Too hungry for digital deals?

Latest content pacts stir cannibalization debate

The Amazon-Discovery pact announced Wednesday may have drawn yawns given the increasing volume of digital deals being done, but there’s a growing debate over whether these pacts end up cannibalizing the TV audiences of the shows involved.

The addition of shows like Discovery’s “Dirty Jobs,” TLC’s “Say Yes to the Dress” and “Animal Planet’s “Whale Wars” to Amazon’s Prime Instant Video may be a drop in the ocean of TV shows and movies getting licensed by subscription VOD services including Netflix and Hulu Plus from studio libraries all over town. But in aggregate, many believe the windfall hitting conglom bottom lines in recent months could come at the expense of advertising revenues set to shrink if eyeballs move from linear TV channels to digital alternatives.

The alarm was sounded loudest earlier this week by Janney Capital Markets analyst Tony Wible, who aired concerns that “the balance of power for the entire industry is starting to shift in favor of IPTV players.”

By his math, Netflix alone could cost the content business $2.6 billion in lost ad revenues by stealing away just an hour a day of viewing time from the networks across a subscriber base close to 24 million. That sum is more than the total value of digital deals that typically deliver in the range of $100 million-$200 million per pact to Netflix. (Amazon will pay $35 million to Discovery under Wednesday’s deal, according to an estimate from UBS Investment Research.)

“We believe investors and producers should look at content as blocks of entertainment time rather than individual shows that are monetized by windows,” cautioned Wible. “The push for windows suggests that producers are not looking at IPTV in this light, which implies they could be vulnerable to cannibalization risk.”

Wible went so far as to downgrade Time Warner from a “buy” to “neutral” in part because of how exposed its networks were to digital viewing while upgrading Disney because ESPN offered better protection thanks to extensive sports assets that have a live-viewing value SVOD market entrants can’t match.

The prospect that Netflix, in particular, may eat into linear viewing was prominently raised when the Los Gatos, Calif.-based company announced its fourth-quarter streaming exceeded 2 billion hours worldwide. By the calculations of BTIG Research analyst Richard Greenfield, that would make Netflix the 15th highest-rated TV network in the U.S. “It simply cannot be all incremental” to existing linear viewing, he warned.

Last month a mysterious reported ratings downturn for kiddie programming powerhouse Nickelodeon triggered somet to speculate that the decrease was linked to a recent surge in Netflix’s stockpile of content aimed at the same young demo. Both Netflix and Nick denied there was any causal relation between the two, and even Viacom CEO Philippe Dauman weighed in, suggesting the audience drop was the result of a Nielsen measurement miscue.

It certainly seems logical that at some point, digital platforms will have raided studio catalogs sufficiently to undermine the ratings for such content on television, not to mention syndication and affiliate fees in the long term as well. But the dynamic between digital and linear viewing may not be as simple as a zero-sum game.

First, consider the school of thought that these content deals not only don’t subtract from ratings but can have additive benefit when viewers get acquainted with a show on Netflix, where they can start from the beginning of a series’ run, and then graduate to current episodes on air. That’s the rationale behind deals like Sony Pictures Television’s recent pact to put the full run of NBC’s “Community” on Hulu, where the show could use old episodes to discover new fans while on hiatus from NBC (“Community” returns to NBC on March 15).

In addition, other analysts dissecting relatively recent Nielsen data have found little evidence that Netflix et al. are siphoning viewers away from linear channels.

Longtime industry analyst Tom Wolzien points to the relatively small number of consumers — mostly aged 18-24 — who are responsible for generating the overwhelming majority of video streams online. But what’s even more remarkable about that relatively small group is how little video they actual watch.

As documented in Nielsen’s Cross-Platform research for the third quarter last year, viewers who stream the most online watch the least amount of video overall when streaming and TV are combined. For instance, those viewers in the top 20% of those who spend the most time streaming average 22.1 minutes per day. That’s a fraction of the total of 243.8 minutes they watch across platforms per day — less than those in the 80% outside of the top 20% watch of just TV alone.

“But they never were big consumers of video, so cannibalization of conventional TV services is not a big issue,” said Wolzien last week at UCLA School of Law’s annual entertainment symposium. “And for now, that would seem to provide more upside than risk for content deals with Netflix and Hulu.”

Meanwhile, the majority of the U.S. audience is either streaming so minimally or not at all that there isn’t much to worry about it, at least yet. That could change in the coming quarters as Netflix continues to grow and is joined by competitors — though their growth could come at Netflix’s expense rather than hitting traditional TV.

In a similar dissection of Nielsen data issued this week, Bernstein Research analyst Todd Juergens also contended that Internet video consumption is not eating into TV time. He zeroed in on teens 12-17, whom he noted spend just three minutes watching video on computers and mobile devices, amounting to 3% of the total 229 minutes being watched when traditional TV time was thrown in.

“There is a popularized notion of the typical teenager constantly digitally connected — at the expense of traditional TV,” wrote Juergens. “If this happens to describe your teenager, I have news for you — your teenager isn’t average.”

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