Market Conditions
There is no denying things are tough.
The situation we face was recently described as “a correction on top of a correction, on top of a correction”.
In relation to scripted television, my understanding of it all goes along the steps see out below. Everyone will have a different experience and I’m sure there are aspects I will have left out that are key….but this pulls a few threads together.
1) It all started in the US with television just getting better - and TV fandom becoming more fervent. Even for shows that were free to watch on TV, we (television consumers) bought the DVD box sets in vast numbers all over the world. (Remember that lovely box of the complete series of the West Wing? That was 2009.)
2) In the UK, Television got also better, and it sold overseas for decent licence fees to a lot of territories. Downton Abbey was everywhere. Back in 2012, it didn’t matter who we were calling, where in the world, when I said, “I’m calling from Carnival, we are the production company that makes Downton Abbey”, I was treated very warmly regardless of what I was about to ask next….
3) Then came the high-end TV tax credit in the UK: 20% back of funds spent in the UK for shows budgeted over £1m/ep. Some drama used to be made for £800k/ep. But who would make drama for that now? Naturally, producers are going to make it for £1m and get £200k back for free to get them to the same place.
4) Around the same time, the streamers started to compete with each other for the second window (more money flowing into the shows) and also started to make those big offers to get original programming – committing to multiple seasons with large “plus” elements to the costs+ model, a new concept in scripted programming. The Crown season 1 started production in 2014.
5) All this extra revenue was incrementally included on the studio’s “ultimate” (the spreadsheet that predicts how profitable a show is going to be) for new shows, and for UK indies all this new revenue made its way into the distributor estimates and could effectively be drawn down and added to the finance plan of a show. With higher deficits and the tax credit, production budgets increased and TV got even better.
6) There was a lot of demand, and a lot of shows were made. As viewers, we were buying big TVs and relishing watching brilliant (and expensive) shows. The last season of Game of Thrones – rumoured to have a $15m/hour budget was released in 2019.
Producers were also doing very well financially. In the UK they typically earned a production fee of 10% of the budget. When TV was made for £800k/ep that would be £480k for a 6 ep season. But now, ten years later, the same show would cost £2m+/ep, and the production company is making more than double the fees for a pretty similar job – it was a very popular business to be in.
7) But by now DVD revenue has disappeared (CNBC reported an 86% decline in US DVD sales between 2006 and 2019) and was replaced by the SVOD licence fees. For a while, the competition between SVODs remained so fierce that these licence fees were enough to make up for the loss of transactional revenue, but in time the huge amount of shows to choose from started to bring these figures down and some shows that were cancelled by the principle buyers after one or two seasons, were looking like they would not cover their deficits. Linear television (and crucial syndication revenue) was also clearly circling the drain. At this point, we (people in the mix doing borrowing base facilities, single project financing etc), felt like a market correction might be approaching.
8) Then came covid. Demand increased again (we were all sitting at home with nothing to do but watch The Queen’s Gambit) and supply reduced due to production shutdowns. Consequently, the bubble: the over-supply, the high production costs, the demand, it all carried on for a lot longer than it would have done without covid. And the unions (rightly) negotiated higher and higher rates for their members….but the bigger the bubble, the bigger the pop.
9) I was at a talk many years ago, where the head of a mini-major in the TV world said that there are 55 buyers of scripted TV in the US, but there are not 55 buyers elsewhere. If all those shows have a deficit to recoup, that requires the show to sell in 200 countries round the world, then at some point, someone is going to be very disappointed. It’s taken a long time, but we can all taste that disappointment now.
10) On top of the studios and distributors not earning some of their deficits back, the value of their libraries has also reduced. There is simply so much television, and still so much new television, that the licence fees for library shows (even shows that were successful in their day) are lower than anticipated on the ultimate. This re-assessment in value is likely to be impacting some distributors’ ability to borrow and fund new programming, even if a show has a very commercial (aka low) deficit.
11) I 100% support the US talent unions lobbying and striking for better terms – the revenue earned during this bubble hadn’t been flowing to talent in the same way that TV syndication and DVD revenue had flowed to talent. Whilst these SVOD licence fees had kept the foot on the gas of production, writers, directors and actors of these shows were, in many cases, flat broke. This was wrong and the deals that were eventually made reflected a correction to this.
12) But the downside, was that many studios and distributors used the strikes as a reason to stop production of shows that were already greenlit and put the brakes on their slates overall…and the pick-up which happened after the covid shutdowns has never arrived.
Most people who have read this will already know all this - and more - but I think understanding the layers is key to making the changes we need. We can learn a huge amount from all of this – we can look at where viewing habits are going, where costs are unsustainable, where profits are too high, and we can adapt to make television for what it’s actually now worth in the market. More on that soon.