As an industry, discussion about Netflix’s disruptive impact is usually framed within the topic of distribution. Hardly surprising, since Netflix started life as a distribution platform for other people’s content.
But as it morphs into a vertically integrated provider that also makes its own content, it is clear that Netflix, and others, are having just as disruptive effect on other parts of the value chain – notably, the content itself. And these ripples across the value chain can be unpredictable.
A comprehensive and excellent study of OTT’s impact on video production from the Boston Consulting Group points out that OTT is starting to decimate the long-standing market for mid-tier content (essentially, any content that is mainstream, but not considered “premium”) and the secondary rights market (re-run rights sold to smaller channels after they have been initially aired elsewhere).
This is disproportionately impacting some genres more than others. Sitcoms, and procedurals (think NCIS, Law and Order, and so on) are genres that always took a larger share of their revenues from these mid-tier channels than other types, and are therefore attracting fewer commissioning dollars than they once did.
The report argues that sitcoms are being replaced by reality shows, which deliver a similar blend of light entertainment, laughs and drama while being more predictable in both production cost and projected audience. Then procedurals, which are self-contained stories that can be bundled in a series but with each episode standing alone, work less well for on-demand viewing because they do not build plot and suspense over time. They do not lend themselves to the increasingly popular binge viewing which the leading OTT sVOD players have capitalized on so effectively.
Traditionally, mid-tier content including sitcoms and procedurals has been defined as having broad audience appeal but at a lower level than blockbuster movies and premium sports as well as the top TV shows. But from the supply side perspective of MVPDs and networks, it also includes secondary rights for content that might originally have been top tier. This itself has traditionally constituted a lucrative market when aggregated across multiple assets.
Secondary rights and the associated financing models are being squeezed by OTT. The practice of deficit financing has been hit, the traditional model for TV financing where a content buyer such as a broadcaster shared production costs with the program producer like a studio, with the return on investment coming in second-run windows, such as syndication. But this second window is being taken over by OTT, with the roles of content creator and distributor merging, as in the case of Netflix or Amazon Prime which hold onto global rights for exclusive distribution through secondary windows.
We should note that OTT’s impact on mid-tier content is not all negative and that some genres are flourishing, the obvious example being documentaries. These have the advantage of having a long shelf life, and are sometimes less-time sensitive.
Implications for MVPDs vary. Firstly they need to be aware of these trends and note SNL Kagan’s finding that in the US market networks characterized as mid-tier have witnessed steadily falling ratings over more than a decade, down from 79% of combined cable network ratings in 2005 to 64% in 2015.
Above all, though, they must be able to drill down accurately into their own mid-tier audiences, analyse them more carefully, and stop seeing them as a cheap and easy way to build audience share or to fill schedules. The middle may be being squeezed but there will be exceptions across all genres and it is in this sector where there is perhaps greatest scope for differentiation and innovation for operators in terms of acquisition, packaging and recommendation.