Lack of Profits Drives Video Ecosystem Evolution

Professionally-produced long-form original video content is expensive to produce. Combine that with high promotion costs and small audiences and you have economic pressures that are very simple to understand, whether you are in the production, packaging or distribution parts of the ecosystem (studio, network or internet service provider). 

Big audiences are required to generate the big revenues that support big production budgets and lots of productions. Small audiences can only be supported if subsidized by profits from serving big audiences. 

And if profit margins get squeezed at every segment of the ecosystem, the profits to subsidize niche programming go away. 

There’s no point in lamenting this fact. It is simple economics. Whatever participants once believed, video streaming seemingly is a case of exchanging “analog dollars for digital dimes.” Revenue does not match cost, it has become clear. So video streaming suppliers are retrenching on the amount of money they spend to create original programming.

That leads observers to lament the content cutbacks. Similar concerns often are raised about the costs of internet access or linear video packages, but cost pressures related to programming rights play a role there as well. 

You might complain about the “below the line” surcharges on a linear video bill for the cost of carrying local broadcast signals, but those charges are a significant and growing part of the cost of gaining rights to retransmit that programming. Sports content is a key part of that cost structure. 

source: Bloomberg  

Costs to carry local TV stations likewise have been rising rapidly for two decades. Costs for a cable operator for local ABC, CBS, FOX, and NBC broadcast stations grew more than  600 percent since 2006, one observer noted in 2019. And that has happened as broadcast audiences shrink. 

One might well note that it is precisely those shrinking audiences--with revenue implications--that have caused local TV stations to lean on cable operator fees to compensate for the lost revenue. 

source: Armstrong 

All those costs get passed on to subscribers. Blame the cable companies if you want, but they must pay broadcasters for those content rights, whether the charges appear above the line or below it. And so long as marketing battles pivot on content and price, and so long as search engines can rank services by price, every service provider has an incentive to quote the lowest-possible price. 

So those content fees get shown below the line, as add-on fees, and not as part of the headline monthly recurring cost. We might all agree it is a bit deceptive. But we might also agree that there are clear business reasons why the policy exists. 

Music streaming provides an analogy, but one that will be hard for video programmers to support: buy the song, not the album. That shift to “a la carte” generally is resisted by networks and distributors alike. 

Such distribution wrecks havoc with brand investments, reduces the profit upside of bundling and reduces the power and leverage of networks. So do not count on a la carte (“buy the song; buy the movie, the show or episode”) becoming ubiquitous. Still, the pressure in that direction remains. 

Linear video subscriptions are losing distribution share because the value proposition keeps getting worse, in comparison to video streaming alternatives. So value propositions will evolve; content strategies will shift; bundles will be redefined; business models will have to change.  So long as professional content production remains expensive, it is inevitable.