Media’s Shift from Growth to Optimization

I ran Investor Relations at TimeWarner from 2008–2013, the period when Netflix emerged as a disruptive force in TV. In investor meetings, our CEO Jeff Bewkes was invariably asked about the threat Netflix posed to the TV ecosystem. He would often respond, sometimes in exasperation, “You can’t jam an $80 thing into an $8 thing!” His point was that Netflix, priced at $7.99 at the time, couldn’t replace the entire pay TV bundle because it could never absorb its costs.

He was right, of course. A decade or so later, Netflix’s Premium tier costs $20 and it has not subsumed the entire pay TV bundle. But it fundamentally changed the economics of the TV business. Netflix was always willing to operate at much lower margins than traditional TV networks. Fearful of watching their traditional businesses eroded away, all of the major TV networks companies reluctantly followed Netflix into streaming. That meant they were constrained by Netflix’s price umbrella and beholden to its consumer value proposition and associated cost structure: massive investments in content, product, streaming infrastructure and analytics. They reasoned, correctly, that they had little choice; if they were inevitably going to be cannibalized, they better cannibalize themselves.

In the last six months, however, the consequences of this transition have become clearer. Increasingly, it looks like Netflix’s cost structure — and therefore the cost structure of the entire streaming business — was predicated on a total addressable market (TAM) that was optimistically high and churn that was optimistically low. Changes in these assumptions will have a material adverse effect on the expected profitability of the business.

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