How Can Niche Streaming Services Survive? Four Top Analysts Have Some Ideas

In the past two years, the number of streaming services in the U.S. market has jumped almost 42%, from 118 to 167, according to Nielsen figures. The number of series, features and other shows have risen nearly as much. Amid that tsunami of options, and competition from some of the world’s biggest corporations, how do niche streaming services survive?

I moderated a panel of four top industry analysts at this week’s OTT.X Summit in Los Angeles that offered some smart ideas, as well as some deep pessimism for the prospects of many of those in the sector. That didn’t dim enthusiasm at the conference, which attracted nearly 600 attendees in Los Angeles, a post-pandemic high for the group.

The panelists included Colin Dixon, founder and chief analyst of NScreen Media; Laura Martin, Managing Director and senior internet and media analyst at Needham and Co.; Michael Pachter, Managing Director of Wedbush Securities; and Mike Vorhaus, CEO of Vorhaus Advisors. The keynote summit focused on ways that OTT.X’s members – largely niche streaming companies, platforms and service providers – could navigate a highly competitive, complicated and challenged industry.

The most basic advice: spread your revenue streams. It’s not enough to count on advertising-supported video on demand to pay your bills. Can you drive revenue from multiple tiers of service, including subscriptions? What’s your transactional commerce play, selling merchandise online to your best fans? Can you do live events, featuring your stars and brands?

“You’ve got to have ecommerce, you've got to have subscription, you've got to have ads, you’ve got to have all the revenue streams that are possible,” Martin said. “I love these retail media networks. We're talking about a lot and advertising, which is an E -ommerce idea, but sort of e-commerce heavy, not e-commerce light.”

Stay focused. Focus makes it easier to serve a specific audience willing to keep coming back. Advertisers appreciate the focus too, because they know exactly who they’re reaching.

“The big guys, they’re general, they've got a little bit of everything, they can't go deep on anything,” Dixon said. “That's your opportunity: know who your market is, know the best way to reach them, and I am reasonably confident that you will be able to pick up a decent-sized audience.”

Martin said she expects gigantism, as the Hollywood media companies try to scale up to better compete with Apple, Amazon, and Netflix.

“I agree with you 100% that it’s gonna go to super big and they're going to compete with Apple and Amazon,” Martin said. “Okay, so super big means bigger than Disney. I'm not sure Disney's large enough anymore. But the point is super big. Or really, I'm going to call it super fandom, like WWE, somebody who knows what their fans are looking for.”

Don’t get stuck in the mushy middle. With consolidation looming, companies that don’t have sustainable business structures likely will be squeezed hard.

"I think (among) the big guys, a couple of them drop out, maybe there'll be some sort of merger,” Vorhaus said. “The little guys, I think, will do fine. I know all kinds of guys doing half a million (dollars in revenue a year), a million (dollars) a year. But these middle guys with real cost structures, I don't know. You know how they say the tweens are in trouble?”

Are you really making/licensing/acquiring content in a low-cost way?

The problem for those in-between companies is their cost structures aren’t optimized for low-cost content production, Vorhaus said. That’s particularly a problem when one of the world’s biggest streaming services, YouTube, gets its content for free, from tens of millions of influencers.

“This cost structure is really important,” Vorhaus said. “They have the town car syndrome: If you're still taking town cars to the airport (to fly to business meetings), you're not making content at a low-cost price.”

Problems are looming just ahead for the biggest streaming services too, because they have their own deeply problematic cost and revenue structures, Dixon said.

“I actually think that the opportunities for smaller providers are increasing, not decreasing,” Dixon said. “And there's a simple reason for that. If you look at what the Big Six are doing, they are all looking for profitability. One of the ways they're going about it is they're cutting the amount of content they're producing, and they're raising prices. I think that's the most amazing economic model I've ever seen.”

