Television will eventually lose out to on-demand video.
This COVID year will be a financially disastrous year for most economic sectors. It is no different in the media: one large media company after another has already indicated that it looks bad. No wonder: the advertising market collapsed like a house of cards, productions were stopped en masse and all related activities in which the sector invests (such as Disney theme parks) suffered even more from the lockdown. The suffering seems to have been over now, as the advertising market recovered at a miraculous pace and most productions have been restarted.
The more cyclical crisis we are now in, however, hides the fact that there is much more going on. In a remarkable analysis, Doug Shapiro, former Head of Strategy at Turner Broadcast System and now an advisor to many major US media companies, explains this month why earnings expectations in the sector are under severe pressure. Part of his analysis has to do with the specific conditions in the US. Cable channels make up a relatively large part of the operating profit of US media companies. Because cord cutting, the termination of cable subscriptions by consumers, continues unabated, this source of profit is starting to dry up. This phenomenon is also starting to emerge in Europe, but for the time being the consequences are not too bad.
At the heart of Shapiro's analysis touches the fundamental development that is now taking place worldwide. Television will eventually lose out to on-demand video. Consumers have discovered the convenience of VOD en masse. Television will no doubt continue to play a role, particularly in news, sports and live events. But the trend is towards online video. This has some remarkable potential effects.
An important effect is unbundling. Consumers are still used to cable subscriptions with a large number of channels. But everyone is familiar with the phenomenon that 90% of the channels in those packages are not watched. In addition, many consumers spend a considerable amount on pay channels: the ARPU (the average amount a consumer pays for a subscription) has skyrocketed in recent years. Because a lot of content becomes available over the top, consumers have more freedom of choice. Canceling bundled subscriptions will cost the sector a lot of margin.
In addition, Shapiro expects operating margins to shrink. Cable channels and larger broadcasters are used to profit margins of 30% and more. The margins at SVOD are considerably lower and at the moment even negative due to the high investments in content and marketing. Disney does not expect to make a profit in the next 3 years with its not inconsiderable successes in this area (Disney + already has 73 million subscribers, Hulu 30 million and ESPN + tripled to 10 million). The margins at market leaders Netflix and Amazon are also very low.
Shapiro comes to the conclusion that the structural development towards online video has a major victim: the profit expectations of media companies. Only time will tell: in about 5 years we will be able to assess whether this actually happened.
Sports rights holders are rubbing their hands in anticipation, because the value of sports rights is rising sharply. After the huge price hikes of the previous decade, there had been somewhat of a stagnation in recent years. The French Ligue 1 even saw the value of its new multi-year deal drop. But now, a new group of deep-pocketed interested parties has emerged: the streamers are about to make major investments in sports. Specialized sports streamers like DAZN have been active for several years. Market leader Netflix, after broadcasting the Paul/Tyson match, has also discovered the power of live sports. YouTube (more on that in my next column) invested in American football earlier. According to figures from Ampère Analysis, streamers will spend over 12 billion dollars on sports rights this year.
The investments that British-Ukrainian entrepreneur Sir Lech Blavatnik has been making for years are starting to bear some fruit. His company DAZN is growing rapidly and attracting one investor after another. The company is running at a significant loss and has a massive need for financing. This month, according to insiders, the Saudi Arabian Public Investment Fund paid a billion dollars for less than 10% of the company. With the promise that he’s building the Netflix of sports, Blavatnik has managed to convince investors. As a result, the company has become a tough competitor to pay-TV channels like Sky and is squeezing many public and commercial TV broadcasters even further.
Entertainment streamers, meanwhile, also see the value of sports—and not just for attracting new subscribers. Keeping churn (the cancellation of subscriptions) under control is at least as important from a strategic standpoint. Therefore, Netflix is going to invest in American football. Less dominant players like Peacock and Paramount+ are also heading in that direction—a development that has the National Football League (NFL) rubbing its hands in anticipation. We also know that trends in the U.S. sooner or later make their way to Europe, which will undoubtedly mean that here, too, the value of sports rights will shoot through the roof.
