The Australian screen sector depends on a whole load of factors which grind along in the background, and ultimately affect everyone’s ability to survive. We depend, for instance, on government decisions which could destroy the sector at the stroke of a pen.
Despite investments in studios and efficient crews, the final deciding factor for foreign production coming here is the exchange rate and subsidies. Ten years ago the Australian dollar was worth US$0.66, in 2011 it was at US$1.06, until it started to fall in 2013, and hit US$0.72 in 2015 and flopped vaguely downhill until it sits at US$0.68 today.
That has corresponded with the demand for high-end production caused by the rise of the streamers, so life is good in the Australian studios. We may see this eventually as a massive pulse of opportunity flowing in our direction which we will or will not be able to grab.
The point is, so many of the background factors affecting the sector at the moment are international. Here are some of the main ones:
In March this year, Rupert Murdoch finally consummated his three year play to split his own company and sell most of it to Disney. He instantly made $4.3 billion to take his estimated wealth to $18.7 billion.
The family kept Fox News, the sport, the Australian print titles, and its 60% of Foxtel, thus securing lines of income and their political influence. The Murdoch effect on Australian politics will not go away soon. The family is against regulation, in favour of private monopolies and implacably hostile to government broadcasters.
Fox Studios in Sydney is now owned by Disney, though the studio lot in Los Angeles remains with Murdoch and is leased to Disney.
The Murdoch deal allowed the family to escape the streaming juggernaut. By selling 20th Century Fox to the Mouse House, it turned Disney into a $200 billion behemoth just as it went into streaming. It offers an enormous amount of pop culture content, a younger audience, the ability to do appointment viewing like sport and games shows, and a fantastic base of historic intellectual property. Add one of the world’s great brands and it looks like Godzilla with rodent ears.
However, the impact of Disney may be more subtle than we think. Before the early 1950s Disney was betting the farm on each animation title and learnt to find every possible way of diversifying. It built Disneyland(s), went into television, added live action films and cleverly recycled its archive. Disney knew it was an intellectual property company and exactly how to make that pay.
So it came into streaming with a sophisticated understanding of back catalogue and classic titles and put the same lens on the Fox titles. That means it has a huge mob of titles for free, while its competitors are starting largely for scratch.
What is more it will be a cheap subscription. The smart money in the sector is betting that most families will settle for two subscriptions, and Disney+ just wants to be the one in the most homes. The second choice will be fought over by Netflix and Amazon Prime et al, mostly using new production. So they go deep into debt, charge a lot more, and hustle the sector for content. To keep an eye on this, we’ve started a monthly streaming column looking at the comings and goings on the new services.
We have seen the streaming monster in terms of Netflix, which has raced in to be the first with the mostest. It has an office in Sydney, but it is all about lobbying and has no production component.
The broadcasters bewail Netflix’s market power and we see the regulation of streaming services in terms of making Netflix pay, most likely on a percentage of turnover. The fight to make the streamers support Australian production is more urgent as other major companies enter the field.
However, this version of our problem could soon be a museum-grade curiosity. In August, when Forbes ran an analysis, Netflix was worth $150 billion which was completely focused on streaming. But it is deeply in debt, and spending a lot of money to secure exclusive content. Here is the horrendous figure: the cost of acquiring each subscriber is said to be $581 including the cost of content. It is losing $4 billion per year, and 61% of its revenue is said to come from licensed rather than original content.
The industry knows that Disney+ will create an increasing content crisis for Netflix as premium content is removed.
The direct consequences for the Australian sector
Netflix is looking wobbly. It may increase prices, but Disney, Apple and Amazon Prime are undercutting it already. We know from producer scuttlebutt that Netflix is compressing prices for material.
The attempt to turn Australia into a pipeline for Netflix may be futile. The number of Australian titles on Netflix accessed from Netflix is said to be something like 1.5% internationally, which is trivial. Netflix purges its slower titles to focus on the major ones, which have higher repeat and franchise value.
The Netflix argument to the regulators is that they will make local material because the international market wants it and because it will entice Australians to join. But how many subscriptions does it sell here? Just this morning Mediaweek assembled the data. Maybe three million subscriptions is the answer with a wild possibility it might be five million. There are 11 million watchers according to Roy Morgan, but that is not a record of income.
