Three tribes go to war
The US$500bn-a-year global TV market accounts for about half the global entertainment and media sector and is about five times the size of the individual music, film, games and sports markets.
It represents the last and largest battleground between the three tribes of tech, telecom and traditional media.
Currently, only US$2 out of every US$5 across the TV sector goes into any content and only US$1 out of US$5 goes into new commissioned content. US$3 out of US$5 is kept by either the distributors of TV (cable companies, telcos and DSAT platforms) or broadcaster brands (networks, thematic channels and premium channel operators).
Given consumers get TV in order to watch content and advertisers back TV to get access to viewers watching content, there is significant scope for disruption and disintermediation if some of that US$3 out of US$5 can be redirected into content.
And that is precisely what Netflix is currently doing, spending US$3.50 to US$4 out of every US$5 on new content or acquired rights and rewriting the TV sector’s value chain in the process.
While some maintain that in the end it will have to increases its own gross margins to get a return on investment, it is unlikely to want to keep – or need to keep – the current US$3 out of US$5 retained by cablecos and broadcast brands. This represents a direct and existential challenge to all traditional TV players.
Even more of a threat to traditional media players than Netflix is the fact that many of the tech platforms, such as Amazon, Google, Facebook and Apple, don’t need to make large margins in TV. For them, TV is a means to a bigger end, which means they will be able to sustain lower margins in TV, funnelling more direct revenue into content than traditional broadcasters and distributors of TV.
Amazon will use TV loyalty and consumption to drive its e-ecommerce relationships, Apple its device based ecology, Google and Facebook their broader aim of hoovering up a larger share of total global marketing spend.
The incumbent TV segment most threatened by this challenge is the basic-tier/thematic TV channel operators, especially the US-led groups such as Discovery-Scripps, Viacom, NBCUniversal, Turner, AMC Networks etc.
They currently earn the highest gross margins within broadcasting but in the future will have to fight harder for their consumers and advertisers as people move away from large basic-tier cable and satellite pay TV packages to a pick and mix set of apps through broadband delivery. Globally, this sector earns just short of US$100bn in revenue, but only spends US$45bn on content.
By contrast, the US$200bn global TV content sector – which includes sports rights, news and films shown on TV platforms as well as scripted and non-scripted TV series – is set to grow twice as fast as the traditional TV sector that nurtured it, at 5-6% a year up to 2025 versus 2-3% a year.
Within this, the US$130bn originated TV content sector –earning its revenue from commissions and secondary TV market sales and ancillary rights, traditionally the relatively low-profit subsidiary of the much larger TV sector – is set to become the key battleground between telcos, tech and traditional media players, not just for control of the US$500bn TV sector but also the US$1tn entertainment sector.
As the three tribes go to war, the spoils of war could not be greater and TV content investment will play a crucial role in determining who wins.