Chuck Ross

Attention Wall St. Investors: Yes, the Traditional TV Media Climate Is Changing, But the Sky Is Not Falling

Aug 12, 2015

Last Friday, Aug. 7, 2015, Mathew Ingram, on the website of Fortune magazine, wrote that investors had spent the previous two days selling-off “TV-related stocks…over fears that the rise of cord-cutting is a bigger problem than they thought.” He added that in the two days “the sector lost more than $50 billion in market value.”

Holy-moley! It sounded as if the sky was falling.

Noted the Financial Times earlier last week, “A minor change to Disney’s guidance for ESPN seems to have triggered the sell-off. Disney reported record profits on Tuesday but warned that ESPN had experienced ‘modest subscriber losses’, saying that revenues from its cable and satellite partners would fall ‘a bit short’ of expectations.”

While this reporting was going on, here in Beverly Hills last Friday TV reporters and critics were meeting with one of the smartest TV executives around: John Landgraf, the CEO of FX Networks and FX Productions. FX has some of the best series on TV, including “The Americans,” “Louie,” “American Horror Story” and “Fargo,” to name just a few.

Landgraf told us how he had sold episodes of FX shows to Netflix so the creators could get more revenues for their creations. And he also said that moving forward there would be winners and losers and that the winners would be programmers that had a defining brand, “identity and scale.”

Joe Flint, a veteran media journalist and one of the sharpest reporters on the beat — he currently works for the Wall Street Journal — asked Landgraf a question about the future of FX and the Wall Street sell-off. Here’s part of it:

“[Wall Street] discovered cord cutting this week, and a lot of media stocks, including your own, are being pummeled. But I guess the question is for all the challenges you speak of, how do you [keep a] balance? Yes, [you] keep your creators happy, so [you] sell show[s] to Netflix. On the other hand, [aren’t you] conditioning a whole generation of viewers to bypass your platform, [which can] lead to cord cutting? [A]nd how do you circumvent that? Or does FX ultimately ‑‑ you talked earlier about the importance of the brand — just become, sort of, a floating brand [and] ultimately you’re in a platform on Netflix versus a linear channel?”

Here’s Landgraf’s thoughtful answer:

Well, Joe, it could take me the rest of this session to try to unpack the various components of that question. So I’ll try to get some of them in there. I would prefer not to have sold any of our content to Netflix. But when you’re in a situation where you have one business that can very successfully monetize somebody’s content that they’ve created, and you have another business that can’t, you have an imbalance, and it’s very difficult to not only refuse that money but then go to your creator and say, ‘Well, we didn’t want our brand to leave our ecosystem, and we can’t do anything with it or pay for it. But we’re just going to hold onto it, and sorry. You’re out of luck.’

And, of course, we could have cut checks to the creators to compensate for that, but part of what we’re trying to do is get bigger, because I think my sense of it has been that you’re going to need scale to deal with this, that managing a larger portfolio was easier because there’s going to be more failure, for example. There’s going to be more shows that fail in an environment where there’s 400‑plus shows than there are in an environment where there’s 250, and a larger portfolio conditions you against that. [Earlier Landgraf had told us that there will be a record number of original series on TV this year, and for the first time ever, U.S. TV – including the streaming services — will have more than 400 original series on this year. Landgraf said this is too many series, and that in the next few years the total number of original series will likely start to decline.]

So what you’re seen with us launching FXX and FXM, going to three channels, going to twenty shows, launching FXNOW, going ‑‑ it’s distributed on 14 different distribution platforms — is trying to scale ourselves up appropriately. Our staff [during] the time I’ve been at FX has gone from 70 to 260, [which is] to say, well, you have to be big. We’re going to have to make some sacrifices along the way to fund that.

By the way, we had a concerted effort not to only sell to Netflix, but ultimately we sold ‘Justified’ and ‘The Americans’ to Amazon, and now we’ve made an output deal with Hulu, so that comes to your last question.

So now the content is spread out, not only at FX, but across three different services, and I guess what I would say is that I think there are actually two bundles that are starting to fray. One of them is the MVPD [Multichannel Video Programming Distributor] bundle, although Wall Street’s reaction this week is, I think, way over the top. There’s nothing that [Disney CEO] Bob Iger said in his call that I didn’t see coming and haven’t been planning for for many years. It is a transition. It is a bumpy, rocky transition, but it’s not a transition that yields a valueless future for major media companies like Disney and 21st Century Fox and Comcast and Time Warner, and only value for Netflix.

But I think the second bundle that’s going to fray is the channel. I think a channel is an artifact of a linear ecosystem. And ultimately what we have to figure out [is] how to create a new bundle of programming, because I don’t believe there’s any future in which programming is simply produced and distributed on an a la carte basis. You have to have a business and a portfolio of programming to be able to take risks, to be able to invest, to be able to market. But I think how that portfolio is structured is going to be different.

