Jaime Lutz, writing in New Jersey’s The Star-Ledger in an early September piece called, “Net TV, New TV,” declared:
“…a revolution is under way that will force traditional TV to make a gradual exit from the production of original programming…‘watching TV’ is going to take on a whole new meaning…”
Lutz was looking at a stream of internet-based original TV programming to come from the likes of Netflix and YouTube, among others, over the next 15 months. According to Lutz, Netflix, Hulu and YouTube alone will be spending a combined $4.3 billion over the next few years to turn out original programming, most of the effort coming from Netflix which has budgeted $3.7 billion for between now and 2017.
Since the dawn of the modern cable age in the 1970s, the major broadcast networks have lost approximately half their audience. But what Netflix et al are after is not another cycle of cannibalization. As Lutz says:
“Forget the stories of ‘cord-cutters,’ those people who decide to give up cable in favor of internet TV – the real problem for the cable industry is ‘cord-nevers’…”
What Lutz is talking about is a rising generation of young viewer more at home watching TV programming on his/her laptop (or anything else that provides internet access) than on an actual TV. In the same way that their parents, growing up with cable, didn’t share their parents’ allegiance to the broadcast networks they’d grown up with, so, too, does this new generation lack much connection to cable. Lutz quotes Credit Suisse TV analyst Stefan Anninger:
“They are growing up in an internet-based video culture in which the mantras of ‘why would I pay for TV?,’ ‘pay TV is a rip-off,’ and, ‘I can find that for free on the web’ are getting louder…these consumers will find pay TV far less relevant to their lives than do today’s adults.”
So, we’re not talking about a migration of audience, which is what happened between broadcast and cable TV; we’re talking about an extinction of one kind of viewing (think of broadcast and cable as the dinosaurs), with the vacuum filled by an entirely new paradigm (think of Internet TV as the mammals that took over after T. Rex and the gang couldn’t hack it any longer). And, with cable costs constantly rising (Lutz says the average monthly cable bill will hit $200 by 2020), there’s less incentive for those cord-nevers to jump into cable, and plenty of incentive for current cable subs to jump out of it and into the arms of Internet TV.
But here’s the rub. Let’s go back to Mr. Anninger’s recitations of the new mantras: “Why would I pay for TV?” “I can find that for free on the web.”
This has got me wondering just who is going to pick up that $4 billion tab?
At this point, a quick refresher course in TV programming finance might be in order.
For all intents and purposes, the broadcast networks are supported by ad revenue. Advertisers buy time on a network and that money pays for programming. Back in the day when there were only three major networks and they held over 90% of all TV viewing, it was a system that worked just fine.
But then cable came along, and its dozens of new channels begin siphoning off viewers, the Big Three’s slice of the audience pie getting cut thinner and thinner until it currently hovers somewhere between 40-50% of the TV viewing audience. Over that time, production costs have risen as production costs are wont to do, while advertisers have understandably become less willing to spend the kind of money they’d spent in the past on a shrinking audience.
Consequently, most scripted TV is deficit-financed, meaning what the network pays a production company for its show doesn’t cover the cost of making the show (the network license fee usually covers about half). A typical one-hour network drama runs about $2-3 million per episode, with a full season consisting of 22-24 episodes for a grand total of as much as $70 million (or more for particularly high-cost shows) of which only about half is being covered by the network. Producers launch a series and cross their fingers it runs long enough to accumulate enough episodes to make it viable for syndication. It’s in those aftermarkets – a sale to basic cable, syndication to local stations, overseas sales, DVD boxed sets, etc. – where the profit is.
But think: even at the bottom end, we’re talking $44 million for one season of one 60-minute prime time series, $20-30 million for a half-hour sitcom…and any one of the Big Three – ABC, CBS, and NBC – has 22 hours of prime time to fill (as well as daytime and late night programming, and don’t forget their news blocks).
Cable programmers have a different cost paradigm. They work in a dual revenue stream environment. Cable companies pay program channels a per-subscriber fee to carry their services, but the channels also carry advertising, though, with their smaller – by broadcast standards – audiences, their ad rates are similarly smaller. Consequently, also smaller: basic cable budgets.
