Despite the dual-threat of unsustainable growth and oversupply, media companies are producing even more original content each year. According to FX Networks Research, 487 scripted original TV series were produced in the U.S. in 2017, many experts expect thousands in 2020 or a 5x increase as margins tighten and content producers lose money to gain a foothold.
Providers like Netflix, Amazon, and Hulu continue to make significant investments in original content. Netflix spent over $12 billion related to content costs in 2018, up from $9 billion in 2016, and many expect this to reach about $20 billion in 2020.
We expect increased spending from Amazon, Hulu, and greater investment from new entrants such as Disney and Warner Media. More original content won’t necessarily result in greater success for these companies, as the added content will compete for attention from consumers who are already bombarded with a plethora of entertainment choices. Many newer market entrants appear comfortable with sacrificing short-term profitability to create or acquire compelling content that they believe will help drive long-term subscriber growth. However, this strategy will likely pressure established media companies’ operating margins, requiring them to show considerable discipline in their programming budgets to avoid margin degradation.
We believe that while most media companies will continue to invest in their own content production, those with weaker balance sheets will need alternate strategies such as co-production partnerships and joint ventures to gain access to either intellectual property or financing to produce the content. It’s important to understand the value of original content, and a few examples of this are NFL games. These live contests have “original content” value that diminishes as time moves forward, but at the time of the game has nearly unlimited demand/value. These are some of the reasons ESPN and the NFL have Multi-Billion Dollar agreements which can make or break the value of the underlying media company.
Another example of the content disruption is happening in movie making, and you will see it when you note the money behind the project was Amazon Productions and not a traditional Hollywood studio. This disruption has expanded the marketplace for actors, producers, and directors and created better content choices in the post cable cutter we are in now.
Content, as we know it, has changed from the 3 channel ABC, NBC and CBS choices our parents had, but it’s important to look at how your choices are changing as a consumer. We expect larger companies like American Airlines or the Dallas Mavericks owning writing and producing their own content as specific content production and financing evolve – the days of 3 channel TV – are well into the rearview mirror, long behind us, but the need for content grows on the back of the cost-saving cable cutting era of 2010. Now the consumer spend and budget shifts as investors must rethink creating content in a post cable cutting era. The landscape has never been more uncertain.