Shattered Windows

Jay Stuart surveys leading distributors about how they are managing windowing, exclusivities, stacking rights and more.

The super-fast growth of TV over the internet, especially SVOD, has shaken up the tele­vision business to the point where the established distribution windows have been upended. While distributors and their customers continue scrambling to create new industry standards, the new reality requires an open mind and a talent for negotiation.

The change that’s occurring is probably bigger now than when technology created new ways to deliver video content in the past. SVOD is not just another window. It is a door to access a reservoir of potentially endless depth. With binge-viewing, it’s not unusual for a viewer to consume an entire broadcast season of a series in a weekend—if it’s all available. That “if” is a big one. Indeed, deciding what should or should not be available on catch-up or SVOD, and when, is one of the many challenges that distributors face as the market continues to digest the impact of internet TV.

“You have to close more deals nowadays in order to generate the same revenue, mainly because buyers tend to either be more selective in the rights they are picking up or try to get as many rights as possible but for very little money,” says Robert Franke, the VP of ZDFE.drama at ZDF Enterprises. “Navigating the shift in the business requires more time and resources. We think this will continue in 2017.”

The model for structuring the rollout of a show has perhaps never been more flexible. Fernando Szew, the CEO of MarVista Entertainment, notes, “The situation is different depending on where the program originates, how it’s financed and so on. There is no real formula. There are the market factors and the strategy you put together, and then there are the actual negotiations.”

As Jamie Lynn, the executive VP of EMEA distribution at FremantleMedia International (FMI), puts it, “Everybody is trying to figure out where the pain points are and where they can find value. There is no one size that fits all.”

GLOBAL HYPE
“Hype is global,” continues Lynn. “Once upon a time, a broadcaster in Europe might have had six to nine months to launch a program. But that has changed. Promotion cannot be contained. If you are late in getting a program launched as a broadcaster, you run the risk of piracy, you miss riding the wave of hype, or both.”

The speed element weighs on the side of the big SVOD players as the route to the international market.

American Gods, rolling out in 2017, is a good example. Produced by FremantleMedia North America, the show will be on Starz in the U.S. Elsewhere, Amazon Prime Video is going to be the first-run window in many markets.

“I can assure you that American Gods fans in Germany, the U.K., France and Italy are aware that the series is coming,” Lynn says. “If the launch were not in line with the American launch, they would find other ways to [watch] it, most likely not legal ones.”

Lynn continues, “Our content is built around big, bold, distinctive shows like American Gods, The Young Pope, Deutschland 83 and Wentworth, so we need to be aware of this reality.”

Even in simpler times, broadcasters rarely bought all rights unless they were financing the show. But they still called the shots.

“It used to be all about the broadcasters,” says Jonathan Ford, the executive VP of sales and distribution at Content Media Corporation. “Ten years ago they said, We want these rights and these holdbacks. Then SVOD started to become a real market, and now SVOD platforms have grown into first windows and are serious competition for broadcasters. The SVOD platforms were all about volume when they launched. Now they are about quality, and they are insisting on being the first window. Multiple windows for a title are more difficult. So the first question becomes, SVOD or TV first?”

That’s all very well in principle, but it’s not a question everybody gets to ask. Major players are investing a lot in original programming and acquiring less, and there is a lot more product on the market with more drama series being produced than in the past.

Stuart Baxter, the president of Entertainment One (eOne) Television International, points out that with 60-plus U.S. buyers commissioning shows, only five to ten of them have the ability to finance all-rights deals, which means the majority of broadcasters must be more strategic about what rights they acquire. “Buyers may not necessarily exploit all rights, but at the same time they don’t want a competitor to undermine their exclusivity or brand in different media.”

BEING EXCLUSIVE
“Broadcasters are all focused on the exclusivity of their offering and the ability to allow viewers increased flexibility in how they consume the product,” says Cathy Payne, the CEO of Endemol Shine International.

“American outlets have become more proactive when it comes to maintaining international rights, with even formerly domestic outlets taking a more global approach,” notes Henrik Pabst, the managing director of Red Arrow International. “It means that if you team up early in the development process, it may be much harder to retain international rights—harder than if you take a fully financed project to them, where they can still be involved creatively but we have a stronger position in holding on to rights. Another challenge is the rights situation within the U.S., as networks nowadays are more able to retain stacking rights, which makes it more difficult to combine their deal with an additional SVOD deal.”

Red Arrow is entering the fourth season of police series Bosch with Amazon as the first window.

