutely will. No doubt.

VIZIO ( VZIO ) does give us some numbers, at least, which I like because they have a product called Platform Plus. So their net revenue is $156 million in Q3, which was up 22% year-over-year. The problem is their Smartcast active accounts is slowing. It's just under 20 million, but their ARPU was up 14%.

So they had ARPU of $31.55. That's trailing 12 months, so divide that by 12 months, and you can see what you're getting. It's about $2.50 a month is what they're getting from a FAST user, where 100% of that revenue is coming from advertising, $2.50.

Okay, nothing wrong with that. But is that profitable? We don't know. And then when you look at Netflix's ARPU of, if you're looking at U.S. and Canada around $15, well, $2.50 and $15 is a really big difference. So this idea that, oh, well, services like VIZIO and Samsung and others have is just going to replace Netflix. Look at the numbers, that's just not going to happen.

RS: Do you see a reckoning coming with investors doing better research there? Do you think it will work itself out with the technology and what comes to market?

DR: I think that's hard to say. I don't speak to individual investors. I speak to institutional money managers and maybe I shouldn't be surprised, but I'm even really surprised a lot of times just how little they know about the industry, which is I guess why they're calling me and other experts who track particular segment and companies in the market.

I think it gets better though to your question simply because more information from these companies is now coming out. Disney had never broken out ESPN revenue separately. It's brand-new.

Netflix, they were known as the company in the industry who would never give you anything to Wall Street quarterly earnings calls. They've been quite open now for a couple of years. They've been giving out more information because they realize if we don't educate the market, that's going to have a direct impact on investors and our stock price.

And so companies are starting to definitely release more details, which if investors notice and they read the 10-Q and they listen to the earning calls every quarter, it's incredible what information you can actually learn. But if they're just reading that press release, that's not where the good information is.

So I track 52 companies every quarter in my space that are public. I read every single SEC filing. I listen to every quarterly earnings call, and then I recap in about two paragraphs everything my industry needs to know, and I do that 52 times every quarter, and I stick it on LinkedIn.

So what I always tell people is, look, if you don't want to do all the work, just follow me on LinkedIn. I've already done it for you. But it's incredible to me how just even when you do that, how little people actually read what's taking place and don't realize the impact to themselves if they're working at some of these companies because you knew Disney was going to do a huge round of layoffs in the beginning of the year. They had to. Just look at their balance sheet.

So what they do? They laid off 7,000 employees. So we're still seeing some layoffs here and there. There's definitely going to be more on the way next year. And then I also track all the companies that provide, or a lot of the companies I should say, that provide infrastructure services to a lot of the streamers because there's a lot of companies there that are delivering their video or transcoding or cloud services.

So there's a whole other portion of the ecosystem tied to streaming of vendors, suppliers, that a lot of these streaming services rely on. And when the streaming services have issues, don't grow as fast, what does that do to the vendors down the chain? Well, they're impacted as well.

RS: Yeah. Dan, I feel like this is such an insightful conversation. I really appreciate it. And I hope that you'll come on again soon because I really feel like there's a lot to be gained by our audience from you coming on.

Feel free to share exactly where listeners can find you. And also if you think there's anything that we left out or coming up that you feel like investors would be wise to be aware of.

DR: Yeah, sure. So thanks, again, for having me. As you can tell, I love talking about this anything tied to the space. So there's a couple of ways they can get information from me. All my information is free, by the way. I don't charge for any information.

So The Dan Rayburn Podcast , weekly podcast and I talk about in 30 minutes what's taking place in the streaming space that people should know about whether investors or they're working in the space, members of the media. I break down a lot of the numbers. So that's my podcast at StreamingMediaBlog.com . I'm writing about a lot of the things that we've talked about here.

On LinkedIn – if you just follow me on LinkedIn, I’m publishing content every single day. A lot of that content is very digestible, but again, it is focusing on facts over opinions. I try and strip my opinion out of everything. I focus on the facts and the numbers because I think that's important.

And then I produce a tech trade show every year in Vegas with the NAB, National Association of Broadcasters. If you go to NAB Show Streaming Summit, April 15-16 , every year I pick a hundred speakers who come on stage and talk about what they're doing. So Disney, Netflix, Paramount, Warner Bros., Fubo, FOX Sports ( FOX ), NFL, NBA, VIZIO, Samsung ( SSNLF ), you name it, they're there. They're there on stage. They're talking about what they're doing. They're making presentations, both technology-wise, business-wise, talking about monetization.

So if you really want to learn about the space, that's an event where over two days, you can hear from a lot of the actual companies in the space and also get to meet many of these executives that most investors would probably never get to talk to the CTO of Amazon. But those are some of the types of people who are on stage and talking and Presidents of some of these companies.

So that's another outlet for people to get some real-world information. Then as far as what else to cover, we could cover a lot, but you could also break down segments of this industry, for instance, on sports. There's a lot of investors who are tracking what's going on in the sports market. The RSNs are imploding regional sports networks. You see what licensing is doing.

The NBA is up for licensing, relicensing soon. That'll be the last big one. But then also for investors outside the U.S., man, there's a lot going on with sports in Europe and some of the car racing potential things that might come up. Apple's name was traded with that news as well.

So you could break down the segment – the industry based on certain segments like movies and TV shows, live sports, advertising supported, FAST, but there's always something new to talk about. And every quarter, we get so much good information from these public companies that keeps me in business. I guess that's a good thing giving out information.

RS: Absolutely. I think the world could use a lot more empathy. I think we could also use a lot more facts at our fingertips.

DR: I agree.

RS: So yeah, way to go for putting more facts out into the world. And because you mentioned it, that you were in the armed services and I know it was Veterans Day this weekend. And I know today in Canada and Europe, it is as well.

So just wanted to also publicly, not in a trite way, but in a deep way, thank you for your service and what you've done. And if you want to say anything, I mean, I know the world is a crazy place right now. If you've gained anything from the journey you've been on that you want to share with the audience, I'd be happy to hear your words if you want to end with that.

DR: Well, thank you. I appreciate that. Veterans Day is a good day for us. Veterans tend to celebrate Memorial Day a bit more, thinking about our friends that we've lost over many years. For me, I'm very privileged and humble and fortunate to be embedded with our special forces community, what are called Army Green Berets, where I spend about half of my time every week. It's actually not on streaming, working with them and volunteering and doing – training them and doing some other things with them at different locations.

And that’s – to me, that's probably more important than anything, because business serves its place, for sure, in everyone's life. You have to have something to do and you have to – it's about what you learn in business, right? That is the key.

But for me, business doesn't drive me. I give away my information for free because I think that's a service to the community, but it's really things that are taking place outside of the business world and people who are making change. And to your point, you used the word before empathy, which is really important.

So, when it comes to what our military members do, the courage and commitment that they have really defies logic. But I like to say on their shoulders, they carry the hopes and honor of our nation. And so many don't know that the sacrifices the military members actually make. Actually, you mentioned it unfortunately, yesterday, over the weekend, we had five special operation soldiers killed in a helicopter crash. How many Americans know that?

So you're right, there's a lot going on around the world. And I always say whether it's in business, whether it's in something like the military, the more information you have, the better informed decisions you make of what's really going on in the world and how that impacts you. So I think that's important.

RS: Amen. Here's to being armed with empathy and information. And hopefully, like you said, taking care of each other. It's the best that we can do and how we show up for each other. Appreciate you, Dan.

DR: Thank you.

RS: Yeah, thank you. Appreciate it very much.

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Streaming Reality Vs. Fantasy With Dan Rayburn