In the past 10 years, the media industry has seen a major upheaval due to the consumer's switch to streaming. This shift has thrown established media giants into a tailspin, as they desperately try to make it work. The feud between Charter Communications and Disney exemplifies how these organizations are clinging to the old ways. This struggle is the crux of the writers and actors strikes, halting Hollywood productions and only furthering media firms' troubles.
For nearly five months, picket signs have been seen at the gates of Hollywood's studios, as writers and actors have advocated for AI safeguards, improved wages and a portion of streaming profits. Unfortunately, streaming has yet to be profitable for many studios. This upheaval of the media industry was brought on by Netflix's direct-to-consumer platform in 2007. It became more unpredictable when Netflix started producing original content in 2013. Because of this, large media companies like Disney, Warner Bros, Discovery, Paramount and NBCUniversal had to compete by supplying their platforms with expansive archives and original shows and films. Nevertheless, the subscription-based streaming model is very distinct from the traditional television bundle that is powered by ad revenue. Studios would find that the licensing costs were considerable and there were low returns for each user. In 2022, Netflix was the first streamer to report a decline in subscribers, causing their stock and other media firms to tumble. Disney soon followed suit. Consequently, they started to put more emphasis on commercial ads, prohibition of password sharing and increasing prices. Media conglomerates also began to cut their content budgets. Disney's CEO Bob Iger promised that they would prioritize quality over size when it comes to streaming and theatrical businesses, citing Marvel as a case of too much material. Even so, streaming is still the prime focus of these organizations due to users dropping cable and going for streaming services. To recuperate their losses, media businesses are now banking on the same strategies that made the traditional bundle so popular. Ken Solomon, CEO of The Tennis Channel, owned by Sinclair, suggested that the solution lies in a combination of resources in order to satisfy customers.
For years, media companies capitalized on two strategies: delivering content to different platforms on a windowing basis, and creating additional cable networks in order to generate more revenue from the bundle. In spite of their success and profits, Jason Solomon pointed out that the pay TV bundle became too expensive for some consumers - an opening for Netflix to disrupt the entertainment industry's revenue-making and spending model. But traditional players had to take risks and strive to stay relevant with their audiences, consequently sacrificing alternative revenue sources. The current state of play is one of flux as major companies such as Disney, Warner Bros. Discovery, reorganize with the aim of snipping away costs, and winging it financially.
Marc DeBevoise, CEO and board director of Brightcove, a streaming technology company, pointed out that these companies had likely spent more money than was necessary. The only company to make any profits off streaming is Netflix, given its considerable head start. UBS analyst John Hodulik added that for everyone else, streaming still remains dependent upon linear television, which is a problem due to the decline of customers and the fact that streaming is not large enough of an opportunity to overcome this. While initially subscriber growth seemed to be helpful in the growth of media stocks, it was sadly not to last. Worries about a recession, inflation, and rising interest rates have caused Wall Street to become focused on profitability in light of the slowing of subscriber growth.
The launch of Netflix into the media market signalled the start of a fierce competition in content production. This has not proved rewarding for any media company though, as spending has greatly increased among businesses in a bid to draw in new customers and retain existing ones. "The networks had joined forces with their streaming services and taken away any flexibility. They were pouring money at the issue hoping that it would somehow resolve itself," stated Solomon. "There was no underpinning economics."
It was a race to launch, with Netflix kicking things off in January 2007 and initially launching original content in February 2013. Hulu followed suit in March 2008, while Paramount+ (previously CBS All Access) got a start in October 2014 before being rebranded in March 2021. Disney+ streamed into the market in November 2019, and Peacock joined shortly after in April 2020. HBO Max burst onto the scene in May 2020, though it was rebranded to just Max in May 2023.
There were massive individual licensing deals for hits such as "The Office," "Friends" and "Seinfeld," which viewers were viewing frequently in reruns. Studios even sealed exclusive agreements with some of the movie industry's most accomplished writers-producers — Ryan Murphy, Shonda Rhimes, J.J. Abrams, Kenya Barris, and the pair of David Benioff and D.B. Weiss — with the intention of creating services that could grip the interest of audiences. Nowadays, the topic of show budgets obtains much attention. Nevertheless, Jonathan Miller, an ex-Hulu board member and present CEO of Integrated Media, does not recall when that was the case, since it was only the four major TV networks manufacturing all of the material. DeBevoise, a former ViacomCBS (currently Paramount) executive, declared he could not remember approving a show, including "Star Trek Discovery," in the mid-2010s at CBS for more than $10 million per episode, indicating many were "substantially, substantially less expensive." At the same time, Solomon, who previously operated Universal Studios Television, remembered when his budgets for acclaimed TV shows such as "Law & Order" were lower than $2 million an episode. "I thought costs were overly excessive back then," he expressed.
