Why Big Media Took Forever to Embrace the Streaming Era
The 2019 launch of Disney+ was just the beginning. But what took Big Media so long?
By Alex Sun
Linear TV is a dying business model, and with each passing year, it bleeds more eyeballs and dollars. In fact, it’s demise was predicted as far back as the early 2000s, when there emerged a general consensus across leaders in Big Media that the future of video entertainment lay in D2C internet-based streaming. The thinking wasn’t exactly revolutionary at the time — dial-up modems allowed nearly half of American homes to get online, and soon after, the introduction of high-speed broadband connections only sped up the number of online households.
By the late 2000’s, Big Media had all the building blocks to stand up its own D2C streaming services. It had a monopoly on content — Netflix was still licensing whatever content Big Media allowed. The internet was mature — bitrates and latency in streaming video to IP audiences had been solved. And there was no shortage of cash to finance such a venture — Big Media was still seeing strong cash flow from its TV networks, and it would be years before the decline of those crown networks strained balance sheets.
But as eyeballs shifted each year from linear TV to the internet, a seismic shift that Netflix rode on, Big Media somehow could not, or would not, respond.
Fast forward a decade to 2020 — Netflix is now the preferred choice among U.S consumers for watching video entertainment, with 61% choosing the streaming service over all other options in a recent poll. The share of U.S consumers choosing Linear TV as their preferred choice fell from 68% in 2017 to 36% in 2019, mirroring the enormous loss in viewing hours, revenue, and even content investment in the Linear TV ecosystem. And then there’s Netflix’s international growth tear, which brought its global base of paid subscribers to 183 million as of March 2020, a scale with no historical precedent in video entertainment.
So why was Big Media so ineffective at adapting to the changing landscape? Why wait until 2019–2020 to launch D2C streaming?
The reasons stem from a web of organizational, infrastructural, and business challenges, some of which are unique to the traditional content distribution landscape. It’s possible these challenges will even handicap Big Media’s pivot into D2C well into the future. Here are some of them:
Reason #1: Stuck with a timid investment mindset
Building a viable D2C SVOD service is enormously expensive. It requires billions in cash spend to build a large content library to sustain substantial viewership and justify a subscription fee. In order to achieve a sufficient content scale, Netflix spent $12B on content in 2018, and $15B in 2019.
But Big Media has long relied on traditional TV for most of its revenue. And in traditional TV, a sufficient content scale can be achieved simply by bundling together hundreds of channels from rival networks.
This “bundled oligopoly” not only means that individual TV networks need not invest heavily in content, but also that doing so would be unlikely to translate into a significant increase in their share of overall viewership within the bundle. After all, a 100% increase in a channel’s content spend won’t translate to a 100% decrease in viewers flipping to a different channel the second their attention spans wane. The competition will always be one click away.
This is why even HBO, the most profitable TV network in the world and the pioneer who first brought premium cinematic-like storytelling into television shows, has until recently been fairly conservative in its annual content spend, which grew from $2.04 billion in 2015 to $2.26 billion in 2017, or in other words, seen a growth of only 3.3% a year. Now compare that with what Netflix spent in that same time period: $4.6 billion in 2015, $6.9 billion in 2016, and $8.9 billion in 2017. In each of those years, the incremental increase in Netflix’s spend over the previous year was by itself greater than HBO’s total spend.
As cord-cutting further pushes Big Media houses away from the protective bubble of “bundled oligopoly”, they’ll need to massively ramp up content spend (and cue years of cash burn) in order to achieve enough content scale that can stand up their own SVOD services. Whether they have the financial and organizational wherewithal to stay this course in the face of anxious shareholders remains to be seen in the long run.
Reason #2: Lack of international presence
In the explosion of D2C services to come, the biggest market for subscribers will be outside the U.S, where 95% of the world’s population resides. And Netflix has been riding the international market for years. So far in 2019, close to 90% of its new subscribers came from the international market. It’s where Netflix sees its future. It’s where it invests heavily. And it’s where Big Media should as well.
