People carry signs as SAG-AFTRA members walk the picket line in solidarity with striking WGA employees outside Netflix offices in Los Angeles, July 11, 2023.
Mario Tama | Getty Images News | Getty Images
Picket signs have lined the gates of Hollywood’s studios for nearly five months, because the industry’s writers and actors rally for AI protections, higher wages and a cut of streaming profits.
The issue is streaming is not yet profitable for a lot of studios.
Sparked by the creation of Netflix’s direct-to-consumer platform in 2007, streaming has upended the economics of the media industry. Yet, it’s still unclear whether it is a sustainable business model for the longer term.
“Without sounding hyperbolic, the change within the economics of the North American media industry within the last five years has been breathtaking,” said Steven Schiffman, an adjunct professor at Georgetown University.
Legacy media corporations like Disney, Warner Bros. Discovery, Paramount and NBCUniversal scrambled to compete with Netflix when it began creating original content in 2013 and slowly pulled market share over the subsequent five years. The studios padded their platforms with massive content libraries and the promise of latest original shows and movies for consumers.
Nonetheless, the subscription-based streaming model proves vastly different than the ad-revenue-fueled traditional TV bundle. High licensing costs and low revenues per subscriber quickly caught up with studios, which had previously placated shareholders with massive subscription growth.
Netflix was the primary streamer to report a loss in subscribers in 2022, sending its stock and other media corporations spiraling. Disney has followed suit. Since then, each have set subscription numbers aside in favor of promoting, a password-sharing crackdown and raising prices.
Media corporations even have begun slashing content spending budgets. Disney CEO Bob Iger has promised the corporate will give attention to quality over quantity in terms of each its streaming and theatrical businesses, pointing to Marvel for example of an excessive amount of content.
Yet streaming stays the main focus for all of those corporations as consumers rapidly cut the cord and go for streaming. To make up for the losses, media organizations are actually counting on methods that when made the normal bundle so successful.
“What’s the elemental solution? Not directly, shape or form, it’s the whole lot brought together,” said CEO Ken Solomon of the Tennis Channel, owned by Sinclair, of the varied business models in media. “It’s about understanding where to place a little bit more resources and the way all of them are glued together to satisfy the buyer.”
A broken model
Two strategies media corporations long relied upon — windowing content to varied platforms and creating more cable channels to reap higher fees from the bundle — proved lucrative and still reap profits.
“This gun has been cocking itself for many years,” said Solomon, noting that the pay TV bundle was a very good value proposition until it became too expensive for consumers. That gave Netflix a gap to upend how the entertainment industry makes and spends money.
Legacy media corporations scrambled to follow suit, unsure if the model actually worked. But they were eager to sustain with changing consumer demand, and in the method they depleted other revenue streams.
Now turmoil rules the industry. Corporations like Disney and Warner Bros. Discovery are within the midst of reorganizations — slashing jobs and content costs while trying various ways to piece together profits.
A picture from Netflix’s “Stranger Things.”
Source: Netflix
“All of those corporations spent extra money than they likely must have,” said Marc DeBevoise, CEO and board director of Brightcove, a streaming technology company.
Netflix, with a substantial head start, is the one company to make a profit off of streaming. “For everybody else, it’s still dictated by linear TV,” said UBS analyst John Hodulik. “That is an issue because the decline in customers accelerates and streaming just isn’t a large enough opportunity to offset that.”
Although subscriber growth initially ramped up streaming subscriber growth and bolstered many media stocks, it was short-lived. Fears of a recession, inflation and rising rates of interest led Wall Street to reassess these corporations and give attention to profitability as subscriber growth slowed.
A content arms race
Netflix’s entrance into media signaled the start of a content arms race that, ultimately, hasn’t paid off for any media company.
Content spending ballooned across the industry, with each company spending tens of billions of dollars for brand new shows and movies in an effort to lure in recent subscribers — and keep those they already had.
“The networks had aligned with their streaming services and brought all of the elasticity out of it. They were throwing money at an issue and hoping that it was going to unravel itself,” said Solomon. “There was no economics behind it.”
Race to launch
- Netflix — launched streaming service in January 2007, first original content launched February 2013
- Hulu — launched streaming service in March 2008
- Paramount+ — launched as CBS All Access in October 2014, rebranded as Paramount+ in March 2021
- Disney+ — launched streaming service in November 2019
- Peacock — launched streaming service in April 2020
- Max — launched as HBO Max in May 2020, rebranded as Max in May 2023
There have been also massive one-off licensing deals for shows like “The Office,” “Friends” and “Seinfeld,” which viewers were actively watching on repeat.
Studios even struck exclusive contracts with a few of Hollywood’s biggest writer-producers — Ryan Murphy, Shonda Rhimes, J.J. Abrams, Kenya Barris and the duo of David Benioff and D.B. Weiss — within the hope that they may create recent projects that would capture the eye of audiences.
Show budgets draw lots of attention as of late. But Jonathan Miller, a former Hulu board member and current CEO of Integrated Media, doesn’t recall that being a spotlight when it was just the 4 major broadcast networks creating the entire content.
