Monday, August 14, 2017, 11:40 AM ET|Posted by Will Richmond
Another day, another high-profile - and no doubt incredibly expensive - SVOD talent deal announced. Today’s is between Netflix and the ultra-successful producer Shonda Rhimes, poaching her from ABC, where she’d been for 15 years. For Netflix, it followed last week’s deals with the Coen brothers for a new series and the company’s first acquisition, of Millarworld, plus many others.
While Netflix has been busily announcing new originals - no doubt timed to offset the fallout from Disney’s decision not to renew its pay-1 output deal upon expiration in 2019 - Amazon hasn’t been sitting still. Last week the company lured Robert Kirkman, creator of the blockbuster “The Walking Dead” series on AMC in an exclusive 2-year deal. That followed recent deals for many other originals, with a heavy emphasis on kids shows. And don’t forget Hulu, which is coming off its biggest original success to date with “The Handmaid’s Tale.”
Of course, SVOD providers like Netflix, Amazon and Hulu paying big bucks to attract A-list talent isn’t a new story. But the recent spending binge once again raises critical issues about where all this is leading and whether it will end well for all participants.
Netflix and Amazon continue extending themselves ever further financially in an effort to draw top names. But as a front-cover Barrons article over the weekend observed, Netflix’s debt-fueled content commitments now total $13 billion as compared with 2016 operating income of just $380 million. Lenders have been generous to Netflix, predicated on the company’s ever-expanding subscriber base. But as Barrons speculates, what happens when that growth ultimately slows, but big debts still need to be serviced?
Meanwhile, even mighty Amazon showed the financial impact of video in its recent Q2 ’17 earnings, which came in well below expectations. In its earnings call, CFO Brian Olsavsky said video investments will increase even further in Q3 and into next year. Even though video is a proven winner for driving Amazon Prime, success isn’t coming without a steep cost.
Another dimension of this arms race is that neither Netflix nor Amazon currently uses advertising as a second revenue leg to support their content spending. For example, when Rhimes’s and Kirkman’s shows appeared on broadcast and cable TV, their networks enjoyed both monthly affiliate/retransmission consent fees plus advertising (note of course that Amazon is leveraging e-commerce revenue). By contrast, subscription-only premium networks like HBO, Showtime and Starz spend just a fraction of what Netflix and Amazon currently spend on content, and consequently are enormously profitable.
One other way to think about the SVOD talent war is that the explosion of high-quality originals on SVOD services will make these services more appealing to viewers, thereby driving more consumption shifts and cord-cutting. As viewers fall out the lucrative and predictable pay-TV content funding model, there will be less money available to producers to pursue their projects outside of the SVOD framework. That will ultimately lead to less high-quality scripted TV, which puts even more pressure other genres like sports to justify expensive pay-TV bundles.
The costly SVOD talent wars are unlikely to end well for many. In the very short term, from a viewers’ standpoint, it’s exciting to have so many great shows available for such low prices. And no doubt, A-list creators and actors are laughing all the way to the bank. But when looked at in a longer-term context, all this big spending on talent carries enormous risks for all involved.