The big business of content delivery

Over the past decade, traditional media companies have faced significant challenges in navigating the industry’s structural shift to streaming. Historically, these companies prospered by selling their large content libraries into traditional pay-TV bundles. They did not need to worry about customer acquisition, servicing, or distribution technology, as these costly activities were borne by their cable or satellite distribution partners. Content truly was king!

But with the launch of streaming in 2007, Netflix transformed the media landscape, demonstrating that while content may be king, global distribution is equally important in the modern world. Viewers quickly sought the greater flexibility, preferring on-demand, binge-style viewing and tailored access to overpaying for generic, under-utilised cable bundles. Thus, with the continued rise of the internet, direct distribution and increased customer choice became crucial factors to success. Traditional players recognised these imperatives and responded by building out their streaming services.

THE PROFIT PARADOX

These media companies initially believed that their extensive content libraries would facilitate the adoption of their streaming platforms. However, they have faced significant challenges in transitioning from the highly profitable legacy pay-TV business model to the new digital format.

In the rush to capture subscribers, content spending across the industry surged, with all players investing aggressively to fill their platforms with new content. Industry content spend, which peaked in 2022 (Figure 1), was amplified by the likes of Amazon Prime paying more than US$50 million per episode for The Rings of Power.

This, along with significant capital and operational investment in technology platforms, decimated industry profitability. Traditional pay-TV earnings declined while billions of dollars were invested in new streaming platforms. This is reflected in their share prices over the past five years, with Disney and Comcast both declining north of 30% and Warner Bros. declining by over 60% before takeover rumours began. These companies declined significantly compared to Netflix’s 80% gain over the same period.

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These streaming wars were an absolute boon for consumers. The rise of various platforms and the surge in new content spend have provided consumers with more choice than ever. This has accelerated the shift from cable and broadcast to streaming, which now accounts for over 50% of US TV viewership (Figure 2). There is no turning back. Viewers have embraced streaming, with almost all US households now subscribing to at least one service, and the average household subscribing to over three.

While significant losses were incurred to develop these platforms, subscriber scale has now been reached, with profitable winners emerging. As the dust settles on the initial phase of the streaming wars, the industry is entering a more rational state. Subscriber growth is no longer the sole objective, and capital discipline has re-emerged as a priority. The industry is witnessing a full-circle moment, with re-bundling, consolidation, profitability, and content quality (over a prior obsession with quantity) once again taking centre stage. These trends are discussed below.

1. FOCUS ON PROFITABILITY

Platforms are prioritising content quality over quantity. Disney is a classic example. The extensive expansion of the Star Wars franchise and the plethora of Marvel spin-offs to populate the Disney+ platform led to a dilution of brand equity and received a lukewarm response from audiences. Management has since acknowledged the issue and is reducing release cadence while reallocating spend to general-entertainment hits such as The Bear and Shōgun, both major Emmy winners.

The streaming economic model is now proven. With subscriber scale now attained and peak levels of investment behind us, Disney, Warner Bros., and Paramount have all shifted from heavy losses to breakeven or positive streaming earnings before interest, taxes, depreciation and amortisation (EBITDA) in the past 12 to 18 months. Netflix remains the benchmark, generating EBITDA margins above 30% (Figure 3).

AI is becoming a margin lever. Using AI in content creation not only lowers cost and time to completion but also increases the quality of the output. Ted Sarandos, the co-CEO of Netflix, stated that visual effects are now produced 10 times faster and at a much lower cost for their projects. James Cameron, director of the blockbuster Avatar films, believes that the costs of computer-generated graphics can be reduced by 50%.

On the demand side, AI-driven recommendation engines improve engagement and reduce churn. These operational gains are already embedded in management commentary across Netflix, Disney, and Warner Bros.

Disney took it one step further by announcing its partnership with OpenAI. OpenAI’s video creation tool, Sora, will now allow users to create AI videos with Disney’s popular characters like Mickey Mouse, Darth Vader, Cinderella, Mufasa and Iron Man. Beyond the deal’s licensing upside, it will expand character visibility outside of Disney-owned platforms, create usage-based revenue streams, and ensure brand-safe character control.

2. MONETISATION THROUGH BUNDLING AND ADS

Have you noticed some of your shared streaming logins being blocked recently? Crackdowns on password sharing, pioneered by Netflix, have become an industry standard, driving meaningful subscriber uplift. But the largest monetisation improvements are generated by higher retention and average revenue per user (ARPU) uplift via bundling and advertising tiers.

