Economics of a TV Show
“I need to stop,” I whispered to myself as I clicked ‘next episode’.
Isn’t that relatable for most of us at this point? OTT was quite the saviour during the pandemic!
Binge watching mystery shows like Lucifer or Stranger Things or comfort shows like Friends or Big Bang Theory was one of the best getaways from the monotony of being stuck in a lockdown. But have we ever stopped to think about what goes on behind the screen, in the production of a show?
Image courtesy: Tired of films and TV shows?
Before coming to Netflix and other OTT platforms, let us understand a little about the television shows. Each hour-long episode of a show can cost anywhere between $1.8 million to $7 million or more, depending on the budget. For example, a 30 minute episode of Friends cost around $10 million dollars in their last season, back in 2004. When we consider the odds stacked against any given project, that level of investment appears even higher. For the Fall of 2013 TV season, Fox, for example, shot eight dramas and eight comedies. Only nine of the 16 pilots were chosen for the fall lineup after being screened for executives and focus groups. ABC ordered a larger slate of 12 dramas and 12 comedies, with 8 shows making the cut. The total spending on these- $60 million Fox’s 9 pilots and $90 million for ABC’s 8 pilots.
For those keeping score, this implies that Fox has a pilot-to-series rate of 56% and ABC has a rate of 33% only. But wait, there’s more. Only 35% of all pilots aired on a new TV lineup will last more than a single season without being cancelled. So the chances of a script succeeding are closer to 2.1 percent. To put it another way, any given script purchased by a network has a 98% chance of commercial failure. These numbers are simply a representation of the massive uncertainty in this industry. It is extremely difficult to predict how a particular show will be received by the audience, in spite of all the efforts that go into its promotions etc.
So the question arises how can TV networks sustain themselves when they invest millions, betting on the very uncertain success of these shows? What are their sources of revenue?
Historically, advertising has been the primary source of revenue for television.
A fundamental principle of media economics is that marketers are willing to pay more for consumers than consumers are willing to pay for content. As a result, while the ad market can be volatile, it tends to rise per capita as economic productivity rises. Over time, larger production budgets can be supported with smaller audiences.
Taking the example of Breaking Bad again, , the network knew it had a quality product on its hands and it charged its customers accordingly. The final two episodes’ running times were increased by AMC from 44 to 54 minutes, or 75 minutes total with commercials, and their advertising costs were increased to as much as $400,000 for 30-second advertisement. The final episode of the show, “Felina,” had 21 minutes of commercial time, which may have brought in $7-8 million in advertising income for the network. And this was all back in 2013!
Today’s content is more niche not because tastes have changed, but because small audiences are more financially viable today than they were in the past. Hence the rise of Netflix!
Now, Netflix’s business model is very different from that of traditional TV networks. We know that Netflix is not big on theatrical release of its content. The majority of the time, Netflix movies are accessible to watch the same day they are released in theatres, as opposed to employing an exclusive theatrical release. And on the rare occasions that a Netflix movie premieres in cinemas first, it takes the company only a few weeks to make it accessible for streaming online—far less time than the 90-day exclusivity period that every other major Hollywood studio uses.
To understand this ‘windowing’ model of the studios, we need to understand that consumers place radically different values on watching a movie. To some, it may be worth $15 (I need to see that new Marvel movie TODAY!) or $5 (what should I rent tonight? It goes without saying that studios want to get the most value from one group without jeopardising the sales of the other. The theatrical distribution was essential to the success of this price-discrimination tactic. Studios were able to distinguish their (hurried, quality-conscious) high-value clients from the rest of the market by making a film only available on “the big screen.” Because if movie lovers could rent the same movie for $4.99 a few weeks later, why would anyone pay $15 for a theatrical ticket?
Good news thus far, but then why does Netflix release their films in cinemas the same day that they offer them “free” to watch on its streaming service? The answer lies in the business model.
Netflix is not in the business of selling individual movies to many different customers. Instead, it’s in the business of selling many different movies to individual customers—in bundles.
Netflix is able to use a distinct form of price discrimination from the film studios thanks to bundled subscriptions. They do not need to determine how much a customer appreciates each movie on the service. The bundle effectively accomplishes that for them.
So how does this bundling business model actually work? In brief,the more things a seller offers in a bundle, the better he is able to forecast the average worth of the bundle across various customers. Although not every customer appreciates the individual movies in the bundle equally, in a large bundle it doesn’t matter because the individual value discrepancies balance out. Netflix can maximise the value it receives from its audience by setting a price that is just a little bit below the average value that a subscriber is prepared to pay for all the movies in the bundle if it can accurately estimate that price.
This is why unconventional approaches to theatrical releases are taken by streaming services like Netflix. They have very less to lose in comparison to the studios. The entire firm is at risk in the conventional business model if the theatrical release window is messed up. But Netflix has a different perspective. It’s excellent if the studio can gain financial gain or accolades by distributing its films in theatres. However, it doesn’t require a good theatrical run to make money off of its films.
Another significant advantage of bundling is that it enables great artists to tell great tales, like the Oscar-winning film Roma by Alfonso Cuarón. Cuarón said in a recent interview that Netflix had made it possible for him to create a movie that would never have been produced for a conventional theatrical release.
Several other OTT platforms are seeing the huge potential and profitability of Netflix’s business model and are following suit with some tweaks of their own. For example, Amazon- they neither sell ads nor charge for content only subscription. All one needs is amazon prime membership to consume the content on Prime Video. And considering the N number of benefits that an Amazon Prime membership offers like free and quick delivery, cashbacks and other offers on shopping, access to Amazon Music and of course, Prime Video, people are willing to pay a single significant amount for all these services.
OTT platforms have now become as much insiders as the television and film producers and networks in the media/entertainment game. They have come up with new and effective ways of doing what has been defined as success in the industry: utilising cutting edge tools to produce captivating content and employing the right business model to deliver these stories to the right audience.
SY BSc Economics