Creative Destruction: the economics of Single Platform Streaming

Previously, we looked at why the Exclusive Streaming Model is Bad Economics:

https://www.dhirubhai.net/posts/tansykellyrobson_disneyplus-streaming-netflix-activity-7019290127864602625-CkZu?utm_source=share&utm_medium=member_desktop

This time, we’re going to look at the consequences of this for:

Episode 1: Creativity and originality of content

Episode 2: Talent

Episode 3: The industry as a whole

And in Episode 4, we'll look at who seems to finding different ways of providing streaming services, and models that might show us the way forward.

Episode 4: Making streaming work for everyone

(all views contained herein are the author's own, and not representative of any other groups, organisations or activities).

Episode 1: Creative Destruction

Hollywood has a problem. The workers are striking, the margins are shrinking, and Disney has enough problems to deal with without a writers' strike. We all know US workers' rights aren't great. Rather amazing they didn't strike sooner. But the malaise goes far, far deeper, and like many pandemics, risks spreading to other markets if the causes - and remedies - are not fully understood.

We have already discussed how the single exclusive platform subscription streaming model is bad economics for those who produce telly, but once you spend A Lot of Money making something, you get a one off lump sum (or none at all if you put it on your own platform), and then? It just… sits there. Doing nothing. Earning… nothing.

You may, possibly, get new subscribers. Probably not many. And if you can genuinely attribute them to the new show, and not the market, competitors, advertising, the weather, etc. your algorithm is a masterpiece as yet unknown to modelling science. But given The Crown on Netflix, for example, costs approx. $10m an episode, and has around 2.7m viewers, the basic maths of that is not reassuring. If, like BBC or ITV, you could then flog your show worldwide across multiple networks, platforms and formats, it would make itself back and then some. But if it’s your USP to get people to subscribe, then you don’t want to overdo that, or your viewers could go Elsewhere to watch it. In terms of production, this is financially… problematic.

This is because selling people subscription services, and making money from telly shows, are what we in the economics game call ‘completely different business models’, or in layman’s terms, ‘not the same thing’.

Whether you’re broadcasting VoD online, analogue, satellite or broadband, linear or on-demand, it’s STILL just broadcasting. The only difference with streaming is that non-linear is VoD – a broadcasting service that essentially allows you to rent content from an archive. A video rental service by subscription.

Blockbuster online, basically.

And I doubt, very much, if becoming The Next Blockbuster But Online is quite the northstar Disney and HBO et al. are aiming for here.

We will look at the consequences on the industry later (Part Three), and on talent (and why it’s striking, Part Two). For now, we are going to look at what effect this has on creativity, originality, and ultimately the ability of networks and streamers to retain viewers.

Adrenaline Junkies and Taking Risks:

First, let’s deconstruct why studios take risks. Risks are ‘nasty disturbing uncomfortable things, make you late for dinner’ [Tolkien]. But, they are also extremely rewarding when you take educated ones. The potential gains of making The Next Big Hit in drama are so astronomically high, that studios can afford to take the risk on a new stand-out prospect. The massive revenues from a major hit, combined with the steady revenue stream of hundreds to thousands of hours of ‘safe’ content allow studios to ‘afford’ to take (educated) creative risks.

Hence amid all the sitcoms and returning series, the Buffys, X-Files, Sopranos and Breaking Bads smashed the drama sound barriers and returned vast revenues to their studios. No one knew they would be smash hits, they took, essentially, a bet. ONCE they were shown, paid for, contracts signed and agreed, and the show broadcast, THEN they became massive hits. As audience levels soared, networks fell over themselves to buy them, competition ramped up, advertisers salivated for proximity slots, demand soared, and as demand skyrocketed, so did their price. Welcome to the basic economics of supply and demand. And not just once, the shows could be sold over and over again, multiple times, to multiple networks, in multiple formats, worldwide, almost indefinitely. As long as people kept watching them, you could keep selling them.

Fast forward to the age of streaming. You make a show, stick it on an exclusive platform, and unexpectedly it becomes a MASSIVE hit. Awesome, right?

No.

