Looking Back at 2022: Streamers Stumble and Turn to Ads as Hollywood Bemoans Erosion of Traditional ‘Second Window’
December 29, 2022
NEWS ANALYSIS — As the nation slowly emerged from the COVID-19 pandemic, home entertainment faced a whole new set of challenges and concerns in 2022.
Subscription streaming, the golden child of the pandemic era, began showing cracks, beginning with Netflix posting significant subscriber losses in the first and second quarters of the year, which sent the streamer’s stock price tumbling. Then came the Walt Disney Co.’s sacking of Bob Chapek from the CEO slot, in part due to the high costs of Disney+, a key factor in the company’s sinking stock price. And HBO Max, after an April merger between Warner Bros. and Discovery, ended the year with a rash of film and series getting dumped to cut costs and prep the service for a union next year with Discovery+.
“2022 definitely felt like a roller coaster of recalibrated expectations for our business on Wall Street, with M&A, growth amid higher churn for direct-to-consumer subscription services, and escalating costs for content production and acquisition,” observes Amy Jo Smith, president and CEO of DEG: The Digital Entertainment Group, the digital entertainment trade association. “Even when the ride was bumpy, though, there were a lot of bright spots, including the growth of ad-supported streaming services (AVOD and FAST) and a wider range of subscription services, the return of in-person events to foster cross-industry collaboration, and, most importantly, consumers’ deep and abiding engagement with premium content across distribution models including transactional, subscription and ad-supported.”
“2022 was another growth year for the OTT business, with SVOD still the leading revenue contributor, but with AVOD and FAST growing rapidly and changing the way that consumers access and enjoy motion picture and episodic content in the home,” adds Mark Fisher, president and CEO of OTT.X, the streaming trade association. “And TVOD remains the primary way that consumers conveniently access new releases and catalog content, much of which is only available via VOD.”
Subscription streaming remains the dominant way in which consumers enjoy entertainment at home or on the go, and in fact grew its overall market share to nearly 85% of all consumer spending on home entertainment, according to the latest DEG numbers.
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But the King Midas touch first felt during the heyday of the pandemic, when theaters were closed and people were asked to stay home, is clearly gone — as evidenced by the launch late in 2022 of cheaper, advertising-supported subscription plans by both Disney+ and Netflix in an effort to boost revenues.
The jury is still out on whether the gambit will succeed, although early reports suggest Netflix, at least, is running into a little trouble. Research house Antenna in December reported that the $6.99 “Basic With Ads” plan nabbed just 9% of new Netflix domestic subscription sign-ups during its first month of availability, while only 0.1% of Netflix’s existing U.S. subscribers switched to the ad-supported option. At the same time, Reelgood found hundreds of movies and TV shows are missing on the ad-supported tier.
“For SVOD services, the major development for 2022 was the sobering reality that their business models, as currently constructed, are not sustainable — as subscriber growth has slowed and content costs have continued to escalate,” observes Bill Rouhana, CEO of Chicken Soup for the Soul Entertainment, a leading provider of free streaming content. “SVODs were spending heavily on original content to differentiate their services and ultimately ran up huge debts. That, combined with an economy that’s in a recession, and consumers cutting back on paying for multiple SVOD services, makes for a challenging future, with maybe one or two winners.”
Not surprisingly, then, the biggest success story for home entertainment in 2022 is the proliferation of completely free streaming content, both on-demand (ad-supported video-on-demand, or AVOD) and linear (free ad-supported streaming television, or FAST).
In this part of the business, one of the biggest developments of 2022 was the August acquisition of Redbox by Chicken Soup for the Soul Entertainment, which gave the combined company more than 145 FAST channels on top of its already strong presence in the AVOD market with Crackle and other services.
“Chicken Soup for the Soul Entertainment massively scaled for the future in 2022 with the acquisition of Redbox,” Rouhana said. “We’ve been working to integrate the companies and are close to finishing that.”
Stefan Van Engen, SVOD of content programming and partnerships at Xumo, a premium FAST service, maintains that “FAST has become an industry darling in the past year. From independent content owners to major media companies, everyone wants to participate.”
