By John Antonchick, NCN Associates (June 29, 2011)

Keynote: John B. Penney, Starz LLC
Opportunities and Challenges for the Dream Factory: Creating High-Quality TV Content for Digital Consumers

John emphasized that it is critical to have content that people want to watch. He discussed the general ecosystem and the issue is how to make and finance that content. He noted trends that implement content on a variety of new devices with ubiquitous, streaming content availability and suggested that this results in a major paradigm change. He also noted that apps are also content.

Looking at Hollywood and the TV business, the basic business model has been ad supported content for a very long time. In order to get certain types of content on the platforms, there needs to be suitable business models to encourage support for that content. This suggests a transition into new business models. Working through these issues together is essential.

Long cycles in the entertainment “story-telling” business lead to considerable stress in dealing with the new device/delivery paradigm(s). This has stretched the older ad-supported business model to the point where the amount of content being developed may decrease. The issues are both real and complex. This results in a slow pace of change compared to the rapid advances in technology.
Quality TV content is typically distributed by major cable/satellite/telco MSOs. TV everywhere and the services typically require a subscription. New services, e.g. HULU, Netflix, etc., are the new players using new variations on the basic model(s). The issue is how to generate enough revenue to pay the content developer(s). “Scripted TV” is different than the non-scripted TV content. John’s discussion is focused on scripted TV content and the baseline cost of creating programming in this business model.

How much does it cost to make a TV show? (not including overhead, etc.). $ 88 thousand a minute! $3.5 million per hour, etc. on a broadcast network. One season of a TV show costs about $ 84 million for a broadcast season. This is really the fixed cost of developing content. Then, there is about $ 15 million a season in “marketing” costs. It might be possible to reduce these costs somewhat, perhaps 20%, but these are the basic costs. Cable may support 12 episodes a season while broadcast suppliers usually support 24 episodes. This suggests a major risk because few shows are a success in their first season and there is no way to recover those costs. So, how to support this type of content development in a new, multi-screen world is a key challenge.

Typical revenue sources are either from subscriptions or ads. This ultimately becomes a problem of price and value. Ads are typically priced based on the number of “impressions”. If this doesn’t generate enough revenue, the distribution channel(s) must consider whether there is enough “new platform revenue” and we don’t have enough yet. The number of ads in ad supported streaming is much lower than in traditional TV (e.g. 8 in HULU vs. 40 in traditional TV) resulting in much lower revenues even with higher cost per thousand. To compensate for these differences, you would need about three times the number of viewers for streaming video.

John suggested that this scenario has evolved from “bad habits”, perhaps involving non-targeted ad models and “library content”. This suggests that “subscription is a good thing” and they can work synergistically with ad-supported models. However, there are limits to this approach. Example: one million Netflix subscribers annual revenue pays for one $ 96 million scripted show. If every household had a subscription and there was no ad revenue, it would cost each household $70 a month to equal the $ 97 billion in network ad revenue. This does not include distribution/delivery costs.
International content, e.g. BBC and the Torchwood show, is an example of getting content on Starz where they are sharing the costs of development while increasing the revenue, i.e. both from the US and Europe. Starz is using this as an opportunity to increase international revenue as well as share costs.

John feels that although there are some “sacred cows” that there is also hope for new business models based on good economics.
Questions included:

1) Does this mean that subscriptions are required? John indicated that a balance between subscription and ad-supported is required. The US will yield more marginal revenue than the largest European markets but considering Europe as a whole and premium providers, those areas cover a larger audience in total than the US. So, there is hope that the European revenues can be substantial.
2) HULU ad content is limited but other services, e.g. CBS online, use many more ads? CBS example is a good one since there is no “trick mode” to skip ads but the question is whether consumers and device suppliers will adopt and support that model. One good thing about the CBS system is that it provides the consumer an indication of how much ad time is required.
3) Isn’t better audience measurement an answer? Yes, but we don’t have a consensus on how and who will do the measuring. Nielsen estimates are still the key reference point to track advertising and the measurement systems are changing slowly.
4) What about users paying for specific shows they watch? Transactions are important but we don’t know how much people will pay, e.g. whether they will pay each week for a show. Today, the impact on show financing from this type of model is helping but not adequate.
5) What is the threshold (number of people) that a show needs to be deemed successful? It is different on broadcast vs. cable but the number of minutes spent has been declining. On broadcast about 1.5 to 2.5 million is a “red light” because the time slot for that show could be increased by other alternatives. Cable needs smaller numbers, perhaps 600 to 800 thousand, but if at the lower end of that range the ad revenue typically won’t support enough to be acceptable.