When the levee breaks on this golden age of TV, what does that look like?


#1

I have a friend from college who is a muckity muck for the sports division of a major television network. His thing is ratings and market research. Want to know the overnights on the Giants/Panthers game in the five major DMAs across the country? He’d shoot those numbers to you off the top of his head. And though general network programming isn’t strictly his bailiwick, he’s interested in it because it does affect his job a little.

And so last week he noted my interest in some quotes he had from analyst Laura Martin at Needham & Company. Needham does market analysis across many areas for serious, institutional investors. My buddy forwarded me the full report she did, and it is utterly fascinating…and utterly frightening at once.

The frightening part is premised on my own view–and perhaps you share it–that we’re in the middle of a glorious golden age of television and I hate to see it end. Never before have we as consumers had so many choices available to us at such ridiculously cheap costs. Regular basic cable–channels like FX, AMC, and TNT especially–are full of original programming that is expensive to produce. Beyond that, platforms like Netflix, Hulu, and Amazon Prime provide other outlets at reasonable price to consumers and offer expensive, high quality programming as well.

Additionally, the rise of high speed digital internet has made it possible for consumers to engage in the rising popularity of what we call cord cutting. People cancel their cable packages and instead subscribe ala carte to pay channels (HBO Now, Showtime) and go with Netflix and Hulu. Go ahead and add to that Netflix’s laissez-faire attitude about VPNs and DNS services like Unblock, and there’s never, ever been a better time in history to be a home consumer of video product.

Laura Martin’s report is scary then because it basically says “This can’t possibly last.” Here’s some key numbers:

Linear TV (that is, over-the-air networks and basic cable) earns .30 for every hour of programming they create.
Netflix shows earn about .11 to .18 for every hour they show, per person.
Youtube and other ad-supported platforms? .03 per hour…and falling because of the prevalence of ad-blocking software and apps.

The problems are twofold. The first is that there’s incredible downward pressure on “linear television” right now, due to cord cutting. How bad? This bad: the market caps for the seven biggest network media providers (CBS, NBCU, Disney/ABC, Fox, Viacom, Scripps, Time Warner) fell $57 billion dollars from July of 2015 to December of 2015. Five months. $57b in market cap lost. That’s a holy shit number and time frame.

The bigger problem is that services like Netflix and DVRs have “retrained” American consumers. We’ve stopped watching commercials. We don’t expect them. During its entire run, Netflix showed Parks & Recreation, just one season behind. People actually waited to watch the show that way, or experienced it for the first time binge-watching on Netflix with no commercials. AMC is in the same place with its shows like Mad Men, Hell On Wheels, Walking Dead, etc.

So what’s the problem? Those content providers are essentially all but giving away their original content, their most valuable asset. As more and more of us consumers cut cords, less and less revenue flows to the people who write the paychecks to the production company that makes Walking Dead. Thus, the pressure mounts on those providers to either jack up price expectations on new contracts with digital platforms (Netflix, Hulu) or simply avoid those platforms altogether. It also means that the days of networks providing full content on their own websites is probably numbered. Seems more and more likely that these networks are going to have to paywall those content offerings to stay viable.

So…whew. That’s the preamble.

My question is: what does it look like when this house of cards comes down? Is it a platform or content provider going dark? Is it a “channel” going to a completely altered format? (You know what makes shitloads of money still on regular ol’ linear TV? WWE, that’s what. Imagine TNT and USA Network going all WWE and UCF, all the time.) Is it the complete vanishing of domestic television from Hulu and Netflix (which is already starting to happen, quite honestly)?

I honestly don’t know how we’ll know or when we’ll realize that the bubble’s burst. I just know that it’s coming, if it isn’t already here. Interested in hearing from you all.


#2

Well, when the levee breaks, we’ll have no place to stay. Obviously.


#3

Prices will change. If AMC is selling rights to Walking Dead to Netflix or whomever and they aren’t getting enough in return to keep generating the content, they’ll raise the prices. That would drive Netflix, et al to either raise their prices (and risk losing customers) or no longer carry the most sought after programming (and risk losing customers). Statistically speaking, there’s always a happy medium to find in pricing, and they’ll find it.

Technology is driving consumers away from cords, but that’s not something that can be fought - cryin’ won’t help you, prayin’ won’t do you no good. It’s a tide. Organizations that depend on technology that is being phased out need to adapt or die, and in their place they are either reborn more diversified or replaced by a new, more effective company. As a consumer, we’ll lose some favorites along the way in the mess of IP law, but aside from that I think it should be fairly smooth.


#4

Right, but then when does the market reconsider movement? Cord cutting is popular now, because Netflix is either 8 or 9 dollars per month, and basic cable is three to five times that.

But what happens when the content price causes Netflix to go up to $15 or $18 per month?

What happens if AMC realizes that they’ll make more money not selling ANYTHING to Netflix at the expiration of contract? What happens is TNT (NBCU), FX (Fox) and others follow suit?

Obviously Netflix’s original content offerings are a hedge against that, but what happens when, say, Universal or Paramount or Warners decides to do their own ala carte movie channels and stops licensing their films to Netflix as well?

Mama you got to move.


