A Free Market OTT Distribution Model Still Doesn’t Work

Posted on Sep 24, 2015 by Adam Garstone

On Netflix you can watch ‘House Of Cards’ but still need HBO Now to watch ‘Game Of Thrones’.

In his book, ‘Adventures in the Screen Trade’, William Goldman states “…the single most important fact, perhaps, of the entire movie industry:”


He considers it so important that, a few lines later, he writes it again, for emphasis.


This unfortunate predicament seems to be spreading from film and TV production to distribution. Most pundits agree that distribution is broken, but nobody knows what to do about it. Ticket sales in cinemas have been in a steady decline since 2002 – panicking Hollywood into responding with… well, Hollywood’s current output. Steven Spielberg famously predicts that this will lead to Hollywood ‘imploding’ – it takes just a few of these expensive films flopping at the box office to put the studios out of business.

In the US, cable TV operators have seen their customers dumping their channel packages in favour of over-the-top services like Netflix and Amazon Prime, who are busy purchasing as many subscribers as they can get. No-one can have failed to notice the FT’s claim that Amazon are paying Jeremy Clarkson and his buddies £160 million for three seasons of Not Top Gear. Amazon probably don’t care if they make money from Jezzer – after all, they only rarely make a profit from any of their operations – they just want eyeballs.

The question is, what do OTT services offer that cable and satellite don’t? Cable customers complain that they have to buy 700 channels to get the 10 that they watch, so they would rather pay £7.50 a month for an HD service from Netflix. The problem with that is that I can watch House of Cards on Netflix, but not Game of Thrones, so I need an HBO Now subscription too. And I want to watch Amazon’s Hand of God as well (love Ron Perlman), so now I’m racking up a serious monthly bill. The OTT providers haven’t solved the channel choice problem, they’ve just raised a different, but related one.

And OTT providers represent minimal income for the feature film market. Most of Netflix’s films are licensed from the big studios. When they had a small number of subscribers they could get favourable terms, but as their market share increases the studios will want a bigger slice of the pie – it doesn’t seem likely that any single operator will get big enough to be able to dictate terms, as Amazon does with book publishers.

By now Netflix have around 68 million subscribers. In North America alone, about the same number of people went to see Jurassic World – just in the month it was released.

To look at it another (slightly facile) way, say you’ve just spent $400 million making and advertising your latest, tentpole summer blockbuster. Netflix are going to have to give you a very large percentage of the cash they get from their 68 million subscribers for you to make the profits you need, if they are your main distribution channel.

So to become serious distribution channels for major films and TV, these OTT businesses will, surely, have to get much, much bigger, or charge their customers more. This may explain three things – the slightly ‘Blockbuster’s Bargain Bin’ nature of most of the films available OTT, their push to buy subscribers, and their desire to produce their own material.

They may also face another issue – the Regulators. OTT services don’t have to adhere to the coverage and content obligations that face traditional broadcasters. As their importance in the ‘broadcast’ landscape increases, will the eye of Government finally fall on them? That would see their costs rise, adding more pressure to hike up subscription fees.

And it’s not so hard for the traditional TV networks to enter the OTT market either – as HBO have shown with HBO Now. There’s a range of companies providing the server infrastructure and, at its simplest, the viewer only needs a browser – the TV companies already have the programme catalogue, which is the hardest thing for Netflix and Amazon to acquire.

If the traditional movie industry is ‘broken’ and the TV networks are losing income, from both subscriptions and advertising, it seems that the current OTT providers are unlikely to be able to fill the gap. So something needs to change, and we all know that it will. It’s just that no-one knows what it will be, or when it will happen.


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