Showdown 2013: Netflix, OTT vs. premium cable nets | Media Investment | Business
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If 2012 was the year of mainstreaming for over-the-top (OTT) services, 2013 will bring a new wrinkle to the game as streamers like Netflix, Hulu, YouTube and Amazon all begin rolling out original television series in earnest in a bid for differentiation in an increasingly crowded market. The question is: a differentiator against whom (besides, of course, each other)? Rather than taking on traditional TV operators like cable, IPTV and satellite, the original content gambit sets the services up to square off more directly with premium cable nets.

For instance, Netflix has been investing in original content with a strategy to tap high-profile partners to create and/or star in the vehicles. After dabbling in the space with Lilyhammer (a police drama starring Bruce Springsteen guitarist Little Steven) this year, in 2013 the streamer is gearing up to release werewolf drama Hemlock Grove from horror personality Eli Roth, and is spending $100 million on the drama House of Cards, which has a pilot directed by David Fincher (The Social Network) and a star named Kevin Spacey in the lead role. It also plans to launch the hotly anticipated fourth season of Arrested Development.

Netflix CEO Reed Hastings has famously called HBO his company's biggest competitor, clearly looking to position Netflix as a premium network. And it's not alone in wanting to add that characterisation to brand identity.

Not to be outdone, YouTube began investing $100 million per year in original content to run a slate of 100 channels meant to give the service a higher-end mien. It's also a way to command a better advertising rate than what its bread-and-butter user-generated amateur videos can offer. As incentive to produce compelling content, the channels have performance targets to meet in order for YouTube to continue funding them. But in practice, a full 100 channels of top-end original content has the potential to lure consumers away from the likes of HBO, Starz or Showtime (all of whom eschew making their content available on the streamers' services).

Hulu meanwhile has 10 series planned, including movie showcase show Spoilers, featuring Clerks director Kevin Smith, and the Up to Speed travel show starring another cult favorite: Dazed and Confused director Richard Linklater.

Meanwhile earlier in the year said that it would leverage Amazon Studios, which it launched in one form in 2010 to produce cheap films for a variety of distribution methods, to produce original shows for streaming through Amazon Instant Video and Amazon Prime. First up is a children's show and three comedies.

Amazon has thrown its original content strategy open to anyone to submit a script idea, bucking the trend of showcasing hot talent and Hollywood names. After a 45-day option period, winners gain the initial $10,000 to flesh out their ideas. Then, if the shows are selected to run on the Amazon Instant Video service, creators get $55,000 more, and are guaranteed 5% of the proceeds from related merchandise in a 360-degree-style deal.

HBO, Starz and Showtime command around $15 per month extra on top of a pay-TV subscription in the US domestic market, compared to the $8-$10 per month cost for a typical OTT service. But the amount of production money being poured into the likes of True Blood, Game of Thrones, Homeland and Californication far, far outstrip what the streamers are spending. "$100 million per year" may sound like a lot in Silicon Valley terms, but in Hollywood terms, that's chump change.

To put it in perspective, a source with close ties at YouTube told paidContent over the summer that Google is funding original YouTube content at a rate of about $1,000 per finished minute. That's a rate that doesn't fly in Hollywood, the exec said, adding that it means that producers are pulling "favours every time you do a shoot. If you're just pulling a location permit in L.A., it's going to cost you $900."

A bare minimum for industry-standard production is about $2,100, the source added.

Meanwhile, the premium cable nets that the OTT guys are trying to emulate are far, far outspending that. Showtime's breakout hit, Homeland, costs $3 million to produce per episode, coming out to around $50,000 per minute.

In fact, despite the hype surrounding the OTT launches in the new year, TV execs themselves seem unimpressed. At the recent Business Insider IGNITION conference, Time Warner CEO Jeff Bewkes noted that the media company will spend $5 billion on original content, including for HBO premium series, terming YouTube's multi-million dollar effort "cute." Ouch.

Andy Forssell, the executive in charge of content at Hulu, said that his company has a $500 million annual budget—and no set number of shows to launch. That, he explains, is a big advantage against the big boys. "We're quality-gated," he told the Daily Beast. "There's no quota that I want to go hit. We don't have a set number of hours to fill, like a lot of traditional networks do—that's actually an advantage I want to jealously guard."

Also, the OTT guys can be more flexible in terms of how they leverage the content. Multiplatform and multiscreen from the beginning, Netflix is able to do things like make whole seasons available to stream at once, giving viewers the flexibility to schedule their video viewing time. And now that anyone with a mainstream gaming console (Xbox, Wii), connected Blu-ray player or a myriad of other STB options can stream these services seamlessly to the living-room set, they are less of an "other" than they have been in the past, making it more feasible to see them as an HBO-esque add on to an existing subscription.

Regardless, it's a space that will continue to develop in 2013. "The phrase that I keep hearing a lot is that it's the Wild West," said J.D. Walsh, the showrunner behind the original Hulu series, Battleground, speaking to the Daily Beast. "And I think that it is the Wild West. What that connotes to me is that nobody really knows what the rules are, what's going to be stable, or who is going to [emerge as] the leaders. But even within the Wild West, you did have some major cities—and that's what you're seeing with these platforms."

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