Going up?

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Cord Cutting and Hollywood: The Sequel

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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On Tuesday, I asked what the unbundling of cable would do to Hollywood. Today, a couple of follow-up notes.

The first is on Viacom's $785 million write-down, more than half of which was due to the falling value of reruns like "CSI," "Community" and "30 Rock." With advertising soft and people shifting away from cable, filling screens with a continuous loop of episodic dramas is no longer as lucrative as it once was.

This has a lot of implications: The value of those sorts of shows may fall, and if you are, like me, more of a fan of original programming that has longer story arcs, you may hope that this means more of the stuff you like and fewer police procedurals. (I still like me a good "Law and Order" marathon.) As well it may. But those cheap reruns also keep networks going during the day, when it doesn't pay to run original content -- and losing the revenue from cable syndication may mean producers demand more money to sell the rights to Netflix. In the long run, that could mean your Netflix subscription costs more.

More broadly, Viacom's move suggests that the heart of the cable industry is already feeling the disruptions of unbundling, and that more changes are probably coming.

The second follow-up is a note I got from a reader who has worked in television post-production for eight years. He offered some thoughts on what unbundling will do not just to his industry, but also to the city of Los Angeles:

With bundling, there is currently an ecosystem of hundreds of channels, with unbundling, you'll see a 2-5 year long shift to dozens of channels as the vast majority of the channels go out of business. If television becomes an "Opt-In" model getting just x subscribers isn't going to pay the overhead for the channel to operate at any realistic price subscribers are willing to pay. The break-even point will be a severe cut off, and eventually most channels will succumb to the math and go out of business.

The downstream effects of that, however, are not the loss of the channels, but the massive loss of content production by all those channels. When a show is made, that money circulates through hollywood paying a hundred people directly as part of the show's staff -- as seen in the credits. 

What's not seen in the credits is all the indirect employment from that show. They are renting office space for the production and for the main office. They are renting office space for post production. They are renting production equipment (cameras, cables, lighting gear, it's one-two large U-Hauls worth of equipment, all rented), they are renting post-production equipment (computers, software licenses, furniture, servers etc) and they are sub-contracting with specialist companies or individual to provide final graphics, a final audio mix, and broadcast tape and final masters (the latter is a very important stage of sub-contracting, as the equipment to make the final air masters can cost hundreds of thousands of dollars). ...

And as channels go out of business, people get more desperate for work, and wages plummet through the floor. the unions will strike, but reality television is largely non-union and will see the worst deflation of any sector, exacerbated by the pressure exerted from union wages not declining. 

In my opinion, unbundling will probably push California into a recession, but most people think I'm crazy, and I usually just point out that the arguments for bailing out detroit was not about the big automakers but about the massive network the automakers relied on to produce a finished product. the same is true of hollywood. ...

In terms of film there is an equivalent of Payola, and the studios will figure out they have this leverage as they produce fewer and fewer films, particularly with the big blockbusters. 

Basically, as a rough guideline, 55% of the reported ticket sales/gross of theatrical receipts are returned to the studio as it's portion of the gate. There are a lot of theaters, and studios are producing fewer films, I expect studios to make up the difference by demanding higher percentages of the ticket from exhibitors in order to offset other declines in revenue flows. It's somewhat the equivalent of payola, it's certainly the soft-spot that they are most likely to target, and as supply decreases their leverage increases.

I find it entirely plausible that theater chains are about to get hit. I also want to tease out the implications of what he's saying about the film and television production ecosystem: If the number of companies producing content falls, the cost of many of the inputs will rise, because fixed costs will now have to be amortized over a smaller customer base.

I'm not saying that all input costs will rise. I'd expect the incomes of people who work in Hollywood to fall -- especially the stars, but also the much more numerous "below the line" workers who do all the stuff we never see, from casting directors to Foley artists, as less content is made and production quality is sacrificed to cut costs. I'd also expect the value of things such as used equipment and real estate to plummet. But things such as specialized software have a high development cost, and with fewer people using them, the remaining users are going to have to pay a lot more to cover that development. In other words, substantial price shifts in both directions will remake the market.

As Bette Davis (almost) says in "All About Eve," fasten your seat belts. It's going to be a bumpy ride.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
James Gibney at jgibney5@bloomberg.net