European pubcasters fiddle while Netflix burns cash

Only last week we reported on how the European Union’s stipulation that all video service providers must include 30% of European made content in their programming, by some measure, could benefit the big SVoD players. This fear is clearly shared by the big European pubcasters such as the BBC, France Télévisions and Germany’s ARD because they have responded by pushing for closer alliances over content production and distribution. They have specified encroachment on their turf by Netflix and Amazon Prime as evidence that the existential threat posed to their existence has amplified over the last year.

The BBC’s Director General Tony Hall has taken the opportunity of his temporary presidency of the European Broadcasting Union (EBU) to accelerate moves towards a closer pan European alliance with extension of commercial ties and joint content production to help build this supposed united front against the big streamers. He cited Comcast’s $39 billion acquisition of Sky as evidence of the rapidly changing competitive backdrop faced by the pubcasters but also alluded to the SVoD players’ increasing spend on local content which could even overtake that of local broadcasters in some cases.

There is an irony here in that pubcasters including the BBC were loud in their condemnation of Netflix and Amazon for their lack of commitment to local content production. As recently as September 2018, Hall was lambasting Netflix and Amazon for their paltry combined $200 million spent on UK-made content and argued that their hegemony would diminish the amount of British programming available to viewers. He insisted there was strong evidence European viewers in general wanted more local content, but that is not so clear, especially in the UK. Viewers have voted with their wallets by subscribing to Netflix and Amazon in large numbers and clearly revel in the huge choice of content available for around just $10 a month.

But it is true there is also demand for local programming from a sizeable proportion of viewers and that is precisely why the big SVoD players are investing more in that. It is not just to satisfy EU quotas, noting that they are similarly spending more on local content in Latin America, Asia and Africa.

When it comes to Europe there are also questions over how well alliances will work, given the continent’s linguistic and cultural diversity. There is of course a universal market for blockbuster English language movies, but demand for cross border content in different languages from the native speakers is much more niche. It is true that partly as a result of the great SVoD invasion such trade in content across language boundaries has diminished and could be revived, but it is unlikely we are going to witness a massive uptick as envisioned by the European pubcasters in their push for a deeper alliance. They would be better off conceding that the big SVoD players cannot be repulsed but can be engaged with, as some are already doing through co-productions.

Their best path to survival lies in tapping these sources of revenue to continue their dual strategy of creating blockbuster series that generate significant export revenue, especially in the case of UK pubcasters, while continuing to make popular local content. It is better to share revenues than not to be able to generate them in the first place as a result of diminishing resources. Spending on content by the UK’s main broadcasters, notably the BBC, ITV and Channel 4, has dropped from around $4.5 billion to $3.2 billion since 2004.

This is not to say the big SVoD players lack concerns of their own, especially Netflix which is following the old Amazon model of spending heavily up front to create market share in the hope this can later be milked for revenues in various ways. In fact Netflix has not gone as far out ahead of revenues as Amazon, with subscriptions generating fast rising sales from the beginning of its transformation from DVD rental to OTT video.

During that time, the firm’s deficit between revenue and spending, or negative cashflow, has ballooned, rising from $58 million in 2012 to over $2 billion in 2017 and most likely almost doubling to near $4 billion for 2018 as will be announced this week.

However, sales have also soared from $3.5 billion in 2012 to around $16 billion in 2018, while subscriber numbers have risen from 33 million to 137 million on the back of strong global expansion as the US domestic market became saturated. So sales have been hot on the heels of spending and that coupled with subs growth reaching or exceeding targets has stoked up the share price to its current stratospheric $337, 28 times the 2012 level. This led to talk of a bubble but is more a race against both local and global rivals to stay ahead, with investors betting on that happening.

A major challenge lies in the business model being limited to SVoD at a time when its rival Amazon gifted with even deeper pockets is experimenting with a variety of alternatives. Netflix of course has done exceedingly well with SVoD and can argue with some justification that it has helped curtail online piracy by making so much content available relatively cheaply. But if, as Adobe used to contend, pirates were potential customers, then other models can generate additional revenues. Some people become pirates because they cannot find the content they want to watch legitimately and many of those have indeed been hoovered up by Netflix.

But there are a significant number who just will not pay at all and they need to be wooed by some form of free content, such as AVoD. Amazon has just made its first move into AVoD by launching IMDb Freedive in the US, a free streaming video channel comprising at this stage around 130 movies and 29 TV shows available free. Amazon has also been trying out TVoD (Transactional VoD) though Prime on behalf of a few content owners, which is another route to market.

Netflix has held out vehemently against both models, just as it has against live sports streaming where Amazon is also raising its game, but it remains to be seen whether it can stay ahead in OTT purely on SVoD fueled by increasingly expensive original content production. One signal Netflix is feeling the heat came just after Christmas with the tweet that its controversial horror film Bird Box had become its biggest hit film to date – notching up 45 million views in the first week. Netflix had never divulged such snap shots before so there was no basis for comparison and the move suggested a need to justify the still increasing negative cash flow revealed this week.