Spring 2015

Industry: Over the Top

With Netflix, HBO, Amazon Prime, and many others following suit, subscription video-on-demand is the new wave for content. But is it supplanting television as we know it, or a boon to production? It's still too early to tell.


(Illustration: Greg Mably)

Say this much for Richard Plepler: He knows how to speak to the tastemakers. The HBO chairman and CEO, and one-time publicist known for throwing posh dinner parties for an eclectic, TED-level guest list, knew heading into 2015 that HBO had popular support for its planned subscription video-on-demand (SVOD) service.

By locking up Apple as a key tech ally and speaking directly to its base, he knew he could gain leverage over his traditional cable distribution partners. That's what led Plepler to take the stage in March at an Apple promotional event in San Francisco. On a day when the Apple Watch and other gear attracted massive attention, Plepler drew some of the biggest applause by announcing that HBO Now, the $15 a month, stand-alone SVOD service, would debut on Apple TV just in time for April's season five premiere of Game of Thrones. (Cablevision followed a week later with word its cable systems would also offer the service.)

The ovation for HBO Now followed similar pomp around SVOD services known as "OTTs" for their ability to go "over-the-top," circumventing distributors to connect directly with consumers. In fact, just about every network is in various stages of aggressive SVOD development. Showtime plans an offering close on HBO's heels; Nickelodeon plans a Noggin-branded library play; and NBCUniversal has a comedy service for the Jimmy Fallon generation on tap.

(In a different part of the over-the-top universe, Apple itself is poised to become a virtual multichannel video programming distributor [MVPD], offering a number of channels without the television connection. Apple is supposedly assembling a "skinny bundle" of some 25 channels it will offer consumers for $30 to $40 a month—including broadcast networks like ABC, CBS, and Fox. Dish Network and others are already offering a Sling TV bundle of channels such as ESPN and HGTV for $20 a month. And Sony's PlayStation Vue has also entered the fray.)

All of this eager positioning attests to the disruptive allure of SVOD among consumers. It's the sense that anyone with an iPad, an Internet connection, and a few bucks for a subscription can foil the bundle merchants at cable, satellite, and telecom companies charging rates of $100 or more per month. HBO's agenda-setting move, fast-tracked last fall, came despite the 43-year-old cable network's need to vigilantly maintain diplomatic ties with traditional distributors, whose greatest fear is that consumers will decide they no longer need them. (Though the fact that they control more than three-quarters of U.S. broadband service may explain why they could abide HBO Now.)

"This is a transformative moment for HBO," Plepler declared from the stage. Slight correction: These are transformative times, all right, but for the entire entertainment business. SVOD has gone from a first-adopter curiosity a couple of years ago to a high-stakes challenger of the traditional television business, at least in terms of perception and spending, if not yet fully on the bottom line. News about digitally delivered episodic content arrives from the major SVOD services at a dizzying pace (J.J. Abrams on Hulu! Woody Allen on Amazon Prime! A Tina Fey sitcom on Netflix!). Some of the biggest noise at the Consumer Electronics Show in Las Vegas in January was made by the old-line likes of CBS and Dish, which each touted stand-alone, over-the-top subscription services. A study by Nielsen last December found household SVOD penetration (defined as subscribing to one or more of the following—Netflix, Amazon Prime, or Hulu Plus) is at 40 percent of all U.S. households and climbing steadily even as traditional pay-TV penetration, currently around 84 percent, dropped less than 1 percent from 2013.

Directors have certainly taken note, especially as high-budget scripted dramatic series have skyrocketed on SVOD platforms. A recent DGA study found that although the number of dramatic episodes produced for broadcast, basic cable, and pay-TV stayed fairly flat in 2014, compared with 2013, the number of such episodes produced for SVOD platforms nearly tripled, from 57 to 153. So, although the numbers are still small overall in comparison with more than 3,000 episodes on traditional broadcast and cable, the boom is real. But the numbers leave a lot of questions in their wake. Will it last? What is the impact on the creative community and the industry at large? If it is indeed a secular shift in content delivery, will it help directors in the long run? And furthermore, will the convenience and "unbundled-ness" of SVOD mean it will, as some suggest, gouge the traditional business to the point where the steady supply of episodic television directing gigs can't be supported at current levels?

In search of elusive answers, first some quick stats: The big three SVOD providers took in about $5.1 billion in subscriber revenues in 2014 and will hit $8.8 billion by 2019, according to a report by Strategy Analytics. However, it should be pointed out that these figures are inflated to some degree since they include all Amazon Prime revenues, even though many Prime members sign up only for free shipping and watch no video. In any case, as a percentage of the total TV pie, it's still a small slice. And of course, SVOD income is limited to subscriptions only, while broadcast networks and basic cable reap tens of billions more from advertising and distribution fees—traditional TV's fabled "dual revenue stream."

