Layoffs, budget cuts, massive churn.

The news coming out of Hollywood about the television industry has seemed exceptionally grim these days, leading to all sorts of articles and posts about the sorry state of the industry and, by extension, everyone and everything associated with it.

Our take is that things are not all that grim. 

Or at least they won’t be if the industry is able to emerge from the constant state of denial it’s been in about two impending realities.

#1: Without Streaming And Retrans Fees, Streaming Will Never Be As Profitable As Linear

We’ll start with this one, because it’s hard to dispute.

The various cable networks and broadcast stations make billions each year in retrans and carriage fees paid to them by the MVPDs and vMVPDs who then pass those fees on to their customers in the form of higher monthly cable bills.

And the broadcast networks make even more billions in what is known as “reverse retrans”—fees paid to them by affiliates that are ostensibly a portion of their own retrans windfall.

To give you a sense of what is meant by “billions”, back in 2017, SNL Kagan estimated that by 2023, retrans fees would total $12.8 billion and carriage fees would total $55 billion. 

Now granted those numbers are way out of date and overly optimistic, but even if they are off by 50 or even 75 percent, it gives you a sense of the massive sums of money involved.

Which is why you do not need to be a rocket scientist to understand that even if the industry figures out the advertising-on-streaming thing and is able to get brands to pay more money for fewer, better-targeted ads, they are not ever going to make up that windfall.

But that does not mean streaming will be unprofitable or a failure. 

It just means that it will be less profitable than the extremely profitable linear.

Retrans and carriage fees do not exist outside the U.S., and the TV industry in the rest of the world has managed just fine.

Take the UK, for example. Series often have as few as six episodes per season, there are not as many of them, and budgets are less ambitious. 

But there’s no denying that, from Fawlty Towers to Peaky Blinders, the industry has managed to crank out a very solid and profitable body of work, despite frequent complaints about not having the types of budgets that U.S. TV networks have.

Accepting this—that streaming will be profitable, but not nearly as profitable as linear—and reconfiguring their businesses to accept this reality, will be the key to success for American media giants.

This seems to be what is happening at Warner Bros. Discovery these days, and we are likely to see others follow suit.

The cutbacks will not go down easy (they never do) and the belt tightening will seem unduly harsh. That’s to be expected after a 30 year party where outrageous fees for everything have become the norm.

But when the dust settles, the industry will be leaner, more cost-conscious… and still very profitable.

#2: All The Major Streaming Services Will Need To Introduce Advertising And FASTs

All of the major U.S. streaming services have global ambitions. 

Meaning they want to be the #1 service in as many countries as possible,

The problem of course, is that in dozens of those countries, few people have the resources to pay for a single subscription TV service, let alone multiple services.

And so the only way to gain a large share of the market is with an ad-supported service, one that is free or practically free.

To wit, Netflix has been struggling mightily in India. They have dropped their price twice, from around US$10 to US$5 to US$3 (and that’s for a mobile-only version) and still do not seem to be making any headway against Disney’s Hotstar service, which ranges in price from free to around US$1.70, with another popular ad-supported plan at around 40 US cents.

Consumers in emerging economies get that they will need to watch ads in return for content. Lots of ads too—it is not unusual to have banner ads running on the bottom of the screen throughout the show.

So American media companies have a choice: be a niche product that appeals to a sliver of the population, the wealthy elite, or be a free mass market service with ads.

We suspect most will ultimately choose the latter.

Which is not to say there is no value to introducing a FAST service in the US as a complement to a subscription service. 

Both Pluto TV and Peacock are good examples of how the FAST services can create a flywheel for their subscription services, teasing out new series and getting viewers hooked on older seasons of hit shows as a way to both draw in new subscribers and re-up old ones. 

WBD has made much of their desire to launch a FAST service in the U.S., too, though Disney, which is in the midst of a CEO swap, has been silent.

For now, anyway.

Point being that while it was a nice fantasy to believe it was possible to achieve Total World Domination on subscription fees alone, it was never going to be anything more than a fantasy.

Advertising does not have to be the wet hot consumer-unfriendly but absurdly profitable mess it is on U,S. linear TV, but the industry needs to embrace it. Call it a necessary evil, call it an alternative revenue stream, call it a cost of doing business, but it’s best to embrace it rather than pretend it’s not an option.

So that’s it: understand that the money tree that carriage and retrans fees helped to feed is drying up. Become more realistic about expenses and then help regrow the money tree (which will likely seem more like a money houseplant in comparison) by embracing advertising. 

The Bottom Line

TV is far from dead. Yes, there will likely be a few more mergers before things finally settle down, but coming to grips with these two simple realities will make the road a whole lot smoother.

If slightly less profitable.