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PERSPECTIVE

Viewpoints from the frontline of content.

Binge or bust

20-05-2015

The binge-viewing phenomenon, made possible in the US via SVoD services like Netflix, Amazon Prime and Hulu as well as pay TV operators’ enhanced VoD, DVR and TV Everywhere capabilities, has been the focus of much media attention of late.

Supply swelled as content owners realised they could yield incremental revenues from such services, and production significantly jumped from 2000 through 2014 in line with demand from the expanding array of players.

Content production continues to accelerate as SVoD services increase their investment in original programming, but in 2015 binge producing has become a corollary to binge viewing.

Emerging trends in the US raise questions about the long-term sustainability of the large programme-commissioning universe. Broadcast and pay TV viewing on a live basis continues to decline year-on-year, falling by approximately 10% in 2014. Cord cutting is now a real threat, with a 1.4 million loss in net subscribers in 2014, according to investment analyst firm Moffet Nathanson.

The rising cost of pay TV services and the availability of online substitutes are two key issues causing this decline.

With the announcement of new slimmer IPTV services – such as Dish’s Sling TV and the Apple TV service, which will comprise a smaller roster of pay TV channels – plus the launch of OTT services such as HBO Now, pay TV cord-cutting is likely to accelerate.

Availability of such services will also ensure younger viewers who have shunned pay TV to date will ultimately become lifetime ‘cord-nevers.’

Simultaneously, US pay TV operators have begun ditching channels without significant implications, most notably demonstrated by Suddenlink, which recently dropped the Viacom networks. There is also pending legislative action in Congress to force pay TV operators to go à la carte.

With these events, there is increasing conversation about the unbundling of pay TV. Should unbundling become a reality over the next three to five years, many of the current pay TV programmers commissioning productions today would be challenged in an environment where they are not protected by the bundle. The stronger channels, such as FX and AMC, could look to maintain economic viability by charging à la carte. However, if the recently announced HBO Now pricing of US$15.99 per month is an indication of what a standalone channel will sell for, the economic benefits of unbundling may be quickly lost.

Clearly, the potential void that could result from unbundling could be filled by the SVoD incumbents. Netflix is reported to be spending US$5bn on content by 2016, while Amazon is also significantly expanding its original content production. By the time unbundling could become a true reality, the product demands of these services could definitely become a mitigating factor. The question is will it be enough to sustain current levels of production?

While the prospect of unbundling could ultimately impact content production over the next three to five years, the economics of producing scripted entertainment poses other challenges to the programme-commissioning ecosystem. With average production costs for a one-hour series ranging from US$3-5m per episode and a 45% survivability overall for a series across platforms (broadcast, pay TV and premium), the economic stakes for each series are high.

Licence fees from US networks typically only cover 50-60% of the production costs, with the balance needing to be funded from domestic and international syndication. Domestic syndication has shrunk in the US as pay TV programmers rely more on original series. In addition, Netflix and Amazon are not currently paying the prices they were paying several years ago as they ramped up their services. Internationally, there are other challenges despite the continued growth of pay TV services globally.

Free-to-air broadcasters in Western Europe and Australia, which will pay significant licence fees for first-run series, stopped relying on American shows for a large portion of their schedules. Premium pay TV providers, such as Sky, are still big buyers, but are now also producing their own original programming. Netflix and Amazon remain big acquirers, yet as they rely more on original content, it is not likely that they will buy at the same rate.

Almost one billion households globally are now pay TV subscribers and the number is forecast to continue growing past 2020. However, in general, basic pay TV services typically pay much less for content than free-to-air and premium services. In addition, much of the growth is forecast to take place in emerging markets like Asia, Africa and Latin America, which (with the exception of the latter) typically pay less for content. As the buying landscape changes for content on a global basis, premium content producers will need to reassess current business models to ensure economic viability.

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