Can CBS Grow Quickly Enough To Compete with Netflix and Disney?

The title of the Will Ferrell cop comedy No Activity, which premieres Sunday on the CBS All Access streaming service, could not be more ironic coming at the end of a frantic, newsy week for big media and entertainment companies that are scrambling to reorient themselves for the post-cable world.
This week alone:

• CNBC reported that 21st Century Fox and Walt Disney Co. have been in discussions for a deal that would remake Fox into a global news-and-sports power and shift significant film and TV properties to Disney as it prepares to launch a streaming service to take on Netflix in 2019.
• AT&T ran into a snag on the way to its $85.4 billion acquisition of Time Warner, as the Justice Department’s antitrust division reportedly wants AT&T sell off Time Warner’s DirecTV satellite service (21 million U.S. subscribers) or Turner Broadcasting (CNN, TBS, TNT) as a condition of approving the deal.
• Apple announced that it had made a two-season deal for a TV series starring Jennifer Aniston and Reese Witherspoon that will be set backstage at a Today/GMA-style morning talk show. That’s in addition to Apple’s reboot of the Amazing Stories anthology series by Steven Spielberg and Bryan Fuller that the company announced in October.
• The world’s biggest movie-theater chain, AMC Entertainment, reported disappointing earnings as would-be theatergoers avoided big summer movies like Baywatch and King Arthur: Legend of the Sword and instead caught up on Netflix’s Ozark and Marvel’s The Defenders. Wall Street investors increasingly believe that a new premium VOD window — weeks instead of months after a film’s theatrical release — that several Hollywood studios are considering would be a massive blow to the theater chains.
• Roku, which is the biggest gateway to streaming to the living-room TV for U.S. consumers, saw its stock price jump 26 percent after reporting earnings for the first time as a publicly traded company. Investors now see Roku as a fast-growing video platform with revenue sharing from numerous SVOD services and a valuable advertising space on the right rail of its home screen.

CBS made some of its own streaming news during its earnings call last week with the announcements that CBS has grown its subscribers year over year by adding more subscribers to CBS All Access and streaming bundles like DirecTV Now and PlayStation Vue than it’s losing from shrinking satellite, cable and telco bundled-TV providers. CBS also announced the reboot of The Twilight Zone for CBS All Access with Get Out director Jordan Peele as an executive producer.

Despite solid earnings report and growth in its streaming division, though, CBS is a medium-sized, domestic player in a market where global scale is becoming increasingly important. With the traditional cable bundle in steady decline and Netflix reaching 100 million worldwide streaming subscribers this year, CBS and every company whose business touches the living-room TV is scrambling to figure out where the media business will land.
“We have advocated that CBS and Viacom recombine — and maybe even combining with a couple of other companies — to create scale,” BTIG media analyst Rich Greenfield said in an interview with Decider. Greenfield said he thinks that having a big, diversified content offering is becoming increasingly important for streaming providers. “Churn is the fundamental killer of all those OTT businesses, and the best way to limit churn is to create a bigger bundle of content.”

Will satellite, cable and telco bundled-TV services — which peaked at 98 million U.S. households in 2012 and has been declining ever since — dwindle to nothing, or will they find an equilibrium in the next few years?
Will a critical mass of cord-cutters and cord-nevers subscribe to streaming-bundle services like DirecTV Now and YouTube TV that charge $35-$40 a month for broadcast and cable channels, or will they find that the even cheaper Netflix, Hulu and Amazon Prime Video are already more TV than they’ll ever have time to watch?
Those are big, existential questions for CBS.

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CBS launched CBS All Access in October 2014 as a way for superfans to catch up on previous seasons of shows and for cord-cutters to follow must-watch CBS shows. Big Brother: Over the Top premiered in October 2016 as the first original, The Good Fight followed in February 2017, and Star Trek: Discovery in September. The Will Ferrell produced No Activity will premiere Sunday after the Discovery midseason finale.
Although CBS does not provide quarterly subscriber totals for CBS All Access, CEO Les Moonves said in February that All Access and Showtime’s freestanding service had about 3 million combined subscribers. Marc DeBevoise, the president and COO of CBS Interactive, told Decider in early October that he expects the two services to have 8 million combined subscribers by the end of 2020.
CBS has been both aggressive and shrewd in its deals with the streaming-bundle providers — getting carriage on all of the major services at high per-subscriber rate, negotiating on behalf of nearly all of its affiliates for national coverage in those deals, being a late adopter with DirecTV Now over price negotiations and an early adopter with FuboTV as an outlet for its NFL package.
Premium cable has also been a growth area for CBS. Like Starz and HBO, CBS’s Showtime has traditionally been tied to consumers’ bundled-TV service but has been able to grow its subscriber base — and in Showtime’s case increase its per-subscriber fees — by launching a freestanding app and becoming an add-on options on Amazon Channels, Hulu and other services.

