The Cost of Content: Revenue, Revenue, Wherefore Art Thou?

2022 saw Netflix surprise the world as the streaming behemoth announced a drop in subscribers for the first time in more than 10 years.

Inflation, subscription price increases, increased competition, password sharing, and the war in Ukraine were all considered to be factors in this decline. However, maybe there was another factor to be considered. Perhaps it's more a matter of maturity?

The Media and Entertainment Industry is approaching its pre-teen phase. It has pushed growth though content quality. It has enlisted the support of clever algorithms to deliver a new kind of user experience and now, as the novelty wanes and new players enter the market, it is becoming clear that the economics of streaming are still not working.

Maybe it's time that the industry plays smarter if it is to get the long-term stability that it so desperately needs.

The changing VOD subscription market

According to a Leichtman Research report, the last quarter of 2022 saw the largest pay TV providers in the US record a loss of 785,000 net video subscribers – 135,000 more than the previous year. With the acceleration of cord-cutting as we all switch to mobile devices, the market should be very much in the favor of on-demand subscription services.

However, as we've seen with Netflix, even the major players have seen an increase in churn among viewers, with 32-million cancellations among 10 premium service providers in the third quarter of 2022, an increase of 4 million on each of the previous two quarters.

Warner Bros is one company that finds itself in the midst of deleveraging. Cancelled projects and the downsizing of departments are contributing to a $1.1 billion restructuring bill as the organization strives to achieve that industry-elusive profitability. AMC Networks also faces charges of up to $75 million as it lays off staff in a scramble to become more profitable.

It's becoming clear that the current model of VOD is not economically viable, however, now the genie is out of the bottle, short of going back in time, it's not likely to go back in. Content consumers are enjoying the freedom provided by streaming services, and the choice, quality and convenience that they provide.

However, the lack of profit isn't reflective of a dissatisfaction with streaming services. Streaming services themselves are increasing in popularity, with many households opting to subscribe to more than one streaming service at a time.

Data from the Convergence Research Group shows there were 89 million US streaming subscriptions added in 2021, and another 77 million forecast for 2022. Convergence Research President Brahm Eiley said "The numbers are still growing like gangbusters, it will be a very buoyant business for a long time."

So, how do we reconcile buoyancy with profitability? The price elasticity of streaming services is proving to be limited. According to an article in Mediapost, the #1 reason for cancelling or ceasing use of an app (30%) is the cost of the service.

The criticality of content quality

It has become clear that quality content isn't an area that Media and Entertainment streaming services can afford to scrimp on. A recent US Samsung Ads study 'The Streaming Index' found that 31% of streaming subscribers reference the availability of original content they can't get elsewhere as being the second most important factor for those trying a new app, second only to the availability of free content.

And high quality, original content doesn't come cheap.

Last year, Netflix spent $18 billion on content and Walt Disney Co. Committed $11 billion to the production of streaming content, as part of its $26-billion budget for TV and film production.

And, despite streaming subscribers still rising, VOD services are struggling to hold onto subscribers beyond the short-term.

Redefining the product in search of profits

VOD providers have started to make some changes to the packaging of streaming services in pursuit of improved profits.

Disney+ and Netflix have already announced the impending arrival of ad-supported tiers, and Warner Bros. CEO David Zaslav has said there's one planned at his company.

They aren't the only ones, either. Consulting firm Deloitte predicts that by the end of 2023, two-thirds of consumers in developed markets will use at least one ad-supported streaming service. They also hinted that we can expect more major ad-free streaming services with half of all streaming video on-demand providers offering a free, ad-supported option, similar to Paramount's Pluto TV, by the end of 2024.

In the search for profitability, ODTV providers are trialing a multitude of different models. Product placement, including digital insertion of products into existing programs is one way that OD producers are looking to mitigate their losses. Streaming platforms such as Netflix are trialing the sale of programs to cable and broadcast channels, and others have moderated their content release to mimic the traditional broadcast model of a series being dropped over a period of time. The hope is that this will reverse the increasing trend of viewers binge watching a series and then cancelling their subscription.