A one-hour basic cable drama has a usual price tag of $1.5-2 million, and seasons are also shorter: 10-13 episodes. Despite their lower costs, basic cable scripted shows are also deficit financed with the channel’s license fee covering about half of the tab. Even though most cable networks don’t offer a full night of new, original programming like their bigger broadcast colleagues, and are heavily reliant on reruns and library titles, they still try to insure that as one short-seasoned series hits its finale, another short-seasoned series is hitting the air to replace it so they have something new and promotable on the channel through a good part of the year.
When you look at what all those channels – basic cable and broadcast – are putting out in terms of both tonnage and expense, even the word “staggering” is something of an understatment. We’re talking thousands of hours of programming each week, and annual costs in the billions. Basic cable alone runs up a programming cost of about $20 billion annually (which includes originals and acquisitions as well as high-priced sports).
Internet TV is a butcher knife hacking away at those financial arteries.
Internet TV bleeds commercial TV in several ways:
The first and most obvious wound is simple audience attrition. Well, attrition may not be the most accurate word. As Lutz points out, commercial TV’s problem isn’t only the people who may be leaving it for alternative delivery systems, but an Internet-weaned generation that never bought into the commercial TV idea to begin with.
But Internet TV is also diluting the audience commercial TV still has. Ad rates for commercial TV are set by how many viewers in a particular demo a given show can deliver to an advertiser at a given time. To this day, no vehicle delivers a mass audience to a specific place and time better than network television. But, as more people watch network shows off-network, the audience dissipates. Instead of everybody watching Fringe at 9 o’clock Friday night, a hunk of the audience may watch the same episode in dribs and drabs on the Internet over the next week or two. Some may wait until the end of the season and binge their way through all 22 episodes in a few days. Networks defensively claim those viewers still count. Advertisers say like hell they do.
Young Internet viewers are less tolerant of commercials than their sit-in-the-living-room-watching-the-family-TV forbearers, so alternative delivery systems appease them with “skip video” options to dodge commercials. Even a somewhat more traditional pipeline like satellite service Dish offers their Hopper service which provides broadcast TV offerings commercial-free.
The less appealing commercial TV becomes to viewers, the less appeal commercial TV becomes to advertisers, and that means less money advertisers are going to be willing to cough up for ad time. Less ad money means less money for programming. Less money for programming means fewer and/or cheaper shows. Like reality show cheap.
It costs basic cable channel AMC about $2-2.5 million to produce an episode of its critically-acclaimed, award-winning series, Mad Men. In contrast, most of the half-hour so-called reality shows (I say “so-called” because cable TV’s idea of “reality” makes The Twilight Zone look like docudrama) filling up much of the basic cable spectrum cost $500,000 or less to produce. That explains why there’s so few Mad Mens on cable, and so many housewife cat fights, bitchy wannabe models, cranky wannabe chefs, boozy beach combers, knocked-up teens et al.
Internet TV can also erode the aftermarket that makes making TV for the networks worthwhile for producers. TBS picked up basic cable rerun rights for top-rated sitcom The Big Bang Theory for $1.5 million per episode. But how much would those episodes have been worth if millions of viewers had already had unlimited access to them online? And without that $1.5 million per, would the show be worth making at all?
So, if Lutz is right – and the southward trend of viewing numbers suggests he is (according to Lutz, online TV watching climbed 4% last year while watching the home set declined 7%) – the question is what happens to outfits like Netflix and Hulu when the broadcast and cable nets start to make, as he writes, “…a gradual exit from the production of original programming…?”
Because the great irony here is – and what is undoubtedly unappreciated by all those “Why would I pay for TV?” Internet cord-nevers hitting the “Skip ad” button – that up until now, commercial TV has been subsidizing much of the Internet TV business.
Hulu is free. Hulu Plus – which has more new offerings and provides unlimited instant streaming – costs $7.99 per month. If you go to the Hulu Plus site and browse its catalogue, you’ll find over 3700 TV series and movie titles.
Netflix’ online service also has a $7.99 monthly subscription fee with access to tens of thousands of streamable titles.
