The Complex Original Content Picture

Last week, original video content was in the news for a couple of different reasons – Apple unveiled trailers for its first two original TV shows and YouTube star PewDiePie was dropped from their original content roster over several apparently anti-semitic videos. Original content from companies outside the traditional TV hierarchy has exploded in recent years but it’s a complex picture, one in which various players are competing for different reasons and in different ways.

Definitions Vary

One of the big problems here is the term “original content” is bandied about as if everyone knows what it means, yet different people use it to mean different things. In a narrow definition, original content would be content commissioned and funded by the provider but Netflix and others also include content for which they have secured the rights later, perhaps as one of several first-run rights owners in various markets. I’m going to use that broader definition because it encompasses the characteristics that give original content its value.

The Three Driving Forces

There are three major driving forces behind investing in original video content and they can be summarized as hedging, differentiation, and money. First of all, big video services like Netflix rely on non-original content for the bulk of their content today – that is, they license existing content from various owners. That has worked well for them over the years but they’ve also learned the content might eventually go away. For example, its deal with Starz famously provided a strong roster of movie content early on but eventually came to an end, resulting in the loss of many movies from the Netflix catalog. Hulu recently saw Viacom pull several of its popular shows from the service in a similar manner. These deals are always for a limited period of time and, when they expire, there’s no guarantee they’ll be renewed. As such, investing in original content is a hedge of sorts against the loss of licensed content.

Secondly, services invest in original content because they want to be able to differentiate themselves from increasingly strong competition. Having exclusive content means your service offers something no other service can but, of course, that content has to be good and interesting enough to make it a meaningful differentiator. So we’re seeing some increasingly large investments in big budget productions designed to act as audience grabbers. Netflix’s recent investment in the first season of “The Crown” miniseries has been pegged at over $100 million, for example.

Thirdly, there are financial benefits to producing original content, though there are some short-term negative impacts on cash as well. Original content commissioned directly by a service provider isn’t subject to a markup by a third party content owner and so the price for the same production will typically be lower. In addition, a service provider can commission exactly the content it knows its audience will enjoy, at the right length, in the right format, and where appropriate in local settings and languages where it needs to attract and keep audiences. So, original content can also be more efficient in terms of bang for the buck than licensing whatever happens to have been produced already by others. Lastly, original content is owned and can therefore be re-licensed to others for an additional revenue stream. The downside financially is original content has to be financed up front to a far greater degree than licensed content. It means the cash drain during a period of rapidly growing investments in original content will also accelerate rapidly, as Netflix has recently demonstrated. In time, that effect will work its way through the system. But, for now, it means Netflix has to borrow to finance its investment in content.

Volumes Vary Significantly too

Though those three driving forces apply to some extent to all the major companies investing in original content, from Netflix to Hulu to YouTube, Amazon, and Apple, the business models behind the investments are different, as are the budgets. Netflix is a standalone company whose sole business model is to monetize streaming video (with a tiny bit of help from a legacy DVD by mail business) and, as such, its content investments have to be profitable over time. Amazon, by contrast, uses its Prime Video service as a way to make its Prime subscription more attractive as a way to drive e-commerce revenues and profits. So it can afford to run its video operation at a loss (and likely does so), while also having less overall and less original content than Netflix. Hulu is owned by several TV companies and, as such, is partly a way for them to hedge against competition from other streaming providers and it doesn’t need to make profits in quite the same way (and, indeed, has significant losses). It also has exclusive or semi-exclusive online rights to a lot of broadcast content, which means it doesn’t need its own originals in quite the same way.

The result of all this is very different levels of investment in, and therefore volumes of, original content. Netflix lists 332 separate pieces of original content on its PR website, of which well over 200 are series with many episodes (and in some cases several seasons). It has talked about ramping up its investment in original content from 600 hours in 2016 to 1000 hours in 2017. By contrast, Amazon lists just 30 original series on its site, with another 35 series for which it has exclusive distribution deals in certain markets. Hulu has about the same number as Amazon, while YouTube’s raft of original content is still in its early days and, of course, Apple is barely getting started.

Impacts on Traditional Value Chains

All of this investment is already having an impact on traditional value chains and business models in the TV and film industries. An analysis I recently did showed Netflix and Amazon had driven up the acquisition prices for distribution rights at the Sundance Film Festival significantly since they started bidding just a few years back. These two between them now snag many of the top titles at the festival. Acquisition prices for TV rights have also gone up and competition for new series and films in development now include these new players who are snapping up rights that previously would have gone to broadcasters or traditional distributors.

Finding the Right Business Model is Key

In all this, there are several distinct business models, a wide range of investment levels, and other differences between the major players. For new participants like Apple, the key isn’t so much to try to match the investment levels or strategies of the players already in the market but to find or establish the right business models and levels of investment required to make their strategies successful. Given that Apple’s current focus is providing differentiation for its music service rather than creating a stand-alone subscription video service, both the scale of its investment and the nature of the content it will create will be quite different from that being funded by Netflix, Amazon, or Hulu. For YouTube, the focus will be leveraging its existing creators, which will lead to very different content (as well as challenges involving creators who engender controversy).

Published by

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

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