It wasn’t long after The Golden Age of Television began that the idea of “Too Much TV” began to percolate through Hollywood. Although it took nearly decade for this narrative to boil over, by early 2015 fears of a TV bubble had come to dominate nearly every trade magazine, agency presentation, industry event, press tour and programming strategy. Nearly a year later, the topic remains a point of insecurity and controversy among networks heads – many of whom suggest that irrational competition, not cord cutting, is the business’s most pressing concern. And there’s certainly reason to believe this is the case.
Since 1999, the number of primetime scripted original series has nearly tripled, growing from roughly 150 to more than 410. Though this growth would appear to benefit programmers, audiences and TV talent alike, it coincided with a more troubling trend: skyrocketing cancellation rates. At the turn of the millennium fewer than one in every ten shows would be cancelled each year. Today, a network is lucky to keep more than half. And nearly three quarters of the shows ordered to replace a cancelled series fail to make it past their very first season. As a result, the American TV industry cancelled more original series in 2014 than even aired fifteen years earlier.
To understand how the TV business got here, the best place to start is channel proliferation. Over the past decade and a half, the number of unique channels received by the average Pay TV household grew from barely 50 to more than 200. Given this, meaningful growth in original programming was inevitable. In fact, we might have expected nearly 575 TV series today, not 412. However, the number of television networks available to Pay TV subscribers has been largely flat (or down) since 2007, which saw only 190 series. So why did growth not only continue, but accelerate? Knock-on effects.
In 1999, the average household regularly watched 13 of the 54 channels available (or roughly 24%). After channel availability nearly doubled, the number of channels watched did grow – but only to 16.5 (17% of the total). By the time we hit 125 channels, viewer appetites had been sated at 17.5. As a result, the average household watches fewer than 10% of the 200+ channels they receive today. In this competitive environment, every channel needed marquee original programming to both attract and retain audiences. And not only did originals drive viewer acquisition and brand differentiation, they were also critical to MVPD leverage. As the number of channels grew, the best way to justify annual affiliate fee increases and keep from being cut out of the increasingly swollen bundle was to offer a show viewers couldn’t miss. On both fronts, AMC is far and above the best case study. Since launching Mad Men in July 2007, followed by Breaking Bad six months later and The Walking Dead in late 2010, the network has more than doubled affiliate fees and nearly tripled advertising revenues.
Yet as the number of originals grew, the industry began to experience not just increased failure rates, but ever-escalating costs of failure and success. A few years ago, a TV series starring a Hollywood star (such as two-time Academy Award winner Kevin Spacey) was seen as groundbreaking. Now, such casting has is frequently considered essential to convincing audiences that a new series is worth their time. A-List Hollywood directors, too, are increasingly involved with small screen content (be it Oscar winners Martin Scorsese, Steven Soderbergh, David Fincher or Alfonso Cuaron), as are celebrities such as Mick Jagger and Seth Rogen. What’s more, many TV shows – from Lost to Game of Thrones and House of Cards – now pursue a level of cinematic production quality that can rival that of Hollywood blockbusters such as Cast Away, The Lord of the Rings and Charlie Wilson’s War. And to ensure awareness among a field of hyper-credentialed new series, networks have massively increased their marketing budgets. “I joke that as a marketer, I wish I’d appreciated five years ago, even three years ago, how much easier it was to launch and sustain a show,” Alexandra Shapiro, Executive Vice President Marketing & Digital at USA, told the New York Times in 2014.
Further exacerbating these challenges is the fact that networks are consistently sweetening their bids for the most promising series. Put pilots, straight-to-series and full-season orders have gone from an exception to an everyday component of programming. Meanwhile, many networks are renewing shows before their premiers or announcing multi-season pickups just so that would-be viewers will even consider trying out a new series. Without it, many (rightfully) assume it’ll just end up cancelled. Making matters worse, the reduction in average episodes per season (itself a reflection of increased competition for “quality TV”) has reduced the long-term benefits of a hit and injured the amortization of upfront costs like pilot marketing, set-building and casting.
In aggregate, this has made the original content game vastly more expensive, risk-laden and failure prone than at any other time in the industry’s history. And in many instances, it takes years to distinguish between the duds and sleeper hits. As FX Networks head John Landgraf told the Producers Guild of America two years ago, “[Networks] just have to make really good shows and keep them on the air two or three or four years. People are just not going to find a show no matter how well you market, in one year. You have to then double down in year two and [then] triple down in year three and hope that it’s good enough that it will accumulate an audience over time.”
So why isn’t there too much TV?
