January 25, 2018

Squeeze Play

Something’s Bound to Give

January is often budget time for both households and businesses. We look at our 2018 finances and try to make the numbers work for another year. In this vein, two stories caught my eye this week. One was a report that US national TV advertising fell 7% in December on the back of continued double-digit ratings declines. The second was the news that Amazon raised the monthly price for Amazon Prime from $10.99 to $12.99. Both data points suggest budget challenges ahead.

What’s it mean for the future of TV? Read on.

1. Peak Originals?
Everyone wants more content, at least until it comes time to pay for it all. Buried in the news about the Amazon Prime price increase came the additional tidbit that Amazon is cancelling three more original seriesJean-Claude Van Johnson, I Love Dick, and One Mississippi. Regardless of the merits (or lack thereof) of these particular shows, the emerging pattern seems clear. The land-grab mentality that has caused legacy TV and SVOD providers alike to green light hundreds of new TV series over the past several years may well have peaked. However, while there is limit to the number of shows that any one service can sustain, Amazon’s cancellations are also being driven by a change in strategy.  Jeff Bezos has made it clear that he wants “more ambitious, attention grabbing event television” as evidenced by the recent acquisition for the global rights to Lord of the Rings.

The problem with a sheer quantity approach is that most shows get lost in the shuffle, losing the marketing impact that causes providers to produce originals in the first place. That being said, the value of quality originals in attracting and retaining subscribers remains highly relevant to the Big-3 SVOD vendors: Netflix, Hulu, and Amazon Prime Video. In fact, TDG will this week release a new report forecasting content budgets for the each of these companies, including both licensed and originals, as well assess new entrants such as Facebook and Apple.

Amazon is a useful canary-in-the-coal-mine in this regard by virtue of its famously low margins. That is, if Amazon finds itself having to prune its lineup and focus on a smaller number of truly buzz-worthy shows, what does that say about the prospects for everyone else?

And remember, all of the aforementioned data points are coming in the midst of a very strong US economy with high consumer confidence and historically low unemployment. The reality is that regardless of business model (affiliate fees, ad dollars, D2C subscriptions), there simply aren’t enough dollars in the US video ecosystem to profitably sustain all of these shows. Something’s got to give.

Given the continued decline in linear TV viewing, it seems unlikely that the legacy pay-TV ecosystem is going to extract more dollars from the consumer. Amazon will survive the price increase and use the proceeds to focus on releases that maximize marketing impact, but people are obviously not happy about it. Despite fears of Amazon’s dominance, the Seattle giant’s relationship with consumers is highly dependent on a perception of value and low prices. While each of the Big-3 SVOD providers have some headroom for price increases, I don’t believe Amazon can regularly push price increases on consumers in the same way that Netflix or Hulu can.

The bottom line: golden ages never last. I predict that, even as investments in originals increase in the next five years, we’ll begin to see net declines in the number of original TV series in production. That being said, the new shows that make the list will enjoy increasingly large budgets, as the Big-3 look for the next Game of Thrones, House of Cards, or Handmaid’s Tale, and spend a small a small fortune to find and develop it.

2. More Consolidation is Coming
In a flat or declining market, it’s not just individual TV series that feel the effects. It’s often entire companies. The usual (maybe even inevitable) response to such markets is consolidation, which means more M&A deals in the video space. I see these deals taking three main forms.

The first kind of deal involves legacy content providers teaming up to cut costs and (hopefully) gain bargaining power with advertisers and distribution partners, as well as the ability to join forces around their direct-to-consumer offerings. The current example for this model would be a recombination of CBS and Viacom.

The second kind of consolidation merger is the vertical integration play. This usually takes the form of distribution buying content. AT&T’s ongoing acquisition of Time Warner (still trying to close by April) is the best current example of this type. HBO may be the prettiest prize out there for this type of deal, but other combinations are certainly possible.

The third, and most disruptive, kind of deal involves tech giants buying up content companies. Just this week Apple announced plans to repatriate nearly all of its $250 billion overseas cash hoard. Alphabet, Facebook, and Microsoft have significant stashes offshore, as well. This cash, combined with the aforementioned vulnerabilities in the current TV ecosystem, could lead one or more of the Big-5 (Alphabet, Amazon, Apple, Facebook, Microsoft) to acquire video content assets for their ecosystems.

The larger economy is (still) booming. The TV market is not. Something’s bound to give.

Stick with TDG and stay ahead of the curve.

Joel Espelien is a Senior Advisor for TDG and serves as an advisor and Board Member to the video ecosystem and technology companies. He lives near Seattle, WA.

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