Rising Content Costs, and The Dilemma Streaming Companies Face

There’s never been a better time to be a content producer.

With services like YouTube and Vimeo, content creators have a better shot at a big break in 2019 than at any time in the past decade. From the avid amateur vlogger who publishes regularly, to the influencer who earns a healthy supplemental income from ads that run with their content, the possibilities for producers are staggering.

Then, there is the upper echelon of modern entertainment: streaming giants like Netflix, Amazon Prime, and Hulu who pay top dollar to professional showrunners to produce premium content like Stranger Things, The Marvelous Mrs. Maisel and The Handmaid’s Tale. As more and more companies like Disney and Comcast enter the subscription streaming market, producers can pitch their best shows to the various streaming companies and exact the highest price.

But that very fact makes it hard for subscription streaming companies to keep their costs down and turn a profit. Meanwhile platform streaming companies like Youtube and Vimeo avoid upfront production and licensing costs altogether. For media companies looking to win the streaming wars, a hybrid approach that takes the best of the Netflix model and the Youtube model provides the best path forward.

A seller’s market for video producers

In the world of streaming video services, producers have the leverage. Consumers want the most entertaining, binge-worthy shows from whichever company can serve them up. Accordingly, streaming behemoths of the Netflix ilk are paying more and more, and must keep doing so to acquire the best content.

That means elite producers and showrunners, the people who churn out blockbuster films or just-as-cinematic TV series, can shop around for the best possible deals.

A prime example is a deal reportedly in the works between J.J. Abrams and WarnerMedia (merged with AT&T who will launch a subscription video streaming service later this year) valued at $500 million, a new record in streaming deals with Hollywood hitmakers if it goes through. In its attempt to carve out a niche in the hyper-competitive streaming wars, WarnerMedia can look forward to more, similarly costly payouts to bring top talent into their fold.

Netflix’s $300 million deal with Ryan Murphy in early 2018, and their $100 million deal with Shonda Rhimes in 2017, set off an arms race that has already reshaped the industry. In 2018, Netflix spent $12 billion on production. (This year its leadership has avowed to play a more budget-conscious role.)

Other prolific showrunners who are already wed to a media conglomerate are in a great spot as well. The $400 million that Warner Bros. TV paid to lock in Greg Berlanti, and the recent deal Sam Esmail of Mr. Robot fame recently signed with Universal for $100 million, are evidence that traditional media companies won’t give in so easily, and will pay to hold on to their superstar content producers who may be wooed by streaming companies like Netflix.

Why the vast sums? These top producers have earned a reputation for sprouting whole ecosystems of consumer experiences and merchandise (think Game of Thrones and Stranger Things).

The demand for exclusive content, whether produced in-house or licensed from major studios, will only drive content costs up further. If companies new to the streaming scene are determined to copy Netflix’s linear business model they will need to bring deep pockets to the table.

The old economics of the content production model are failing

As content production costs rise, streaming services are under pressure to show a profit. The Chinese digital media conglomerate iQiyi is facing this dilemma right now. Its Q4 2018 revenues were impressive, reaching $1 billion for the first time, up from $700 million the same time a year prior. However, that 43% growth in revenue was eclipsed by iQiyi’s 97% growth in content acquisition costs.

So what is the ambitious, newer streaming company to do, in order to prove they can compete with Netflix et al and turn a profit? One option is to raise membership costs. That’s the route Netflix has gone in partial surrender, no doubt, to the financial pressures of their content acquisition warpath. But it’s a strategy that risks losing subscribers, and will still fail to keep pace with rising content costs.

If the business model relies on constantly producing new content, the expenses of which run the gamut from location scouting and creative talent, to equipment, editing, and numerous other line items per production, a streaming company can only scale so far before the bottom falls out.

Licensing content can be just as expensive, and just as damaging to the bottom line. And as content creators build their own streaming services, they will pull licensed content from competitor streaming services, such as like AT&T, WarnerMedia, and NBC Universal are doing to Netflix this year by pulling Marvel movies, Friends and The Office from Netflix. Licensing is a risky long-term strategy.

Simply put, the unit economics of most major streaming solutions are not attractive. No matter how many new members are drawn to a new service, the content that lured them will eventually run its course and lose value. Then it’s time to burn through more cash to stock up on new content.

Why media companies must embrace the platform model

However, the content arms race doesn’t need to be zero sum. The platform business model, which connects producers and consumers, can produce high-quality video while keeping costs low. Take for example content platforms like Youtube and Vimeo who avoid steep upfront costs altogether by focusing on user-generated content. YouTube boasts a vast, loyal user base, while being unburdened by production and licensing expenses. Members are organically “tuned-in” to their favorite content producers, who produce shows on their own dime and share revenue earned with Youtube.

In fact, Youtube recently shut down its experiment in premium content production and chose instead to double down on user-generated content by improving the tools and digital studio that creators need to produce great video. Put differently, instead of paying for premium content outright, Youtube invests money in giving creators the tools necessary to produce high quality video.

Traditional media companies would be best equipped to compete in the streaming wars by building a user-generated content platform alongside their library of premium media. User-generated content can produce great hits at a low cost that pave a profitable, sustainable path out of the content arms race. With a network of content creators that sign up for the platform and generate content at little expense to the platform, media companies can serve viewers a mix of premium and user-generated content. This lets them chart a course for long-term growth.

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