Commentary
Surprise, Surprise: TV Companies Discover Streaming Costs Too Much
- by Adam Buckman , Featured Columnist, December 8, 2022
When you get right down to it, the arithmetic seems pretty simple, at least to a lay TV blogger: The billion-dollar investments that the streaming companies have been making annually to create content are far exceeding desired profit margins, or resulting in little or no profit at all.
As a result, the majors are cutting costs and turning their attention to other priorities. For Disney under newly returned CEO Bob Iger, this seems to mean shoring up Disney’s other businesses, most notably its theme park business. Streaming might still be a priority, but first? Maybe not anymore.
At Warner Bros. Discovery, the behemoth created earlier this year from the merger of Discovery Inc. and WarnerMedia, production has halted on expensive movies and releases canceled, and layoffs are hitting units such as CNN.
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This was certainly not the outcome that the major TV companies foresaw when they dove whole hog into streaming and then declared that this new business would be their top priority from then on.
For the big TV companies, streaming mania gained steam with each new launch -- Disney+ in November 2019, WarnerMedia’s HBO Max in February 2020, NBCU’s Peacock in April 2020, AMC+ in June 2020, Discovery+ in January 2021 and Paramount+ in March 2021.
“Streaming first” became the bywords for the majors, especially when a worldwide pandemic led to mass lockdowns and millions of potential subscribers were homebound with little else to do but watch TV.
Movie theaters stood empty as consumers of film and video content became accustomed to staying home for much the same entertainment experience they used to have in movie theaters but at much lower prices.
The TV biz had never before seen such a captive audience and the streaming companies must have thought they had struck a gold mine.
They apparently felt also that if and when the lockdowns ended and people began venturing outdoors, the new home-viewing habits would by then be so ingrained that the future of their streaming businesses was assured.
They all started up streaming businesses with no long-time experience in that business. The only strategy they could observe was the one Netflix had used for years to stay at the top of the streaming totem pole -- namely, spend and spend and spend like there is no tomorrow.
“Always be producing” became the mantra for everybody. The goal was content tonnage -- quantity and only sometimes quality. What they all found was that streaming is a beast, and it needs to be continuously fed.
Now there are signs that the business is struggling, or perhaps the better word is “matured”-- or more to the point, saturated.
Where can new growth come from now? Typical households now subscribe to multiple services, but how much TV can a typical family watch?
And another question: How do the billions of dollars in content creation translate into profits? I read this week this week that one Disney+ series -- just one -- “The Book of Boba Fett” (pictured above) cost an estimated $15 million per episode to produce, the same as its “Star Wars” universe companion series “The Mandalorian.”
Even if you take into account the obvious appeal of such shows to “Star Wars” fanatics, do these expenditures really draw subscriptions in sufficient number for the shows to pay off?
In an appearance earlier this month at a New York Times media conference, Ben Affleck characterized the Netflix approach to making movies as “an assembly line” that prioritizes quantity over quality.
He posed a question to Netflix. “How [is Netflix] going to make 50 great movies a year? How is that possible? … You just can’t do it.”
Once upon a time, the TV business attempted to make just enough shows so they could profit from the ratio of production costs to revenue from ad sales.
The streamers are now getting into that very business. In adapting to the ad business, will they change the way they make shows?
And speaking of saturated, where is all of this new ad money supposed to come from anyway?
The plans were to keep us locked down forever but that didn't work out so now the streaming platforms are kinda screwed.
If my memory doesn't fail me, the original idea about 'streaming video' was to give access to existing content, but under a different payment model than the 'usual' cable TV, where the same shows and series are broadcasted over and over again, across different schedules, and let viewers just record what they like best — to be viewed later, at leisure. Streaming, by contrast, would allow video-on-demand of the same content, and could be handled under a more convenient subscription model, where the viewers would choose what exactly they wanted to view (as opposed to getting 200-channel-packages which nobody will watch 99% of the time).
That would have made sense, back then when Netflix was a new company, and I imagine that content giants such as Disney and friends would easily jump into the new trend, sooner or later; this was, after all, the concept of Hulu, among many others, which were new companies that assembled existing content, licensed from third parties, and offered it through an Internet streaming option.
