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Dealing With the Devil?

Not so long ago, streamers like Netflix and their ilk threatened the television economy by encouraging cord-cutting, but now TV companies are slurping from a new stream, selling programming to digital video distributors like Netflix and Hulu for hundreds of millions of dollars.

Big money has soothed some of those fears, but questions remain whether over the long-term the checks will keep rolling in and, more importantly, whether strengthening online video distributors will create new competition for viewers and advertising spending, as broadcast content did for cable.

But running a media company in this day and age is about making your quarter for Wall Street. And shortterm, digital dollars are boosting revenue and profits of the media companies that have recently cut deals, making the pros and cons of allowing vast libraries to be available online via subscription VOD a hot topic during this quarter’s earnings calls with analysts.

“One of the most exciting areas of growth is the increased demand for our content from online video distributors like Amazon, Netflix, Hulu Plus and others,” CBS Corp. CEO Les Moonves told analysts this month.“In less than eight months, we have secured deals that are worth hundreds of millions of dollars annually to us.”

And Moonves said he doesn’t see any change to that momentum, forecasting growth in that space in 2012: “Going forward, we feel very good about our ability to make significant money from this development year in and year out, no matter which streaming service consumers choose.”

In a recent report, Morgan Stanley analyst Benjamin Swinburne said that streaming represents between $1 billion and $1.5 billion in revenue today and that TV companies are “likely to see significant growth in the next 3-5 years.”

Right now, executives say the streaming money is good, but they are being careful not to hurt their traditional business. “We have some big businesses we’re trying to protect, and that’s why we did windowing with our content,” said Mark Greenberg, CEO of Epix, which did a $1 billion deal with Netflix a year ago. At the same time, Greenberg added, “we always try to find a way to expand the pie.”

Time Warner and CBS made some of the potentially biggest recent streaming deals as co-owners of The CW, which licensed its programming to Netflix and Hulu.

CEO Jeff Bewkes of Time Warner, which will realize $100 million in revenue from Netflix alone in the fourth quarter, told analysts the deals are “game changers,” making The CW profitable.

“They are great examples of how new distribution outlets can be additive to the traditional TV ecosystem,” said Bewkes, who has been outspoken about Netflix in the past.

Weighing the Downside

But at some point, if streaming grows, it’s got to cut into broadcast and cable viewing, according to BTIG analyst Richard Greenfield.

“Intellectually I find it very hard to believe that there’s this much viewing going on without it having some cannibalistic effect,” said Greenfield. “It’s not so much that I think share is going to collapse for traditional television, but we’re going to see the next layer of fragmentation.”

Greenfield asked about this during Discovery Communications’ earnings call last week. “Candidly, nobody knows,” replied Discovery CEO David Zaslav.

“We couldn’t find through our research any discernible degradation. In fact, the people that consume a lot of content on Netflix were over-indexing in terms of how they consume TV and how they consume us,” Zaslav said. “We don’t think it’s going to interfere with our ability to continue or monetize our content and our brands in a very meaningful way in the traditional cable area.”

Greenfield said media companies are making shortterm deals in the belief streaming doesn’t hurt ratings. “It’s all great unless it’s impacting the core business,” he said.

Nor is it clear how long this wave of money will last. “Now it’s just, ‘How much money can I get from it to help my near-term financials?’” Greenfield said. “I don’t think the media companies are thinking out " ve years whether the Amazons or the Netflixes will be able to keep paying for this content.”

Laura Martin, analyst at Needham & Co., said media companies have a huge incentive to protect the current $150 billion industry. “If they unbundle the current TV ecosystem, the ecosystem loses 50% of its value, which means no one wins,” Martin said.

Nevertheless, streaming is growing and companies reliant on young viewers like Fox, Viacom and The CW have to be particularly vigilant “because they are really subject to these ratings trends right now of what a 20-year-old is doing with TV,” Martin said. “As they solve their ratings problems, we’re going to see really innovative things come out of them because they’re going to try to hold on to their viewership.”

Martin added that in an increasingly digital world, the best-positioned companies own the programming. “Content owners are going to want more of their rights, and the people who have to share their ownership are going to be relatively disadvantaged. And people who are used to leasing other people’s content are going to find themselves paying more for less because they have new competitors,” he said, adding that could make the business model for a typical cable channel more difficult.

The new world could also prove difficult for traditional media, because advertisers will want to follow that content online, said Tracey Scheppach, executive VP and director of innovations at media agency VivaKi.

“We’re one decade into a two-decade transition,” Scheppach said. “The groundwork is being laid for the future. We can’t simply sit by and watch. What I worry about most is as the viewer goes, is the ad model keeping up?”

Scheppach said that advertising will be a part of the digital future. “I don’t know why Netflix does not see that,” she said. “There are two or three competitors [to Netflix] that are starting to have an ad model. Will [video] be subsidized or free? It’s a game of chess that’s got to play out.”

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Jon Lafayette
Jon Lafayette

Jon has been business editor of Broadcasting+Cable since 2010. He focuses on revenue-generating activities, including advertising and distribution, as well as executive intrigue and merger and acquisition activity. Just about any story is fair game, if a dollar sign can make its way into the article. Before B+C, Jon covered the industry for TVWeek, Cable World, Electronic Media, Advertising Age and The New York Post. A native New Yorker, Jon is hiding in plain sight in the suburbs of Chicago.