As internet TV goes mainstream, distributors like Game of Thrones producer HBO are fighting to keep their grip on profitability.
By Elizabeth Fry
When actor Kevin Spacey won a Golden Globe award for his performance in the Netflix-produced series House of Cards, not just the actor but the production house made headlines. So too did Amazon, when it won two awards for the gender-bending drama-comedy Transparent, and then announced that it had signed Woody Allen to write and direct a new television series.
Even faster than expected, new digital video streaming services have begun producing fresh and bold original content that competes head-on with traditional broadcast television. Internet TV has gone mainstream.
According to observers such as Claudio Aspesi, a senior analyst at research firm Bernstein, what we’re seeing is not the emergence of powerful new streaming distribution players. Rather, it’s the victory of high-quality content. Firms like Netflix and Amazon have simply reacted to that new reality, and that’s why they’re suddenly attending showbiz awards nights.
The end of channels
It’s all happened so fast. Just a decade ago, distributors ruled the film and television game. Broadcasters and cable companies alike did deals with content houses and then broadcast or sold [in the case of pay-TV] bundles of content to viewers. The consumer ended up with programs they liked a lot (live football, Harry Potter movies) and others they liked less (Hogan’s Heroes replays).
But the internet has simplified program distribution and effectively ended that game. Channels? It’s obvious that many consumers couldn’t care less about channels. They care about shows – and about watching them whenever they want. Says Reed Hastings, chief executive of Netflix, the world’s biggest streamer: “The magic of streaming on demand is being able to binge on episodes or watch a movie in the middle of the night.”
Netflix has been perhaps the most successful in negotiating the path from the old industry model to the new. Starting out as a flat-rate DVD-by-mail service in the US, it cleverly transformed itself into an internet-based streaming content provider at just the right moment.
The new internet services – Netflix, Hulu, Amazon Prime and iTunes – have unleashed an insatiable hunger for a la carte and on-demand options. The industry has now essentially accepted that it has to cater to this hunger or be consumed.
As Rob Leach, director of Business Development & Consumer Digital at BBC Worldwide Australia and New Zealand, explains it: “Some big blockbusters, such as Game of Thrones and House of Cards, need to be released globally to reduce piracy. If they are released in one territory but not in others, consumers will find an illegal way to get these programs if they are not offered a legal option.”
“The magic of streaming on demand is being able to binge on episodes or watch a movie in the middle of the night.”
This radical change in viewing habits is pounding the traditional TV business model. Television audience hours have fallen, and the advertising value of the television show has been slashed. Suddenly, every television company is looking to protect its revenues by entering the streaming content business.
The differences between online and television services are now increasingly blurred. The UK market, for instance, features film and TV subscriptions (Netflix), short-term pay-TV passes (Now TV), and the download of pay-TV programs on tablets for offline viewing (Sky Go Extra). In Australia, Foxtel competes to offer hit TV series with not just Google Play and Apple’s iTunes, but new internet services including Seven Network’s Presto, and the Fairfax/Nine streaming venture Stan.
In its early days, streaming looked to be a fantastic new business model. Yet bizarrely, the streaming model itself might have already had its day. There is no longer anything unique about streaming someone else’s content online. The early streaming leaders might become just generic distribution channels, with perhaps just a dozen new shows a year and a big library.
This explains why these content aggregators and distributors are spending lots on new content. As Leach observes, the new video streaming platforms are looking to drive subscriptions through differentiation: more platforms, better recommendations and high-quality (preferably exclusive) content.
Content takes the throne
Nowhere is the shift in power from distributors to producers more obvious than at HBO. The cable network has long been famed for producing its own hit content: Sex and the City, The Sopranos, The Wire, Entourage, Boardwalk Empire and Game of Thrones, to name just a few. The new services are fighting for access to this content, which they’ll use to attract viewers. That competition is driving up the prices of sought-after content. Netflix, founded on the principle of low costs for content, must now compete with these new players and pay the same price as everyone else.
When HBO’s parent Time Warner last year broke out HBO’s earnings for the first time, it revealed a powerhouse: HBO made an operating profit of US$1.8 billion in 2013, on revenue of US$4.9 billion. Netflix had similar revenue, but just US$228 million of profit, largely due to the weight of rising content expenses. Its content obligations rose more than US$1.6 billion in the first nine months of 2014, to US$8.9 billion. This underlines the extent to which content costs are rising. And yes, it’s the same for Amazon Prime – it’s just that Amazon Prime has more resources.
