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Valuing ‘Killer’ over ‘Filler’

Video entertainment is all-important in so many ways. Netflix has been around for almost 10 years but it is only in the last 2-3 years that it has gained international prominence. Amazon Prime is an even more recent phenomenon. ‘Content is still king’, but the metrics are now changing.

A comprehensive 67-page study from the equity analysts at Deutsche Bank looks at how the whole video market has and is changing, and how there’s a “scramble to own the big hits”. The upcoming release of The Crown, and its reported $100 million investment by Netflix (and being made by Sony Pictures Television/Left Bank Pictures) and on Amazon Prime’s The Grand Tour (the ‘new’ car show from the former Top Gear trio of Clarkson, Hammond & May) with its reported costs of $3.2 million for its opening scene and making the segment “the most expensive ever made for the small screen”. The Grand Tour is costing upwards of $4 million an episode.

Netflix and Amazon are making a material difference. The headlines are NOT being made by traditional programme makers. “Amazon & Netflix have become significant programme commissioners, moving on from just buying third-party rights. Incumbent cable & satellite platforms are responding by raising their spend on commissions to own, rather than just rent third-party rights. The European ad-funded channels (the likes of ITV, TF1 & ProSieben) are facing a greater battle for eyeballs & advertising revenues and responding with aggressive buying of content assets,” says Deutsche Bank’s report.

However, the bank cautions: “It is not all good news for the existing programme makers. Viewing is increasingly concentrated in the key hits. The existing programme makers are also struggling to adapt to more viewing on mobile which suits short-form shows better than their traditional 30min-1hour slots. They are facing new competition: YouTube, Instagram, Vine & the social sites, spawning a bewildering range of new video for every possible niche. Advertisers are following the eyeballs and trying to become content creators themselves. Traditional TV programme makers are facing an onslaught of new creators of content and fragmenting audiences.”

The bank says: “There is a shakeout of killer versus filler. The risks of being on the wrong end of this; the filler content, which props up the TV schedules and pads out the cable/satellite bundle, is greater-than-ever. We are seeing falling subscriber numbers in the US for certain channels. In Europe pay-TV operators are also moving to cut payments to third-party channels which have traditionally padded out the 400 channel guide. Falling linear viewing means less eyeballs and pressure for the major European ad-funded channels. Amazon & Netflix are now cutting back on the size of their catalogue to focus on their own commissions in an effort to differentiate. TV channel launches are slowing globally meaning less airtime to fill with programming.”

The study looks at five key criteria in how it assesses content assets, and comparing the impact of a large catalogue, the impact of pay-TV vs FTA, overall scale, and the potential from Merger & Acquisition activity. “The US studios are still the clearest winners of this analysis: They benefit from the greatest scale and greatest export potential with strongest brands and being English language. But content production exposure is not a singular driving thesis for any of the US media stocks given such broad diversification. The surprises for us in our analysis of European assets were the growth potential at Vivendi with BanijayZodiak acquisition, the sharp turnaround in KPIs at Fremantle, but deepening concerns on ITV Studios.”

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