It just… sits there. Doing… Nothing. Other regions might pay something for it. Yay. But demand isn’t intense. They probably would’ve done that anyway. It suppresses competition, suppresses demand, and suppresses price. As we discussed earlier, you MIGHT get more subscribers. Yay. But it’s hard to tell if that’s the show or another extraneous factor, and cost per viewer makes it, essentially, a loss-leader. Yup. It’s a MASSIVE hit, and it’s losing money (so why, you ask, are market valuations going up, not down? We’ll get to that in Part 3).

Prosecco, not Champagne

Essentially, exclusive single platform subscription streaming is a disincentive to… create hits. Ars gratia artis means studios want to make hits, but there is quite literally no incentive to. Hits won’t make them money, and trying to find ‘something different’ that will stand out is disincentivized by the market, as it will put off their streaming buyers. This is destructive to creativity, originality and quality (also to talent, but we’ll cover that in Part Two).

Exclusive streamers are risk-averse, because they don’t have absorptive capacity for it. Because the gains in linear and non-exclusive distribution are so high from a massive hit, studios were incentivised to take creative risks to get a stand-out hit. But we have just seen exclusive platform streaming means a hit, far from making vast revenues over long periods of time at ever increasing prices, not only just sits there earning nothing, but can actually be loss-leaders.

Exclusive streamers are also averse to buying risk. They want to keep the subscribers they’ve got, because the steady revenue stream is what the markets watch. The stability and growth of monthly returns are primetime viewing for Wall Street. You can’t risk losing them to a competitor. So what do you do? You make stuff you already know they like. Monarchy sells. Make The Crown, and more of it. There is an established Star Trek fanbase, make more spin-offs, prequels and sequels. Marvel? Same. Star Wars? Same. Cosy crime. Good sell. Gritty northern damp crime. Good sell. And occasionally they will do Some More of what was unexpectedly popular – Squid Games, Fleabag or Nordic Noir, for example. Does the latter prove they are taking risks? No. Because the unexpectedly popular is, nine times out of ten, a risk Someone Else took (usually Public Service or National Broadcasters).

Could we use this model to predict exactly what Disney+ plans to invest in over the coming 2 years? Let’s guess. What sells now? Marvel. Star Wars. Popular pre-existing Disney Character prequels and sequels and live-action remakes. Now let’s compare this to their forward plan. As if by Disney Magic, look what the line-up is dominated by!

Swipe Left

This makes the creative industry go cold. It’s an endless, endless rehash of what’s gone before. But the Markets - down Wall Street again and in shareholder meetings - LOVE IT. They know it’s popular, they know it’s SAFE. And ever upward goes the market valuation. The effect on studios and production companies is deadening. They have to make their turnover targets, and in the modern day and age, that does mean selling, a lot, to exclusive streamers. Selling to exclusive streamers, in turn, means selling them something they already want. Selling them something they want means selling them… exactly what they’ve had before, and is nice and safe. Exclusive streamers flatly deny this, insisting they are focused on originality and creativity. Taking one look at their line up proves that claim is, patently, nonsense.

The effect on the viewer is also deadening. You only have to spend a few minutes of market research to identify viewers beginning to get highly irritated by a lack of original content, endlessly swiping stuff they’ve seen before, or the flat feeling at something newish, that viscerally disappoints. Or finding something original (Warrior Nun an unexpected hit), only to find... it’s been cancelled. Why? Because it’s EXPENSIVE, and isn’t making money. It’s just… sitting there. The number and volume of hits Netflix cancels astounds the industry, and perplexes it. But it only perplexes it because the industry makes TV shows, and hit TV shows make money. Netflix et al. don't. They make shows, yes, but so they can do their core business - selling streaming subscriptions. 'Hits' make precious little difference to streaming subscriptions except to ensure subscribers aren't lost (neutral impact on revenues), or possibly attracting a few more (net lost revenue given hits are eye-wateringly expensive, and the negative production cost to 'new' subscriber revenue ratio... if you can attribute 'new' subscribers directly to your hit at all).

So exclusive platform streaming is disincentivising risk, originality, creativity and even making hits become loss-leaders. Let’s see what that is doing to the one thing the ENTIRE industry is utterly, totally and critically dependent on: Talent.

This will be covered in a future instalment! (Always release your episodes weekly, keeps the viewers interested!).