June 29, 2011, Connections Conference, Santa Clara, CA—John Penny from Starz described "The Challenges and Opportunities for the Dream Factory " in his keynote talk at the Connections Conference. He equated innovation to a problem solving system.
What is needed is to combine the creativity associated with Hollywood and television with the innovations in technology created here in Silicon Valley. This combination is necessary to keep scripted PC alive. Widespread connectivity and social networks are driving changes in both industries.
Some of the drivers derived from technology include the social media, now used for marketing and for creative collaboration, mobility and its influence on all screens, location-based services, and the availability of ubiquitous bandwidth. These technologies have enabled streaming content delivery, cloud-based services, and a whole new world of apps.
Hollywood and television are holding onto statement business models based on ads and some subscriptions. Because technology has enabled new platforms, the industry needs to change to monetize distribution. The creative industry likes storytelling that needs to transition into new business models. The older models, developed in the 50s, provided over the air broadcast totally supported by ads.
The entire industry was based on very long cycles, and the ads funded content creation. Now this funding source is moving towards targeted audiences resulting in greatly reduced amount of money available to create content. The challenge is how to create and deliver stories on TV. The television industry has long lead times and relatively fixed development cycles.
Scripted content is very expensive and one response from the networks is to add reality shows for much less money. Although the cost of creation are different between cable and broadcast, the average is about 3 1/2 million dollars per hour. The total cost for a cable season of 12 episodes is about $42 million. A broadcast season of 24 episodes cost about $84 million plus another 15 million for marketing. Each of these currently displays about 14 minutes of ads per show.
As ad revenues decrease, the studios need to find equivalent sources of money, taking into consideration that the success rate of new shows is very low. These high costs, and the high risks associated with new shows offer continual challenges on obtaining a return on your investment.
Content distribution is now going across multiple platforms including broadcast, cable, satellite, and the phone company. New channels include many sources of online video distribution including Hulu, Netflix, iTunes, etc. studios need to serve both channels and still make money. Producers are trying to balance risk and return but the numbers are not encouraging.
Currently, the industry equates ad dollars with volume, but online and over the top delivery systems are paying dollars per thousand impressions. There is not enough money coming from the new platforms. Broadcast runs about 40 ads per hour but only eight per hour in online streaming. Broadcast, including cable, considers 34 million viewers to be a profitable level, but online audiences total only 9 1/4 million people. Even though the cost of broadcast ads is less than those online, the difference in reach means the online audience cannot match the volumes associated with broadcast.
As a result, the networks need to increase the online viewers by a factor of three to achieve a constant level of income. The online revenue model is okay for old library content but cannot support new and scripted episodes. Adding subscriptions to the online services is good, but limited. For example 1 million Netflix users at eight dollars a month pays for one scripted show.
Currently ads are about $70 billion plus another 27 billion from fees for cable delivery. If we took the British model, and all households paid $70 per month, would have a $100 billion resource available for content creation. Televisions started with United States even though many shows are exported to the rest of the world without this international hook, studios have to forgo other income.
One new model is the show Torchwood which is done in partnership with the BBC. Front-end financing comes from the BBC and ongoing production costs come from Starz. The need for money to develop programming affects all the networks. The questions now are how to partner technology and television, and how to preserve television with its vast array of high quality scripted content.
The basic economics forces a minimum functionality and consumers need to fund content creation in some way. In the past, linear programming was ad supported. Subscriptions, like cable, add incremental income. Exporting content to Europe and Asia adds some incremental income but also costs more to internationalize content. The model like iTunes to pay per episode is too difficult, because aggregating the many transactions is a very large cost resulting in only a fraction of the money available for content creation.