#5

My guess is we’ll see 2 major shifts:

  1. The original programming cable channels will either collapse or be absorbed into streaming platforms. AMC, SYFY, etc. So will the original programming portions of the over-the-air channels.
  2. The “linear” channels that remain will move to almost entirely stuff people want to watch live: news, talk, sports, reality shows, etc. We’ve already got a bunch of cable channels devoted to those, and the over-the-air channels don’t really have all that far to go.

So that leaves streaming platforms to continue on their present course: give people their non-watch-live content, and increasingly produce it themselves.


#6

Definitely think we see:

  1. Paywalled network (sorry linear) content online, only available from those networks. Or possibly as premium offerings from other providers (e.g. Netflix CBS). But I think the former is more likely. I don’t forsee ways to better capture live audiences working myself. But I dunno. Didn’t we already glut on reality tv?

  2. Netflix et al price hike. Which is fine by me. I’m willing to pay more. To a point. I don’t want to pay 30 bucks a month each for like 4-5 different services. There are be-suited people out there who are convinced I will, I’m sure.

  3. A “shift” in the content we get from all providers. I would prefer less content while maintaining quality. But I think pressure forces things in other directions, unless a reasonable rate hike is met with “yay!”, and maybe not even then. Also may way is awesome for me but it does hurt some of the people who work on TV shows (maybe a lot of those people), and that sucks for them.

  4. It might become less lucrative to be a big TV star. Remember when the Friends people all got renegotiated to a mil an ep or whatever? It was such a huge deal. And they were an outsized example, sure. But the point is, while yes they had contracts already NBC was making crazy amounts of money relative to the cost of the show. How is everyone going to make crazy amounts anymore? Maybe they won’t make amounts that crazy.

  5. Let’s slide over there just a little bit and pretend not that we’re customers, or network execs. Let us instead pretend we’re college athletic directors. What do we see when we look out from our cushy offices and survey the landsdraad? (very!) Slowly (but steadily) dropping attendance. The subsidizing of our awesome tv contracts is drying up and there’s no fucking way we see the same increase in the next round of contracts that we’ve seen in the last few (and that may be true even if we’ve got a trump in the hole, say a 9 game conference schedule). We’re, uh, we’re not really beating this “pay the players thing” in the press or in the courts, are we? Man, even though the only place we have to spend this money is coaches, facilities, and bizzaro debt projects we sure are good at spending it. Gosh, do you think this is some sort of bubble sitting on top of another bubble? Just kidding! Everything’s perfectly all right now. We’re fine. We’re all fine here now, thank you. How are you?

I see some people trying to stuff adds in online content and I see it failing. I see attempts to add value to the whatever you call the DVd/Blue ray market (secondary streams? idk), because some of us are still creatures of habit. I will one day want to own various Netflix series on DVD/Blueray, or the equivalent, with commentary and extras and such. If someone makes something I love, I will revisit it. And if I can do so in this way, I will. I do adore consuming media in all of it’s forms.

It’s hard not to worry how this could affect the content. The nature of these things is that most people go conservative in the face of shrinking revenue. It’s just a death sentence.


#7

As someone who doesn’t watch a lot of TV, I guess I don’t understand why people can’t just pay $60 for a season of Game of Thrones, with steadily decreasing prices as time goes on. Use the videogame model.


#8

Salient quote from my buddy on all this:

“When we look back at this media era I think we’ll find the #1 reason people left old media is we made it too attractive not to”

Translation for consumers who aren’t network executives like him: “We’re about to make it a whole lot less attractive.”


#9

Well, for one GoT is a show that appears on Pay Cable, so it is at least propped up by subscription pricing models. It is using the videogame model, Tim. Subscription MMO model, that is.

For others, though, they’re created by linear television media companies where the revenue is all ad driven, and it’s ads over time. You can’t pay $60 for a season of Walking Dead or The Americans or Brooklyn 99 because the gamble is too high for networks to assume the risk. What if only 6,000 people pay for a full season?

Here’s another finding in Laura Martin’s report: it costs about $110-150m to bring an OTT (as in, Netflix/Hulu/Amazon/) original programming series to air (OTT programming, as it’s known). I will assume that the costs to bring linear television programs are similar. No network is taking that leap on a show with a videogame model if they can more easily amortize that risk over time with ad revenue.


#10

In the end, Netflix et. all made a reasonably legit TV-consumer out of me, as compared to the hilarious shit-value of cable/satellite TV. If we wind up in a world where each network or conglomerate’s programming is silo’ed behind one of 12 different $25/mo paywalls, then I’m opting back out real damn quick. If that winds up with there being less TV to watch, so be it. I can always stick Twitch.TV on in the background of my meal-eating, instead.


#11

Interesting post, Triggercut. With the caveat that I know almost nothing about the entertainment industry, I note that many other industries survive, or even thrive on razor-thin margins. Most of the food industry, from farmers to groceries, works that way. It’s brutal for insiders, but folks who just like to eat do just fine. We still see plenty of innovation, competition and choices in response to consumer demand.

