Member Mailing: Does $115B+ in Content Spend Reflect Inelastic Demand? Or Marketing Challenges in Streaming, Instead ?
Key Takeaways
Marketing is emerging as a pain point in direct-to-consumer models in 2022, and streaming is not immune
Not even Netflix is immune, something we learned from Nielsen's latest The Gauge
A big emerging question is how the seemingly inelastic demand for content from streamers reconciles with that pain point
What we perceive as inelastic demand may be more reflective of the modern-day studio system that is emerging
In other words, cultivating and betting on A-list talent may be better marketing than direct-to-consumer marketing in 2022
I am now about two-thirds through Maria Konnikova's The Biggest Bluff - a book on how a writer trained herself to become a professional poker player - and came across this passage:
Our brains, it turns out, are veritable prediction machines. We are constantly making sense of the environment — and making guesses about what will happen. It's called predictive processing: we actively think one step ahead and look at the environment accordingly. Our brains are more proactive than reactive. Whether our predictions are accurate or not, of course, depends on the inputs and the prediction-making process. Whether they improve in accuracy or not over time depends on our capacity and willingness to learn.
One prediction I have been consistently making is that the increasingly, seemingly inelastic demand for content seems unlikely translate into user and/or revenue growth if streamers cannot solve for marketing on-platform and off-platform.
But, to follow Konnikova's logic, we have signals that the pieces are lining up in response to this inelastic demand, but I have yet to think one step ahead about this development.
For example, NBCUniversal will build eight new stages as part of a major development to boost production at its Universal Studios lot, and independent movie lot operators and other legacy studios, including Warner Bros., will add new soundstages and other facilities to serve the run-up in streaming demand.
So, if demand for content is indeed inelastic, all of these studios and lots are making smart business bets, and we are witnessing a marketplace naturally respond to inelastic demand reflecting a streaming-dominated future.
The flip side of this question is, what if they are not making smart business bets because the demand for content is not inelastic? What if increased content spend does not translate into user and/or revenue growth?
In the narrow case of the lots, they will have made overly aggressive, if not expensive, bets. They will have missed key marketplace dynamics that reflect how demand is more elastic than they are assuming, and that studios are more selective than the gross sum of $115B+ may suggest.
I think there is a case to be made that the studio lots and others have missed that the most impactful dynamic shaping demand for content is marketing, and not spend. As I wrote in Why the "Streaming Wars" Are Actually About Product Channel Fit back in October 2020:
I would argue [the "streaming wars"] are about which companies are savvy enough to understand the marketing required to drive scale in those channels where it finds product-channel fit.
Meaning, the demand is being shaped by both:
Netflix's "ubiquitous access" - its ability to make its content available one-click away to its subscribers both on-platform and off-platform (online and offline), and
the inability of the rest of the streaming marketplace to replicate that model across various distribution channels.
I think that is a reasonable prediction that sheds a light on streaming marketing that neither Hollywood or Wall Street has not processed yet.
What happens if the demand for content is not inelastic?
Inelastic demand occurs in streaming when more production companies receive more budget to produce more content regardless of price.
Soon-to-be Warner Bros. CEO David Zaslav's promised attendees of The Goldman Sachs 30th Annual Communacopia Conference that nearly 200,000 hours of programming that would "shock and awe" consumers:
“We don’t want to be confusing and we also want to put ourselves in a position for a shock and awe global strategy, when you look at the menu – the diversity, the power of the content that we have in one place when this company comes together.”
I wrote in The Curse of the Mogul Strikes Back in 2022 that audiences may not be in "shock and awe" if content cannot break through:
...content spend is escalating, while the risk of "nothing [cutting] through" to mass audiences is escalating. There will be $115B in content spend in 2022 with fewer guarantees of success, if not increasingly opaque definitions of success emerging.
This point about "cutting through" came from a quote from an anonymous marketing executive to The Ankler:
Some would say, "Movies may be having a hard time, but overall for entertainment, this is the best of time, more money flowing than ever, more chances to make more things."I think that is true, but requires a dot, dot, dot, at the end of the sentence, which says: but what if there's just too much to consume?
What is the danger of that?
The danger of that is that nothing cuts through, that you do not have any communal experience. You have to ask yourself, are we only going to hear about content through our peers? How are things going to reach any form of mass audience? These things cost too much money to deepen niche audiences.
This is an important quote because it helps to frame the market perception of $115B as resulting in "just too much to consume" for consumers. That, in turn, helps to explain the perception of streaming services' inelastic demand for content.
What if demand is actually elastic?
What if the demand for content is actually not inelastic, despite the optics?
Meaning, the budgets for content spend will go up but it will not be money spent blindly to generate "too much to consume".
For example, Starz has increased its programming from seven original shows in 2020 to 12 this year. It is seeking some form of corporate spinout where it can obtain more spend to "super-serve" its two core demos of Black and female viewers.
The objective is not to get larger for the purposes of more spend, but rather to be able to serve its two core demographics with more content, a strategy that can drive incremental and global growth, and reduce churn (a problem Starz had when it was relying more heavily on its Power franchise).