Do the sums on Netflix income from Australia right now, and it turns out to be three million subscriptions at $13.99 mid tier over twelve months, which is $503 million.
At Screen Forever this year, Netflix provided Lisa Hamilton-Daly, the director of Original Series (Drama). She was asked how many Netflix Originals we can expect per year.
Realistically,’ said Hamilton-Daly, ‘It’s probably one or two at the top, just because we have a certain amount of slots. But with co-productions you have a lot more leeway. It is not a flood of stuff but I am really curating your projects and thinking about what fits best for the slate.’
Here is the paradox: that is a lot of money and the industry wants to divert some of that to support production. But if Netflix can make our market work without financing Australian productions, it is going to keep a lot more of that $503 million. It has an active incentive to build the offering out of new content amortised over as much as possible of the international market.
The rise and rise of local
The word across Screen Forever from the commissioning experts was constant: we want local content which is globally interesting and we promise you that audiences are responding to exotic experiences. When we said that didn’t work for all those years, we lied.
However, when we watch ‘local’ and ‘exotic’ shows from other cultures, mostly across Asia for the moment, we discover they are often designed to fuel subscriptions in their own region, rather than for the West. Which means they are cheap. You can bet on it.
So, at least some of that model is driven by second string low budget deals, and we can expect the European ones are very sensitive to local subsidies. This is not the kind of high quality dreamscape material that Australian producers want to make in their dignified hunt for blue chip.
However, it is useful to Netflix to kick along the Australian market by doing good local but the overseas interest needs to be pretty high.
Terms of trade
Here we come to the real crisis in streaming for the local production community. Australian producers are not protected by terms of trade legislation or agreements as they negotiate with Netflix, which is under financial pressure to reduce costs. Australian producers are increasingly exposed to audience economics in a world where those audiences are increasingly able to choose content from around the word.
Netflix in particular has the notion of simplicity baked into its structure, in order to keep the company’s costs radically lower than its competition. But any rights which accrue to creators and the international collection agencies have to be administered, so they would rather pay a higher up-front fee. One flaw in that deal is that they are also trying to cut up front fees, so they want to loot the producers coming and going. IBC has a clear description of that problem from a British perspective:
Traditionally, the advantage of producing for hire for Netflix is that it paid a big premium on top of budgets to buyout international rights. But these are reportedly reducing.
Tom Harrington, senior research analyst at Enders Analysis, says there are dangers for producers given the growing power of a just a few SVOD services who aren’t bound by terms of trade with producers. “There is a fear that Netflix’s growing market power could create a situation where independent producers just become “producers for hire” who get no IP – which is usually the case now but also the margin they make on their production costs is squeezed more and more. Netflix will also take more work in-house.
The company has been securing production space around the world. But not here.
There are some cute implications in this which are only now maturing. There could be a nasty fight with the unions in the US. Public broadcasters will offer better deals. The other streaming companies may take the pick of the crop by offering better terms.
Any of these outcomes would pick away at a fatal urge in the Netflix culture to create an utterly simple model, shorn of human judgement, in an extension of its passion for algorithms in understanding audiences.
What happens if the dominant player becomes Disney? The politics of that relationship will rely on different numbers which nobody yet knows though the mouse will have targets.
The BFI has published an excellent guide to the options for a negotiated or a no deal scenario. The short answer is that the existing arrangements last until the end of 2020 and productions funded in that window will proceed with those rules. Negotiations could maintain pretty well all of the current arrangements with Europe but a crash-out is more imponderable.
Either way it seems as if the UK will regulate streamers in the same way as the EU.
The BBC is under pressure from its haters in the Tory ranks and we are left to wonder about BBC Studios.
The Asian market
We will look more closely at our region next year, as our neighbours develop their intra-Asian market. China no longer seems to be the Valley of All Audience Delights although a small player like Australia may find niche opportunities. Again, more of that next year.
What can be learnt from this? Keep going, grab opportunities, do not assume any company will last. Get together when you can. Work like crazy on franchises. Support your local graphic novel industry.
Hang onto your IP.