Even so, the widely held narrative that is unstoppable—and not entirely inaccurate—is that consumers have embraced SVOD in a way that was not fully anticipated by traditional TV companies. Time Warner CEO Jeffrey Bewkes famously scoffed at the competitive threat of Netflix in 2010. "It's a little bit like, is the Albanian army going to take over the world?" he quipped. Cut to the present, when HBO's move to hasten its OTT plan is widely seen as an effort to blunt the incursion of Netflix, which has 39 million U.S. subscribers, ahead of HBO's 33 million. The other two major SVOD players are also gaining. Amazon has never disclosed exact Prime numbers except to say that it is in the "tens of millions." Again, how many members actually watch video content isn't clear due to the fact that Amazon, like other SVOD platforms, isn't Nielsen-rated and discloses little about viewing patterns, preferring to mine the big data to help create targeted programming instead of promoting the aggregate numbers. Hulu Plus, the premium tier of the service jointly owned by 21st Century Fox, Disney, and NBCUniversal, now has more than 6 million subscribers.

The creative community has also embraced SVOD providers simply for being dedicated to backing original content, following in a long line of cash-rich Hollywood arrivistes. Netflix is in the midst of a massive content push, aiming for 320 original hours in 2015 (at least 50 percent more than HBO), with big name properties including a multi-series licensing deal with Marvel Studios and a series of exclusive movies with Adam Sandler and the Duplass brothers. Amazon has mojo of late thanks to Transparent, Jill Soloway's DGA Award-winning series, plus its announced episodic deal with Allen. Hulu shuffled its management team in 2014 and has retooled with a major series from Abrams adapted from Stephen King's book 11/22/63. In addition to spending on original content, all three platforms have also emphasized fortifying their lineups with familiar, syndicated fare. A report from RBC Capital Markets projects the revenue from SVOD syndication deals to reach $6.8 billion this year, up from $5.2 billion last year, thanks to marquee pickups like Friends on Netflix, CSI on Hulu and much of HBO's back catalog on Amazon Prime. Although this could benefit directors in the short term, it could also have a negative impact over time. At this time, it's impossible to say if the residuals from licensing shows to SVOD ultimately will result in the same earnings per episode as from traditional sources like syndication, basic cable, and home video.

In reaching its latest agreement with the Alliance of Motion Picture and Television Producers, the DGA sought to ensure that income from high-budget dramatic series made for SVOD platforms would echo similarly budgeted cable and broadcast programs. For example, initial compensation rates for comparable programs are the same. In addition, the Guild developed a brand new residual formula for use on SVOD platforms, as well as formulas covering the potential future exploitation of original SVOD programs in other media. So if a made for SVOD program like Orange Is the New Black is "reverse syndicated" for basic cable reuse, residuals would be payable.

As content news rattles around social media and viewers struggle to keep up with technology and what SVOD content can be viewed where, a reality check is in order. Numerous research studies do document a reluctance among millennials to spring for traditional cable, so-called cord-nevers and cord-cutters. Sanford C. Bernstein analyst Todd Juenger, one prominent and credible critic, has blamed SVOD adoption for ratings erosion on many ad-supported TV networks of late. "SVOD is no longer incremental, it has become cannibalistic (especially in the summer, when linear TV is at its weakest)," he wrote in a research report last fall. "Viewers like SVOD because it offers programming on demand, without advertising and offers a pleasing interface and helpful recommendations," Juenger said. And yet, overall consumption of TV content remains at healthy levels—across all platforms, Americans are somehow watching an hour more of TV content per week than they did 10 years ago. Predictions in some quarters that subscribers to pay-TV bundles will eventually cut the cord en masse are not borne out in recent statistics.

In its annual study of the top pay-TV providers, representing about 95 percent of the cable, satellite, and telecom market, Leichtman Research Group found they lost about 125,000 net video subscribers in 2014 (a tiny fraction of a percent), close to the 95,000 they lost in 2013. At the same time, it should be noted that not all SVOD content is necessarily luring viewers away from pay TV. There is the reality of a not-insignificant burn rate of new series on SVOD. Ratings are never released (since subscription numbers are the only things that matter) but heavily promoted series like Hemlock Grove on Netflix can disappear quickly. The renewal rate among original shows on cable is 48 percent and broadcast just 36 percent, but plenty of SVOD shows are one-and-done affairs. Amazon can, and did, suddenly kill a series (The After) created by Chris Carter of X-Files fame, never airing it, with little explanation.

Although the dam is still holding, there is pervasive anxiety about leakage, in part because some of the content offerings of SVOD have cleared the high-quality bar of the current golden age of television. In today's wide open marketplace, Fridays, when most Netflix shows arrive in bulk, are now the time for appointment viewing as much as Sunday nights have been in the past for shows like The Sopranos, The Good Wife, Mad Men, and Homeland. The customs of the old three-network world have gone three-dimensional, with a multitude of places where compelling series can appear.

"The days of the 500-channel universe are over," CBS Chairman and CEO Leslie Moonves said at a recent investor conference. Instead of a bundle of hundreds of networks, the rush to appeal direct to consumer will continue. "I think the floodgate is now open," he said. It remains to be seen, however, just how this new wave will affect directors in the long run.

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