The Dawn of Netflix
In 2007, when a lot of entertainment companies were dragging their feet and humming and hawing over how to best monetize their valuable content for online distribution, Netflix boldly went in the direction of offering through their service a variety of movies and TV shows via online streaming. They cut deals with content providers that were big and lucrative and improved their technology, especially with their user interface and streaming capabilities, Yes, the deals were more in favor of the entertainment companies, but those were done with the design of growing their value and brand through the years. Short term pain for long term gain. As a result of their efforts, they set the “binge watching” revolution on its ear so to speak, making it easy for people to access a variety of TV shows whenever they wanted to watch. If you wanted to watch season two of “Sherlock” at 2 am in the morning after a bender, at the click of a button you were there. Who couldn’t resist that?
Netflix’s model for content distribution has proven to be a huge success. By charging a monthly fee to watch shows, they weren’t at the mercy of advertisers to fund their operations and expansion. However, they saw the writing on the wall pretty early. Eventually, these entertainment companies were going to figure out that they could distribute their content through their own in-house services, especially when agreements eventually expired and Netflix had to the power to command more money given their established name and value of service. Netflix devised a backup plan should this happen, make their own shows. They announced at the TCA’s on Sunday that they were planning on spending six billion on content this year.
Also discussed at that Netflix panel, a lot of their profitability and future success will come from international expansion. Wait, did he say international? Oh yes, Netflix is going for that coveted piece of the pie, the pie that entertainment companies for years have been using as their hidden and understated boon for profits. A company like Disney or Warner Brothers could instantly make money or break even on a TV show, no matter or good or bad in the US, by just selling it internationally. Now Netflix is threatening to cut into that business as well. The Netflix model has already drastically changed the landscape and rules in the US, so going for the international market is most definitely perceived as a big threat to some.
Online Test Case - The CW
Ten years ago The CW network was formed. It was a combination of the then fledgling WB and UPN networks, a partnership between two unlikely giants in the entertainment business, CBS and Warner Brothers. The synergy of one youth skewed network as opposed to two was supposed to be a win/win for both companies as it gave them an outlet for less mainstream TV programs that they could make instant money on while saving on that operating bottom line. The joint venture got off to a shaky start though. When The CW started broadcasting back in 2006, it was very clear that they were not going to be able to compete as a traditional network. The big four had a stranglehold on the evening time slots and DVR ratings weren’t being counted yet. Cable was also competing as well, and this was before every cable network offered their own original programming. When that happened, things got really bad. Their ratings and revenue plummeted and the network was bleeding money.
Enter Mark Pedowitz, current President of The CW. When he took over the network 2011, he abandoned the idea that The CW could work as a traditional network. (Of course he also abandoned the idea that one network could only survive on going after women 18-34, but that’s another story). With DVR and online streaming gaining popularity, he saw right away that their target market wasn’t going to watch their shows live. To him the philosophy was simple, he wanted people to watch their shows. He didn’t care HOW people watch their shows. In late 2011 they cut a monster deal with Netflix, one that was said to be in the billion dollar range. For a money losing network such as The CW, this deal would drastically improve that bottom line and essentially make The CW a player in the TV market. That’s a very big deal for a small network that barely pulled in $400 million in ad revenue each year. The deal secured that all shows that aired on the CW for the next four years and their back catalogs would be available to Netflix subscribers.
Other networks since then have been forced to stream shows online as their TV ad revenue dried up because of less viewers watching live. NBC, Fox, and ABC all have a stake in Hulu. CBS started their own online service in 2014. In order to feed such services, networks now are giving preference to their “in-house” shows as opposed to shows from other studios. The results have been mixed from a TV viewer standpoint. This is good news for creative shows that struggle in live ratings but manage to find an online audience, like The CW’s “The 100.” That show is owned by Warner Brothers.
However, the Warner Brothers also owns a critically acclaimed show that always did well in the ratings, “Person of Interest.” That show aired on CBS, who has boldly declared that they are giving their limited time slot availability to their in-house shows, aka shows produced by CBS Television Studios. Naturally there are exceptions like in the case of “The Big Bang Theory,” their number one and highest profile show, which is also owned by Warner Brothers, but the shift was really noticed this season in other cases. “Person of Interest” was replaced by “Limitless,” which is doing no better in the ratings but it is more cost effective for CBS. To this day “Person of Interest” has its supposed final season sitting in the vault, just waiting for a chance to be aired. Many don’t understand not only why isn’t this show on the schedule, but why it’s a final season. Business and network politics are killing it, a victim of this new revenue model. The same also happened to recently cancelled “Mike and Molly,” another Warner Brothers show on CBS.
Back to the CW though, whose shows have mostly found audiences because of their easy accessibility online presence on Netflix. This has resulted in a rise in ratings for most shows. For example, “Supernatural” has actually been experiencing ratings increases since season eight (when live, DVR and online ratings are combined). This is because a new generation of audiences that were too young to watch the show when it started are catching up on Netflix and TNT where it runs in second run syndication. Just a few years ago it was estimated that one-third of the CW audience watched online and it is believed that number is higher now. Aging shows like “The Vampire Diaries” are seeing audiences more than double now when DVR and online is factored into the equation. It only makes sense, since CW shows are mostly genre shows that fare better with the binge watching crowd. The same crowd that doesn’t watch live.
