By Mike Darcey, Advisor-in-Residence, The Project X Institute
To borrow a phrase, perhaps we have reached the end of the beginning. But we are a long way from the end and many questions remain.
Years ago, we watched an interesting sideshow as Netflix used the internet to bypass traditional distributors to create a new content play. This ceased to be a sideshow when Disney abandoned the old content- and channel-licensing model and went all-in for DTC, and then others succumbed to market pressure to follow suit.
However, recent share price corrections suggest the honeymoon is over and we need to consider where this revolution is heading, how DTC fits into the bigger picture, where the money will be made, and what new equilibrium will emerge.
The jury is out on the most basic issue of whether a DTC model can be profitable. Questions have returned about just how much cash Netflix is burning through and whether it will ever be consistently profitable. And if Netflix can’t make the DTC numbers add up, what chance do other DTC providers have?
Optimists point to further price rises and a slow-down in content spend when the initial scramble calms down. Naysayers argue there is no cash-positive equilibrium; DTC is inherently unprofitable, the bundles are too small and too narrow, and the extra duplicated operating costs are too great.
Meanwhile, the traditional platforms are not heading for extinction as first thought, but are reforming as the new aggregators, offering a convenient one stop shop for all content. The new DTC players find they need the old guard to help with distribution and, for now at least, live content including sports and news means many consumers are sticking with their cable and satellite bundles.
And with DTC profits more elusive than some had hoped, the major content groups are less inclined to sacrifice all to drive DTC, reverting to DTC being part of a portfolio: a broad content business, some DTC, alongside traditional channel and content licensing and other forms of exploitation.
So now it looks like the new equilibrium will involve a coexistence between the new world and the old, with the balance between the two yet to be determined.
As we start to converge on a new but uncertain equilibrium, what questions does the industry still need to address?
- Consumers will only buy so many DTC offerings and there is a scramble for seats at the top table. For a while this was about first mover advantage and sheer scale. But now the early “losers” are fighting back, stressing the breadth of their offering, covering multiple genres, perhaps including news and sports, as if WBD and Paramount want to pitch themselves as a new version of the basic cable bundle.
- Media attention tends to focus on paid-for offerings, but a range of free offerings – such as Tubi, Roku, Pluto, Freevee – are quietly gaining traction and AVOD layers are set to become far more common. Will the paid-for DTC model be undermined from within? The struggle for DTC profitability makes it almost certain that advertising will enter the DTC revenue mix. But will this reduce demand for subscription, how much money can they really generate, and from whom will the ad spend be diverted? Should the European FTA players be worried?
- The tendency for re-bundling is clear, hence the battle for the lucrative role of aggregator. So far, the main players to emerge are the same crowd as last time, the traditional platforms, leveraging their continued control of premium sports and wrapping the DTC players around them. But is there room for others to emerge, perhaps focusing on the half of the population for whom sports is less relevant?
- Fortunately, the share price correction has come just in time to prevent the European FTA broadcasters from doing anything rash. None wholly abandoned the old model, and now no one will. DTC is important but sits alongside traditional linear forms of exploitation and monetisation. Key questions now are the balance, the windowing, and fighting for local prominence. Could European FTA broadcasters come together as a new generation of aggregators, or is their history of fighting each other too hard to escape?
- Sport is emerging as a key factor, central to the resilience of traditional platforms but now also a serious consideration for DTC bundles looking for genre breadth and differentiation. Even three months ago it felt safe to say that the key sports rights are roughly where they were 10 years ago. But recent news flow around the world suggests this is not guaranteed to hold and we could be on the verge of an almighty battle.
About the author:
Mike has an extensive background on the strategic and commercial side of television, publishing and telecoms and now undertakes a series of non-executive roles alongside strategy advisory services in these sectors.
Mike is currently a board director for Sky New Zealand and for Arqiva. His previous board positions include Chair of M247 (connectivity and cloud services) and of Dennis Publishing. Mike’s current and recent strategy advisory clients include an array of broadcasters and platforms, both pay and free, and sports rights bodies, in the UK and beyond.
Before turning to plural life, Mike was CEO of News International (Times, Sunday Times, Sun) for three years. Prior to this, Mike spent 15 years at Sky, initially as Director of Strategy, then as Chief Operating Officer. During this time, Mike was integrally involved in all the main strategic decisions and commercial deals, especially with content suppliers and distribution partners. Mike’s involvement in major sports deals included five renewals of the EPL rights. Mike was also closely involved in Sky’s engagement with policy and regulatory issues.
Mike started his career as an economic advisor, working especially on contested legal and regulatory proceedings.
The opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of Mediagenix or The Project X Institute.