One Clear Casualty of the Streaming Wars: Profit

Going direct-to-consumer also adds significant operating costs for traditional networks. These costs approximate the gross margin that traditional pay TV distributors retain, meaning there is little or no economic advantage in cutting out the middleman.

For context, the cable networks business is one of the most profitable industries in the U.S.; it represents the vast majority of major media companies’ profits; traditional TV networks revenue growth is, for the first time, stagnating; and traditional TV is far larger than the streaming market — roughly $100 billion in TV network affiliate fees an... See more

There is a lot of excitement about traditional TV companies transitioning to streaming, but an unavoidable conclusion is that the streaming business is structurally much less profitable than traditional TV.

Why is streaming less profitable? Starting with economic theory, unbundling digital information goods inherently reduces profits and streaming is unbundling TV.

Until recently, the relative resiliency of traditional pay TV and the rapid growth of streaming have obscured the inevitability that TV will go through a similar transition. But we’re on the cusp of it now. Traditional TV is, finally, rolling over, and streaming profits won’t likely be big enough to make up the difference. Many of the downstream ef... See more

Yet another source of profit pressure will be much higher churn, due to much lower consumer switching costs.