Meanwhile, the fallout from home entertainment’s “streaming uber alles” philosophy has had a pronounced effect on Hollywood, as the financial realities of producing content for primary consumption on all-you-can-watch streaming services led to a dearth of theatrical feature films, particularly after the year’s midpoint. According to Comscore, just 22 films opened theatrically over the summer, half as many as in 2019, the last pre-pandemic year. Not surprisingly, box office revenues for the year are expected by Gower Analytics to clock in at $25.8 billion, up 21% from 2021 but a significant drop from the $42.3 billion generated in 2019, the last pre-pandemic year.
Further impacting Hollywood’s bottom line in 2022 was the continued erosion of what was once the biggest post-theatrical revenue-generator, disc (DVD and Blu-ray) and, to a lesser extent, a la carte digital sales and rentals (known as TVOD, for “transactional video-on-demand”).
“In the rush to feed the big streaming services, many of them under the same corporate ownership, the big studios have effectively turned their back on what has traditionally been their biggest post-theatrical revenue generator,” says one veteran industry observer. “Without this critical component of the movie food chain, billions of dollars are being flushed away.”
Indeed — movies rarely generate enough money from the box office to turn a profit. In the not-too-distant past, even films that lost money at the box office more than made up the difference through robust packaged-media sales, which for a time even exceeded theatrical revenues, as well as foreign licensing rights. Projected disc sales even became a factor in studio decisions on whether to greenlight movies or not.
But as subscription streaming became the dominant form of home entertainment consumption, Hollywood seemed to lose interest in this once-crucial second window. Sure, the studios tried getting people to buy movies digitally, but consumers weren’t biting, particularly since they could get a whole month’s worth of entertainment from Netflix and the other streamers at roughly the same cost of a single digital movie. Discs, meanwhile, were all of a sudden seen as yesterday’s technology. In 2006, the year Blu-ray Disc was launched, disc sales brought in nearly $17 billion in consumer spending. In 2021, the latest full year for which figures are available, the total was less than $2 billion.
In the first nine months of this year, according to DEG estimates, 84% of the total consumer spend on home entertainment, or $22.3 billion, went to subscription streaming services. Consumers spent just $4.7 billion on physical and digital purchases and rentals. Combined purchase and rental spending on DVDs and Blu-ray Discs slipped 15% to an estimated $1.6 billion, while digital sellthrough and VOD revenues fell less than 3% to $3.16 billion.
The physical media side of the business received a jolt in the fall when Walmart, still the No. 1 retailer of DVDs and Blu-ray Discs, seemingly implemented a 20% reduction in floor space in its electronics department for discs.
And yet home entertainment executives are adamant that the traditional, transactional home entertainment model, including discs, still has plenty of life left in it.
“Thanks to consumer demand, creative efforts from the studios, and the ongoing support from digital and physical retailers, the transactional business continues to be remarkably resilient despite the challenges of the last few years,” says Bob Buchi, president of worldwide home media for Paramount Pictures. “In 2022, the industry and consumers benefited from the very welcome return of theatrical new releases, sales of which were up 69% across the industry through October, while also providing the longer-term benefit of refreshing the catalog business for years to come.”
Buchi says Paramount Home Entertainment in 2022 “enjoyed a 200%+ spike in the theatrical new release business thanks particularly to Top Gun: Maverick and its record-setting digital sales at over 4.5 million transactions inception-to-date in the domestic market alone and equally impressive results from around the world.
“Meanwhile, consumers continue to show up for both digital and physical releases of special catalog titles. Our 50th anniversary celebration of The Godfather this year generated over $25 million in consumer spend. We’ve also seen a strong consumer response to 4K debuts of titles like Planes, Trains, and Automobiles and Pulp Fiction. In television, the ‘Yellowstone’ franchise continues to dominate, generating more than $125 million in consumer spend this year, which has helped spur the expansion of the Taylor Sheridan universe to ‘1883,’ ‘1923’ and ‘Tulsa King.’”
Buchi maintains that traditional home entertainment “remains very important to collectors and cinephiles who appreciate the best-possible quality audio and video presentation and the compelling bonus features, while general audiences appreciate the broad selection and the flexibility to access their favorite films whenever they want.”
