Online streaming: Television’s looming car crash

Deepti Kapoor was pushing 40 and her writing career had struggled to rise above the ordinary. Her first novel, A Bad Character, was published in 2014 and sold fewer than 2,000 copies. Ms Kapoor freelanced for websites like HuffPost, writing blog posts such as “I was a party girl, but yoga saved me from myself”. 

Years later, she pitched Age of Vice, the first novel of a crime trilogy set in Delhi. In October, her agents submitted the manuscript to publishing houses in New York and producers in LA. 

What happened next was indicative of the spend-to-win mania gripping the entertainment industry. Within weeks, offers came rolling in from most of the big studios, with more than 20 bidders — a number that one publishing executive described as “unprecedented”.

Amazon wanted to make a TV series out of it, as did HBO. Michael Ellenberg’s Media Res bid; so did Fox’s FX Networks, via a partnership with Nina Jacobson’s Color Force, the studio behind Crazy Rich Asians. WarnerMedia separately pitched a feature film with producer David Heyman, who made the Harry Potter films.

FX won the auction, which closed last week, paying about $2m to option Kapoor’s books for a television series, according to people familiar with the deal. In comparison Hidden Figures, the book about three African American women who worked at Nasa and which was the basis for the hit film of the same name, sold for less than $100,000 in 2014. The high pricetag for Age of Vice comes as media groups scour for ideas that can be packaged into streamable content: last week, Disney chief Bob Iger announced that FX will make shows for Hulu, the streaming service in which Disney owns a controlling stake.

Hollywood is in the midst of a costly land-grab. America’s traditional media empires are spending tens of billions of dollars as they fight back against technology groups that have ravaged their business. As the distribution model for entertainment is remade, a revolutionary ardour has seized the industry: the choice is to win the streaming battle against the likes of Netflix, or face commercial oblivion. 

The immediate result has been clear: more television than ever before. There were 496 scripted TV shows made in the US last year, more than double the 216 series released in 2010. In the past eight years the number of shows grew by 129 per cent, while the US population rose only 6 per cent. The trend is set to deepen, as groups like AT&T’s WarnerMedia commission dozens of new series to convince people to sign up for their streaming services. 

“This isn’t a gold rush, it’s an arms race. We don’t know if there is any pot of gold,” warns an executive at a big media group. “Once the music stops, there will be carnage. It might take three to five years, but there has to come a point when we come to our senses.”

In recent years, Netflix has spent tens of billions of dollars bankrolling its own content to build up an independent library, in anticipation that traditional media groups would eventually become rivals, rather than partners willing to license films and television series. 

That moment has arrived. In the span of about six months, Disney, Apple, AT&T and Comcast are launching new streaming services, asking people to pay nothing for some services or up to $15 a month to watch their libraries of films and shows.

The goal, says Discovery Inc chief executive David Zaslav, is to attract 150m subscribers and become “the third man standing with Netflix and Amazon”. Netflix already has 160m paid global subscribers. 

“It’s fear-driven frenzy over the same pie,” says Mr Zaslav. The battle over scripted entertainment is “going to be a mess”, he adds, “and in the end it’s not clear anyone will make money”. 

The boom has awarded big Hollywood names, such as JJ Abrams, Shonda Rhimes and Ryan Murphy, with nine-figure deals to make shows for streaming. But it has also trickled down to artists like Ms Kapoor, who is due for an estimated $80,000 pay cheque per episode to write and produce the upcoming series. 

Nearly everyone the FT interviewed warned that this pace of spending is unsustainable, and that not all the new streaming services would survive. Tom Ara, co-chair of entertainment law practice at DLA Piper, predicts some “softening” on the content boom when the streaming battle shakes out. However, he does not expect it to return to pre-streaming levels because “streaming platforms have rewired our brains” to expect bingeable, movie-quality fresh content all the time.

After watching Wall Street reward Netflix for its boldness, the older media groups are under pressure to respond with new streaming services. “Time is of the essence,” says a senior film executive. “Every quarter if you are not saying you are going to do something that will compete with the streamers . . . you’re going to be punished for it by the street”.

Most executives trace the start of this high spending era to 2013, when Netflix paid a premium to snatch political drama House of Cards from HBO. It set the tone for Netflix for years to come: outspending traditional studios to attract the most sought-after scripts. 

Years later, the studios are now mimicking the strategy, resulting in fierce bidding wars and soaring content prices. Netflix is regularly being outbid: earlier this year WarnerMedia bought the streaming rights to Friends, the 1990s sitcom, while NBCUniversal secured those to The Office — removing two of Netflix’s most-watched shows from its platform in 2020 and 2021. 

Netflix executives say the price of the most popular content has jumped by a third from a year ago. Reed Hastings, chief executive, told investors last month the $100m Netflix paid for House of Cards would today be “a bargain”.

Mr Hastings continues to tell colleagues this is “no time to pull back”, arguing that “the best defence is a good offence”. But some in the industry see even this technology-based company reaching its limits after missing its subscriber targets for two consecutive quarters. “How many more [pricey films like] The Irishman can they viably make?” asked the chief executive of a film financing group. “When you make a mediocre [heist] movie like Triple Frontier for $125m . . . no conventional film financier would ever do that.”

