It is a classic cartoon trope—a character blows a bubble that keeps growing and growing until it becomes clear the bubble is about to burst and leave a big mess.

The kids industry has its eyes on the world of streaming, where the cash pouring into content production is breathtaking. (Look at that bubble.)

Streaming giant Netflix reportedly shelled out upwards of US$13 billion on original productions in 2018 and is expected to up that number this year. Amazon, meanwhile, committed US$5 billion last year, and Apple has indicated it will throw down US$4.2 billion in new content spend over the next four years. (The bubble just keeps getting bigger.)

Other players, including telecom conglomerate AT&T’s WarnerMedia, with HBO as its crown content jewel, and NBCUniversal and Fox’s joint-venture Hulu, are also expected to pitch in billions in new money. (It’s still growing.)

Furthermore, the kids space, well-known for driving up subscription numbers, is expected to garner a significant share of the funding. (Look at it go.)

But is it sustainable, or are the SVODs spending themselves into a bubble burst? (Pop!)

Even if the bubble bursts, there is always a place for high quality content, says Find Me in Paris producer David Michel.

Warning signs

One need only look at the market instability late in 2018—when Netflix stock lost about 20% of its value—to see an early sign of a potential future correction. It’s difficult to draw any concrete conclusions from something as variable as stock prices, says Tim Mulligan, EVP and research director at London, UK-based MIDiA. But research suggests that the streamer is under pressure due to its debt (which some estimates put at more than US$8.3 billion). “So far, that debt has been financed in a low interest-rate environment,” says Mulligan.

An expected rate hike in the future will make servicing it substantially more expensive over the next 12 to 24 months.
What’s concerning is that debt may be fuelling Netflix’s content growth.

While partnerships with content owners like Disney and 20th Century Fox helped build the platform’s viability, as library owners created their own services and short-term rights deals expired, the more secure bet for the SVOD was to create a boatload of original programming that would live on it exclusively and make a Netflix subscription a “must have” for consumers.

Amazon, Disney and, to a lesser extent, US-only platform Hulu have likewise invested in premium original content, uncorking a production-dollar geyser.

In the short term, the high-market demands mean it’s the “best time ever” for content producers, says Mulligan.
Michael Hirsh, CEO of Vancouver-based WOW! Unlimited Media, agrees that the emergence of SVOD heavyweights has amped up the production business over the last couple of years, but he isn’t concerned.

“Kids programming is the stickiest part of SVOD offerings,” says Hirsch. “It’s hard to take a channel away from a kid. So we think the boom we are seeing is going to be the biggest in the animation field.”

Indeed, the October 2016 merger between prodcos Rainmaker Studios, Frederator Networks and Ezrin Hirsh Entertainment was a direct result of looking for ways to better feed a new content pipeline—one that will demand kids programming, says Hirsh. For its part, WOW! is preparing for that heightened demand by increasing staffing and studio capacity.

However, Mulligan’s perspective is that prodcos like WOW! might be going down the wrong road by investing at a time when SVODs are precariously over-spending on content in order to build subscription numbers.

“Companies are using content to drive their overall business model,” he says. “We have seen an over-investment—billions of dollars—in content, which is the result of the need to acquire audiences in this land-grab mentality.”

The worry is if (or when) a contraction comes and the SVODS shutter, there will be no other alternative provider left to fill the vacuum. The emergence of these platforms has altered the entire broadcast model, and there is no going back.

Find Me in Paris

Consolidated horizons

Many analysts believe this over-spending on content isn’t sustainable in the long term. First, an examination of the market reveals that building subscription bases might be close to a zero-sum game.

At press time, Netflix had roughly 137 million streaming subscribers worldwide. But the platform had a softer Q2 in 2018, when it added just 5.1 million new members, significantly less than the 6.2 million that had been forecast. It’s still a 25% year-over-year growth, but shareholders panicked and stock stumbled. The company has since recovered and continues to grow quickly (with some estimates predicting the platform will double its reach by 2023).

Was the Q2 dip a portent of things to come or a small blip that should be ignored? Time will tell.

Yet, this is all pre-Disney+. The content heavyweight is expected to offer an aggressive value proposition when it enters the market. There is heavy churn in subscription numbers as month-to-month commitments are the norm, but analysts argue subscriptions are not an infinite pie.

“In our surveys, we have seen that consumers are typically willing to take on two or three subscriptions,” says Ali Choukeir, research analyst at S&P Global Market Intelligence in Monterey, California. “There is really not a huge chunk of people out there who don’t have any SVOD services already.”

Moving forward, competition will control growth. With consumers limiting their commitment to just a handful of subscription services, at least some of the emerging platforms will falter or shutter completely.

