Parks Points

A Muppet Always Pays His Debts – Sesame Street Finds New Home Behind Paywall

by Glenn Hower | Sep. 1, 2015

Recently, Sesame Workshop, the nonprofit organization behind Sesame Street, announced a programming deal that will send Sesame Street from its longtime publicly-subsidized home on PBS to the corporate Time Warner-owned home of Westeros on HBO. According to a press release from Sesame Workshop, the deal includes:

  • a five-year order of 35 episodes per season (nearly twice its current 18 episodes per season)
  • 150 library episodes; a muppet-based spinoff series
  • an additional educational series
  • library episodes from Sesame Workshop-produced shows Pinky Dinky Doo
  •  2009 reboot of the 1970s educational series The Electric Company

New episodes of Sesame Street will begin airing on HBO as early as this fall.

Exact financial details of the agreement were not immediately released. On the surface, this looked like a surprise move. After all, aside from movies, HBO is known primarily for its adult-themed programs like Game of Thrones, The Wire, Girls, and True Detective because FCC governance is less strict on premium television. However, the move benefits both Sesame Workshop and HBO.

For Sesame Workshop, the main issue at hand was funding. A look at Sesame Workshop’s financials (which contains the amusingly named expense category “Muppet acquisition”) shows a nearly 14% decline in revenue between fiscal years 2013 and 2014. Only a fraction of Sesame Workshop’s funding comes from its network home PBS (around 10% according to a report from Variety) with the remaining revenue coming from donations, product licensing fees, and content distribution fees. Content distribution fees, which comprise about 30% of Sesame Workshop’s income, are experiencing market volatility impacted largely by over-the-top streaming video. An increasing number of families access on-demand programming through outlets like the PBS Kids app, as well as library content from online subscription video on-demand services like Netflix and Amazon Instant Video.

Since 2012, physical media spending by U.S. broadband households declined 40% on an average monthly basis, as noted in the Parks Associates study 360 View: Digital Media and Connected Consumers. The decline in physical media spending translates to a potential funding crisis for Sesame Workshop. The issue is compounded by declines in linear viewing time, diluting PBS’s power in negotiating for content licenses. PBS cannot make up for the revenue decline, opening the door for a private programmer to make up the shortfall.

Sesame Workshop moving to HBO is advantageous in that its show format will not have to change. Sesame Street will still be able to broadcast content in a commercial-free environment, a key element for the educational program since its inception. Moving from public broadcasting to a premium subscription network ensures that Sesame Street will continue to air without potential pressure or conflicts of interest that may arise from being subject to advertisers.

This gives HBO the ability to leverage a strong and beloved content brand in Sesame Street and the additional educational programming that comes from Sesame Workshop. The primary focus of HBO remains distributing programming through its traditional pay-TV partners, but the launch of HBO Now has created new opportunities for HBO to expand its content offering. HBO Now allows HBO to compete directly with Netflix, Amazon Instant Video, Hulu, and other OTT video services for the subscription VOD audience. Netflix and Amazon were proactive in acquiring and commissioning children’s programming for its services, with Netflix even modifying its interface to allow account holders to separately track viewing behavior of their children.

The Sesame Workshop deal allows HBO to move into the children’s programming market, a strong move with the recognition of the Sesame Street brand being unparalleled in the United States. The move provides incentive for new families with young children to subscribe to HBO Now, since many new parents are now Millennials that are most likely to be the cord-cutters or cord-nevers that HBO seeks.

Sesame Street’s move to the other side of the paywall is indicative of three major market factors in United States television and video offerings to consumers:

  • Over-the-air television is not going away, but it is becoming incrementally less relevant in the U.S. Over-the-air television is no longer seen as a primary means to watch video for young viewers, who show a penchant for watching video over the Internet. The movement of one of the most beloved children’s television shows of all time to premium television will accelerate this shift.
  • Public broadcasting in the U.S. continues to struggle. Public broadcast television in the United States is unique compared to other developed markets. Broadcasters like BBC in the United Kingdom, NHK in Japan, KBS in South Korea, and CBC in Canada have broad scopes for programming that attract broad audiences, while PBS member stations struggle to attract audiences between the ages of 10 and 65. Losing one of the most successful programs on its network to a pay-TV network is a serious blow to what little power PBS wields in the U.S. television marketplace.
  • Over-the-top video is here to stay. With Sesame Street expanding to HBO, children will continue to access the programming primarily on Internet sources, especially with the opportunity to watch episode after episode. HBO sees the opportunity to expand its footprint and reach and should be confident in the ability to attract more subscribers due to the Sesame Workshop agreement.

It is not all bad news for PBS; Sesame Street is not completely abandoning its home of 45 years. The agreement provides for a nine-month exclusivity window for HBO and its platforms on new episodes before programming will be released to PBS for syndication, purportedly free of charge. While it may feel wrong that Sesame Street is moving to a corporate network, HBO will still be able to provide Sesame Street with an environment similar to public broadcast and maintain the same feel and integrity that the show has enjoyed for the past four and a half decades. However, the exclusivity window gives the impression that over-the-air viewers may be more of an afterthought than a primary audience, with each episode carrying the message that HBO sends its regards.

Glenn Hower

Glenn Hower

Senior Analyst

Glenn Hower currently studies entertainment content and delivery services. Glenn is experienced in entertainment content production and distribution systems with a particular emphasis on radio, television, and film content.

Glenn earned his BA in music with a focus on the music business and industry from the University of Texas at Austin. He earned his MS and MBA from Texas Woman's University in Denton, Texas.

Industry Expertise: TV & Video Content Production, Content Licensing & Distribution, Television Services, Broadband Services, OTT Services, Digital Music

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