Content price inflation seems to be an inexorable trend in the TV world, with pay-TV operators often placing the blame for their latest price-hike on the increasing costs the Hollywood studios demand for licensing their premium product. But what’s causing it?
One theory is that there has for some time been a large hole in the studios’ business model, caused by collapsing revenues from sales and rental of DVDs and Blu-ray discs, which has yet to be filled by revenues from new digital formats like download-to-own (DTO). According to this line of reasoning, the studios are bridging the gap by charging the pay-TV sector a premium.
Another theory is that the Hollywood majors are finding their production costs escalating year by year, and have to recoup those costs from somewhere.
As might be expected, the reality is more complicated than either of these two alternative explanations.
In the UK, points out David Sidebottom, Principal Analyst at Futuresource Consulting, the situation with new digital formats is mixed: “the number of consumers buying transactional digital video appears to be slowing, largely driven by a decline in digital renters. However, those purchasing Electronic Sell-Through (EST) movies and TV shows are marginally increasing.”
While it is true that such formats have so far failed to compensate for declining physical media sales and rentals, he explains, “we are seeing it being offset if you include SVOD. In the UK market last year for example, if you include packaged video, transactions and subscription, [total revenues] grew last year by 3% to about £2bn. We’re expecting similar growth-rates this year as well. And the proportion that is SVOD is obviously increasing.”
On this account, digital video revenues are more than compensating for the loss in physical revenues, but only if SVOD is included.
But don’t increasing SVOD revenues impact pay-TV revenues, which would ultimately have a knock-on effect in Hollywood? Sidebottom concedes that in the UK, pay-TV revenues are currently flat, amounting to just over £6bn, but he puts this down to “natural saturation” in the UK pay-TV sector, not SVOD.
Futuresource’s research confirms separate findings from BARB, that – although in the USA, there is evidence to suggest that SVOD is beginning to cannibalise pay-TV – the relationship between SVOD and pay-TV in the UK, as elsewhere in Europe, is generally complementary, with pay-TV households more likely to take SVOD services than free-to-air only households.
However, Michael Goodman, Strategy Analytics’ Digital Media Director, points out that while at a macro level overall home video revenues may be recovering in some territories, “studios are generating less cash from SVOD than they do from sell-through or rental. And [where] SVOD now accounts for the lion’s share of consumer spend on home video this is causing a problem for [them.]”
This, he argues is, firstly, because SVOD undercuts the DTO and rental markets, and secondly, because the studios undervalued their libraries, licensing content – particularly, older movies and TV shows – to SVOD providers “at ridiculously low rates – and in many cases are now locked into bad long-term agreements.” Studios are working to change this, he says, but it will take time.
Meanwhile, the studios continue to lack visibility into how movies and TV shows are performing on SVOD, he points out, making it difficult to negotiate with Netflix and other providers as equals: “it is hard to negotiate when the other guy has all the info.”
Goodman also believes that – although not the only reason for increasing content costs – production costs are indeed rising, due to a variety of factors. “Just on the TV side, the number of original series produced annually has doubled in the last five or so years, from a little over 200 to more than 400,” he argues. This means increased competition for scripts, intellectual property, actors, directors and writers, “all forcing studios to pay more. […] It is getting increasingly competitive, and thereby expensive to acquire it.”
Meanwhile, new formats, such as 4K, HDR, and VR, all require new capital investments and increasing production/post-production costs, he points out. Previously, these increased costs would have been offset by new revenue streams from new formats, but this no longer appears to be the case.
“The short answer,” says Goodman, “is that studios are making less money from digital distribution than they did from physical distribution, even though in the aggregate digital revenues are now larger than physical revenues, at least in some markets.”