Universal Pictures Home Entertainment president Michael Bonner also had a very good year. “From premium windows through to catalog, Universal’s transactional business remains very strong, with robust consumer demand for content across windows and formats,” he says. “Our premium window continues to generate meaningful engagement with audiences and material value to our home entertainment business with titles like Sing 2, Jurassic World Dominion and Black Phone leading the way. Providing consumers with broader choice and flexibility in how and where they see our movies is working to further fuel adoption and engagement.”
Jason Spivak, EVP of distribution for North America Television & Home Entertainment at Sony Pictures Entertainment, says the transactional business “continues to thrive, particularly from a digital point of view. Even with the rapid increase of SVOD options and other new-release patterns over the past few years, transactional digital continues to be a core business, satisfying the ongoing consumer need to curate a purchased virtual collection of latest hits and library favorites. Over the past year we were extremely pleased with the digital performance of many of our films, including Ghostbusters: Afterlife, Spider-Man: No Way Home and Uncharted.”
Adam Frank, SVP of global digital sales and distribution at Lionsgate, said digital movies sales were one of the company’s bright spots in 2022.
“We have seen new releases continue to perform extremely well via electronic sellthrough, in some cases ahead of pre-COVID levels across the entire box office spectrum,” he says. “Consumers are eager for new content no matter how they access it — transactionally or via SVOD or AVOD — with theatrical-first product proving to be the most valuable from a downstream monetization standpoint.”
For independents, the rise of AVOD presents another potentially lucrative sales opportunity, coming at a time when sales to SVOD providers is increasingly hit-or-miss as the subscription streamers vacillate between producing their own content or buying it from third parties.
“AVOD has become a fantastic category for us — both our own FAST channels, and distribution on a myriad of platforms,” says Garson Foos, CEO of independent film distributor Shout! Factory. “We see that continuing to grow. It’s the emergence of the long-tail into visual content — as we’ve seen with streaming services for music.”
As for the traditional transactional end of the business, that’s still the indies’ core.
“2022 was another strong year for transactional, with a strong new-release slate — Belle, Operation Sea Wolf and JFK: Destiny Betrayed — paired with strong catalog pickups (Laika Studios, Ferngully, the ‘Halo’ catalog),” Foos says.
The gift market remains a bright spot for independents, almost exclusively on the physical side of the business.
“Our impression is that it’s largely physical,” Foos says. “We don’t have a lot of evidence that the gift purchase has transitioned to digital. We still see good sales from holiday gift-card giving in late December and early January. And our complete-series TV sets, deluxe film sets like ‘Friday the 13th,’ ‘Halloween’ and our deluxe Steelbook packages always see big spikes around the holidays. Nothing says Happy Hanukah like our new Carrie 4K UHD Steelbook release.”
“People like tangible gifts, and discs are still a great tangible gift,” adds Ed Seaman, chief operating officer of the MVD Entertainment Group, another leading indie.
“Similar to the vinyl collector’s marketplace, deluxe Blu-rays and UHDs are coveted, and not just for the superior quality,” he continues. “Nobody predicted that vinyl would continue to grow since its resurgence 15 years ago, yet each year it is reaching new heights. The video market shall likely follow for the collector’s market. Digital gift giving seems less and less relevant with the market trending more and more to AVOD.”
Overall, though, “for independent product and catalog, transactional can be challenging,” Seaman maintains.
“Getting placement on the biggest and best platforms can be a struggle, but when something does get placed the results are still very good,” he says. “Inclusive digital platforms for film remains the biggest challenge — and opportunity — in our industry. There is no consistent place to find virtually any film you’d like to see. Everyone is fatigued by the need to subscribe to multiple services to see what you want to see. Compared to the music industry, there is no Spotify in the video business where you can reliably find virtually anything you’d like to watch.
“There is an opportunity to build or aggregate the various sources of entertainment into one easy-to-use, all-you-can-eat service. The fragmentation and frustration in finding what you want is also an opportunity for disc sales, which is now the most reliable way to find what you want.”
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Tom, as an long time reader, may I wish you and your wonderful crew the best of the Holidays and a Happy New Year!