us watch2508_us watch 29/08/2015 09:06 Page 1
Buyer beware!
According to Larry Gerbrant, the future of OTT and
cord-cutting may hinge on programming margins.
ery early in my
career as a
programming
analyst, I was mentored by
a retired TV syndication
executive who let me in on
one of the reasons the
Hollywood studios were so
successful at programme
licensing negotiations,
especially with local TV
stations. He contended that
they knew the maximum
amount a TV station (and
eventually, the basic
networks) could pay for
programming and their job
was to push the sale to the
limit without forcing the
buyer out of business.
In fact, they had data on
what the average spot cost was
in a particular market and what
the likely ratings would be for a
show and had worked out how
much revenue the series would
generate over its licence period
and what percentage of the
revenue the channel could afford
V
“Netflix will spend
as much as 74% of
its revenue on
original and
acquired
programming.”
to pay before they ever started
the negotiations. The buyer, on
the other hand, had nowhere
nearly as good market
intelligence on how low a price
the programme seller was
willing to accept in the
negotiation.
What is ultimately going on
is that the law of supply and
demand plays itself out as an
industry matures and pricing
reaches a state of economic
equilibrium. This phenomenon
28 EUROMEDIA
PROGRAM MARGINS:
NETFLIX VS. US BASIC
NETWORKS
has already played itself out in
the pay TV business where, at
least on an industry average, the
basic networks pay 46% to 48%
of revenue for a combination of
original and acquired
programming.
In the early days of the Over
The Top TV industry, the
business appeared to defy the
laws of economics and held out
the potential for
extraordinary margins as
subscriber growth at
companies such as Netflix
took program sellers by
surprise. The next round of
negotiations saw prices for
programs rapidly escalate
and Wall Street firms such
as Morgan Stanley are
forecasting Netflix will spend as
much as 74% of its revenue on
original and acquired
programming. This is where the
economic dance of buyer vs.
seller becomes interesting.
Netflix stock’s valuation is
predicated on its ability to bring
its programming margins back
down to a level close to what
linear channels typically spend.
If subscriber growth falters,
Netflix will be faced with
dramatically scaling back its
spending on original fare or
cutting back on library
acquisitions.
There is a deeper lesson in
these numbers. As OTT
matures, program syndicators
(and original content creators)
programming margins will
stabilise towards the industry
mean of 40% to 50% of revenue
and OTT channels will wind up
with economics that look very
much like
Larry Gerbrandt
[email protected] has been a
media analyst for more than 25 years with
companies such as Kagan and Nielsen. He
is a principal at Media Valuation Partners,
which provides strategic consulting, research, valuation and
expert witness services and is a managing director of Janas
Consulting, which provides management consulting,
valuation and investment banking services.
traditional linear channels.
These programming costs, in
turn, will be passed on to
subscribers and advertisers.
In fact, the laws of supply
and demand are already playing
themselves out in damping
down the early cord-cutting
momentum. It turns out that
the unbundling of individual
channels or ‘skinny bundles’
only really benefit light users of
television and who only have an
interest in a handful of
channels. Trying to replicate
something that contains the
most popular programming
(especially sports and kids
shows) using OTT offerings
winds up not being much of a
bargain and requires
considerable technological
dexterity. Ultimately, hit shows
are a relative rarity and the
owners (and talent) expect to
be paid a premium,
irrespective of the distribution
medium. The unseen hand of
marketplace pricing will play
itself out as surely in OTT as it
has in all other forms of video
distribution that have
emerged since television
became a mass medium in the
early 1950s.