“We are going to have clear leaders, and everyone else will be left behind,” adds Mulligan.

Niche operators like Turner Classic Movie’s Filmstruck and Warner Bros.-owned DramaFever couldn’t keep up and shut down in 2018. Whether or not these failures are harbingers of an upcoming contraction is up for debate, but it hasn’t stopped the likes of Netflix, Amazon or Disney from doubling down on spending.

Mulligan warns technological advances like robust internet networks and mobile tech have helped create a saturated entertainment market, which is an underlying cause of the subscription ceiling. “We are now in the peak-attention economy,” he says. “There is no unoccupied entertainment space left.”

Trim the fat

Signs to watch for in terms of contraction might already be evident. Take, for example, Netflix’s cancellation record in the last year. Since January 2018, the SVOD has axed 15 series. Besides shows like Orange Is the New Black and Everything Sucks!, it has also halted production on Marvel’s Daredevil, Iron Fist and Nick Cage as all things Marvel start their inevitable migration to parent company Disney’s service. Mulligan believes these announcements are just the beginning of a major correction that is inevitable in the next year or so as platforms look to trim expenditures. Of course, the content-slashing will be informed by the deep metrics owned by each platform—giving them the opportunity to fashion cuts that minimize subscriber upset.

“Platforms are going to make sure any changes are in keeping with customer demand,” says Doug Pollack, GM of aiTV products and innovation at Maryland-based data management firm Lotame. “If they see that 80% of the consumers watch 30 programs, and that the other 200 series they produce only attract 20% of their customer base—they’ll get rid of the fat.”

However, Pollack believes that Netflix, an originator in the category, holds an important algorithmic advantage over its nascent competition. “They are savvy from a technological standpoint,” he says. “The data they already have sets them up well for the future.”

Castlevania’s creators believe the future of SVODs lay in “mass niche” content.

Stay small

Paris-based prodco Cottonwood Media, meanwhile, believes keeping the number of productions at a manageable level is the key to insulating businesses from the dangers of a large bubble burst.

“It’s not going to be a good market for big production groups,” says co-founder David Michel.

Cottonwood is currently in the second year of production on Find Me in Paris, a live-action teen drama that has found a home on terrestrial broadcasters including ZDF and Nickelodeon, as well as with Hulu. Michel says studios that craft a small number of high-quality productions will be best-positioned to survive consolidation fever and find a home in the resulting market. “If you can create good content, you can live off the crumbs of what some of these platforms are investing,” he says.

There might be a contraction that will force prodcos to re-evaluate their production outlay, says Michel, and mid-sized companies are most likely to take a hit. “Mid-sized companies will probably have to merge or consolidate,” he says. “[But] there will always be a role for small players that are agile.”

The big players are also looking for differentiating factors, and turning specifically to talent. Netflix and Disney each rafted exclusive and overall deals at the end of 2018, locking in producers and creators of some of the most popular kids content. The SVOD signed agreements with the likes of Chris Nee (Doc McStuffins, Vampirina) and Chris Williams (Moana, Frozen). Disney, meanwhile, locked down partnerships with Craig Gerber (Sofia the First, Elena of Avalor) and Travis Braun (Vampirina, Muppet Babies).

Get specific

Some producers, though, reject the idea of a looming bubble burst or the limitations of subscription fatigue. Instead, they see the growth of a market fuelled by niche content, pointing to success stories such as the anime-focused SVOD Crunchyroll (and its paid subscription base of more than one million) as proof that there is a future for increased production.

Fred Seibert, CCO of WOW! Unlimited Media, sees the entertainment market as consistently dynamic.

“The biggest jazz record in the ’40s was Benny Goodman’s “Sing, Sing, Sing” and it sold 50,000 records,” he says. “Fast forward to the ’80s, and Michael Jackson sold 40 million records for “Thriller.” Today’s market and tomorrow’s market don’t necessarily resemble each other.”

WOW! currently produces several animated kid-focused series for Netflix, including Castlevania and several Barbie movies. Seibert, along with partner Hirsh, is optimistic the market can sustain a steady increase in content so long as producers get specific.

“For all the services you see now, I think it’s nothing compared to how many you are going to see popping up,” says Seibert. “Niche is where you are going to see growth in demand.”

Hirsh is also optimistic about the future for what he dubs “mass niche” content. He says that the global distribution platforms have made it possible to serve big customer bases that might be geographically diffuse, but in total have enough critical mass to make it a worthwhile endeavor.

“Even though you are dealing with a niche market, you are reaching a lot more people because these platforms have global distribution,” he says. “It’s a new paradigm.”