Though the trends above are concerning, it’s important to recognize that the industry’s carrying capacity has increased substantially in recent years. Thanks to DVRs and channel proliferation, the average American watches nearly 18% more live + DVR television than they did in 2000 (or roughly one hour more each day). The rise of OTT and mobile video, which enable us to watch content in places never before possible, has led to another 15-20% in individual video time. On top of these per-viewer gains, the US population as a whole has also grown by more than 13% (~37M Americans), resulting in a more than 50% compounded increase in the amount of time spent watching video in the United States.
The ongoing shift from linear television to ad-free (Netflix) or ad-light (Hulu) OTT consumption, meanwhile, means that audiences can also watch 20-35% more video content per unit of time than they could during the days of linear-only viewing. Similarly, the amount of time spent watching previously-viewed content is down substantially over the past decade, with primetime content benefitting from much of the substitution (estimates here vary widely). While both of these trends created economic challenges, they run counter to the belief there’s “too much” television for audiences to consume.
As for the supply side, more than 95% of the growth in original programming has come from cable and OTT series, which average 10-13 episodes rather than the broadcast norm of 22-24 per season. In addition, the broadcast season itself is declining. Empire, which was the 2014-2015 season’s #2 show among 18-49s, aired only 12 episodes in its first season and will release only 18 in its second. Were we to chart the increase in original series hours or episodes, we’d still find significant growth over the last decade and a half, but this would work out to a roughly 100% increase versus the more widely reported 175%. In addition, immense growth in the international video market also means that a “successful” television series doesn’t need to “hit the black” through US distribution. Saying there’s too much TV for American audiences or American distribution misses the point of present-day content economics.
Consider, too, that growth in the number of original series largely represents a change in the type of content aired, not incremental content. Last year there were almost 1,700 series airing in primetime. Yes, a greater proportion of those are original scripted series (which are the most expensive type of content to produce) than ever before, but consumers face just as “much” choice as they did before. And unlike reality content, original series tend to have much longer viewing tails and catalogue value. From a macro-perspective, it should also be noted that the domestic network television business has never been more lucrative than it is today. Over the past 15 years, network revenues have more than doubled in inflation-adjusted terms, while cash flow margins expanded from less than 20% to nearly 35%. And not only did half of this growth occur after the number of networks peaked, two thirds of it was collected by basic cable networks.
Given this, it’s not only hard to believe there’s too much competition – but it makes sense that competition for signature programming has become more intensive. The pie has never been bigger.
Changing the Channel
If we take stock of the past decade and a half, we come up against an interesting confluence of superlatives. Video content has never been more popular, nor have television profits been higher. Original programming has greater strategic value than ever, but this same content is struggling on both the revenue and cost sides of the profit question. So what’s happening?
What we’re seeing is not irrational content investments, but the expiration of the traditional TV model. The real problem isn’t a surfeit of “good TV”, it’s the economic model behind it. For close to three decades now, the major network groups have had an incentive to add or spinout a new channel whenever possible. Though consumers came to ridicule channel proliferation and protest its effect on cable bills, this strategy benefited everyone in and around the TV business. Each additional channel not only expanded viewer choice, it led to both greater content variety and the Golden Age of TV we all know and love today. And of course, it ushered in record industry profitability. Year after year after year.
Yet this same model was also deeply inefficient. To justify its existence and monetize its channelspace, each new network needed to fill their 24-hour weekly schedules with additional (often exclusive) content – regardless of actual audience interest. More troublingly, each network group (e.g. 21st Century Fox, Time Warner) would then focus on optimizing each one of their up to two-dozen channels independent of one another. At NBCUniversal, for example, the heads of Syfy, USA, NBC and Bravo would each try to increase the ratings of their individual channels and do so under the belief audiences would watch more of their content if more “good content” or the “right” on-brand content was available. Not only was this strategically flawed, the very limitations of linear-delivery that channel proliferation hoped to escape (i.e. you can only show one thing on a channel at any given moment) meant that no matter how many shows a viewer liked, they could really only support one for any given timeslot. Though this hypothetical viewer may watch the runner-up at a later date or time, the longer they waited, the less economic value they’d create. Even if they binged the full season on-demand in a single day – a clear sign of the value a series provides that viewer – all that really mattered was whether they’d later watch it live. Making matters worse, the limitations of linear consumption data means that linear networks could never distinguish die-hard fans from occasional viewers or the strategic importance of a low-rated show from a high-rated show. Just as the value of any given eyeball is the same as another in the same demographic, so too is the value of two shows with equivalent ratings.
As a result, it’s not only impossible for network groups to optimize across their portfolios, they actively cannibalize and fragment their own audiences in pursuit of growth. This was fine back when traditional television consumption was growing, but today, it’s rapidly eroding. Meanwhile, audience behavior is rapidly transitioning away from live-linear consumption and towards binge-based viewing (regardless of the initial release strategy or distributor). In addition, the digital networks – free of the many constraints of linear – are able to optimize for their audiences, rather than focusing on an individual channel, timeslot or genre, and deploy much more sophisticated performance metrics. Netflix is expected to release 55 original series this year, more than any US broadcaster. Given the pace with which they’ve ramped up original content spending and their committed roadmap – not to mention the fact the average account watches more than two hours of Netflix per day – it’s hard to say this irrational.