At some point in time, Netflix realised that if they produced their own content, instead of paying hefty licenses for other's content, they would have creative freedom and avoid self-imposed limitations on competing channels (such as adult content, including sex & profanity), thus addressing a market not covered by those who were far too concerned about sex & profanity (but would gladly show violence!). The model seemed to work and was picked up by many other streaming companies: suddenly, all of them started boasting new, unique content, which nobody else had (or could sublicense from).
The problem, of course, is that the subscription model apparently was never rigorously evaluated with a strict business plan. It looks like it was assumed that, on a future date, things would click into place, especially on the long tail — new subscribers would probably still want to watch slightly old content, which would already have been produced (and hopefully paid for) and would have zero licensing costs. The concept, by itself, is not completely stupid; the problem, as I see it, was that there is simply far too much competition, and viewers are not that keen in signing up for a dozen or more services, just to watch one or two series on each of those. The old 200-channel-package deal from cable TV would make much more sense on that context — because, ultimately, the viewer would pay a much lower subscription fee, even if it meant ignoring 99% of those channels and relying upon recording devices to pick the correct time to store only those series and movies that the viewers would like to watch. Ad, aye, viewers might still like to watch one or two specific series only available on this streaming service or that and therefore still keep a couple of streaming subscriptions active — just not all of them.
Here is where, I think, Amazon and Apple, while being minor players, would have a slight edge, since they can combine their streaming services with their other services, and thus offset the costs of actually running a 'separate' video streaming service — instead, the 'package', in their case, means pooling together a lot of goodies that only they can offer (such as Amazon's Premium delivery service or Apple's iCloud storage...) with a streaming service. In other words, if someone has already decided they will use Amazon's Premium delivery services, and will pay for that no matter what, then it's far more likely that they will be willing to get Amazon's streaming service as well — especially if it's cheaply bundled. Sure, Netflix may have nicer series, but Netflix doesn't deliver books and CDs (or anything else) at home.
Granted, there will be still an opportunity for 'bundling' together services, by partnering with others. For instance, subscribe to Uber Eats, get a free subscription to HBO or Peacock. Why not? Around here in my country, mobile phone operator Vodafone (the local branch) had offered, for quite some time, a 'free' Netflix subscription with their own cable TV + Internet services. Vodafone thought that they would have an edge on their competition that way. It worked for a while until all cable operators had 'agreements' with Netflix, making Vodafone's offerings irrelevant; thus, they abandoned their special partnership with Netflix. That just means that if you want to continue to get access to Netflix services, you now need to pay both Vodafone — for the Internet fibre connection — and Netflix — for the video streaming content. But so does the competition, making the choice of Internet cable provider irrelevant...
I don't know how video streaming services will be able to stay afloat. They will certainly have to rethink their cost framework. It's clear that, the more competition they get, the harder it will be to sustain the cost of producing brand new, original content. So... we'll see what happens! :-)
The basic mistakes that the streaming folks made was that all TV viewing would quickly shift to streaming---five hours per day per person--and that all that mattered was edgy drama series that you could binge watch on demand---all of the rest----news, sports, game shows, talk shows, reality fare, etc, was of no real consequence to most viewers.
They were hopelessly wrong on both counts. Of course, people with modest incomes were concerned about ever rising cable system and satellite distribution pricing---so cord cutting began---which fueled the underlying assumption of the streaming enthusiasts---to them "linear TV" was a dead duck and its demise was perhaps a few years away. They also failed to understand the business importance of TV advertising---the branding type of advertising---so they largely ignored it. One has only to examine the comments made by Reed Hastings some years ago to see this---but he wasn't alone.
So now, several doses of reality have set in. First, edgy dramas and big time movies available on-demand are only part of what most people want from TV---they have other needs and these can be supplied by "appointment viewing" just fine. Also, the average person now devotes only 1.9-2 hours a day to streaming content---a good deal of which---like 80-85% ---is not to "original content. And it costs an awful lot to keep buying "quality" originals from Hollywood and elsewhere to woo subscribers who will usually cancel---as they are allowed to---once they have seen an "original" they find of interest. So you have a huge "churn" issue---bigger that cord cutting as a percent of total subscribers. So why are we surprised that the streamers have now adopted what has always worked for the broadcast TV and cable folks---more reruns, cheaper fare and, coming soon, lots of commercials?