The summer of 2018 was a blockbuster one for entertainment deals.  As summer began, AT&T closed on its acquisition of Time Warner. Disney won the “Fox hunt” on July 19, after Comcast withdrew its bid to focus on buying Sky. And then on September 22nd, one day after summer officially ended, Comcast beat out Disney/Fox as the winning bidder for Sky.

Noticeably absent from the media and entertainment deal frenzy were the large internet giants - Apple, Netflix, Amazon, Facebook and Google. These companies were instead making deals directly with talent.  Apple made a splash announcing 17 major content deals in 2018 alone, including deals with Oprah Winfrey and Reese Witherspoon. 

Netflix, in the meantime, has officially become a Hollywood studio, without buying one.  By the end of this year, it is estimated that Netflix will spend up to $ 13 billion on original content.  

Amazon, under new content leadership, is re-upping its content game, committing over $ 5 billion to original content in 2018, a budget that exceeds that of large independents, like Lionsgate. 

Facebook appears to be focusing more on acquiring sports rights and investing in content that builds community. 

Google via YouTube, is also striking content deals, with the likes of talent such as Robert Downey, Jr., Kirsten Dunst and Will Smith.  Programming from these celebrities and others is expected to debut in 2019.

While these internet giants are investing significantly in content, why aren’t they opting to just buy Hollywood assets to achieve needed scale? 

Well known media and entertainment analyst Todd Juenger of Sanford C. Bernstein provides a compelling answer:  “We continue to believe that Silicon Valley is not going to pay a multiple on affiliate fees and advertising that they are in the process of destroying. If they want content, they will hire the talent and create it themselves.”  

Talent has welcomed their overtures. In a podcast interview with Peter Kafka of Recode Media in December of 2017, Scott Frank and Steven Soderbergh discussed how the experience of working with Netflix on the Emmy-award winning limited series Godless was superior to that of working with traditional networks.

In addition, like the studios that preceded them, the large digital media players understand the investment value of owning and controlling their own intellectual property.  Netflix built its own original strategy leveraging engagement data on the content they originally licensed from the studios. They also built direct relationships with talent, offering to pay them more than the studios and give them more artistic freedom.  Today Amazon, Netflix and Apple regularly pay 125% of what it would cost to produce comparable series for a U.S. network, which is still less than the cost of buying a major entertainment company.

Traditional Broadcasters Fight Back

Until now, the strategy of not acquiring established media and entertainment companies has made sense.  But will it over the long term? 

First of all, traditional incumbents are now responding with their own offerings, and increasingly withholding rights from digital platforms. Disney’s plan to launch "Disneylix" in 2019, bolstered with content acquired from Fox, will definitely constrain the amount of production talent available in the market. 

AT&T has already announced its plans to launch a new streaming service leveraging Warner content, as well as strengthening its HBO offering. 

Walmart has announced its intent to launch its own streaming service in the US to compete against Netflix and Amazon. 

In Europe, broadcasters on a country by country basis are exploring partnerships to create direct to consumer offerings. For example, Pro-Sieben and DIscovery recently announced an initiative to build a German streaming platform while the leading UK broadcasters are committing over £125 million to build Freeview into a truly hybrid offering. Sky under Comcast leadership will certainly accelerate the development of its Now TV offerings. 

These initiatives will inevitably increase competition for talent and rights in the U.S. and abroad, which can ultimately challenge the leadership advantages of Netflix and Amazon.

These emerging competitive platforms from traditional media players have built in advantages that are not always fully valued. Their business models are not built on subscription revenues alone and have an ability to generate revenues on multiple platforms via windowing. 

Once a show has been exploited on Netflix and/or Amazon, there are limited opportunities for generating ancillary revenues on those shows. In addition, marketing support has been categorized as opaque, with many shows being lost in a sea of titles. Producers like Shonda Rhimes and Ryan Murphy became household names due to the marketing support that their incumbent networks provided them. Now that they will be part of the Netflix stable, will their programs receive the same support? 

The Value Of Data

Then there is the question of data.  While traditional media companies have historically not had direct to consumer data, content creators could look to ratings and box office results to understand how their programs perform. Such data is currently not available and could lead to longer term conflicts between content creators and the digital platforms. The challengers could also lock in talent by ensuring greater data transparency.

Other challenges to the digital platforms include regulatory pressures. The European Parliament recently voted in favor of 30 % local content requirements for streaming services at the same time that European broadcasters are building and developing their own streaming services. 

The success of the digital platforms is largely contingent on their sustained ability to grow internationally. Will they be able to continue to grow through direct relationships with local talent or will they need to consider acquiring traditional media companies who have long-standing content relationships in these countries and/or established local production companies in these countries who have deep knowledge of local audience preferences?

Last but not least, in the case of Netflix, there is the question of debt. Can the company continue to increase its subscribers and ARPU by relying on its existing model or will it need to explore other alternatives? 

So while traditional media companies are not on the buying lists for digital players, the digital streaming universe will continue to grow in complexity and choices which will ultimately impact the longer term deal landscape for content creators and traditional content companies.