For smaller companies, one idea is to make “shoulder content” around someone' else’s expensive show. The Roku Channel, for instance, just debuted a documentary about the NFL Draft.

“I think basically these best channels come down to marketing and knowing your fandom, but also being able to have content that other people don't have that isn't expensive to make,” Martin said.

FAST isn’t the solution, at least not by itself.

While lots of companies are launching lots of FAST channels to help boost their bottom lines, that’s exactly the problem: a mire of thousands of competing single-show or single-genre channels popping up just about everywhere.

“I want to add, and it's a cautionary tale, the problem with all digital advertising is that it has unlimited supply, so there is no pricing power,” Martin said. “It is my fear that it is a race to the bottom of advertising for most AVOD and FAST because there is no limit on ad-unit supply.”

FAST is supposed to give viewers an easy, no-thought-required, lean-back TV viewing option, Vorhaus said. It may be the definition of background entertainment, designed to provide company, not close engagement.

“It's evergreen, it's long tail, it's not hits,” Vorhaus said. “If you're making hits for FAST channels, you're gonna lose money, right?”

Part of the challenge is understanding that FAST isn’t just a recapitulation of basic cable TV, circa 2003, Dixon said.

“I think we're thinking about FASTs wrong,” Dixon said. “We're thinking about them like they are the equivalent of cable TV. They provide a service, with a set of content, in the same way traditional TV did. But then, it’s not traditional TV. There were no bandwidth limits. You can put up a channel, tell your audience about it, and have them come to that channel for a week or so and then have it go away. You just have so much more flexibility.”

Bundling is coming, and not just with the services under your own corporate umbrella. We’ll see more of the kinds of deals Verizon has with +Play, which provides discount access to services such as Netflix, Paramount+ and YouTube TV’s Sunday Ticket, but also non-traditional subscriptions such as Peloton, Snap+, Calm Premium, and Super DuoLingo.

But smaller companies in particular need to find some friends and huddle together. It may require some discounting of a service’s “retail” price to make the bundle a bargain. But bundles also keep customers around, reducing churn and marketing/acquisition costs. Pachter said bundling can double potential revenue.

“I honestly think that's somebody's going to be the consolidator of all this crap,” Pachter said. “It's not going to be Netflix and Disney. But somebody's gonna figure out a way to put all this together. I'm hopeful it's Comcast, but they are so stupid, you never know. But they should be the ones because it can ensure their survival.”

About 30 hours after the panel, of course, No. 2 cable company Charter Communications had a very different response, proposing a new kind of cable carriage agreement with Disney that would have included its 18 networks and local station group, and also its (ad-supported) streaming content.

Disney demurred, saying Charter should have offered “a market-based solution.” The real point of Charter’s proposal, of course, is that the market is fundamentally broken.

Charter’s trying to get to the next place where consumers already are, or will be soon. Meanwhile, as the football season kicks off, millions of Charter cable households have lost access to ESPN, ABC and all the rest.

All of this is unfolding under a darkening cloud of uncertainty caused by two major factors: the great reset of all the major streaming services and their media company owners over the past 16 months since industry leader Netflix’s disastrous April 2022 Q1 earnings call; and the ongoing strikes by unions representing actors and writers.

The strikes are showing no signs of settlement soon, analysts acknowledged.

While media companies such as Warner Bros. Discovery and Paramount Global have said they’re saving $100 million a month by not spending on new productions (and Netflix upped its free cash flow guidance for the year from $3.5 billion to $5 billion), they’re also likely seeing much higher churn.

Eventually, services with no compelling new content will see subscribers cancel. Services will eventually have to spend heavily to attract the customers back, and still need to keep producing must-watch shows. In the short term, Warner Bros. Discovery and Paramount Global said they’re banking $100 million worth of unspent production and other fees. But it’s worth noting that after the Charter-Disney fight broke out, Disney shares dropped to their lowest level since the first day of the pandemic lockdown, and WBD saw its shares plummet 12%.