So What’s Going to Happen?
Firstly, we will see some competitive relief in the original series space. Today, there are scores of channels with operating and programming costs that exceed the ad revenue they generate plus the affiliate/subscriber fees they’d receive in an unbundled environment. As packages slim down and the bundle erodes, many channels will either fold, consolidate or have to reduce their programming expenses immensely – all of which will result in either fewer series or more modestly-budgeted fare. Critically, many networks are only in their 3rd or 4th year trying out original series, which to Landgraf’s point, means they’re only just able to assess the success of their originals efforts. As these networks come to terms with the returns generated by these shows, we’ll no doubt see investment pullbacks. To this end, we’ve already seen several OTT competitors exit the market: Microsoft shut down its TV play in 2014, Yahoo terminated its own earlier this year and Sony’s largely unnoticed first foray, Powers (which was renewed for a 2nd season that will premier this year), may result in the same.
The consolidation of network portfolios into singular online offerings (such as Netflix) will bring added programming efficiency, but it’s unclear that this will lead to net a reduction in content. As the dominant digital players reach unprecedented audience and geographic scale, for example, they’re likely to accelerate their content investments – not slow them. Ultimately, however, original series are likely to remain competitive tablestakes. Twenty years ago, a network could thrive on repeats and syndicated programming, but with so much content now available on-demand, networks need distinct, high quality original programming to build and maintain an audience – regardless of whether they’re delivered OTT or via coax.
At the same time, the shift to online distribution will also ease many of the pressures facing original series today. Linear primetime programming is evaluated on a standard, largely inflexible basis, as a network head has a relatively objective sense of what a time slot is worth, as well as the ad revenue a slotted show brought in and its attendant cost. This arithmetic naturally emphasized viewer volumes (and first-run, live viewers at that) over viewer engagement – as scores of much-loved but nevertheless cancelled series will attest. With online distribution, performance metrics become far more balanced and complex. Netflix, for example, considers metrics such as the pace of viewer consumption (i.e. how quickly a season was watched), whether viewing was correlated with reduced churn and/or increased consumption, as well as how it affected subscriber additions. Although these criteria won’t necessarily grow industry capacity, they should reduce annual cancellation rates by allowing for more varied definitions of success. As Netflix Chief Content Officer Ted Sarandos announced at CES earlier this year “linear TV only scores with home runs. We score with home runs, too, but we also score with singles and doubles and triples.” As traditional TV shifts online, this will apply to all players. Crucially, however, the major technology platforms benefit from even greater P&L flexibility. The whole of Amazon Studios may run a deep loss but still create net value to Amazon’s loyalty program. “[Our mandate is] to create fantastic content that Amazon customers will love, that will make Prime more fantastic and desirable,” Amazon Studio’s Head Roy Price told The Hollywood Reporter in 2014, “that is really goal number one.” With its forthcoming series, Apple no doubt feels similarly.
But perhaps most important to this dialogue is the increasing irrelevance of traditional classifications such as “primetime v. daytime” and “premium” versus “non-premium” or “short-form” versus “long-form”. Does it really matter how long YouTube’s forthcoming original series (headed up by former MTV programming executive Susanne Daniels) are? Or when they’re released? Or what they look like? The linear television era was defined by constraints that no longer apply in the digital era. As such, metrics like the number of 22 or 44 minute original scripted series released during primetime (defined as 8:00PM to 11:00PM Monday to Saturday and Sunday 7:00PM to 11:00PM Eastern Time for broadcast networks, except those that are only 8:00PM to 10:00PM Monday to Saturday and 7:00PM to 10:00PM Sunday, and 8:00PM to 11:00PM Monday to Saturday and 7:00PM to 10:00PM for cable networks) are of ever-decreasing significance and determinability. The future of media entertainment will not be determined or characterized by “primetime original scripted television series”.
None of this means we won’t have too much content or that Netflix doesn’t make mistakes. Both are entirely possible. But when a programmer says “there’s too much TV” or “we make more shows than we can afford collectively“, it’s important to recognize that this statement is based on today’s business models. Not only are they in decline, they’re never coming back.
“TV Has a Business Model Problem. And It’s Killing Good TV” is the first of a three-part series on the future of video and Hollywood. Part two, “After TV: Video’s Future will be Bigger, more Diverse & Precarious than its Past” can be found here. Part three, “By Obsessing Over The Present, Big Media Has Forgotten Its Past And Endangered Its Future”, can be found here.
Matthew Ball is a Director of Strategy & Business Development at Otter Media and leads Strategy & Originals at REDEF.