“When you put together our traditional bundles, skinny bundles, and our over-the-top services, we have more [subscribers] today at both CBS and at Showtime than we did a year ago,” Moonves said last week during CBS’s earnings call. “Best of all, as consumers cut the cord and switch to skinny bundles or go over-the-top, the economics get better for us. So not only are we growing subs, but we’re also growing our rates as well.”
Moonves said that CBS earns twice as much from a subscriber who leaves a traditional provider like Comcast to sign up for a streaming-bundle provider like Hulu and three times as much from one who signs up for CBS All Access. At the same time, CBS earns more from those subscribers who stick with their longtime provider with annual increases in subscriber fees and ad rates. Cord-cutting, Moonves said, has “real, measurable upside for us.”
Wells Fargo media analyst Marci Ryvicker has said she expects 15 million subscribers to leave tradition pay-TV providers and 14 million to sign up for streaming-bundle services by 2022. If that’s how the U.S. market shakes out over the next five years, CBS would actually strengthen its per-subscriber profitability without a significant decline in its overall consumer reach.
CBS is also building out internationally — buying a major Australian TV network in September and beginning an international expansion of CBS All Access in 2018 — is seeing continued growth in its free, ad-supported CBSN news streaming channel, and is launching the free, ad-supported CBS Sports HQ streaming channel “in the coming months,” Moonves said last week.
Finally, CBS has doubled its TV production over the last five years to 65 shows in 2017. Many are long-running shows with lucrative off-network deals like Madam Secretary, which just sold into a syndication deal worth nearly $200 million. CBS also produces shows for outside distributors like American Vandal for Netflix and Dynasty for The CW.

That’s the rosy scenario that Moonves laid in last week’s upbeat earnings call — with nods to CBS’s solid returning TV slate, Young Sheldon having the makings of a hit, Oprah Winfrey joining 60 Minutes, a resurgence in late-night, etc. — but the threat that Netflix and other streaming services will eventually drive broadcast and cable to the margins is still very real.
CBS’s share price is down 13 percent year to date in a market that has begun to disfavor traditional broadcast and cable companies. If cord-cutting were to suddenly accelerate beyond analysts’ current expectations and those consumers don’t come to streaming-bundle services, CBS’s subscriber and advertising revenue would fall into steep decline.
The CBS primetime lineup is also showing signs of wear. Much-watched dramas like NCIS, Blue Bloods and Bull have some of the oldest viewers on all of broadcast TV, according to Nielsen season-to-date ratings data. Young Sheldon is the first breakout hit on the comedy side in years, and NFL ratings are down steeply over the last two seasons.

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CBS All Access does not have Netflix’s constant infusion of new programming or Hulu’s next-day episodes of ABC, NBC and FOX shows, but it’s a nice complement to both of those services at $6 a month for consumers who have cancelled cable — or never had it in the first place — and aren’t interested in a streaming-bundle service.
To grow the service and make it a must-have for a critical mass of viewers, though, CBS All Access needs shows like Netflix’s Stranger Things or Hulu’s The Handmaid’s Tale — shows that are zeitgeisty enough that you’ll sign up for the service just to experience them. CBS hopes that will be Star Trek: Discovery.
CBS spent more than $100 million on the first season of Discovery and has already greenlit a second season that will go into production next year. That CBS would make such a large bet on a series that does not air on either of its two major platforms — the CBS broadcast network and Showtime premium-cable network — is a sign of how important streaming is to CBS’s future.

“Every division at this company wanted Star Trek,” Moonves said. “Showtime wanted it. The network wanted it. … We felt as we were doing are planning for All Access, we said we need something extraordinary, we need something that people really feel is worth paying for outside the norm.”
Star Trek: Enterprise has been a critical success, and CBS said that All Access had its two best sign-up weeks ever in the two weeks after the series premiered. To get Season 2 on the air before the end of 2018, CBS needed to renew it quickly.
The question for CBS is whether it can grow — and change — itself quickly enough to keep pace with Netflix, Disney and whatever happens next.
Scott Porch writes about the streaming-media industry for Decider and is also a contributing writer for Playboy. You can follow him on Twitter @ScottPorch.

Stream Star Trek: Discovery on CBS All Access