In its last reported quarter, online TV streaming service Netflix (NASDAQ: NFLX) hit one out of the park, netting millions of new subscribers, while boosting its spending on new content. Meanwhile, ticket sales at the box office notched a year-over-year decline, this in spite of Disney's (NYSE: DIS) newest installment of the Star Wars franchise.
Despite the two metrics headed in opposite directions, many investors still look to the box office to measure the health of entertainment studios. My prediction: In the near future, total TV-streaming subscribers will be a metric we give more credence to.
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Over the last decade, sales of tickets at movie theaters have declined. Theater operators have been able to partly offset this by raising ticket prices, enticing viewers with higher quality screens and reclining seats. Still, the slow slide at the box office isn't the rosiest of pictures.
That isn't to say no one is watching a screen, it's just that the screens are smaller. Streaming video services, often credited for contributing to the ditching of traditional pay TV, are part of the problem for movie theaters, too. The U.S. leads the world in TV viewing, and the number of hours has crept even higher in recent years. The average family watches four and a half hours of TV content every day. An increasing amount of that is via a streaming service like Hulu, Netflix (NASDAQ: NFLX), or Amazon's (NASDAQ: AMZN) Prime Video service.
Subscribers and churn: the metric of the future
TV viewing at home is a leading factor in people going to the movies less often. That's a problem for entertainment studios. When they release a movie, the hope is for a blockbuster hit so that revenue from ticket sales is higher than the movie budget and advertising. It's a high stakes game, though, especially considering it's pretty easy for movie production budgets to reach nine digits these days, and that's before distribution and advertising costs. That makes the amount of profit gained, if any, unpredictable.
With streaming services, revenues earned are a little less uncertain. Subscribers pay monthly fees for services, so the trick becomes keeping them paying with new quality content. In the past, that usually meant TV shows, as they provide more viewing time than movies. Miniseries and new movies are also headed to streaming, though, as Netflix has been showing off lately with its movie starring Will Smith, Bright, or cinematic event-style TV series like Stranger Things.
The pace of new releases skipping the silver screen and going straight to the home could pick up. Netflix has competition from Hulu and Amazon's Prime video, both of which are dumping money into new content; Disney is also gearing up to launch its own service in 2019; and AT&T (NYSE: T) has a similar service through its DirecTV subsidiary. Even Verizon (NYSE: VZ) has been rumored to be working on its own online streaming service.
With all that competition, new content could become an increasingly important way to draw in and maintain subscribers, especially as studios themselves make internet streaming a bigger part of their business. Right now, new subscriber growth is alive and well as Americans and households abroad continue to migrate online. Eventually, that growth will start to slow as the industry matures and more competition enters the fray. At that point, churn rates -- the number of customers discontinuing their subscription to a service -- will become a way to measure the success of online entertainment content.
I'm certainly not saying the box office will die out. The silver screen can still be a lucrative business. Studios have homed in on winning formulas for blockbusters, focusing on sequels, and sci-fi and superhero action adventures. However, if the trend keeps pace and ticket sales continue to struggle, look to streaming services to play an increasingly important role in paying the bills for entertainment studios.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Nicholas Rossolillo owns shares of Verizon Communications and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Netflix, Verizon Communications, and Walt Disney. The Motley Fool has a disclosure policy.