Video Briefing: Amazon and other OTT channel resellers want percentage of revenue, not costs
Not all distribution relationships are created equal, and there’s more to Amazon — and other OTT channel resellers plans for growth than meets the eye.
The key hits:
- Amazon Prime Video Channels is estimated to make $2.6 billion in 2019.
- As a growing revenue stream for Amazon itself, Amazon wants to keep more of the money by hiking up its percentage take to as much as 50 percent.
- Some partners such as CBS and Showtime have negotiated deals where they get paid a fixed fee per subscriber. (Netflix has a similar arrangement with T-Mobile, which gives Netflix away for free to some wireless customers.)
- Amazon is pressuring companies that are on a fixed-dollar relationship to move to a percentage-based model.
- The fixed-dollar relationship can help both parties: media companies get paid a guaranteed fee per subscriber and distributors can set whatever retail price they want in an effort to drive people to bigger, more lucrative businesses.
- But not every company is Netflix. And Amazon is pressuring those with fixed-fee deals to accept the (increasingly restrictive) percentage-based agreements.
- With more competition coming from Apple, Roku, Hulu and others, some argue that this could help create friendlier deal terms with distributors. But even Apple is considering a 50 percent cut of subscriptions for its news subscription service.
As we’ve reported extensively, Amazon Prime Video Channels program has become crucial in driving the adoption of subscription streaming video channels from TV networks and digital publishers. A research report from BMO Capital Markets in December estimated that Prime Video Channels will drive $2.6 billion in sales in 2019 and roughly $3.6 billion next year. Based on an estimated average where Amazon only takes 30 percent of subscription revenues generated by the program, Amazon will pay out $1.8 billion to its OTT channels partners this year.
Prime Video Channels is a lucrative and growing revenue stream for Amazon itself. BMO’s report estimated that Prime Video Channels accounted for 7 percent of all subscription revenues generated by Amazon in 2017, a number which it expects to grow to 14 percent in 2020.
How can Amazon grow that revenue stream? By charging more for its services. A report from The Information last fall revealed that Amazon is looking to raise its take by up to 10 to 20 percent and capture 50 percent of the subscription revenue generated by the channels it resells. Roku, which came out with its own channels program earlier this year, is said to be asking for similar percentages, per sources.
This is going to force companies to think hard about their channel distribution strategies — unless you’re one of the few companies that has already signed or can still swing a fixed-dollar wholesale deal.
Some early Amazon Prime Video Channels partners including CBS and Showtime have such wholesale agreements, sources say. This means that CBS, Showtime and a few others have set a fixed price for their channels, which Amazon pays for each new subscription in exchange for having the freedom to sell those channels at whatever retail price they want. Another version of this relationship can be seen in the deal between Netflix and T-Mobile, which is “giving Netflix away for free” to some of its wireless customers, but is paying Netflix for every one of those subscribers. (This is also how pay-TV works — and especially what premium cable networks such as HBO, Showtime and Starz are used to.)
But Amazon has been pressuring media companies to move from the fixed-fee to the percentage-based deals, sources say.
A wholesale/retail relationship can be attractive for both parties. The media company gets paid a fixed price per subscriber and doesn’t have to worry about pricing and customer service and all of the things that go into managing the relationship with the customer. The distributor can eat the cost of subscriptions because it’s trying to drive people to a bigger, more lucrative business.
“The distributor sees this as a way to capture more users for its services,” says an exec at a TV broadcaster. “They don’t have to think of it as a big profit center — which is good for us on the content side — but as a land-grab for a larger number of users and subscribers of their platform — which they can then use to launch other services.”
But what if the distributor has so much leverage that it doesn’t feel like eating costs? By all accounts, Amazon Prime Video Channels is responsible for a significant chunk of OTT channel subscriptions today.
And not every company is Netflix, which doesn’t need Amazon’s distribution muscle. The other big issue here is on the data front: Prime Video Channels and The Roku Channel aggregate content inside Amazon and Roku’s platforms, which means the distributors get direct access to how people are engaging with these channels — while also sending very limited data back to the media partner. It’s a big reason why Netflix and Hulu, as well as niche services such as Crunchyroll and WWE Network, aren’t likely to show up on Prime Video Channels. Netflix’s T-Mobile deal, which is a pure wholesale arrangement, is a more attractive option for these companies.
Most OTT media companies, though, need Amazon and Roku. And if Amazon and Roku want to charge (increasingly strict percentages), media companies will have to take the percentages.