Disney sought to take advantage of the success of its Marvel Cinematic Universe by creating more than a dozen superhero shows for its Disney+ platform, each with shortened seasons of six to 10 episodes that cost around $25 million apiece. Netflix invested in multiple seasons of "The Crown," "Stranger Things" and a The Witcher series for which production costs per episode ranged from $11 million to $30 million. Warner Bros. Discovery has added "House of the Dragon," which cost an estimated $20 million per episode, and the upcoming "A Knight of the Seven Kingdoms: The Hedge Knight" (not yet filmed) to its direct-to-consumer offerings. Amazon, meanwhile, drew the biggest price tag with its first season of a Lord of the Rings prequel series that cost $465 million, but was met with a lukewarm reception. According to Solomon, "The price of content isn't always determinant of success" - as demonstrated by The Simpsons, which started out crudely animated.
DeBevoise stated that the economics for actors, writers, and the industry have shifted. He pointed out that the proposed cost hikes are unreasonable considering the revenue models, and questioned if there was something wrong with the industry if these increases happened, and actors and writers not getting their due.
Although publicly traded Hollywood studios are expected to submit quarterly financial reports, there are not any regulations that necessitate disclosure of streaming viewership data. This lack of opennes has caused negotiations between film studios and the actors and writers to be particularly difficult. "People are aggravated over how these parties can convene and share information and develop a deal which is favorable to each side," according to Schiffman, a teacher at Georgetown. "Until something like that happens, this situation will continue into next year," he added. Particularly, streaming studios have been reluctant to discuss viewership metrics and prefer not to couple pay with the success of productions, including those that have been contracted out to other companies.
In contrast to linear television, traditional studios commonly provide additional payments, known as residuals, to individuals employed on television shows or films after their initial launch. This is seen in the form of actors and writers being paid when a film or episode runs on broadcast or cable television, or someone buys a DVD or Blu-ray Disc.When it comes to streaming, however, no additional earnings are available. Studios usually pass on a minor amount to actors and writers from the licensing fees, but no extra pay is given even if the show does exceptionally well on the platform. Actors are attempting to revise this state of affairs.Chris DeBevoise commented: "The streaming model has been wanting for actors and writers, which I’ve personally aided, because it initiated a transformation from a long-term to short-term financial situation that was most likely either not properly understood or not explicated".
To make streaming viable financially, media companies are re-implementing business models that used to be profitable. These include advertising, licensing the content to other outlets, reducing password sharing, and showcasing the content on several platforms at varying intervals. Peter Csathy, the founder and chair of Creative Media, commented that Netflix understood that subscriber numbers would not be beneficial if the finances did not add up. Even with the rise in cord-cutting, the pay TV bundle still produces a substantial income. The recent Charter-Disney quarrel was a clear example, as they decided to make Disney+ and ESPN+ accessible with some pay TV subscriptions.
Rob Thun, chief content officer at DirecTV, recently voiced that distributors are funding streaming services in order to provide a better content experience than linear TV. He elaborated that if it weren't for these licensing fees, these companies would not be able to survive. This appears to have been a sort of 'awakening' moment for popular streaming companies such as Disney and Netflix, who have recently become increasingly reliant on ad-supported offerings to grow their subscriber base and generate additional revenue, despite the instability of the ad market. Fox Corp.'s Tubi and Paramount's Pluto, which imitate broadcast networks, have been on the rise and their parent companies are now receiving more ad money from these platforms, while other media outlets like Warner Bros. Discovery are funneling content for licensing fees. The Vice Chairman of NBCUniversal, Paul DeBevoise, commented that these various business models 'work', and that it all ultimately comes down to providing consumers with the best price-to-value and time-to-value.
Disclosure: Comcast is the parent company of NBCUniversal and CNBC.
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