DeBevoise, a former ViacomCBS (now Paramount) executive, said he doesn’t remember greenlighting a show, including “Star Trek Discovery,” within the mid-2010s at CBS for greater than $10 million an episode, noting many were “much, much cheaper.”
Meanwhile, Solomon, who once ran Universal Studios Television, recalled when his budgets for top TV shows like “Law & Order” were below $2 million an episode. “I assumed budgets were uncontrolled back then,” he said.
Shonda Rhimes attends 2018 Vanity Fair Oscar Party on March 4, 2018 in Beverly Hills, CA.
Presley Ann | Patrick McMullan | Getty Images
Disney sought to capitalize on the success of its Marvel Cinematic Universe by developing greater than a dozen superhero shows for its Disney+ platform. Although the seasons were shortened, often only six to 10 episodes, each episode cost around $25 million. Similar production budgets were seen for the corporate’s foray into the brand new live-action Star Wars TV series.
Netflix has poured money into multiple seasons of political drama “The Crown,” science fiction darling “Stranger Things” and a series based on The Witcher video game franchise. Production costs per episode for these series ranged from $11 million to $30 million.
And Warner Bros. Discovery is adding more Game of Thrones series to its catalog of direct-to-consumer offerings with “House of the Dragon,” which cost around $20 million per episode, and the upcoming “A Knight of the Seven Kingdoms: The Hedge Knight,” which has not begun filming.
Meanwhile, e-commerce giant Amazon shelled out a record $465 million on its first season of a Lord of the Rings prequel series, which was met with tepid responses from critics and fans alike.
“The value of content is not at all times determinant of success. ‘The Simpsons’ were crudely animated initially, right? So, it isn’t necessarily that in case you go spend lots of money, it really works,” Solomon said.
Bart Simpson plays esports in an episode of “The Simpsons” that aired on March 17, 2019.
Fox
At the identical time the economics for actors, writers and the industry as an entire modified.
“The issue is that the price increases don’t make sense given the revenue models. Something got broken on this a part of the business if that sort of increase happened and actors and writers do not feel like they got their justifiable share,” DeBevoise said.
A growing disconnect
While a lot of Hollywood’s biggest studios are publicly traded and must share quarterly financial reports, there aren’t any rules about providing streaming-viewership data. This lack of transparency has made recent contract negotiations between studios and the industry’s writers and actors especially contentious.
“There is a frustration about how these people can get together and share this information and provide you with something that is affordable for either side,” said Schiffman, the Georgetown professor. “But until that happens, in my opinion, this thing goes on until next 12 months.”
Streaming studios, particularly, have long been reluctant to share data around viewership and don’t need compensation to be tied to the recognition of shows, including those which have been licensed from other studios.
That is in stark contrast to how linear television has handled popular shows. Traditionally, studios pay residuals, long-term payments, to those that worked on film and tv shows after their initial release. Actors and writers receives a commission each time an episode or film runs on broadcast or cable television or when someone buys a DVD or Blu-ray Disc.
In relation to streaming, there aren’t any residual payments. Studios that get a licensing fee pass on a small sum to actors and writers, but no additional compensation is given if the show performs well on the platform. Actors, particularly, need to change this.
“Why I believe the streaming model has been a difficult model for the actors and writers, and I used to be a part of helping that model, is that there was a fundamental shift of long-term versus short-term economics that likely wasn’t properly understood or explained,” said DeBevoise.
Back to the longer term
Media corporations’ effort to make streaming profitable is drawing out lots of the old business models that were successful previously.
The subscription streaming model is being subsidized now by tried and true models like promoting, licensing content to other platforms, cracking down on password sharing, and windowing content to different platforms with longer stretches of time in between.
“Netflix understood finally, due to Street, that subscriber numbers don’t mean jack, if the economics don’t pencil out,” said Peter Csathy, founder and chair of advisory firm Creative Media.
Even the pay TV bundle, despite rampant cord cutting by consumers, stays a reliable income.
“We, the distributors, are funding the streaming experience. And it’s frankly a greater content experience on streaming than what’s provided to us on linear TV,” said Rob Thun, chief content officer at DirecTV. “These corporations will stop to exist without the funding of distributors’ licensing fees. Perhaps it is a moment of awakening.”
Disney and even Netflix, which long resisted ads, are amongst the businesses relying more on ad-supported offerings to spice up subscriber growth and produce in one other revenue stream, at the same time as the ad market has been soft.
This is particularly true as free, ad-supported streaming services like Fox Corp.’s Tubi and Paramount’s Pluto — that are likened to broadcast networks — have also exploded. Besides the parent corporations leaning on the ad revenue from these platforms, other media corporations, like Warner Bros. Discovery, are funneling content there for licensing fees.
“By way of the business models, all of them ‘work,'” said DeBevoise. He noted paid tiers for the costlier, timely content will remain, while free and options with commercials will support the older library shows and movie. “There are going to be hybrid models that reincarnate the dual-revenue cable TV model with each a subscription fee and ads. It’s all going to be about price-to-value and time-to-value for the buyer.”
Disclosure: Comcast is the parent company of NBCUniversal and CNBC.