Ten years from now I’m not saying that the linear channels that represent the FX Networks won’t exist. They’ll exist, but they might represent 50 percent of our consumption ten years from now, of our programing, as opposed to 95 percent of our consumption today. And so as we reinvent that model, how we own and how we distribute the content and when it gets used is going to have to radically change.

And…if you can’t serve ads ‑‑ if basically the only thing an advertiser will buy is C3, and so essentially it’s very difficult to sell an ad after the third day — then how do you have every episode of ‘The Americans’ in a service with targeted advertising where essentially value ‑‑ appropriate value — is being attributed to the person that just starts watching the first episode of the first season today, because they’ve been hearing for three years from you guys how great it is? Right now there’s a tremendous value differential, and I think that’s ridiculous. I think the advertiser will come to understand that that’s ridiculous, because it’s not really just about demography. It’s about who. As you can start marketing to individual people who are the appropriate people to tell about your products, you don’t care basically whether they’re watching the fourth season of ‘The Americans’ or first season of ‘The Americans.’

So it’s gonna be a messy, inelegant process and there are gonna be weeks like this week when Wall Street, I think, radically overreacts to a piece of information, and then it will recover a little bit. But as much as I think Netflix’s position in the future is quite secure, and I think it will still be making programming a decade from now, I think that’s equally true of the company I’m a part of and equally true of a number of other large media companies.

Landgraf also mentioned during the Q&A that 10 years ago, when he took over running FX, 55% of its revenue was from advertising. Now, he says, “it’s 32% of our revenue this year, and I’m forecasting it will go down one percent every year, so it will be 31% next year and 30% the year after that.” He added, “Our content ownership revenue was zero” 10 years ago, and is 12% now.

After the Q&A session I caught up with Landgraf and asked him a few more questions:

TVWeek: “Given that the percentage of monies FX gets from ad revenues is so much less now than it was when you took over 10 years ago, why continue with that model at all? Especially when you are only getting paid by most advertisers for live viewing plus three days?”

Landgraf: “It’s a complicated question, because a lot of the people who watch our channels watch movies and other acquired programming. I’d say about 80% of the time spent watching the FX Networks is spent NOT watching our original programming, and we don’t have the premium window for that programming. We have the ad-supported window for that programming.

“So one of the challenges we’re facing right now is that we’ve made all the money wholesaling our programming to services such as Netflix and Hulu.

“We have a tremendous amount of money coming from those relationships, but those relationships are somewhat restrictive. So you find yourself in this weird situation where you have to develop your new business without shutting down your old business that you have today. And sometimes the business you have today – not shutting it down – includes the new business.

“So if I look at the advertising business, for example, I actually get excited about the decline in advertising revenue. Because, if you think about it, maybe transitioning from the business we have today – where, maybe we have 20 ads in an hour of programming – to a model where we put four ads in instead — will require us to take a decrease in ad revenue of 20%. We can’t take a decrease of 80% in revenue, but we might be able to figure out a model where we take a decrease of 20%.

“But you can’t take a decrease of 20% if 55% of your revenue is from ad sales – you wouldn’t meet the expectations of Wall Street or your bosses. But if ad sales were only 25% of your revenue, a 20% decline, well, that’s 5% of total ad revenues, as opposed to 11% of total revenues. And you know what? Maybe we could absorb that with some upside elsewhere. So in some ways I think you need to wait for the right inflection point to make certain transitions.

“So it’s this weird thing – you are simultaneously running the business you have today and you are trying to imagine and create the business you might have tomorrow. And you don’t make much money [today] from that hypothetical business you might have tomorrow. But if you don’t create it, then you are not ready to pivot when the moment arrives, and you are kind of doomed to just being forever a subset tomorrow of what you are today. So it’s an interesting transitional challenge.”

TVWeek: “If the drivers of today’s TV business are to a large extent ABC, CBS, Fox and NBC, where do they go with their business models, which are so ad-driven?”

Landgraf: “That’s one of the reasons retransmission consent, which is essentially subscription revenues, is such an important part of their future. All of their growth in revenue now is coming from that. And their advertising business is declining too.

“They do have certain opportunities we don’t have. Fox, for example takes all of its content and puts it on Hulu classic. And when you look at their non-linear revenue, the revenue they earn outside of their linear channel, a very, very high percent of it comes from Hulu, because it’s a large aggregator and it has a terrific and growing ad-targeting system. [Note: Hulu is co-owned by three of the four major networks: ABC, Fox and NBC.]

“But we here at the FX Networks can’t do that. Because we have covenants with our MVPDs [Multichannel Video Programming Distributors] that say this is a subscription product and it’s going to be exclusively available to people who pay for television, whereas broadcasting is given out free, over-the-air.

“So the differential in the broadcast networks ability to earn non-linear revenue, and our ability to earn non-linear revenue is substantial. On the other hand, a much larger percentage of our revenue comes from affiliate fees.

“So each segment of the business has a unique transitional task and we are all going to have our own challenges, but I don’t think they are insurmountable.”


  1. Excellent explanation.

  2. Recent news from Viacom makes this story laughable

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