FINANCING FORMULAS
“The value of the first window has never been more absolute,” FMI’s Lynn observes. “In the case of drama, we are looking at increasingly expensive content. Production budgets have grown massively, outrunning just about any other inflation you can find. Distributors and broadcasters share the risk, and distributors increasingly so. So they need to find ways to cover the budgets and keep the shows profitable. The arc of the financing is to put together multiple windows of exposure to get to the big number. If the distribution is all about the first window and that window does not pick up the tab, then the industry obviously has a problem. The simple fact is that shows cost X, and it’s a matter of seeing if one player buys it out or people play together.”

Now there are cases where the SVOD player displaces an originating broadcaster as the first window. For example, Amazon Germany will fund Deutschland 86, taking over from RTL, which did Deutschland 83.

“A few years ago, maybe we were overrating the importance and value of multiple windows,” Lynn continues. “But it seems to be swinging too far in the other direction, with a view that the windows beyond the first window have almost no value.”

He adds, “Many public broadcasters are responding well. Because of their economic constraints, they might be more willing to accept a very short first window or being the second window. It’s a question of price, whereas commercial companies might be put off if one of the large SVOD players has the first window.”

Of course, the basic deal-making rules still apply.

“First we do the math,” ZDFE’s Franke says. “Do we get at least as much money from a platform as we would get for selling the rights individually? We also discuss the matter with our producers, since sometimes a global rollout can have a positive impact on the visibility in the overall market, which can increase the sales potential for the second window.”

“We certainly consider SVOD first,” Content’s Ford says. “There is nothing secondary about those platforms. Being on them is prestigious and exciting. It’s all about the return. However, they have very specific licensing terms that affect the financial model. Traditionally, broadcasters license titles to air and pay when they acquire the product. The SVOD players argue that their audiences don’t watch the shows all at once, so the payment should be stretched over a longer period. This is true of the acquisitions in any case. Original titles would be more like TV deals. So we have to analyze the proposition against our forecasts of revenue per territory.”

Putting together presales is also not as straightforward as it was in bygone days. “Once upon a time you did a few presales in, let’s say, the U.K., France and Australia, so you had early partners on board and you offset the investment,” FMI’s Lynn says. “Now, so many of the potential partners are joined up. Look at Sky in the U.K. and Germany and Italy. Putting together a patchwork of presales is more difficult. It’s hard to limit the joined-up relationships.”

“The biggest issue right now, and the most contentious, is stacking rights,” MarVista’s Szew says, referring to broadcasters being allowed to stream all episodes from the season of a program they acquire for TV. “It’s not only a matter of broadcasters versus SVOD, but it’s even within the broadcaster discussions. If you are a broadcaster, you have an obvious benefit from being able to stack rights. If you are about to show season three, you want to have seasons one and two. Stacking rights devalue the SVOD rights, and somebody has to pay for that.”

Endemol Shine’s Payne observes, “Linear broadcasters want to allow their viewers to be able to revisit all episodes of a season rather than have earlier episodes become unavailable as the series progresses. Nonlinear providers want to retain the restriction against stacking and box sets to protect the reason a person subscribes to their service. It comes back to the debate that more rights or holdbacks granted in that first window will have [an impact] on the income to be derived from the second window, and that needs to be weighed against the rollout strategy for that particular program.”

Endemol Shine sold exclusive international streaming rights for BBC’s crime series River to Netflix.

STACKING SALES
“In-season stacking rights and box sets are very important,” says eOne’s Baxter. “A lot of channels require a minimum number of hours or percentage of the series. However, these additional rights do need to be part of the value equation, as many SVOD operators will not take a second window if full-season stacking is available in the first window.”

Broadcasters are mostly being protective, according to MarVista’s Szew. They are prepared to step up and pay because SVOD is pulling at their audience and many of them have their own platforms.

“In some cases, they get the stacking rights just to prevent the SVOD platforms from having them,” Szew says. “The adage was that SVOD could promote, but broadcasters are seeing that if they have a path to market, it enables them to protect themselves.”

The U.K.’s Channel 4 has pointed to the next level of evolution in linear with its All 4 online environment. Deutschland 83 was made available both on linear broadcast and as part of the new Walter Presents VOD platform for foreign programming. Walter Presents’ founder, Walter Iuzzolino, has indicated that if the big multinationals like Netflix and Amazon are supermarkets, he wants to run a corner deli.

“This is a terrific way for a linear broadcaster to find a new way to work, instead of just fighting for the linear window and limiting the ability of nonlinear for catch-up,” FMI’s Lynn says.