Netflix is still growing, but it’s unclear how far that can continue. Despite a strong line-up of original content – including Season 3 of its celebrated House of Cards – the company’s US growth rates have started to fall. The market is saturated, competition is intense, and it’s hard to see where the company can extract its pricing power.
Now HBO plans to offer a cable-free option, streaming its content over the internet itself. Its so-called “over-the-top” streaming service is planned for an April 2015 launch – just in time for Game of Thrones’ Season 5 premiere.
“Smart forecasters are avoiding predicting just what this industry will look like down the track.”
The power of HBO’s streaming decision can be seen in the big US cable networks’ reaction. They have been forced to stem the influence of these digital interlopers by also offering cheaper anytime-anywhere streaming on any device.
US sports content giant ESPN will also go “over the top” this year. And once sports fans can watch ESPN without a cable package, all bets are off. The cable groups’ stranglehold on premium content will be permanently broken.
Netflix is still largely a distributor of other people’s content, and its CEO, Reed Hastings, can see the power of HBO and other content creators growing. He’s now saying that Netflix must become HBO faster than HBO can become Netflix.
But something else is going on. Even as the distribution game is changing: the production game is changing, too. Aspesi notes that new technology is making it much easier and cheaper to produce a show. And the supply of old archival material, like Hogan’s Heroes, keeps growing.
The peculiar result of all this is a market where distributors clamour for a tiny supply of audience-grabbing global hits like Game of Thrones, and buzz-making local favourites like The Voice, while at the same time new content creators, archive distributors and others flood the content market with cheaper product that will crop up on internet services, too.
The success of Netflix and Amazon is prompting a rethink by content creators and aggregators alike. Big changes continue to happen almost daily in a vibrant and highly innovative market. It’s all still a long way from being played out.
Netflix and Amazon Prime have shown that solid content can be created by newcomers and their money is as good as anyone’s. And it’s not just that content owners such as HBO are bypassing the traditional pay-TV platform; production houses are starting to buy channels. Amazon announced it will produce original movies for theatrical release this year.
Smart forecasters are avoiding predicting just what this industry will look like down the track. To Aspesi, it’s likely that new business models will emerge as the marginal cost of distribution and content drops. Aspesi argues that a combination of different business models and technical solutions will put more people in the position to choose how they acquire, access, view and dispose of the content they want.
But for all the drama, like one of those long-running HBO series – Game of Thrones, perhaps – no one yet knows how it will all turn out in the end.
The legacy businesses fight back
Traditional TV companies are not standing still and waiting for the streaming platforms to eat their lunch. BBC Worldwide’s Rob Leach thinks the legacy business models will be challenged, but says there is no reason why local rights holders or broadcasters cannot survive. They simply have to adapt, delivering linear channels over the internet and offering consumers more payment options – unbundled content, season passes, catch-up viewing.
Leach also notes that many big pay-TV companies are owned by or own large internet providers and telecommunications companies. In some circumstances they can still bundle services (pay-TV, telephony and internet access) to make them financially attractive in a way that’s difficult for the pure streaming platforms.
The clear problem for legacy business is that the video market is going global. “We are seeing a shift towards simultaneous global release,” notes Chris Whiteley, senior vice-president for BBC Worldwide’s digital business. Such releases currently happen only for big titles. But once the process is refined, he predicts it will become the norm for any content which audiences want, be it a mass-market product or a niche program.
Ross Crowley, programming director at Foxtel, doesn’t quite agree. He argues that only a small percentage of overall content is likely to get globalised.
“We all get that there are some shows that need to come out over the world at the same time. And [when] we delay episodes of top US programs like The Good Wife, we lose some ad sales. But there is a vast amount of great content that people will not rush to watch the very day it’s released.”
Crowley says that in Australia at least, the availability of global access has shifted free-to-air TV to buzz-building live and local shows like The Voice and My Kitchen Rules. “People will always watch local shows,” he says.
This article is from the March 2015 issue of INTHEBLACK.