But it’s hard for Big Media houses to transition to an internationally-focused mindset when domestic Pay-TV carriers (AT&T’s DirectTV, Cox’s Contour, Charter’s Spectrum, etc.), whose distribution reach is almost entirely limited to the U.S, have always been effective in delivering audience reach, engagement, and revenue at scale. Big Media houses only had to give secondary attention to the international market, often limited to a faint footprint in English-speaking markets like the UK. At the corporate level, they’re satisfied with using the international market to simply boost domestic bottom lines by 10–15%, instead of the other way around.
Reason #3: Lack of experience in being consumer-focused
Within the protective and oligopolistic bubble that was Pay-TV, Big Media could focus on maximizing revenue extraction from that oligopoly through bundling and rebundling, instead of maximizing value creation for the consumer. Examples of how they maximized revenue extraction include demanding higher “affiliate fees” from Pay-TV distributors (Comcast, Charter, AT&T), and spinning new channels (FX splitting into FX and FXX in 2013) in order to charge consumers more for their Pay-TV package, even though the new channels added zero value for consumers.
On the other hand, maximizing value for the consumer encapsulates just about everything that tech companies obsessively experiment and tinker with: Facebook’s massive investments in new consumer apps, Netflix’s obsession with reducing viewer friction with personalization algorithms and autoplay, Instagram’s foray into allowing users to view and share videos through new formats, etc.
There’s an obvious pattern here: maximizing value for the consumer is usually brought about by transforming consumer-facing experiences and the technologies behind them. But the problem for Big Media companies is that they’ve never seen themselves as tech companies before. Plepler, the former head of HBO, had a favorite saying: HBO is a media company, not a tech company. And he grew louder each year with that insistence, even as every industry from taxis to cigarettes was being disrupted and reshaped by technology.
Reason #4: Constrained by long content deal cycles
In the video entertainment landscape, content licensing deals are negotiated 3 to 4 years in advance and last for at least as many years. One of the reasons it took Big Media so long to launch its own D2C SVOD services is that even after leadership had made the decision in 2016 to seriously shift towards D2C, it would still be years before outstanding licensing deals could expire and the licensed catalog (everything from big-hit sitcoms like The Office to Disney’s Marvel slate) could finally leave Netflix and return home to their Big Media owners on their own SVOD services.
This helps explain why Netflix was able to fuel its growth using the content slate of Big Media houses for so long.
We can consider Disney+ as a case study on the detrimental impact of long deal cycles in content licensing on SVOD launches: when it launches in November 2019, Disney+ will lack many of the high-profile tentpoles consumers would normally expect to be on the service. Most of the Marvel films that preceded Captain Marvel (2019), a long list that includes Avengers I, Avengers II, and Black Panther, will have to stay on Netflix until at least early 2021. And every single Star Wars film, with the exception of The Last Jedi, will likely remain with WarnerMedia until 2024. And all this because of licensing agreements made years ago. The story is similar at other Big Media houses: WarnerMedia won’t have Friends back from Netflix until early 2020, Comcast won’t have The Office back from Netflix until early 2021, and 20th Century Fox (and by extension, Disney) won’t have its Pay-1 theatrical outputs back from HBO until the end of 2022.
If deal cycles are so long (to give you a sense of “long”, Fox’s current output deal with HBO was signed in 2015 and lasts through 2022), why does Big Media sign them in the first place? Why hamper business flexibility for years on end when the internet landscape changes so fast?
The answer boils down to the obvious culprit: money. Content licensing is a business that generates tens of billions of dollars a year. It’s also COGS-free and goes directly to EBITDA. For the CBS Corporation, licensing content to other companies brings in over 20% of its EBITDA.
