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US Content Distribution Studios Go Direct to Consumer

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US Content Distribution Studios Go Direct to Consumer US content distribution Studios go direct to consumer 13 April 2021 François Godard [email protected] Tom Harrington [email protected] Tom Standen-Jewell [email protected] +44 (0)20 7851 0900 Most content is likely to remain Despite relying on a narrow IP Responding to the rise of Netflix accessed by consumers through base, US content production is and Amazon Prime, studios seek bundles. Provided they engage booming, overwhelming other to shift distribution from with aggregation, European markets and seeking alternative wholesale to retail—but only broadcasters can adjust to the new distribution to cinemas Disney may succeed studio model Related reports: Amazon Prime on Sky Q: Now almost fully aggregated [2020-120] Disney+: non-exclusive deal with Sky Q [2020-019] Peacock: the future of ad-supported TV brands? [2020-002] Consumers endorse Disney's digital transition [2020-013] If your company is an Enders Analysis subscriber and you would like to receive our research directly to your inbox, let us know at www.endersanalysis.com/subscribers Studios go direct to consumer [2021-036] 2 Summary • Hollywood studios are leveraging copyright law by focusing their new production development on existing intellectual property, already a source for most blockbusters but increasingly for TV series too • The production boom in television series understandably subsided during the pandemic but is likely to resume • Leadership in volume production has passed from TV networks to streamers, even though Disney and Comcast/Universal remain the biggest investors. AT&T’s HBO still enjoys a pre-eminence in quality • Outside the US, and specifically in the UK, domestic fare remains far more popular than American content—but the latter’s appeal is increasing thanks to streaming • Despite its continuing popularity and unique relevance, non-US domestic production needs access to greater financial resources to keep pace with Hollywood budgets spiralling upwards • Cinema closures due to the pandemic have accelerated the decline of the theatrical exhibition window, leading studios to experiment with a mixed distribution model • Studios are under pressure from financial markets to copy Netflix and deploy direct-to-consumer (DTC) strategies. In theory, studios would pivot from wholesaling content to channels and platforms to retailing direct to consumers, eliminating middlemen • Forecasting profits for new DTC vehicles may please Wall Street, but much uncertainty remains on the future of legacy divisions • Disney has relentlessly built scale through acquisition. Disney+ now has scale akin to Netflix and is well designed to facilitate the migration of brands from linear to on-demand • AT&T’s WarnerMedia’s HBO Max lacks momentum and suffers from hazy positioning • ViacomCBS’ Paramount+ and Pluto may have more future in bundles than as DTC vehicles • Comcast/NBCUniversal associates Peacock, its online on-demand brand, with a broader aggregation strategy supported by its fixed network. In Europe, Sky follows a similar approach with telecoms and content bundles • DTC services increasingly join pay-TV bundles, pointing to a future where distribution will still need aggregators. The new ecosystem opens space for European broadcasters to extend their prominence as content suppliers and discovery paths Studios go direct to consumer [2021-036] 3 1. IP power and Peak TV 2. Cinema impairment: the flow to TVOD & SVOD 3. The studios’ digital transition 4. The endgame: bundling and aggregation Studios go direct to consumer [2021-036] 4 IP drives Hollywood • IP has been driving Hollywood since its birth as an US Copyright law extensions–a Mickey Mouse timeline entertainment powerhouse, underpinning expansion 120 1998 Copyright Term Extension Act 2023: current in merchandising, theme parks and video games copyright expires 100 1976 Copyright Act • Helped by skilful lobbying, studios have gained extensions of copyright from US legislators: in the 80 1909 Copyright Act past century the maximum length has almost 1831 Copyright Act 60 doubled to 105 years in 1998, with similar 1790 Copyright Act extensions in Europe 40 1928: 1978: Mickey Original 20 Mouse is copyright • If there is no change, Disney’s Mickey Mouse—or at years in duration Maximum created expires least the Steamboat Willie version—will enter the 0 public domain in two years 1790 1840 1890 1940 1990 Note: Note: Assumes author lives 70 years and created their work at 35. • Studios are increasingly reliant on this accumulated [Source: Tom W. Bell, Enders Analysis] IP. On the newly-rebranded service Paramount+, 43 episodes from four Star Trek series will premiere