The EconomistNovember 16th 2019 BriefingThe future of entertainment 632
1of iac, who in 1986 founded Fox Broadcast-
ing as a rival to the three incumbent free-
to-air networks, abc, cbs and nbc, came in
the mid-2000s with Netflix and, soon after,
Amazon Prime Video, the e-commerce
giant’s streaming service.
The industry’s initial response to the
challengers was to pawn its crown jewels.
Netflix paid hundreds of millions of dol-
lars for rights to stream beloved sitcoms
like “Friends” or “The Office”. hbostruck
deals with Amazon to supply it with pro-
gramming such as “Six Feet Under”. This al-
lowed the streaming upstarts to rack up
subscribers and splurge on more content.
In time, they began producing their own
programmes, notably in 2013 with “House
of Cards”. Netflix released the entire first
season of its political drama at once, usher-
ing in the age of “binge-watching”.
Meanwhile, the rest of the business was
being reshaped in other ways. Many media
groups were folded into vertically integrat-
ed conglomerates that controlled both the
production and distribution of content. In
2013 Comcast completed its purchase of
nbcUniversal. In 2015 at&t, a telecoms
company, bought Directv, a satellite firm,
and in 2018 paid $85bn for Time Warner,
owner of hbo and the Warner Bros studio.
Disney eschewed vertical integration but
expanded horizontally. Its megadeal with
21st Century Fox was the fourth for its boss,
Bob Iger, who had earlier snapped up Pixar
(an animation studio), Lucasfilm (maker of
“Star Wars”), and Marvel Entertainment,
home of Marvel Comics.
This flurry of consolidation created a
handful of giant content owners, with
massive back catalogues and a willingness
to spend heavily on old shows and new pro-
gramming (see chart 1). In October hbo
Max reportedly agreed to pay over $500m
for the American rights to air 23 old series
and three new ones of “South Park”, a satiri-
cal cartoon owned by Viacom. It was one of
the biggest on-demand-licensing deals of
all time. The same rights went for $192m
four years ago. As one media executive puts
it, with more than a hint of admiration,
“at&t is not screwing around.” Since 2010
just three groups—WarnerMedia, Disney
and Netflix—have ploughed a total of
$250bn into programming (see chart 2).
As content-related costs have surged,
the lucrative old business model has reced-
ed. Netflix has made viewers less willing to
pay over the odds for a big bundle of pay-tv
channels, which generated margins of
around 50% and accounted for as much as
three-quarters of profits at media con-
glomerates like Time Warner, Disney, Via-
com or News Corporation. Streaming as a
stand-alone business either loses money
or at best, breaks even. Netflix books ac-
counting profits but has yet to turn free
cashflow positive (though it expects to
soon). It has accumulated $12bn of long-term debt despite making no acquisitions.
Media firms moving into streaming have
“swapped a quarter for a nickel and paid $5
for the privilege,” sums up one executive.
There are three ways to make streaming
pay. Firms can accumulate deep ranks of
loyal subscribers at home and abroad. They
can raise prices. Or they can spend less on
programming.
Winning over millions of subscribers is
getting harder. Once consumers have paid
for broadband and for a simple bundle of
news and sports, it takes only three or four
streaming services at current prices before
the bill adds up to not much less than what
they coughed up for old pay-tv. Companies
are jumping into streaming in a peak-at-
tention economy, notes Tim Mulligan of
midiaResearch. Consumers have no more
spare leisure time for new tvapps. Reed
Hastings, boss of Netflix, has named “Fort-
nite”, a hit video game, and sleep as his
main competition.
In practice, his and others’ streaming
services will probably have to claw viewers
away from each other. Even then, custom-
ers may not stay. Switching costs are low.
People might sign up for Disney+ to see
“The Mandalorian”, leave and then come
back a year later for a new Marvel film.
If building an enormous subscriber
base looks hard, what about raising prices?Netflix did so in the spring, when its stan-
dard plan went up by $2. There is chatter
that Disney may need to raise its price for
Disney+ sooner rather than later. But that
risks driving subscribers into rivals’ arms.
Again, Netflix serves as a cautionary
tale. In the third quarter it added just
500,000 American subscribers, 300,000
fewer than expected. Earlier this year it saw
their number decline for the first time in 12
years. And that was before Disney, Apple
and others entered the fray. Globally, Net-
flix now expects to add 26.7m subscribers
this year, down from 28.6m in 2018; 90% of
its subscriber growth comes from abroad,
where it is potentially more expensive to
win viewers because of the need to tailor
content for each market.
That leaves spending on programming
as the last lever on profits. This, says Mr
Roberts of Comcast, will need to be pulled
back somewhat over time. There is no sign
of that yet. According to Bloomberg Intelli-
gence, a research firm, the average cost of
producing a single episode of a scripted
drama is close to $6m, twice the going rate
of three to four years ago. This year 16 firms,
from Disney to Quibi, a short-form mobile-
video platform, will spend a total of $100bn
on content, according to ubs, a bank. That
is roughly equal to the sum invested in
America’s oil industry this year.Goofy?
Disney expects its streaming service to
break even by 2024, once it reaches
60m-90m subscribers. The plan is for two-
thirds of these to come from overseas.
Some on Wall Street worry that the firm
could lose money on Disney+ for years to
come. Streaming may encourage a faster
rate of “cord-cutting”, as people cancel
pricey pay-tv subscriptions, cannibalising
the company’s mainstay cable profits.
Mr Iger has as good as admitted that Dis-
ney is betting the farm. But, as he explained
in his recently published autobiography, it
has little choice. Its rivals appear to share
the sentiment. at&texpects to invest $2bn
in year one of hbo Max and to earn no rev-
enue at the start. Over time, the hope is, in-
vestment will go down and revenue will
rise; the service is also expected to break
even in five years.
Still, a shake-out looks inevitable. There
is much uncertainty about who will be left
standing. The prevailing view in the indus-
try is that Netflix will be hard to dislodge. It
has amassed 158m global subscribers and
created a brand that appeals to all ages and
tastes. Its recent purchase of rights to
“Seinfeld” will help make up for the loss of
“Friends” and “The Office”, two of its most
popular shows which at&tand Comcast,
respectively, plan to pull from Netflix. It
has 47,000 tv episodes and 4,000 films in
its American catalogue, according to Am-
pere Analysis, a research firm. That is farAnd nothin’ on
United States, scripted original seriesSource: UBS1CableBroadcastPay -T VOnline2009 18171513115004003002001000Bonanza
Cumulative content spending*, $bnSource: UBS *Including sports †Forecast22010 19†18161412250200150100500WarnerMediaNetflixDisney