“Either way, it isn’t easy to make a buck,” says one entertainment studio executive. “Every percentage point of margin you’re paying to a distributor, it’s a percentage by definition that’s not going to your bottom line.”
Some have argued that help will come in the form of more distribution options. In addition to Amazon Channels and the Roku Channel, Apple will soon launch a competitive service; Hulu has already begun to bundle its service with others; and YouTube TV and other virtual MVPDs are already active wholesalers. The more places a channel is distributed, the less reliant you are on a sole distributor.
But let’s not assume that more distributors automatically equals better terms. There’s evidence pointing in the other direction. Apple, for instance, could come in with a lower take rate. Even its 30 percent year-one iTunes tax is better than half. Apple could apply downward pricing pressure to Amazon and Roku.
Or Apple can see Amazon’s success and decide that taking a 50 percent cut sounds like a pretty good — and lucrative — idea. The company is already asking news publishers for 50 percent of revenues generated by its upcoming “Netflix for news” subscription service, according to The Wall Street Journal. Apple needs to grow its services business, after all.
“With Facebook, you get that initial spike and in the course of four to five days get 80 to 85 percent of your views. Whereas YouTube, we’ve had campaigns that have long since ended but are still raking in views. Occasionally, we’ll go back and look at time watched on a video and go: “Holy shit, there’s another 20 hours. How did that happen?” It’s because YouTube has that search component.” — Digital publishing executive
Numbers don’t lie
+$100 million: Insider Inc.’s revenues surpassed the nine-figure mark for the first time in 2018.
1,100: The number of theaters around the world that Netflix’s “Roma” has played in, only 250 of which have been in the U.S.
$30: Average CPMs on Twitch, according to ad buyers.
What we’ve covered
How Amazon’s Twitch is pitching advertisers (pitch deck):
- Amazon’s pitch to marketers touts the live video streaming platform’s community of gamers and high engagement numbers.
- Twitch’s audience still skews heavily male, with 81.5 percent of users being male.
Read more about Twitch here.
Complex Networks is licensing 16 shows to Netflix and Hulu in 2019:
- These are all existing, licensed programs, which means Complex retains the IP.
- Complex’s content development and licensing business is a “high eight-figure” business, according to Complex Networks president Christian Baesler.
Read more about Complex here.
What we’re reading
AMC Networks CEO warns big media deals won’t work (sub required): AMC Networks, which has a market cap of $3.5 billion, is a small fish compared to Disney and WarnerMedia. CEO Josh Sapan argues that bigger isn’t always better and often leads to companies splitting a few years after splashy mergers. AMC, meanwhile, is increasingly betting on itself by producing more of its own content and creating niche subscription streaming services. But market realities are market realities and it will be interesting to see how AMC can manage a business that is being increasingly controlled by less than a dozen mega-companies.
DAZN is looking to buy more sports rights: DAZN is reportedly looking to spend $2.5 billion on live sports rights globally this year. The company has some interesting people behind it, including former ESPN boss John Skipper. But I still can’t get over the name and pronunciation (and terrible commercials).
WarnerMedia’s Kevin Reilly doesn’t want “Friends” on Netflix: The executive, who is now in charge of content for WarnerMedia’s upcoming streaming service, said that he expects the company to pull some of its top titles from Netflix and other licensors. That said, he also acknowledged that WarnerMedia will continue to license some movies and TV shows to external parties. Original programming, meanwhile, won’t show up until 2020 or later. Remember, while Disney and WarnerMedia are both launching streaming services this year, there won’t be a material change to the content market until 2020 or 2021 as rights deals expire and the companies roll out their own expensive slates of programming.
Disney+ will feature non-Disney content: Disney has licensed a show from CBS for its upcoming streaming service. Netflix, Amazon and Hulu are the content buyers with most of the hype today, but don’t rule out Disney, WarnerMedia and other media companies investing in new and existing subscription services.
Facebook courts YouTube creators abroad: Facebook is sponsoring VidCon London as it tries to lure more video creators to Facebook Watch with the promise of making money from ads. Creator Jay Shetty will talk about how he made $1 million last year from Facebook ads. Shetty also has 20 million followers.
The cartoon industry is booming (sub required): Studios are struggling to keep up with the demand for animated programming. Netflix alone has 40 executives around the world focused on commissioning, developing and acquiring children’s programming. Streaming services are also willing to let producers retain the ability to sell merch based off the programming in exchange for worldwide streaming rights.
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