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Free streaming services are turning the media business on its head. Again

WHAT’S OLD IS NEW AGAIN 

Free TV is having a moment.

Heard of Tubi, Freevee, and Pluto? They’re just three examples of “free ad-supported television” —aka FAST— a new crop of streaming services that work the way traditional TV networks worked:

(1) Pay money for the rights to show content, then (2) make money by selling ads against that content.

It’s a simple business model: the spread between what it costs to run the shows and what they make from selling ads is their profit.

And free streaming sites are popular. In some cases, you don’t even have to sign up: they’re built right into your hardware: Samsung builds its “Free TV Plus” service into every new TV they sell, and Roku builds “The Roku Channel” into all of its streaming devices, too.

GOOD TIMING

As people everywhere re-evaluate their spending in the wake of the cost of living crisis, FAST’s ‘free content’ value proposition is resonating with more and more people.

But there’s actually a deeper money story behind the rise of FAST, and it’s an interesting one.

$$$

Everyone knows that high-quality, big-budget shows are expensive.

But high-quality content is actually expensive twice—it costs a lot to make and then costs a lot once again to broadcast.

Most streamers have to pay residual payments (that’s fancy finance speak for “income that people continue to receive after completing the income-producing work”) to the writers and directors and actors that worked on the shows on their platform, every year that the shows remain on the platform.

(A lot of people think that Netflix doesn’t pay residuals, but that’s not entirely correct. They don’t pay residuals for their original shows, which are “bought out” when they’re commissioned. But, of course, Netflix does pay residuals on the shows that they license… which is why popular titles like Friends have disappeared over the years. Too expensive to keep on.)

SUBSCRIBE NOW

As a result, streaming services —having splurged to make a lot of original, exclusive content— are now struggling to pay the hefty licensing fees and residuals for other top-tier shows. (The streamers’ situation isn’t made easier by the fact that subscribers can easily do things like share passwords, and cancel/restart their subscriptions.)

This leads to weird outcomes like Warner Bros. Discovery dropping Westworld —a show that aired on their cable channel HBO— from their streaming site HBO Max (recently rechristened “Max”). Warner Bros. Discovery decided that paying the Westworld residuals wasn’t worth keeping it on the platform.

And that’s not an isolated example. The financial strain that streamers are facing has moved plenty of top shows and movies away from premium subscription based services —like Disney+ and Netflix, which, though they both have an ad tier, still earn most of their money from subscriptions— and onto free, ad-supported platforms.

All of this is upending the traditional content hierarchy: popular, FAST platforms gain viewers because they’re free. More viewers mean they can charge advertisers more. That gives FAST streamers even more money to license even more expensive shows and movies. Which, of course, entices ever more viewers.

Bottom line: these free networks are becoming the home of top quality content, triggering a pretty interesting shift in the dynamic of streaming content.

OK, WHAT’S THE POINT HERE?

Specifically, all of this is bad news for the Netflixes of the world: as we all get accustomed to blockbuster content appearing on free platforms, our appetite for paying subscription fees might decline.

For us viewers, however, it seems ok: ultimately, FAST could lead to more choices and better experiences for viewers, as platforms compete not just on content, but on the overall value they provide.

What’s more, greater ad revenue may mean higher content budgets, and (potentially) more money for unionized writers (currently on strike to bolster pay, and prevent studios from using AI to generate screenplays).

But there's one last angle to consider here. As ad-supported platforms become more successful and prominent, we could see a resurgence of advertiser influence on content.

Though people don’t talk too much about it now, historically, this has been a thing: advertiser demands used to totally shape the creative direction of popular shows. If this model carries over to the streaming era, it could impact the type and nature of content produced.

What’s old is new again, indeed.

More:

Dozens of TV shows are disappearing from streaming platforms like HBO Max. Here's why »»

The Wild West of streaming TV is here and it’s free »»

Written by Jon Kallus. Any feedback? Simply reply. Like this? Share it!👇