The implications are ominous for Big Media houses that plan to keep their content in-house for the sake of their own SVOD services: in the long run, each will lose out on hundreds of millions to billions in licensing revenue, amounts that won’t be offset by SVOD revenue in the medium-term, and possibly not even in the long-term. It remains to be seen whether they can withstand capital constraints and the unhappiness of shareholders in the long-term pursuit of D2C success.
Reason #5: Facing organizational deadlock
Big Media companies are composed of complex organizational layouts involving tens of thousands of people, all of which develop around multiple business segments, in which the largest and most revenue-generating remains the television network (although size and revenue don’t mean it holds a promising future).
And when traditional TV networks (with their thousands of staff spanning linear ad sales, programming operations, deal makers, etc.) comprise the most profitable vertical within the company, leadership will naturally be reluctant to pass it over for something else that’s new and unproven, be it a new tech-stack or business model. This was how Viacom was able to miss how the rise of internet-based consumption (Youtube, TMZ, Vevo) would steal away its core Pay-TV audience of teenagers and pop-culture lovers, and why HBO spent years putting off any serious push to reach consumers directly through internet streaming instead of simply through Pay-TV. The predominance of Pay-TV distracted leaders in both companies from truly grasping the enormously disruptive potential of internet-based platforms that were brewing right under their noses.
And at the same time, it’s hard to blame leadership: maintaining stable earnings each quarter is tantamount, after all, shareholders need to be satisfied. Capital is limited. And risk is always a difficult thing. Which brings us to our next point…
Reason #6: Lacking cultural affinity to risk-taking
How Netflix, a mail-delivery company with no prior history in content production, talent management, or streaming video, went on to disrupt global entertainment and swallow away audiences whole from Big Media, is a triumph of the scientific and methodical approach that Silicon Valley’s management class takes in building products and businesses.
When Reed Hastings and his team committed to delivering video content via OTT streaming, they didn’t just commit to developing a product that didn’t yet exist (and cue years spent tinkering towards a viable tech stack, at times in a garage or back-office room, which branched into numerous development paths, most of which became dead ends, and one even spinning into a line of console-connected devices we know today as “Roku” players), they also committed to closing the curtains on their profitable mail-order business (read: mail-order was profitable, and also their entire business).
The significance of a company that’s willing to disrupt a happy present for the sake of a not-yet-tangible future can’t be overstated — it’s the state of mind that defines tech companies, whether they’re at-scale organizations or startups.
But at legacy companies, the governing state of mind is focused on preserving what has been carried from the past to the present. And that doesn’t leave much room for taking risks (at least not at scale), which is problematic because launching and scaling SVOD services is the embodiment of risk on an enormous scale. SVOD involves years of enormous cash burn (in order to buy/build up content libraries that are large enough to justify subscription fees), long development times (original content and talent take years to nurture, and subscriber growth needs to be sustained for years in order to reach a significant revenue base), with no guaranteed chances of success (competition is stiff, consumers today have more entertainment options than ever, and lagging subscriber growth will probably spell disaster on a P&L’s bottom line).
And that’s why it shouldn’t come as a surprise that out of the 3 SVOD services that have achieved massive scale (“massive” defined as having a subscriber count in the tens of millions), two are the spawn of tech companies — Netflix and Amazon. And both companies used their existing and already-scaled business segments to jumpstart their SVOD service and then to subsidize its growth for years afterwards. For Netflix, it was the mail-order business. For Amazon, it was the e-commerce platform.
And Hulu, the only one of the 3 massive SVOD services to be spawned by Big Media, was spawn as a joint venture between 4 Big Media houses in order to limit upfront investments and reduce risks among them.
The point is — SVOD is a long, expensive, and risky game. It’s a game in which Big Media stands at a competitive disadvantage to Big Tech, where enormous cash burn, rapid product lifecycles, and large appetites for risky ventures from senior leadership are operating (and cultural) norms.
Alex Sun leads business analysis, planning, insights, and operations at a retail-connected streaming service Vudu.