As the media and entertainment industry pivots to streaming, questions are being raised about the sustainability of business models weighted with huge cost and low margin.
Netflix has spent $17.3 billion on programming over ten years — 45% of all content spending since 2010, according to JustWatch. It spent two-and-a-half times more than next nearest competitor Amazon Prime Video last year.
Another report by BMO Capital Markets predicts Netflix will have spent $26 billion by 2028.
Yet, according to Forbes, “Netflix One Question: Is It Losing Money Or Making Money?,” Netflix reckons it needs four years on average to begin to make a 90% return on content. It made a net profit in 2019 of nearly $2 billion but its content costs remain astronomic.
“While it needs to rein in content spending in the long-run to boost cash flows, this could prove tricky, as subscriber growth could slow (or even decline) if it doesn’t keep updating its library at the same pace, given the competition in the streaming space,” Forbes warns.
So, it has to keep spending just to stand still. Meanwhile Disney spent about $1 billion on original programming for Disney+ in 2020. HBO Max reportedly invested $2 billion and Apple TV+ had a $6 billion content bill in its first year.
Is this sustainable?
The global television industry is enjoying an unprecedented boom, with producers across all genres — from high-end drama to quick-hit reality TV formats — benefiting from the truckloads of cash global streamers are pumping into the business.
WATCH THIS: TheGrill: Focus on AVOD presented by FilmRise
As inflation rises toward a possible recession and consumers continue to tighten their belts, ad-supported video-on-demand — including FAST channels — are quickly becoming the norm.
WrapPRO recently convened a panel of industry experts to discuss consumer habits amid the rise of AVOD as part of its symposium, “TheGrill: Focus on Streaming presented by FilmRise.”
Moderator Brandon Katz was joined by Daniel Christman, SVP of cross platform group at Screen Engine/ASI; Tejas Shah, SVP of commercial strategy and analytics at FilmRise; Katina Papas Wachter, head of ad revenue strategy at Roku; and Alysha Dino, senior director of publisher development at Publica.
The rise of AVOD could create favorable conditions for both producers of advertising and delivery platforms, Christman commented, kicking off the discussion. “There just isn’t an overwhelming urge among consumers to add more paid subscriptions to their monthly budgets, especially as we head into all this recession talk,” he says. “And we know the demand for content is as great now as ever. So this sets up as an extremely favorable story for those involved in ads content creation, and delivery.”
Watch the full conversation in the video below:
READ MORE: ‘The Great Shift to AVOD’: Why Viewers Are Flocking to Ad-Supported Streaming (WrapPro)
According to one sales executive at French-based TV studio Banijay, “We’re working with everyone, from [AMC Networks-owned streamers] Acorn TV and Sundance Now to the likes of Hulu and Peacock…. We’ve also seen a huge appetite for content on traditional linear TV in the last 12 months, driven in part by the pandemic lockdown, and the AVOD business is exploding.”
But everyone is wondering how long this will last? As sure as eggs is eggs bust will follow boom.
In a new report, “U.S. Media: Is Streaming a Good Business?,” the analyst firm MoffettNathanson advised that while investment in new content is skyrocketing, there is no guarantee revenues and profit will follow.
The analyst argues that most U.S. television groups are moving away from the “high-margin/low-capital model” of pay TV toward a streaming model that offers, at least initially, “low to non-existent margins with high capital intensity.”
In other words, domestic streaming isn’t all that much different in terms of profit margins from low-end basic cable and premium pay networks.
What makes a difference is international scope — something Netflix has focused on for several years by building up content catalogues and local production hubs in places like Korea, Spain, Brazil and India. It heeded its own data suggesting that the North American market was likely saturated and that growth had to come from overseas.
“Netflix’s greatest asset — and the likely Achilles’ heel of many of their competitors — is indeed their international footprint, which should drive incremental profit and ROIC into the future,” writes analyst Michael Nathanson. “Absent a truly global ambition and subscriber base, we struggle to see how many of these nascent SVOD/AVOD services will profitably scale.”