One senior Netflix executive says the sentiment internally is that: “We already bulked up . . . Obviously we will still bid on things if they are exciting, but the sense is we got ahead of it.”

The streaming wars are expensive. Netflix is set to spend $15bn on content this year, and has $12bn in long-term debt, and more than $20bn in commitments for future shows in off-balance sheet liabilities. Analysts at Wells Fargo noted that for every dollar consumers spend on a monthly Netflix account, they receive almost $1bn of content. Disney and HBO Max are not far behind, with plans to each spend around $11bn in 2019 as they commission new series.

Apple has committed more than $6bn to its streaming push, according to people familiar with its plans. Last month it hosted a lavish premiere at New York’s Lincoln Center for The Morning Show, starring Jennifer Aniston and Reese Witherspoon. Apple paid around $250m for two seasons of the talk show drama, beating Netflix for the coveted programme, according to people familiar with the negotiations. 

That equates to about $12m per hourly episode, higher than the $8m-$10m for HBO’s Game of Thrones. And a sixfold increase on the $2m cost per episode of Friends, in which Ms Aniston starred. Even nostalgic fare has soared in value. Netflix in September agreed to pay $500m over five years for the global rights to Seinfeld, the 1990s sitcom. In 2015 Hulu bought the US rights for about $20m a year. 

Casey Bloys, head of programming for HBO, told investors last week that the network is “dealing with [price inflation] on a case-by-case basis”. “There’s more competition than ever, and more platforms and services doing more and more, and prices are going up,” he says. 

“We’ve seen nothing like this since the golden age of the studios in the late 1930s. It’s a rush,” says Michael Ellenberg of Media Res, the producer behind The Morning Show. But he cautions that “like any period of fast innovation there will be winners and losers”.

Investors have cheered the spending splurge, propelling Disney’s share price to historic highs, despite an expectation that the company’s profits will suffer for years to come as it spends heavily on streaming and loses a good part of around $6bn of revenues from selling content to streaming services. 

This comes even as Disney, Apple and AT&T price their services cheaply, pushing for rapid US expansion. AT&T, for example, doubled the volume of content that comes with an HBO streaming subscription for the same price: $15 a month. Apple is giving away its streaming service to the 200m people who buy its devices each year. Disney has priced its service at $7 a month — less than half that of a standard Netflix subscription — and will give it away for free to customers of Verizon’s unlimited phone plans.

These deals are great news for consumers, but questionable financial strategies for publicly traded companies. “We are looking at a multibillion-dollar car crash coming, funded by US capital markets,” says Claire Enders of Enders Analysis.

Underpinning the boom is an assumption that streaming services will relentlessly eat into the market for traditional TV customers who switch from or supplement their existing deals. Morgan Stanley estimates that in five years, Americans could pay for 305m subscriptions to streaming services, rising from around 180m today. 

Meanwhile, Disney and its peers have little choice but to adapt. In the third quarter of this year another 1.7m Americans ditched their traditional television packages from providers AT&T, Comcast, Charter and Verizon.

Research group MoffettNathanson predicts Disney’s streaming business will be lossmaking for five years, but that by 2024, streaming will bring it $23bn in annual revenues — nearly half of total sales.

The appeal of streaming was always to offer more choice, at cheaper rates. But the explosion of services — there are more than two dozen in the US — may change the cost calculus. “The consumer will be left in the exact same position that they didn’t want to be in,” says Jason Cloth, founder of Creative Wealth Media, which co-financed hit movie The Joker. “You will be paying as much, maybe more, for all these speciality streaming services.”

There might also be parallels with the profusion of niche cable television channels in the 1990s — and the bout of consolidation that followed. Mr Cloth noted that “it would be interesting” if an aggregator, such as a cable company, packaged all these streaming services together into a cheaper bundle.

John Stankey, the AT&T executive who runs WarnerMedia, expects demand to start to drop off soon. “Three years from now, we see maybe a moderating in the demand hours for production,” he told investors, as he pitched WarnerMedia’s streaming service from the historic Warner Bros studio lot where Casablanca was filmed. 

Few confidently predict how this will play out, but the reckoning is likely to be unsparing. Some big ventures are expected to fail, or retreat. Smaller and midsized studios may take a more limited role as suppliers to the dominant platforms. Discovery and other groups are banking on consumers opting for niche offerings, from cooking to sport.

Among Hollywood executives the talk is ultimately of a wave of consolidation, with successful streamers or tech groups such as Apple buying up media groups and movie studios lacking the scale to compete. “When the dust settles there may only be four or five big guys left,” says one. 

The immediate loser may be Netflix’s stock price. Its valuation is “just getting increasingly hard to defend,’’ analyst Michael Nathanson warned last month, while questioning whether Netflix can hit its US subscriber expectations. MoffettNathanson estimates that Netflix’s valuation should be “less than $200 a share” — a steep cut from the $290 it currently trades at. 

For the sector, the question is who will be burnt the most. “What happens when they can’t sustain it?” says the chief executive of an independent film studio. “All of a sudden you will have this very bloated machine, that can’t pay for its overextended self. I think the industry is afraid to call it for what it is.”