Why Netflix, Amazon, Apple & co. are Spending Billions of Dollars on Original Content
With an ongoing war of content to attract new subscribers to their services, broadcasters, studios, and streamers are out-spending each other to gain the upper hand. With first casualties surfacing and no clear winner on the horizon we look at the economics of content and why the war chests are only going to get bigger in the coming years.
Tobias Jaeger sat down with Inside Wirtschaft editor-in-chief Manuel Koch to discuss the current trends and shifts happening in the media & entertainment industry. With big tech companies like Apple, Amazon, Facebook, Snapchat, and Netflix all pursuing their own global content strategy, Manuel Koch asked Tobias Jaeger about the reasons for the combined double-digit billion dollar amounts being invested into original content.
“Owning the rights is the Holy Grail. That’s what everyone is after. Controlling rights is the name of the game.”
The below conversation is a translation of above video which was originally recorded in German.
Manuel Koch: Ladies and Gentlemen, welcome to Inside Wirtschaft. Today we are looking at the shifts and changes in the media industry. Companies like Apple announce that they will be spending more than $1 billion dollars in content, Netflix will spend more than $7 billion dollars this year on original content. Joining me now is investment banker Tobias Jaeger of AXIOM Venture Capital. Thank you for being here. What is driving this change?
Tobias Jaeger: There is a lot of pressure on companies like Apple and Netflix to continue to grow the number of their subscribers and while Apple might have a slight advantage in launching something new due to their existing subscriber base on iTunes, which many people are very familiar with already but their focus was on music so far so they have to watch out that they are not falling behind when it comes to video content. Netflix has been very strong in that segment for ever, also because they started as a DVD rental business with millions of subscribers and then enabled new growth when they switched to digital streaming. They are, of course, under attack from Amazon Prime and both players have to continue to invest in original content to attract more subscribers.
“So there are only two options, create something for everyone or find a niche to own and go deep.”
MK: Snapchat is looking at doing the same, they announced they will investment in original content. Is that that a necessary expense to create loyal customers?
TJ: Yes, I think users, or subscribers, are used to getting a lot of conent, pretty much immediately and in an unprecedented bandwidth. There are so many areas of interest and every person wants individualised content. So there are only two options, create something for everyone or find a niche to own and go deep. In the case of Snapchat that means they will have to keep an eye on makes sense to offer via their app or now their glasses that makes people happy and continue to use their products.
MK: What the rights? They are increasingly becoming the most important piece of the puzzle. Are those rights sold at some point or held indefinitely?
TJ: That’s really the point why Netflix and Amazon and the others are investing so much. To be the owner of any rights to the programs. Because only when they own the rights can they control the exploitation and they are not dependent on existing deals that have been made with content buyers. Owning the rights is the Holy Grail. That’s what everyone is after. Controlling rights is the name of the game.
MK: So are the market leaders like Netflix and Amazon also the new power producers in the industry?
“Only when they own the rights can they control the exploitation and they are not dependent on existing deals that have been made with content buyers.”
TJ: Of course they are very hot at the moment. They are producer, buyer, and financier in one. That is, of course, very interesting for producers who approach them and say ‘have a look at our show, let us know if you are intersted’. Everyone wants to work with them now and for good reason. I think the most prominent example is “House of Cards”. When the producers wanted to make the show they approached every single broadcaster and studio. Everyone said no. Netflix didn’t. They said ‘we love it, let’s do it’. That might be, of course, because they have different insights into user behavior and tastes. We all know this from buying things on Amazon where you will always get product recommendations based on your purchases. You can do the same with content. So after watching a couple of things they can predict with acceptable accuracy what else you might be interested in. In that sense, Amazon and Netflix have huge head start because they know their customers well already. In comparison a studio or broadcaster, who usually don’t own their customers directly, they will get very little feedback by default but have to buy the insights after the fact. Netflix and Amazon get those insights almost for free.
“In addition, the new content players don’t have the expensive burden of a legacy or historical cost of the last 50 years like old broadcasters and some studios.”
MK: So long-term the value of Amazon and Netflix stock could increase in value substantially?
TJ: For sure, it is a huge competitive advantage to generate these insights in-house and use them to test new ideas and concepts and get almost immediate feedback from paying users. That makes the development and subsequent production of content more efficient and that, in turn, helps to have a wide slate of products to offer globally. In addition, the new content players don’t have the expensive burden of a legacy or historical cost of the last 50 years like old broadcasters and some studios.
MK: As we can see there is a big shift happening in the media industry. Tobias Jaeger of AXIOM Venture Capital, thank you very much for being here. And you, ladies and gentleman, thank you for your interest and for watching. Be sure to visit our website at inside-wirtschaft.de and to like our social media channels.
The conversation was originally recorded on September 27, 2017.
About Manuel Koch
Manuel Koch is a German TV Host, Stock Market Expert (New York Stock Exchange, German Stock Exchange Frankfurt), Media Coach, and CEO at Inside Wirtschaft. He produces content for his clients like Handelsblatt, Hapag-Lloyd or the Vienna Stock Exchange.
About Tobias Jaeger
Tobias Jaeger is the CFO of London-based television production and content studio Colibri Studios. Tobias has lived, worked, visited, and studied in over 43 countries on 4 continents. Previously, he has held positions at Business Associates Europe, SAP AG, StrategosPoker, Aramark, and entrepreneur academy. Tobias is also a Managing Partner at media-focused SFO AXIOM Venture Capital.