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NATPE: Are Happy DaysHere Again?

Complete Coverage: NATPE 2013

As the National Association of Television Programming Executives (NATPE) conference and exhibition celebrates its 50th birthday this week, attendees have good reason to sense some enthusiasm among their conversations in the cabanas, bars, suites and poolside parties around the famed Fontainebleau in Miami Beach, Fla.

No, there’s not a secret million-dollar party being planned (not that we’re invited to anyway). And the elaborate, city-like exhibition floors are gone for good. But a new force is in the mix with the potential to do what really always made NATPE exciting in its go-go days: Make owners of TV content a lot of money.

Subscription video-on-demand (SVOD) services have grown up as a TV programming buyer practically overnight. Since April 2011, when Netflix acquired the streaming rights to Lionsgate’s Mad Men—sparking hope for owners of serialized TV everywhere that, like Lionsgate, struggled to find a syndication home for their complicated story lines—the over-the-top (OTT) subscription market has gone from looking like a certain threat to the traditional TV industry to one whose consumer spending has exploded into the billions.

Dan Cryan, senior director of digital media, IHS Electronics and Media, pegs the value of the OTT subscription market in terms of consumer spending at $3.2 billion in 2012, up from $1.6 billion in 2011. Given the rapid adoption of WiFi and the relative bargain SVOD services arguably go for, it’s understandable that Cryan projects that spending will reach $5 billion in 2016.

That market features such services as Netflix, which currently represents nearly 70% of the SVOD market, including movies, as well as Hulu Plus and online sports subscriptions, such as MLB At Bat, said Cryan. It does not yet include Amazon Prime, because that still represents a small fragment of the market; Apple’s iTunes, which is not subscription-based; or Google/ YouTube, which is only advertising-based, more closely mirroring free over-the-air TV, according to Cryan.

Netflix, Hulu and Amazon may not have big sales booths plunked down at the conference—this year. However, Netflix chief content officer Ted Sarandos will be on hand at NATPE this week in Miami, for the fourth year running.

“It’s sort of miraculous,” said Frances Manfredi, president of NBCUniversal Cable & New Media Distribution, who forged one of TV’s first OTT streaming deals and has gone on to sell shows such as Saturday Night Live, 30 Rock, The Office, Law & Order: SVU and Friday Night Lights to Netflix, Amazon and others. “How many times in this industry do you see something go practically overnight from negativity and fear to this sort of ecosystem opportunity?”

Although Mad Men sent up the first flags, the deal that really alerted the industry to this opportunity was closed in October 2011, when Warner Bros. and CBS licensed all of The CW’s series to Netflix through the 2014-15 TV season in a deal estimated at $1 billion. Simultaneously, Warner Bros. and CBS licensed in-season episodes of The CW’s shows to Hulu. The CW, which targets young women, has been ratings-challenged since its 2006 launch, and its continued existence has often come into question.

“That deal meant everything for The CW,” said Jordan Levin, former CEO of The WB (which was combined with UPN to create The CW) and founding partner/ CEO of Generate, owned by Alloy Digital. “It kept the lights on over there.”

That echoes what Warner Bros. Television Group boss Bruce Rosenblum told B&C last April (“Bruce Rosenblum: Maintaining His Independent Streak,” April 16, 2012): “The Netflix and Hulu deals were very important in securing the financial stability for the network for the foreseeable future.”

Those deals also made Rosenblum bullish in April about what SVOD will mean for the TV business over the next decade. “This SVOD business will evolve to a place where the names will change, there will be various cycles of ups and downs, but over the next 10 years it will evolve to a place of equilibrium where the business model will work and where there will be increased value for the episodic stories that we all produce,” he said.

With a nod to both the potential—and mystery—of SVOD’s impact on the TV ecosystem, NATPE adopted the theme “Beyond Disruption.” As the industry gathers in Miami Jan. 28-30, the conference program will take a close look at the widespread implications of the array of deep-pocketed and proudly disruptive digital platforms.

“Collectively, we’re emphasizing and trying to demystify the world of digital, because everyone is well aware that there are these big shifts going on in our business,” said NATPE CEO Rod Perth, who is overseeing his first NATPE.

Finding the First-Run Balance

One theoretical area of growth that lands right in NATPE’s sweet spot is licensing windows of syndication’s first-run shows, such as Ellen DeGeneres or Steve Harvey, to SVOD providers. Both of those shows, and several others, already offer free YouTube channels that run complementary fare.

This fall, syndicators will premiere such new first-run shows as CBS Television Distribution’s The Arsenio Hall Show and The Test; Warner Bros.’ Bethenny and TMZ Live; Sony Pictures Television’s Queen Latifah; MGM’s Paternity Court and Trifecta’s OK TV and America Now. While SVOD deals aren’t expected to be in play for these shows right now, distributors are considering the possibilities as they look to maximize revenue.

“There’s an opportunity [with SVOD services] to provide, on a limited basis, programming that’s already premiered on the stations to promote the broadcast series,” said Ken Werner, president of Warner Bros. Domestic Television Distribution, one of the key architects of that first CW deal.

It’s a tricky question, however. Distributors need to eke more revenue out of their first-run content, but the advantages of those shows for TV stations is that they are exclusive in the station’s local market—so station owners and managers might object to SVOD sales of these shows. And viewers tend to watch the shows inpattern, allowing them to see the advertisements. Most viewers do not record shows such as Judge Judy or Live! With Kelly and Michael to watch later, because there’s always a new episode coming tomorrow.

“First-run is really the last bastion of TV-station exclusivity,” said one distributor. “And when those episodes end up on an on-demand service, the consumer gets really overwhelmed by the volume of content.”