It’s clear, however, that this hasn’t been all smooth sailing. DAZN incurred the wrath of German consumer organizations by hiking its prices for the Bundesliga and the Champions League a little too enthusiastically. Technical problems in Italy plagued the sports streamer, and even Netflix underestimated the impact of a mega-event like the Paul/Tyson match. Those are temporary problems, though—ones that will disappear as streaming technology advances and industry expertise continues to evolve.
Private equity firms see these developments as well and are becoming more and more interested in sports organizations. And here again, the NFL is at the center of attention. After an extensive study, the league concluded that private equity firms (at least to a limited extent, for now) can invest in NFL clubs. Sports are increasingly being valued for what they’re truly worth, because there’s still so much potential in them—due in no small part to streamers taking an interest in the rights. In other words: sports are streaming ahead!
Oege Boonstra begon in de media als commercieel directeur bij facilitair bedrijf NOB en werd later onder andere directeur van de internationale operaties bij Endemol. In 2008 was hij een van de twee oprichters van 3Rivers, waar hij recent is teruggetreden uit de dagelijkse bedrijfsvoering om 3Rivers met raad en daad te blijven bijstaan als non-executive chairman.
Ronald Goes studeerde eerst economie en accountancy. Daarna was hij onder andere CEO bij RTL Productions, betrokken bij de opzet van SBS en meer dan vijf andere tv-zenders in Nederland en bestuurder bij Endemol en Talpa Media. Momenteel leidt hij al meer dan vijftien jaar, vanuit Londen, de wereldwijde productietak van Warner Bros.
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In recent years, money seemed to be endless in the media world. The advertising markets were booming after the COVID crisis, funding for public broadcasting remained largely untouched, and the marketing machines of new video streaming platforms worked overtime. Investments in content were skyrocketing, there was insufficient staff to complete all productions, and the sky seemed to be the limit.
How different things are now. Market leader Netflix, for example, has reduced content investments by a third. Advertising markets have also come under pressure, particularly in Germany. Finally, politics has again started to interfere with broadcasting contributions: in the Netherlands, the budget for public broadcasting was cut by €150 million, and other countries are also pausing to reassess.
It is therefore unsurprising that all media organizations have started to watch their spending. Some have even implemented drastic budget cuts. A good example is Warner Bros. Discovery, where one initiative after another has been announced to achieve billions in savings. The cause is the enormous debt burden the company carries. It must be said that this policy is paying off: the debt has been reduced by a third in three years. A remarkable achievement. It’s hardly surprising that financial engineering played a key role in this process. However, the fact that it is done so openly is. One example: a film like Batgirl, which was already in post-production, was completely written off. The costs were booked "below the line," meaning they did not appear in the profit figures. The reason: the series was considered "non-core business." This kind of accounting trick is being adopted by more media companies.
Another interesting aspect is the funding of public broadcasters. In the Netherlands, under the leadership of the then-almighty Harry Kramer, the broadcasting fee was incorporated into general taxation around the turn of the millennium. It was deemed that the fee was outdated, so it was abolished, and public broadcasting was then funded from general government funds. This had significant disadvantages for public broadcasting: politics could now directly interfere with its financing. The result is well-known: public broadcasting has been facing significant cuts in recent years.
In the United Kingdom, they still use the old system of a television and radio license fee. Everyone who owns a TV must pay £169,50 annually. Many Brits are questioning why this mandatory fee still exists in an era of video services paid for directly. Interestingly, it is considered a legal offence to not pay the license fee. It’s no surprise that it’s now up to creative financial minds. It will be interesting to see what emerges from this: even a tax on broadband connectivity is being considered. A system that Spain recently dismantled. Financial engineering of hand has become the norm in both the public and commercial media domains...