Netflix's success could be bad news for content companies, analysts say

Reed Hastings at DealBookYouTube ScreengrabNetflix CEO Reed Hastings.

Streaming giants like Netflix and Amazon have been pouring money into putting out their own original content instead of licensing old shows from traditional networks.

Netflix CEO Reed Hastings has repeatedly said that original content is the future of the company, and this will only be accelerated if networks become more reluctant to licence shows to one of their main competitors. So far both Netflix and Amazon have had great success producing quality shows, and have been rewarded with Golden Globe nominations and critical buzz.

But this could be bad news for content creators, according to analysts.

In a note to investors on Monday, analysts at Needham wrote that a shift from linear TV to Netflix (or YouTube) represents a shift from two revenue streams to one. While linear TV gets both subscription and advertising revenue, Netflix gets only subscription and YouTube gets only advertising. They say this generally lowers the value of the content, with the boost from a second revenue stream sitting at roughly 30%.

To back this up, they estimated how much content creators — for example the studio that makes a series or the team behind a YouTube channel — get paid by these various companies per each hour that people spend watching a show.

Here are Needham’s calculations of what content companies make (per person, per hour) from these different sources:

  • Linear TV: $0.30
  • Netflix: $0.11
  • YouTube: $0.03
  • Multi-channel networks (TV “networks” that exist on digital platforms like YouTube): $0.01

This is a drastic difference. And one reason for it is that US consumers pay less for each hour they watch on Netflix ($0.18) versus TV ($0.25). This difference in price can be magnified even further if we take into account how annoying a person finds the advertisements they have to watch on TV. The true “price” difference could actually be greater than the difference in subscription costs.

The danger of this entire situation, as the analysts see it, is that consumers are being “retrained” by places like Netflix to expect to pay lower costs for premium TV content. The analysts contend that “content companies that put identical quality content on digital platforms with low or no ad loads are undermining their most valuable asset, the dual-revenue stream.”

In the current state of the market, this doesn’t necessarily hurt the content creators’ bottom lines. If Netflix won’t pay them enough for a show, they can try to sell it to a traditional network. But as time goes on, especially if the success of companies like Netflix and Amazon takes a chunk out of the budgets of linear TV companies, these factors could put more downward pressure on how much a “TV” show is worth.

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