While SVOD represents potentially powerful new revenue, it’s unlikely that it will supersede TV’s most lucrative off-network deals, such as Warner Bros.’ sale of The Big Bang Theory to TV stations and TBS, or Twentieth’s sale of Modern Family to USA and TV stations, which premieres this fall. Those deals, in which shows sell for an estimated $2 million-plus an episode and then bring in millions more via advertising sales, are the deals that power studios, allowing them to develop and distribute all of their other series.

Those big sitcoms can also change a network or TV station’s fate: The Big Bang Theory regularly propels TBS to the top of the cable rankings, while Warner Bros.’ Two and a Half Men kept the Tribune-owned stations afloat during troubled times.

Indeed, while distributors are currently enjoying the found money that SVOD providers are funneling into the traditional TV business, they’re not necessarily counting on that revenue to fund their futures. Admitted one syndication executive: “SVOD services will never be able to pay us enough money for those big sitcoms.”

For now, the rule on SVOD sales of off-net fare is that the bigger the draw the show is to traditional players, the less chance there is that it will end up in SVOD distribution. For example, Warner Bros.’ The Big Bang Theory is sold to TV stations and to TBS but isn’t widely available over SVOD because the big players were more than willing to pay enough money to maintain some exclusivity with it. A more niche sitcom, such as NBCU’s Parks & Recreation, which was just acquired by WGN America, is more likely to end up on SVOD because the more established players won’t pony up for the exclusivity.

Look, too, for more SVOD deals for drama staples later in their syndication runs after having done big tours of off-net duty, like the deal CBS struck with Netflix for CSI: Miami, which has run successfully for years on A&E.

Just as studios have long witnessed bumps in primary runs of shows when they enter syndication, content owners also are looking to SVOD services to boost viewership. Especially for shows that are serialized and ripe for the much-buzzed-about binge viewer.

“SVOD services set up a place where you can, on a regular basis, catch up on shows that you’ve missed,” said Werner, who earlier this month closed another deal with Netflix, licensing such Warner Bros.- produced cable fare as Cartoon Network’s Ben Ten, Adventure Time and Johnny Bravo for Netflix’ Just for Kids section, as well as previous-season episodes of network shows such as TNT’s Dallas, Fox’s The Following, A&E’s Longmire, NBC’s Revolution, ABC’s 666 Park Ave. and USA’s six-episode miniseries Political Animals. The fact that Time Warner CEO Jeff Bewkes, who has been publicly skeptical of Netflix in the past, was willing to make the deal demonstrates traditional media’s changing attitude toward SVOD.

Some industry executives do remain cautious about SVOD services’ ability to spend their way to growth, pointing to the possibility that they’ll spend more money to acquire content than they’ll reap in new subscriptions. “The problem that we all face is how much money SVOD providers can continue to pay for content given what we know about this new environment,” said one distributor. “Yesterday’s deal doesn’t necessarily establish today’s deal.”

In announcing fourth-quarter earnings on Jan. 23, Netflix said it reached 27.1 million U.S. streaming subscriptions but faces steep cost demands for content, especially overseas. Cryan of IHS expects the subscriber gains to justify content costs for the foreseeable future. The strong fourth-quarter earnings report boosted Netflix stock to a 52-week high on Jan. 24 to $149.17, nearly triple its 52-week low of $52.81 in NASDAQ trading. It closed the day at $146.86.

The potential dilemma doesn’t seem to concern Netflix’ Sarandos. “Prices are definitely sustainable as long as the viewing is high,” Sarandos told B&C. “It’s a true meritocracy in terms of licensing fees. I will pay an enormous amount of money for programming that gets watched an enormous amount of times. The business model only gets upside-down if you pay an enormous amount of money for content that people aren’t watching.”

SVOD Originals on the Horizon

As SVOD services begin to dabble in launching original programming, they face the challenge of not having their own air over which to promote upcoming premieres, which could present opportunity for yet a new generation of partnerships with networks.

“The only way I believe original production on SVOD works is as coproductions,” said one distribution executive. “They need to recruit a linear TV partner and let that partner have a secondary run of their original show.”

That’s happened to some extent in the satellite TV space, with DirecTV taking over distribution for critically adored but ratings-challenged shows: NBC’s Friday Night Lights and FX’s Damages. In the future, those kinds of deals could also include an SVOD window.

Insiders suggest we may soon start to see SVOD partnerships among networks and studios involving an SVOD player sharing distribution rights with the network from the get-go—as part of the launch plan.

Meanwhile, the SVOD services also are producing original shows, with Netflix having already launched Lilyhammer. On Feb. 1, Netflix will make all 13 episodes of House of Cards, starring Kevin Spacey, available. It also has new episodes of former Fox series Arrested Development in the works, among their slate. Amazon, which opened its own production studio in 2010, has six pilots in production. Hulu also offers plenty of original series, including three that it’s releasing this year: The Awesomes, The Wrong Mans and Behind the Masks.

And there are endless channels on YouTube, although monetizing those digital channels via advertising remains challenging. “What’s important is keeping really low economies of scale on production,” said Levin, whose Alloy/Generate networks, such as Smosh, garner as many as 100 million unique views on YouTube. “The reason these channels are profitable is because they produce in a really ef! cient manner and because they’ve reached such a degree of scale.”

Today, those original productions and channels may be small potatoes, but they represent a brave new frontier. Perhaps a little like the days of yesteryear, when upstart producers sold unknown shows like The Oprah Winfrey Show to TV stations.

Andrea Morabito contributed to this story.

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