Compare that to HBO or Showtime whose typical monthly fee runs in the $14.00 range. Because premiums services like these are add-ons to basic cable packages, the cost is actually higher. Comcast cable subscribers, for example, usually can’t get either service for a total cable/premium monthly cost under $80. And, there’s no way any – or even all – of the premium services can match the tonnage in programming Netflix and Hulu and Hulu Plus offer at any given time.
But Netflix and Hulu are dependent on not only what other services produce, but on those services’ willingness to share their top-drawing programming. In 2011, Showtime opted out of an arrangement to provide its programming for Netflix’ streaming service figuring if people could see Showtime programming on Netflix, they didn’t have much reason to subscribe to Showtime. Other programmers – including commercial TV programmers both basic and broadcast – have also been cagey about what programs they will and won’t share with services like Netflix and Hulu. Despite the hundreds of TV titles Hulu Plus offers, there’s a reason ratings heavy-hitters like The Big Bang Theory and Two and a Half Men aren’t among them.
So, let’s say you’re Netflix. Between audience erosion and increasingly wary advertisers, commercial TV’s ability to produce large amounts of scripted programming is being squeezed. And, the nets, cable and broadcast, don’t always want to share their programming riches with a service that may very well use those assets to cut into their respective owners’ audience.
So, you say, We’re gonna make our own stuff! and you write a check for $3.7 billion and start making shows.
We’re not talking reality cheapies about seaside barflies with the production quality of a bad home movie. Some of Netflix’ announced projects include series by David Fincher and Eli Roth, and a revival of the acclaimed cult series from Ron Howard, Arrested Development. The budget for Fincher’s series is reported at $4 million per episode rivaling the top end of broadcast network dramas.
Here’s the thing: with less cheap – and even free – material available, and having to make up at least some of the difference with originals, monthly fees of $7.99 aren’t going to cut it.
Here’s another thing: as massive an investment as it is, even $3.7 billion isn’t going to be enough to keep the Internet audience happy.
In this respect, Internet TV may be a victim of its own success. Internet TV watchers aren’t shackled to weekly schedules which bleed a favorite series to viewers one episode a week over 22 weeks. This is the on-demand generation: they not only want to see what they want to see when they want to see it, they expect to. Lutz talks about a penchant among Internet TV viewers to binge-watch, banging through a multiple episodes of a show – even an entire season’s worth — in a few days.
Ok, so $3.7 billion spread out over five years, even figuring low-end broadcast network caliber budgets… When you do the math, what you get is only enough programming to fill two hours of prime time seven nights a week for a single 22-week season. If the pipeline of content from commercial TV dries up – either because channels don’t feel like feeding what’s turning into a direct competitor, or because commercial TV itself is drying up – Netflix is either going to have to offer less, or start making more of its own stuff.
And there’s a problem with that, because that Internet audience – if Stefan Anninger is right – not only wants what they want when they want it, they also don’t like to pay for it…or at least not pay very much. The current reason they can go online and view favorite TV shows for little or nothing is because someone else is footing the production bill: networks, their advertisers, production companies.
But if those guys stop sharing, or – more likely, speculates Lutz – they simply start backing out of the scripted programming business, the money to fuel production is going to have to come from somewhere.
Looking at what happened in the evolutionary arc of premium services like HBO and across the basic cable spectrum, it wouldn’t surprise me to see a new range of content pipelines which eventually comes to look uncomfortably like the system their replacing except delivering programming on an on-demand basis instead of through a network’s anchored schedule: escalating subscription fees to keep up with escalating programming costs; programming which becomes less nichey and more broad in appeal in order to pull a larger audience as an attraction to advertisers; less ability for viewers to avoid advertising to appease advertisers; low-cost and sometimes sensationalistic programming to cut through the clutter of a market infinitely more fragmented than today’s.
Lutz paints a rosier future. Noting that some of the best shows on TV come from cable and not the broadcast networks, he sees the Net TV future as a cornucopia of great content delivered on-demand. I don’t doubt the ability of Netflix and Amazon to turn out great stuff; it only takes deep pockets, somebody with a neat idea and the ability to execute, and a bit of luck.
But money has always been the great poisoner of beautiful ideas, and even the deepest pockets have a bottom.