The problem is the CW/Netflix deal has expired. At the recent TCA’s Mark Pedowitz confirmed that their current negotiations with Netflix are not going well and they are considering other options. That doesn’t mean that CW shows are being pulled from Netflix, just that new shows this season are not eligible for airing. Old seasons of shows like Arrow, The Flash, and Supernatural can still be shown on Netflix, but new 2015-2016 shows are not eligible. Trust me when I say that Crazy Ex-Girlfriend is worth a binge watch. Sadly, it doesn’t have that opportunity currently and it’s struggling to find an audience. The CW needs a longer term and reliable option.
One rumored option is that The CW would start their own online streaming service, charging around $2 to $4 per month. Granted this is just a possibility being tossed around and not a firm reality. The reports of this new service came from “two people with knowledge of the matter” and not Mr. Pedowitz himself. According to the Wall Street Journal, “Mr. Pedowitz declined to specify who else CBS and Time Warner might be talking with regarding a new output deal but said he expected the issue to be resolved in the next six to nine months. He also did not rule out coming to terms with Netflix.”
The WSJ report also mentioned one huge sticking point to the negotiations, international distribution. Netflix wants to expand their streaming of the CW shows to the new international markets. And there’s where things come full circle. Remember what I told you earlier about international revenue? That has been a massive key to Warner Brothers and CBS making money on the CW shows and not tossing out the network entirely. Almost all CW shows turn a profit for their studios as soon as they go to air, even poorly rated ones like Reign. Beauty and The Beast gets awful CW ratings, but it’s very popular internationally and makes money for CBS studios. That’s why it keeps getting renewed. If Netflix wants to expand the current structure internationally poses a big risk the bottom line for Warner Brothers and CBS in those markets.
So yes, now The CW is being forced to consider other options. Whether openly speaking about those options is merely a scare tactic used during negotiation or if they’re serious is not known at this time. However, The CW is also facing another problem that might send them to an in-house online streaming service…Tribune Media.
Securing the Affiliates
At ten years old, the original affiliate agreements are up and The CW has managed to easily sign several high profile local station groups, such as Gray television, Media General, and Sinclair. With Gray television, they pick up 19 existing stations and 4 new ones, all to go with Sinclair’s 24 stations and Media General’s 16. Things are still up in the air with Tribune though, which holds 13 markets. They hold the largest markets, New York, Chicago, and Los Angeles. As expected those negotiations haven’t been going well.
Tribune has been outspoken about their displeasure in The CW for years, especially as they struggle with their dwindling revenue options after emerging from bankruptcy a few years ago. Tribune CEO Peter Liquori in 2014 complained openly about their strategy of programming for “people who don’t watch television” and he wanted a seat at the programming table. Tribune airs news after CW programs air and younger viewers tend not to stick around for the newscasts. They also constantly pre-empt CW programming for local sports events, something that does hurt the live ratings of The CW but boosts the local broadcasts. There are a few reports that Tribune wants the digital rights to CW shows, allowing them to stream CW shows online in their markets. That’s a piece of the pie that The CW is very reluctant to give up since it’s been critical to its bottom line and survival the last few years.
Tribune’s options if they lose The CW aren’t ideal. In order to earn more revenue and make them more competitive with cable channels who get subscriptions fees, the US broadcast networks started charging local stations “transmission fees.” All of the CW affiliates pay a transmission fee, and sources say that they are asking for increases in those fees, although the big four networks charge much heftier fees given their higher ratings. If the Tribune stations are dropped The CW, they would have to go independent. For a company with a shaky financial picture and the numerous original programming options already out there, the risk is high. Buying second run shows is expensive as well, especially if it’s a popular one like CSI.
The CW has been exploring alternate options for a while now should Tribune not renew their agreements. The most obvious one is to air on CBS digital sub-channels, but those aren’t highly watched channels. The other is to offer an online service. While neither are ideal options, with other affiliates easily on board, The CW can at least carry on in a good amount of smaller markets. Their traditional broadcast model isn’t going away any time soon.
So what have we learned from all this? It’s business and it’s all about negotiation. Warner Brothers and CBS are both very shrewd negotiators and aren’t easily going to give away their content without a price. The one question is, how deep would The CW go with their catalog in an online service? The network is only ten years old. Unless Warner Brothers allows them to dip into the old WB network’s catalog, the service does lose a bit of its luster. CBS is already airing old UPN shows like Everybody Hates Chris, The Game, and Star Trek: Enterprise on their All Access service.
Given that the mere idea was only mentioned this past week, we do have to wonder what sort of thought has been put into the new service. It’s still way too soon to tell. One thing is for sure, given that The CW has found huge success streaming online, they’re not going to do something that will prevent that sort of easy access to their shows in the future. With CBS launching their own All Access service and Warner Brothers’ Time Warner sibling HBO starting their own HBO To GO service, they do have other implemented models to follow.
Only time will tell as all these new services are launched, but it can be assumed that eventually streaming services can be offered in bundles, much like cable television. That’s still far out in the future though. As a viewer myself, it is a pain to subscribe to so many monthly services, but having choices is nice and if the studios and networks don’t make money the choices diminish. It does make it hard when shows are not in one central location for a casual viewer to check something out on a whim, but I suppose if a fan of Arrow subscribes and decides to check out Supernatural that’s not a bad thing. One thing for sure is an online service will not be a replacement to The CW live airings and will be just another supplemental income stream. As long as I get my fix of Supernatural every week, we’re good.