Bundling is back. Disney’s US bundle of Disney+, Hulu, and ESPN+, which combines family-friendly, adult, and premium sports programming, has been one of the most effective churn-reduction strategies in the market. Hulu’s monthly churn declined by c. 2 percentage points after bundling, equivalent to a c. 20% annual retention benefit.

Cross-company bundles are also emerging. The Warner Bros. and Disney+ streaming bundle delivered a significant retention uplift after three months, outperforming Netflix over the same period. Importantly, bundling reduces the pressure for each service to produce a hit every month, while content depth stabilises engagement and reduces churn.

Advertising tiers are thriving. The most material monetisation lever thus far has been advertising, with streaming already accounting for a material and growing portion of US video advertising spend. These tiers, which come at a lower cost to the consumer, dramatically expand the addressable market while earning high-margin advertising revenues. As advertising personalisation improves with viewing-history data, streaming advertising inventory is becoming more premium and measurable than that of traditional TV. We can expect such tiers to launch in South Africa and other emerging markets in the next phase of rollout. This will unlock incremental ARPU growth where pricing power is limited compared to the US.

3. CONSOLIDATION

The long-held belief that “content is king” originated in an era when distribution was effectively commoditised and protected. This rendered premium or exclusive content as the primary lever to draw in audiences and support higher affiliate fees and advertising revenue. As stated, on the internet, customer acquisition, retention, and global reach matter more. Netflix has built an unmatched distribution and engagement layer, weakening the standalone value of sub-scale content libraries.

We have been of the view that, in a market with this level of fragmentation (Figure 4), consolidation was inevitable. This is now playing out with both Netflix and Paramount bidding for Warner Bros. Discovery last year, with Netflix emerging as the frontrunner. Warner Bros. holds HBO, which owns the highest-quality library globally. Key titles include Game of Thrones, Succession, The White Lotus and The Last of Us, and valuable film franchises such as Harry Potter, Superman and Batman. It also boasts the world’s largest TV studio.

Netflix, with over 300 million global subscribers, holds an enviable position. Its global reach gives it the ability to deliver breakout TV shows, while it can amortise its content spend over the largest user base. Evidence of the Netflix effect is clear: older titles such as Suits surged to global popularity once listed on Netflix. Niche titles and international content, like K-Pop Demon Hunters, became worldwide hits through the platform’s reach. Even live-adjacent content, such as Drive to Survive, materially expanded Formula 1’s fanbase.

And it is now looking to beef up its content library through the acquisition of Warner Bros. If Netflix can uniquely enhance the value of intellectual property, it makes sense for them to own it themselves. We believe Warner Bros.’ content library is positioned to benefit disproportionately under a scaled platform like Netflix.

Disney has also recently fully acquired Hulu, which strengthens Disney’s general entertainment offering beyond its legacy princess, superhero, and Star Wars franchises. We expect this consolidation trend to continue.

PLAYERS’ POSITIONING

Netflix demonstrates clear leadership in the streaming sector, is seen as a must-have subscription, and is exceptionally well positioned to better monetise Warner Bros.’ content. As the leading global aggregator, it offers extensive distribution reach and high levels of user engagement.

Disney also benefits from strong opportunities to further monetise its intellectual property through its Parks and Entertainment segment. The Parks division has shown considerable resilience, and plans are underway to establish another Disneyland in Abu Dhabi. In addition, Disney’s ESPN unit is uniquely placed to capitalise on the transition of sports content to streaming. With an unparalleled portfolio of sports broadcasting rights, significant brand recognition, and strategic bundling with Disney+ and Hulu, ESPN enhances the overall value proposition.

For smaller platforms such as Peacock and Paramount+, we anticipate ongoing initiatives aimed at either consolidation or partnerships to enhance their market position.

CONCLUSION

Streaming media has moved beyond the growth-at-all-costs phase into a period defined by discipline, scale, and monetisation. Value is no longer created by owning content in isolation, but by combining high-quality intellectual property with efficient global distribution, sophisticated data, and diversified revenue streams. Profitability, rebundling, advertising, and consolidation are not cyclical responses but structural outcomes of this maturing market.

In this environment, advantaged aggregators with scale and engagement are best positioned to compound returns, while subscale platforms face diminishing strategic relevance. For investors, the opportunity now lies in identifying the platforms that can consistently convert content investment into durable cash flows rather than subscriber growth alone.

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