As Streaming Wars Escalate, CBS May Not Need to Beat Netflix — Just HBO

CBS All Access_Comp - iStock - H 2018
iStock; Sylvain Gaboury/Patrick McMullan via Getty Images

The broadcaster shows growth by doubling down on direct-to-consumer bets and pushing for overseas and younger audiences. "The goal isn't to be number one," analyst Paul Verna notes.

"Star Trek Discovery was an international sensation," CBS chief content officer David Nevins told Wall Street analysts Nov. 1, promising more iterations of the franchise. But viewers won't see them on the nation's top broadcast network. The shows are all set for CBS All Access, the net's $5.99-a-month streaming service.

Season two of Discovery launches Jan. 17, followed by a new series with Patrick Stewart as Capt. Jean-Luc Picard and, after that, Lower Decks, an animated version for adults. "All Access will continue to be home to all things Star Trek," Nevins said. "We expect to have more Star Trek announcements coming shortly."

That the popular franchise will grow exclusively on All Access — which is aiming to compete with Netflix, Amazon Prime, Hulu and new services to come from Disney and WarnerMedia — is a testament to how important the effort is to CBS. Joe Ianniello, hosting his first earnings call since his promotion to interim CEO, gave digital initiatives much of the credit for CBS posting its best third quarter in history in terms of revenue and earnings per share.

"Our sub growth is especially strong where we get the highest rates, on our direct-to-consumer streaming services, CBS All Access and Showtime OTT," Ianniello said. He then reiterated that the goal of 8 million subscribers between the two will be reached in 2019, one year ahead of schedule, and it's full steam ahead in foreign markets.

All Access Canada is "off to a solid start," he said, while in the fourth quarter CBS will be launching Network 10, its streaming product in Australia. "We will continue to expand into new territories in 2019, and we are confident that digital distribution on a global scale will be very lucrative for CBS," he said.

Analyst Barton Crockett of B. Riley FBR agrees the fast growth in digital cannot be ignored, noting that CBS is the "highest [earnings-per-share] grower among its peer set, benefiting from targeted, early, accretive pursuit of OTT."

But if CBS offerings are ever to close the gap with top streaming giants, they should combine them into a more robust offering at a single price, analysts suggest. After all, eMarketer estimates that at the end of 2017, All Access and Showtime OTT each had 2.5 million subs compared with Netflix's 52.8 million in the U.S., and by 2023 All Access and Showtime OTT will each boast 5.7 million to Netflix's 67.3 million. (Ousted chief Leslie Moonves once predicted 16 million subscribers for All Access plus Showtime OTT by 2022.)

"It will be challenging for CBS to build and sustain scale in the global direct-to-consumer market by selling smaller, distinct services," says Ben Weiss, chief investment officer at 8th & Jackson Capital Management. CBS did not break out financials for All Access and Showtime OTT, and it's likely that the numbers are small when compared with the whole of CBS, which reported $3.26 billion in revenue in the third quarter. Ianniello said "growth initiatives" will generate more than $4 billion this year, up 75 percent from 2015, but that includes what stations pay to carry CBS as well as the digital products.

Maybe taking on Netflix, or Amazon and Hulu, isn't the goal of CBS, notes eMarketer analyst Paul Verna. In the near term, surpassing HBO Now — expected to have 7.9 million subs by 2023 — will suffice.

"No one is competing with Netflix at this moment," says Verna. "And I have a pretty good idea that whatever Disney launches next year will be bigger than CBS All Access. They just have a deeper well of content. What the market will bear is a $6 monthly service, and the goal isn't to be number one, it's to be as good as it can be with what CBS has."

Another goal for CBS is to get its content in front of younger Americans. Netflix dominates among ages 13-to-49 while CBS is tops among folks age 50 and older, according to agency MullenLowe Mediahub. "We are in the midst of our biggest year yet in Showtime OTT sign-ups as we continue to reach new and younger viewers," Ianniello has stated.

In fact, CBSN, the company's digital news service, is also breaking ground there, as Ianniello said during the earnings call it now boasts 1 million daily streams and the average viewer is 38, "decades younger than the average of broadcast and cable news."

CBSN will be a stand-alone channel on Hulu's live TV service, and it will roll out local versions this year beginning in New York, with Los Angeles coming next year. CBS also launched ET Live on Oct. 31, and it has CBS Sports HQ, which is growing faster than All Access.

All Access also has in the pipeline a new Twilight Zone from Jordan Peele, the Oscar winner behind Get Out, as well as Why Women Kill from Marc Cherry of Desperate Housewives fame, and it debuted the psychological thriller Tell Me a Story on Halloween night.

And the ballgame could change again if CBS merges with another company and inherits more content to populate All Access, just as Disney is depending on 21st Century Fox content when it closes its partial acquisition of Rupert Murdoch's company.

"We continue to presume that the most likely outcome for CBS is a merger, probably with corporate sibling Viacom," says Crockett.

A version of this story appears in the Nov. 7 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.