The average churn rate in the U.S. is 37%, with the highest churn being among Gen Z (people born between 1997 and 2007) and millennials (people born between 1983 and 1996) who boast a 50% churn rate according to Deloitte. By prolonging the viewing experience, it gives chance for the series to build momentum among viewers and provides more opportunity for viewers to encourage others to watch through social media and other channels.

Other streaming providers are tempting long-term streaming subscribers with an offer of a low-priced subscription subsidized through advert placement. In Chile, Costa Rica and Peru, Netflix is testing features that would allow subscribers to add up to two users outside of their household, for an additional $2 or $3 per account, to make viewing a more sociable, sharing, and collaborative experience.

However, before we all start throwing caution to the wind and pursuing all manner of new and improved product offerings, should we take time to revisit the P&L and ensure we are squeezing every drop of profitability potential out of the back end of the VOD product offering?

Delivering more value from your P&L

Content production has always been a difficult industry in which to manage costs. Expense control can be difficult, particularly for the surprising number of content creators that don't forecast at all.

A siloed approach tends to result in a lack of visibility between departments that all work with their own data. This can limit an organization's ability to create accurate cash flow forecasts. And without accurate cash flow forecasts, it's not possible to understand exactly how the budget changes throughout the content production process, and to control the budget throughout the lifecycle of the content production process. For full control, visibility needs to be in real time, accurate, and to span all departments for a complete picture.

However, with competition tougher than ever among the growing number of VOD subscription offerings, limited studio availability (despite ambitious expansion programs at many leading studios), and more production houses drawing from the same pool of talent and skills for their pre- and post-production teams, costs have become increasingly complex. This, teamed with the squeeze on profits for almost all streaming service providers is causing upheaval within the industry.

By improving visibility on end-to-end cost management and embracing intelligent tech to uncover all potential revenue streams, discounts, and rebates, studios can manage profit margins more effectively. Implementing best practice workflows to improve efficiency wherever possible can unlock a heap of previously untapped profit potential in VOD services.

Finding clarity in an ever-changing media landscape

To forge a way forward in this constantly changing landscape, media and entertainment organizations need to cut costs, while also continuing to attract consumer attention. The industry needs to shift its focus to real-time analytics to be able to measure costs effectively. And to get visibility on where and how budget is being spent so they can pursue smarter routes to profitability without resorting to reckless cost-cutting that can result in harming viewing and subscriber figures long-term.

If organizations are truly committed to reaping the benefits that technology can offer, they will need to step away from existing manual or single-use tools and the fragmented systems that are creating a lack of integration along the production workflow.

Then, through the introduction of an end-to-end system that places analytics at the heart of the content production process, Media and Entertainment Organizations will be able to secure broader visibility across their organization.

invenioLSI Content Financials brings real time financials into SAP, enabling media and entertainment businesses to make informed and sustainable budgeting decisions. When teamed with ML and AI within SAP S/4HANA, Content Financials can deliver best practice insights from across the industry, and real-time information that empowers organizations to optimize their profitability at every stage of the content production process.

Alongside greater visibility of financials, Content Financials makes the management of funds easier too. AI and ML provide real-time, actionable insights on things like talent rates, so that content creators can make better-informed decisions and operate more efficiently. It provides faster and more streamlined workflows making things like paying talent much easier and quicker, even with external talent acquisition. Even subscriptions become easier to manage with built-in subscription management.

With Content Financials, data becomes joined up across an organization, making it easy to track your internal employee data, from recruitment to security and performance, all in one system.

And, as the industry shifts its focus toward making the most of content by following the 'make it once distribute to many' models in the quest for a higher content ROI, Content Financials provides improved control over their P&L, making it easier than ever to trace ROI accurately.

Find invenioLSI Content Financials in the SAP store and get in touch with sales@inveniolsi.com and take the first steps towards improved financial understanding of your content creation.