The number of original scripted television shows has soared to once unimaginable heights—an increase of 69% over the last five years across all outlets and an astronomical 680% online—taking the price of content along with it. Sky-high costs and megadeals may generate headlines, but what will happen in the marketplace as we move away from these outsized deals? When buyers and sellers don’t see to eye to eye, are there equitable win-win strategies to bridge the value gap? How will more competition from streaming video on demand (SVOD) impact the cost of content? What’s the key to success for dealmakers in the “experience economy?” And how does the race for the rights to stream sports events change the game?
Recently, Marc Suidan, Technology, Media and Telecommunications (TMT) Deals Leader, and Curt Monday, TMT Deals Principal, discussed risks, opportunities and strategies for capturing value for dealmakers interested in content.
Marc: It’s no secret that there are plenty of outlets for sellers of content, which is clearly driving cost. But are sellers beginning to experience any particular challenges or pressures around high valuations?
Curt: Content creators and producers need to show that they can continue to perform at a certain level to justify their valuations. But continuing to produce high-quality content that resonates with viewers is a challenge. Buyers of production companies are wary of paying higher multiples only to be disappointed because new content falls short and can’t generate sufficient ROI. The value gap is an increasing concern.
Marc: Are there ways to address the value gap rather than simply walking away from the deal?
Curt: There are different ways to structure a deal and monetize content. Many are particularly well suited to content deals, where future performance is especially unpredictable. One viable option, used for years in smaller production acquisitions, is earnouts. The seller gets part of the purchase price up front and is later paid in full if the agreed upon, predetermined level of future EBITDA is achieved. Other mechanisms could include incremental payments to the seller of a new series if production is picked up or an existing series reaches a defined number of seasons. Puts and calls that give the buyer the right, but not the obligation, to buy in the future at a certain anticipated price (lower or higher respectively than the current price) offer other options for monetizing over time. These types of arrangements naturally have implications for integration, especially around the continuity of management and creative teams and the timing of SVOD agreement re-negotiation(s).
It’s worth noting that content producers have new avenues for monetizing their content. With so many outlets, especially new entrants in SVOD, it is now possible to monetize investments in content production earlier with less risk. Content producers may be able to license an original scripted show to another distributor (such as an SVOD) after just a few seasons, for example, compared to historically needing to reach 80-100 episodes before possible syndication. And because there is such a large pipeline of content, novel combinations of content and the bundling of content may offer new monetization opportunities. It’s important for sellers to highlight these opportunities to buyers, and for buyers to appropriately consider them in their deal models.
To further bridge potential value gaps, buyers should spend more time identifying potential buyer-specific synergies related to the exploitation of content, such as the monetizing acquired intellectual property rights, global licensing opportunities or merchandising opportunities. Sellers can also be more thoughtful about these considerations and better tailor the message to each potential buyer.
Marc: We’ve seen an explosion in the number of scripted series being produced over the past several years, driven by new outlets’ demand for content. Do you expect this growth to continue?
Curt: This is the million dollar question. As you mentioned, the driver has really been the new entrants in the SVOD space, which went from fewer than five original series in 2010 to more than 115 in 2017. Scripted shows for basic cable networks also saw a big increase through 2015 before declining the past two years. Meanwhile, the number of scripted series on broadcast TV stations has been generally flat the last four years, with some modest uptick in the number of series on premium cable networks.
What will dictate this continued growth is whether content aggregators can generate an appropriate ROI on their investment in original content. With the increase in shows, there are significant increases in production costs, and with that, the ability to generate an appropriate ROI becomes more challenging. You see this playing out in the recent decline in basic-cable scripted shows. They are facing challenges due to a decrease in cable subscribers resulting from cord cutting and shaving, and hence carriage fees, combined with a soft TV advertising market. This is leading to this group of content aggregators ordering fewer scripted shows relative to historical levels.