“In-season stacking is crucial for networks because if they cannot make a current show available to consumers in its entirety, the consumer will find something else to watch,” Red Arrow’s Pabst says. “As a distributor, granting these rights significantly reduces a show’s financial prospects in the SVOD window—and, in some cases, negates the window completely. However, granting these rights improves the chances of getting and keeping a show on the air.”

“Networks have been more flexible with procedurals, but they are increasingly walking away from deals for serialized programming where they cannot secure in-season stacking rights,” Pabst continues. “The demand for them is growing, especially from U.S. broadcasters, but this then affects our ability to sell the SVOD rights separately. That said, more and more networks now have their own SVOD platforms in order to hold on to viewers, which often has the positive effect of helping to keep the show on air.”

CATCHING UP
“SVOD players want to be the home of on-demand, but broadcasters have their own form of on-demand in catch-up, and catch-up is especially important for the second-tier broadcasters that do not get big ratings for their linear programming,” says Content’s Ford. “We see many more titles that are exclusive to TV or exclusive to SVOD. This can be good for getting the price up.”

“It’s a wonderful world right now, having a mature business in television and cable and a new business in SVOD competing for the same content,” MarVista’s Szew acknowledges. “But not everything always gets sold as you plan it. You might anticipate having a deal with an SVOD platform to help finance a show, but if that deal is not as rich as you thought, you lose out.”

Some of the shows Content Media distributes to free TV are also licensed to Netflix. Line of Duty is an interesting case. Ordinarily, the holdback is 18 months for the BBC. There was a gap in the production between the first two seasons and the third one, which lasted more than 18 months, so the distributor was able to license the first two seasons to Netflix. Before the third season aired, there was a spike in the on-demand viewing of seasons one and two on Netflix. As it happened, the third season scored record ratings for BBC Two. Season four of Line of Duty will probably arrive sooner than in 18 months, so Content Media won’t be able to offer Netflix season three in time for the SVOD customers to be fully caught up before it airs on BBC. Unfortunately, the holdback of 18 months by the BBC is not subject to negotiation. The duration of the holdback is set in stone as a requirement of the company’s terms of trade.

“There is a consideration of exposure,” Ford says. “You want the viewers. Good ratings make a series more likely to get renewed, which we want. For a documentary, there might be a question of a message that the makers want to get out there, so the aim is to reach a wide audience. Not long ago, that automatically meant broadcast, but now Netflix is in almost 30 percent of U.K. homes, and the percentage is even higher in the States. The fact is that penetration is higher than some of the big pay-TV channels. In the case of Line of Duty, I would argue that the Netflix window actually helped boost the BBC ratings. SVOD can be a promotional platform. We are seeing that in the States. Broadcasters in other markets are not there yet.”

In the last 18 months or so, Netflix and Amazon have been trying to limit catch-up to 6 to 12 months, 30 days per episode with a maximum stacking of five episodes, or 50 percent of the available episodes. Catch-up applies only for the first run. In other words, if a broadcaster repeats the series, it can’t go back on catch-up again.

ZDFE’s Franke reports seeing a trend of broadcasters trying to get extended catch-up periods. “We always try to find a balance, which helps our broadcasting partners promote the titles they also air online without harming second-window exploitation on OTT. We also try to avoid broadcasters grabbing for rights that they will actually never exploit.”

“When new technologies arise, they get debated commercially and distributors and broadcasters try to come to an industry standard,” Lynn says. “There might be 6 to 18 months of confusion. Not long ago, catch-up was limited to 7 days, and then it became 30 days with rolling 5-day stacking.”

While agreeing that this is the industry standard, eOne’s Baxter points out that broadcasters are frequently asking for more episodes.

In the next year or so, the complexity of the market is likely to increase, as more competitors enter the online-TV game at various levels.

NOW WHAT?
“There have been a lot of changes in the market, and fragmentation of the TV landscape means that there’s no longer a one-size-fits-all window and exploitation strategy,” Red Arrow’s Pabst says. “Each show needs to have a tailored approach that considers a range of factors. In the coming year, we anticipate the rise of smaller platforms, such as niche channels and VOD, that can afford bigger shows and will have more sway in negotiations.”

MarVista’s Szew expects to see more SVOD players, too. “Broadcasters are shifting that way. It’s what skinny bundling is about. Eventually, you will probably see ways to organize all this diverse offer for the consumer. So aggregation may be a new factor. There are a lot of micro-SVOD players targeting niche audiences at different price points. Many of these, probably most of them, will not survive, but the model is valid. Then you have the generalist players like Netflix and Amazon, and there will probably be new ones. A lot of what happens is going to come out of the mega-mergers that we are seeing.”

And still on the sidelines is Apple.

Pictured: FremantleMedia International’s American Gods.