On the other hand, there’s the airline industry, which reacts to thin margins by competing solely on price and treating customers like self-loading freight. However, that is a classic case of limited consumer choice, enormous barriers to entry, etc. I’m not sure that entertainment fits this model, though.

I wonder if the primary impact of all these changes will be on investor returns and compensation within the entertainment industry. Does “all but giving away their content” mean the business model provides thin profit margins, or is it truly unsustainable without massive changes?


#12

They’re free to try, but the genie’s out of the bottle. If one company doesn’t offer a convenient, ad-free buffet of high-quality programming, people will flock to one that does.

If lots of companies offer little paywalled silos of programming, that won’t be sustainable either. A small number of the biggest and best will prosper, and the rest will eventually be forced to shut down and put their content on the best services (and the longer they wait to do this, the more unfavourable of a deal they’ll get). Those top services will be able to raise their prices…and that’s fine. If, all told, people have to spend $50 or so on monthly, all-you-can-eat, convenient TV spread out over 2-3 services at most, that’ll be reasonable and sustainable. So when the house of cards comes down, I expect higher costs for consumers, and a somewhat lower supply of great TV as some investment is driven out of the business, but that’s it.


#13

Same here. I’ve certainly appreciated the current era of high-quality scripted TV available through reasonably priced buffet-style models through Netflix/Hulu/Amazon. But I didn’t subscribe to cable 10 years ago before those services arose, and I wouldn’t subscribe if they vanished tomorrow. There are more entertainment options out there than I have time to actually engage with. If the industry finds a way to supply a reasonable amount of good quality, ad-free, on-demand content for a reasonable price, as they have been doing for the past few years, then they’re more than welcome to their share of my monthly bills. If not, then they won’t. I’m not going to lose any sleep about it either way.


#14

I don’t see things going the way of “everyone has their own streaming site and you have to pay for them all” for two reasons: 1) a good number of potential customers will simply stop watching, as several have said above; and 2) people will simply steal the content instead. There hasn’t been much mention of the underground black market in streaming pirated content yet, but it has potential to be a major player in this discussion. For now, getting content via the various streaming services is reasonably priced and the intrusive-ads annoyance factor is practically zero. If either of those changes significantly, we’ll fairly quickly see pirating go through the roof.


#15

Now you’ve got me really curious about the two business models. Do networks sign up ad dollars before a full show is produced, or do they still front the money? And I’m not a businessperson, but I assume consistent monthly revenue is more desirable than product-based revenue.


#16

I guess what I’m getting at is that as society becomes richer and time becomes more valuable, who wants to eat at the buffet?


#17

I question… not the validity of those numbers, but rather the context.

But aren’t those apples-and-oranges numbers?

I mean, Netflix is paying 11 cents for an episode of The Brady Bunch that aired for the first time forty years ago, and 18 cents for the first season episode of The Walking Dead that aired six years back. And since those shows are (effectively) available for viewing again and again whenever you want, their eventual market penetration would theoretically trend towards 100%.

And yeah, that’s an impossible pipe-dream, but is does mean that GOOD shows will eventually be seen by more people now than they would have done in the past, right? I’ve watched TWD since it first aired, and I see it with all the commercials (fast-forwarded). But my daughter just discovered the show, and she’s binge-watching it during her Winter Break.- she’s someone who, before the advent of the digital providers, would have simply shrugged off the show since she didn’t discover it “in time”. Likewise, my wife asked to watch the first episode recently. I’m that same way Breaking Bad: I’m on episode three.

So I guess my question is this: is it the case that these shows are making LESS money due to people watching them on a digital provider like Netflix rather than during its original run, or is it kind of like a Steam sale or DVD sales where the “real” money only starts to flow once the content is available at a discount?

For example, if 1.5 million people watched an episode of The Tin Wisdom Show at .30/person in the pre-internet days, then that’s $450K. If only half a million catch that show “live” now, but then three million catch it on Netflix later for a dime each, then that’s a total of $550K, so hurrah for Netflix.

Is it? I mean, I would assume that network viewing numbers are “up” in the Fall as opposed to the Spring, but maybe not. What was the drop (if any) in that time frame last year? And $57 billion is a HUGE number… unless that’s out of $1.5 trillion or something. Then it’s a rounding error. What’s the context?


#18

The drop in $57b in market cap is a 13% loss of market cap in 5 months. That’s insane, and its why folks like ESPN have been laying off folks and not renewing high priced contracts.

And I think you missed the context on the Netflix thing. They make .11 per hour on their original content. So…they make .11 for every person who watches OITB or Jessica Jones per hour. I assume what they pay for licenses on movie and television properties varies widely from show to show, from flat up-front fees to combinations based streaming frequency and usage fees.

The message overall seems to be to content providers, telling them to stop giving their content away cheaply or for free


#19

When i look at my son’s account on the streaming services, it is mostly youtube stuff and binge watching shows. Other than a couple shows (Game of Thrones), he doesnt watch much live/direct TV. I dont think it is a big part of his experience. As other people said there are plenty of options and there no longer is ‘water cooler’ television that everyone has to watch to be able to talk about.


#20

I guess the problem is, though, that a lot of the content he watches is subsidized and paid for by those older traditional models, and that might be the problem going forward.