When you look at SVOD companies and that growth in original content, the question is how long it can be sustainable. Even today, many of the leaders in this sector are not generating positive cash flow, due to the large investments they are making in content. As the growth in subscriber levels for SVOD players begins to level off, I believe investments in new scripted content will do the same, although not in the short term as there are likely to be new entrants such as Facebook and Apple combined with the launch of Disney’s over-the-top (OTT) platform that will drive additional growth over the next few years.
I also believe there will likely be consolidation in the industry due to weaker players either being acquired or no longer being viable, and that will also be a catalyst for fewer original productions. On top of that, there is the practical reality that there are only so many hours that viewers have to consume content, and it becomes more challenging to even discover new content. Given all that, I expect the number of scripted shows to begin leveling off the next five years, and potentially some modest declines beyond that.
Marc: Let’s take a deeper dive into the issue of unpredictable future performance. Is there any way to predict and reduce risk to help make a smart deal?
Curt: Many shows have been successful thanks to the power of their original stories and the quality of the actors behind the characters. But a great story is no guarantee of success. Consumers can be famously unpredictable. And while there are skeptics, especially with creators of content, data analytics is more likely to be used to predict what content might be successful than a hit-or-miss approach. User data—which shows what viewers watch, when, on which devices, and how they search for content—can inform decision-making for both creators and distributors. PwC research shows, for example, that despite the proliferation of content, 60% of consumers say they struggle to find something to watch.1 Strong predictive algorithms can help creators, producers and distributors better understand what will resonate with consumers or better help viewers discover content they will like. As we’re seeing with SVOD, it’s not just about what consumers want to watch, but where, how and when they consume content. While there is great opportunity with data analytics, it’s fair to say we are in the infancy stage. Not only do we need to better understand the data itself and how to use it, but content creators need to be comfortable with using data to help augment content creation.
Marc: One thing we’re hearing a lot is the intense competition for sports content, with new media players getting into the game and consumers clamoring for more interactive content. What comes into play for deals around media rights?
Curt: There may be a lot of questions going forward around the acquisition and monetization of sports content. Despite sagging ratings, sports continues to dominate live TV. As we know from PwC’s own research, live sports is one of the primary motivators keeping people connected to the cord, with a whopping 81% of sports fans subscribing to Pay TV. That said, many sports fans would trim or cut subscriptions to pay TV if they no longer needed it to watch live events.2
This highlights the importance of sports to the traditional cable bundle and one reason sports properties continue to command rich premiums. However, it also highlights the significant opportunities for streaming subscriptions. OTT sports subscriptions are showing strong growth, and there is more on the way with the expected launch of ESPN+ and the announced launch of Turner’s B/R Live. And alternative sports such as UFC, WWE and e-sports, largely driven by OTT and multi-channel networks on YouTube, are beginning to take off. With this backdrop combined with newer entrants such as Amazon, Facebook and YouTube looking to acquire more sports programming, I expect the prices for sports programming to continue to escalate.
Nonetheless, key questions around a target that owns sports rights are basically the same for every dealmaker and platform:
For the large broadcasters, the sports programming itself often may not generate a positive return, but there is perceived halo effect for the broadcaster’s other content that can be promoted during the broadcast. While this may be true, broadcasters need to ask themselves if they can get a better ROI by investing the costs of sports programming elsewhere in the business.
Robust diligence regarding terms and timing is critical around sports rights and licenses, given the live and seasonal contexts and the potential for massive international audiences. Further, we continue to see the sports rights themselves being sold through linear and digital packages, and it is critical to understand the terms of the underlying rights themselves to appropriately assess the ROI opportunities.
Marc: Let’s conclude with post-transaction issues. Where are the most important synergies for capturing value?
Curt: To begin with, it’s critical to build synergies into integration plans. This is particularly relevant for TMT companies, given new digital workflows, differing points of entry and transition into new digital technologies, and the enormous value that resides behind the scenes in operational and platform synergies. Content costs are exploding due to demand, the sheer number of outlets, the rapidly increasing production costs—the typical production budget for high-end cable and streaming dramas has reportedly doubled in the last few years—and the competition for talent. Dealmakers should be asking how synergies can be realized through scale to offset these costs.