In these frantic times for the video industry boundaries are more fluid than ever – as players coming from the Internet, Hollywood, social media traditional pay TV and sports – all interact and jostle for position.
It is all about content and it might seem that many traditional broadcasters will be forced out of the game by newer players and the very big pay TV operators or Telcos with deeper pockets. But in the content wars there is some room for nous and experience, with scope for audience gain and retention through quirky, local and artisan content.
But such broadcasters are at risk of falling by the wayside when it comes to the emerging global online content game. This is generating inflation in content rights and expenditure that will test many of the big players just as content owners see that their future lies with cutting out the distributors and going direct to consumers.
Disney and the Hollywood gang are already signaling this shift in strategy as they pull their content away from online distributors and instead gear up for a direct assault on them. Disney’s CEO Bob Iger heralded this “major strategic shift” with the view that “the future of this industry will be forged by direct relationships between content creators and consumers.”
It was something which Faultline Online Reporter saw as inevitable as far back as 2003 it is Faultline Manifesto.
This begs the question of who the content creators will be, with Netflix, Amazon and the Internet players all clear that this is where they must be to repel the Hollywood advance into their SVoD territory. That is why original content, more than rights, is becoming the battleground as far as VoD and TV series are concerned, with sports and other live entertainment constituting the other category.
The content battle then boils down to three fronts, live – especially sports, rights to movies and shows, and original productions. The Internet players have been moving out from rights into originals for a good few years now and some are entering sports as well, being joined by the social media players. In sports too there are moves by the major rights holders to go direct, which we will examine in detail in a future story.
Until recently the Hollywood studios have kept faith with the traditional cable, satellite and IPTV distribution model. And they used OTT video for a little extra pin-money.
But Disney then broke ranks dramatically in August 2017 by announcing a major shift to OTT distribution from 2019, through two parallel offerings. One will be an ESPN sports service comprising mostly tier two sports like the National Hockey League and Major League Soccer, but the other pitched at the SVoD brigade will be an entertainment service made up of its own movies and kids content, as well as animation films from Pixar. Most significantly it said it would no longer allow Netflix to show new movies, which would instead be streamed via BAMTech, over which it now has majority control.
This was provoked by events in the US pay TV market in particular, where cord cutting has become rampant and major disruption or consolidation is occurring among both distributors and networks. Discovery Communications, owner of various channels including Eurosport, TLC and Animal Planet, is buying Scripps Networks, owner of the Food Network, for $14.6 billion, aiming to increase leverage with distributors.
On the operator front AT&T has followed up its $49 billion acquisition of DirecTV completed July 2015 with an even bigger $85.4 billion bid for Time Warner, reflecting the latter’s position in broadband as well as pay TV. As with the DirecTV bid this has been referred to the regulator, which took a year to clear the deal in that case.
The disruption is driving an inflationary spiral in content with this growing distinction between originals and rights which is becoming increasingly crucial. It is also important to distinguish between sports and other premium rights, for while both are subject to similar market forces it is not always the same broadcasters, distributors and operators involved. So while ESPN still just topped the overall content league in 2016 by spending $7.3 billion, this was almost entirely on sports leagues. By contrast Netflix, which came in number three at $6 billion, spends entirely at present on movies and TV series or documentaries. Others have a mixed portfolio, such as NBC in fourth place spending $4.3 billion and CBS fifth at about $4 billion. The same is true for number two Sky, which spent £5 billion ($6.6 billion) in 2016 on a mixture of sports, movies and series.
The main change in the content league for 2017 is the surge of Amazon, which with annual revenues approaching $200 billion is about 20 times the size of Netflix, albeit spread across ecommerce and cloud services as well as video. Amazon is very much the elephant in the room of content because it is unique in being able to treat video almost as a loss leader for its Prime service which aims to dominate digital life services.
For 2017 Netflix has increased its content spending by about a third to $8 billion, funded in part by a $1.6 billion bond issue just issued. Sky has said it will have spent $7.5 billion on content across the group, about 7% up on 2016, while Amazon has hinted in various slightly ambiguous statements that its 2017 total will be double the previous year’s total, which would bring it up to $6 billion.
But in the light of Disney’s move and other developments, original content spending is becoming the most crucial metric and on this front the social media platforms are also becoming serious players. Amazon has stated that its original content spending for the second half of 2017 will be triple that of the same period of 2016, without specifying the amount. This will definitely be way ahead of Sky, which itself is ramping up spending on originals to $750 million for 2017. Meanwhile Facebook has come in by spending $1 billion on original content for its new Watch video platform, which for now bears closer resemblance to YouTube than Amazon, Netflix or for that matter Sky, focused more on short-form videos designed for sharing online.
But Facebook sees this as an interim step to lure people onto its platform while it starts adding longer form content and aims to increase viewing time. Facebook is already producing a few full-length TV episodes, although it looks like its long-term strategy will still be different from the OTT players in being to encourage third parties to produce originals for its platform rather than funding them directly.
Google itself is taking a nuanced strategy, aware that YouTube needs a stake in the ground of original content production, while still encouraging third parties and not attempting to match Amazon or Netflix in spending at this point.
Apple is in a different position again, also unique by dint of its ability to cream off 15% of subscriptions to third party OTT services accessed via its appstore, including Netflix and Hulu, so does not want to kill this golden goose by pushing too hard into original content. Its $1 billion spend on original content in 2017 represents a compromise, although Apple can be accused of flaying around not quite knowing where it is going. Certainly its content produced so far has been lackluster and has failed to make much compact compared with Netflix or Hulu, which incidentally is spending $2.5 billion on content in 2017.
Clearly at a time when rights prices are rising more quickly even than the cost of original production, the battle is zooming in on original content, which of course also puts a premium on the best writers, creators and directors. It may also stimulate an off-shore boom in production, which we are already seeing with Hollywood being about the most expensive place to make a movie or series.
This will put pressure on the major movie studios, while for the big sVoD players and Netflix in particular the challenge is to start getting a sufficient return on content investment to see off the Hollywood frontal assault.