Next week my students begin the section of NMC (new media) 101 on finance. I use the Havens and Lotz Understanding Media Industries and Organizations book. The book is television focused and I extend it with readings from Richard Caves to explicate the ‘nobody knows’ principle and the original work of Kahneman and Tversky on prospect theory which provides more context for the theory of organizational behavior they rely on.
The underlying dynamic described in the book is one of adaptation to scarcity, and organizational behavior is driven through an understanding of risk. For understanding the television industry in the United States, 1994–2012 it really works. I can teach IPO activity and web based concentration models with the concepts developed in he book for television. That is where the problem comes into play: the underlying concept of scarcity in the television market has been rendered moot.
The Capital Furnace
Netflix is losing billions of dollars every year on content. Price per hour on scripted series has risen dramatically. Reality television, if produced today, is not used so much as a cost control mechanism but as content in itself. Decisions in this market place are no longer based on cost control, but on pure audience satisfaction. Subscriptions to CBS online service are driven by access to Star Trek: Discovery. As Netflix loses access to the deep well of historical content, I am starting to realize that I need Hulu too: 30 Rock helps me do my late night housework. Hulu as a Comcast creation and CBS online are tied to traditional media companies, they will likely make more conservative choices. Netflix on the other hand is free to burn stock market money. Some of the talk from Netflix goes as far as to suggest that a higher burn rate is some how desirable, as if failing to cover costs is an indicator of success.
Instead of making decisions under conditions of scarcity, Netflix may be free to assume abundance. What does this do the text? I for one, enjoyed situation comedies and content that was deeply constrained. It is unclear if a lack of constraint will lead to better art or exploitative kitsch. Sadcoms are already common, imagine a world where they are all sad, and shocking. Further, Netflix could change the equilibrium of the market to endorse unsustainable production values. This is why the depth of older content matters: stock piles of Scrubs or 30 Rock can tide audiences over.
Taking a more bare-bones accounting perspective, the late network era included revenue from advertising, carriage fees, product placement, and after markets. Product placement was never viable. Advertising is omitted from most online channels. Carriage fees will fade as the owners of legacy content monetize their own catalogs. What is left is the subscription fee, and the IPO money. Netflix is operating under the assumption that the value created by rapidly burning the IPO money will push the market to produce a new equilibrium point at a much higher subscription price. It is entirely possible that old media dynamics will return as the IPO money begins to decline, after all, that money is still tied to investors if not banks. In the new television industry game, Netflix’ rivals may be positioned to produce less original content at lower price points, effectively disrupting Netflix attempt to skim the cream.
The End of Sports Carriage
I have argued many times that carriage payment equilibrium is not inherently desirable for Comcast and that cord-cutting enhances market efficiency. This can be seen nowhere more clearly than the spike in carriage fees for ESPN. The problem in sports economics is that sports fandom was over-estimated. At the peak of ESPN carriage, the world wide leader could boast ninety-four million subscriptions. This is no longer the case.
The NFL has been in decline for nearly five years. NASCAR projected at it’s peak (a decade ago) that it would catch the NFL. Denny Hamlin makes an important point, NASCAR is setup to pay the track owners, not the drivers or even the racing teams. Most sports industries operate in tax funded buildings which then use a combination of ticket sales (multiple channels), advertising (a variety of products), clothing sales, and carriage fees to make money. The assumption in the industry for several years has been that increasing carriage would heal all wounds. Attendance at college football games has been dropping for some time. Most tickets, and personal seat licenses, now vastly outstrip the buying power of the public.
Carriage produced a glut for ESPN. Loss-leader content like Mad Men and Breaking Bad used the carriage glut to steer money into fringe businesses. Teaching the loss leader was relatively straight-forward. Make one really good show to lock in the carriage fee. Netflix has no such underpinnings. Make one really good show so you can, get more money from yourself? Carriage was a closed system. There was only ever going to be so much money in the carriage ecosystem. In order to push money back to ESPN, other channels would be starved, and perversely cable subscription prices could rise. Pushing the audience into the hands of online distributors. The sports bubble as such has already popped.
What will I teach from this?
Media finance professors today are not teaching a market that is defined by overcapitalization. This is an important foundational moment: the industry has always abided overproduction as a means of risk mitigation, now overproduction (at ever rising prices) is a means of pushing the imaginary future price higher and higher. What this model misses is that in overproducing at risking production values might drive past the impossibility of adequately modeling media demand (known as the nobody knows principle, derived from Caves citing Becker’s Art Worlds), it fails to compensate for the ars longa principle (that deep pools of old content can sate current demand).
To decode that: A. Netflix has produced a TV bubble, B. the only way this works is if the bubble is durable enough to inspire a great degree of spending on media, C. audiences might as easily turn to older content or sports over new quality television. D. it is likely that as Netflix burn rate remains high, traditional media finance theory could return as a negative affective cascade (bubble pop).
In general, powerful properties like ESPN (even post peak) will be combined with deep wells of content to produce important platforms at lower price points. The Disney-Marvel-Starwars-Sports platform could easily best Netflix. A Star Trek — crime show driven CBS platform could take the place of CBS: the diamond platform. This is not to say that Netflix is doomed, but that when we teach the TV industry glut, we should be talking about more than the contemporary television text or lauding the current powerhouses, but presenting students with ways of understanding the future of platforms in the context of multiple equilibrium points with different organizational behaviors contingent on capital source. In short, Netflix burns money in a furnace because they think a hot market can burn out the others, Hulu is building a war chest of old content, CBS is transitioning their brand positions smoothly between television modalities. One market, three models.