this Hours of Star Trek-branded scripted content since 1966 year. Disney+ has ten Star Wars series planned, while HBO Max is considering a Harry Potter series and is 50 developing spinoffs of Game of Thrones 45 40 • Reliance on existing IP is even more striking on the 35 30 big screen: in the past three, regular theatrical 25 seasons, only one of the top ten most-grossing films 20 was not a sequel, a reboot or a spinoff, Bohemian 15 Rhapsody in 2018 (see next page) 10 5 0 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 2021 TV series Animated series Feature films Note: 2021 values are projections based on network programming announcements. [Source: Enders Analysis] Studios go direct to consumer [2021-036] 5 Cinema consolidates around ‘sure-things’ Sequels, reboots and spinoffs in the top ten grossing films globally 12 10 10 10 9 9 9 8 8 8 8 8 6 6 5 5 5 5 4 4 4 2 2 2 0 0 1970 1980 1990 2004200520062007200820092010201120122013201420152016201720182019 [Source: Box Office Mojo, Enders Analysis] Studios go direct to consumer [2021-036] 6 Peak TV: driven by the need for scale and desperation • The first phase of Peak TV was propelled by basic cable channels’ need to fight on-demand and become more than just repositories of syndicated Estimated number of US original scripted series rerun programming. The second phase has been the rise of the SVODs 600 532 487495 500 455 452 • The explosion in the number of US scripted series in production was 422 389 stunted in 2020 due to: 400 349 288 ⎻ Some channels quitting the expensive and competitive scripted 300 266 210216 182 192189 market prior to COVID-19, such as A+E and Cinemax 200 155156 161163159168 ⎻ Some series being postponed due to COVID difficulties/prosaic 100 issues such as demand for soundstages or talent 0 ⎻ Some series being cancelled due to added COVID costs making 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 them unprofitable and dispensable: anecdotally PPE has added up to $300-500k per episode for some programmes, testing adding Note: Excludes non-English language, short-form content, one-offs and children’s programmes. $100k and there have been other costs such as quarantining actors [Source: FX Research, SNL Kagan, Enders Analysis] and subsequent payment of lost pay. As such, borderline shows are Estimated number of US original scripted series by commissioner less likely to continue 200 • Primetime averages (18-49 year olds) for scripted-dominant channels saw big declines in 2019 YoY, with TNT (-16%), USA Network (-16%), TBS (- 150 18%), Adult Swim (-23%) and FX (-25%). 2020 saw a minor and temporary respite: studios are fast pulling assets out of channels and placing them in 100 their OTT offerings. Only the NFL remains as a major fixed viewing asset on linear 50 • Despite the drop in 2020, we have not yet reached Peak TV. Some borderline shows will go but the competitive dynamic (and the existential 0 necessity to spend big on content) is not going anywhere. Indeed it has 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 probably even accelerated with the decline of cable. Furthermore, AVODs Broadcast Basic Cable Premium Cable Online Note: Excludes non-English language, short-form content, one-offs and children’s programmes. like Tubi, Roku Channel and probably Pluto are starting to launch series [Source: FX Research] Studios go direct to consumer [2021-036] 7 Variability of content spend and quality Estimated 2020 content spend by media group, $bn • It is now less of a case of what channel or service has what particular show, but what media group has what particular asset, how many of them, and 16 how they are utilising them 14 12 10 • Comparison of spend on content gives an indication of output volume 8 (including licensing of third-party content). The arsenal that each company 6 4 has at its disposal becomes more important given the consolidation of 2 0 resources and distribution due to the move to DTC A+E AMC • Quality is a more difficult metric to represent, here we show Emmy Disney Netflix Apple MGM Amazon Comcast Discovery Lionsgate nominations—we note the caveat that it is arguable whether the best ViacomCBS WarnerMedia shows win awards, and that critical acclaim doesn’t necessarily align with Note: P&L not cash spend—as such, Netflix may look underrepresented here—does not include sport or viewing/value news. Some content spend may be double counted e.g. production spend by one group and acquisition cost of same programming by other group. • Under AT&T, HBO (WarnerMedia) will be making more content (both the [Source: company reports, Enders Analysis] channel and HBO Max): between 2018 and 2019 HBO channel went from 100 hours to 150 hours of original content Major Emmy nominations by media group since 2013 • In the past, HBO’s drama output has
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