Starz reflects how the concept of "value" in streaming has evolved, as Joe Adalian of Vulture wrote in The Streaming Shows Are Coming From Inside the House last week [1]:
Every conglomerate is now obsessed with building up their respective streaming platforms, which exist to serve all kinds of viewers rather than particular demographics or brand identities. Instead of worrying about whether a show will run enough seasons to strike it rich in the syndication afterlife, the overriding mission for production companies is to create shows that bring value (read: subscribers) to these company-owned streamers, since the success of those platforms is what will determine the future profits of the conglomerate.
Adalian's article highlights another example of this trend with Hulu's Only Murders In The Building. The hit show ended up on Hulu as a result of Disney placing both ABC and 20th Television under the same umbrella unit as the streaming service.
So, the optics of that outcome and $115B+ in spend would suggest the demand is inelastic, and streamers move quickly to produce shows because they need content. But, what we perceive as inelastic demand may be more reflective of what Adalian describes as " a modern-day studio system" that is emerging:
In theory, super successful creators and producers stand to lose under a system where their projects are not being shopped on the open market. Less competition usually isn’t a good thing. But the fact is Disney’s decision to concentrate on internal projects wasn’t made in a vacuum: Rivals such as Comcast, WarnerMedia, and ViacomCBS are also now pushing their best new content to in-house platforms. Just as importantly, Netflix and Amazon have spent the last few years building their own studio operations, and while both still buy a ton of projects from third parties, their biggest bets are increasingly from talent housed within (such as Shonda Rhimes, Ryan Murphy, or Amy Sherman-Palladino). The result has been the creation of a modern-day studio system, where the biggest artists sign up to work for one team rather than set up projects all over Hollywood.
Rather than assuming $115B+ funding a glut of content on streaming services, it may be more reasonable to assume that in-house studios will allocate that spend to attracting and retaining the best talent to produce content for a service.
In other words, there is inelastic demand in streaming but mostly from in-house studios seeking to lock down A-list talent and premium content.
This is the bet that Blackstone's Candle Media is making (as I wrote about in Three More Acquisitions from Blackstone's Candle Media (Kevin Mayer & Tom Staggs).
But it also may leave in the lurch a lot of producers who have assumed inelastic demand. In other words, the new dynamics suggest independent producers who are not or do not have A-list talent risk falling lower in pecking order.
That helps to explain the "push to go big or go home" trend taking place both between Hollywood power players like CAA and ICM, and independent television and film companies linking up or being bought out, as Scott Roxborough reported for The Hollywood Reporter.
Mergers help production companies to "boost their production potential and take a bigger share of growing licensing and commissioning revenues from the streamers." But really, it helps independent producers to remain in consideration for projects from streamers.
The higher up in the pecking order the collective of independent television and film companies, the higher the probability of additional streaming productions being funded may be.
In this light, $115B+ in spend is not inelastic demand. Rather, it reflects rewards of extraordinarily and increasingly larger coffers for talent who can deliver audiences in an increasingly competitive marketplace.
The Marketing Conundrum
The easiest solution for streamers trying to solve for Netflix's technological and creative advantages with "ubiquitous access" appears to be to simply give up and build a studio system to work with A-list talent or A-list productions studios, instead. The bet is that A-list talent offer a higher probability for success than solving for the complexities and vagaries of digital marketing.
In some ways, it reflects an inherited devil-may-care attitude to marketing which may reflect the old sayings, "When the content performs, that's great marketing. When the content bombs, that's bad programming" and, "Marketing blamed for a flop and forgotten with a win". [2]
But, it also may reflect the new market reality of the emerging challenges with the changing parameters around digital privacy in 2022 and beyond, and the emerging value of first-party data over third-party data, as these interviews with e-commerce marketers from eSeller reflect.
The reality is marketing is a complicated pain point itself for everyone with a direct-to-consumer model, and not just in streaming. Effectively, the optimal mix of channels for marketing is no longer obvious to any marketers.
Even Netflix is currently navigating bearish consumer behavior (meaning, likely higher churn) in the U.S. and Canada markets despite increased content spend, as I wrote in Monday's essay Nielsen's The Gauge, Netflix's Price Hike, Raise A Big Question in CTV.
Conclusion
It would not be unreasonable to build predictions for the future of streaming based on the consumer behaving in surprising ways that even the market leader Netflix did not expect.
That does not bode well for unused studio lots banking on a glut of new content productions: if every streaming faces increasingly less understanding of the target consumer, and faces increasingly fewer channels to reach them, then Return on Investment becomes that much more speculative. [3]
It is less speculative with talent proven to draw audiences, a bet that Netflix recently made with its hugely successful star vehicle, Red Notice, with Ryan Reynolds, The Rock, and Gal Gadot.
We will learn in today's Netflix earnings call whether we can expect more of that model - and an evolution of "ubiquitous access" in reaction to digital privacy - as the moving pieces of digital marketing become more complicated by digital privacy initiatives.
Footnotes
[1] Adalian's article is also worth reading for its deeper dive into how Disney's decision to separate its studio and distribution businesses has allowed creative execs to work on making shows while the newly created Disney Media and Entertainment Distribution group to concentrate on growing subscriber counts for Disney+ and Hulu.
[2] Thanks to Twitter follows Emily Horgan and Gavin Doyle for these quotes.
[3] That leaves open the reasonable question of whether we are in the early stages of a bubble in LA real estate.