Euromedia September October | Page 28

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.