Industry overview

COVID and The Big Bubble 

The entertainment industry has undergone one of the most difficult and volatile economic times over the past two years that will have a major impact on the trends and opportunities for the next several years. My goal in this overview is to recount the recent events that have fueled this dramatic evolution that have changed the way consumers will find their desired content and dramatically altered how content producers will monetize their creative output and achieve sustainable returns on investments. 

First, we need to look back to 2020 when the world changed as COVID ran rampant and much of our society went into a lockdown. This sudden complete isolations created enormous free time and fueled an explosion of Home Entertainment consumer consumption. When these factors started to naturally recede, we had created a deceptively high rate of content consumption which was not sustainable. Initially, the positive impact was felt in older media formats like DVD and BD which sold briskly at Walmart, Best Buy, and Amazon and helped smaller independent distributors see renewed income from their legacy physical infrastructure.  But the real benefactor was digital distribution, and the greatest impact was seen in SVOD consumption as the Major Studios shifted from theatrical release strategies which included home video windows to a fast-track direct to streaming outlets owned by the Studios. Premium VOD and TVOD also saw strong focus when audiences were homebound, but those release windows have since faded as studios have shifted back to a more traditional theatrical release approach which focuses on younger demographics. 

Unfortunately, many industry executives thought the new high-water marks made with content consumption during COVID would be sustained forming the new normal. New roles, new jobs and new departments were created to meet this demand and massive spending was encouraged as studios fought to secure market share in the form of subscribers at almost any acquisition cost. Many also didn’t fully appreciate the different consumer revenue generated by an “all you can watch and pay one price” paradigm vs. the older “pay individually for everything you watch” approach. In all fairness to the Studios folly, Wall Street had been encouraging the Major Studios to rapidly transition from the traditional multi-window approach to a direct-to-consumer model which utilized subscriptions. Those studios that didn’t embrace this new data driven model were seen as dinosaurs and for a while their stock was punished. But as the data from studio streaming operations became more transparent, Wall Street suddenly saw the long road ahead of red ink and lower lifetime values coming from studio IP and branded content. As their tone and support for studio stocks shifted to profitability from pure market share growth, we saw the studios caught in a difficult bind that required a massive rapid about face. 

During this brief consumer bonanza, Independents were able to ramp up modest budget productions and funding was abundant with DVD and BD selling strong and the AVOD market starting to see larger audiences which largely benefitted independent film and classic TV. AVOD Outlets like Tubi aggressively embraced independent products and these smaller films had decent revenue from both physical and digital during this short lived boom period. SVOD prices reached a saturation point forcing more cost conscience consumers to use AVOD for part of their entertainment needs which further fueled Indie film revenue. The entire industry felt the rising tide initially caused by COVID, but that party was about to end. 

The studios had increased content spending and output by 25% in a two-year period in part to meet the COVID demand curve and in part to satisfy Wall Street’s dreams of a new direct-to-consumer business with super charged digital valuations. Suddenly everything had changed again. Consumption and demand were cooling and would not provide never ending growth. Studios felt it and so did Independents. Acquiring and maintaining subscribers was skyrocketing and churn rates rose from single digits to 20%, 30% and even 40%. Physical sales at Walmart were down and Best Buy would soon exit the industry. The amount of new content and cost of content had also escalated to an unsustainable level. It was time for massive changes and 2023 saw the marketplace shift in several significant ways. Virtually every Studio SVOD service introduced a lower cost subscription with ads to reduce consumer price concerns. Several SVOD players have initiated Password Sharing Restrictions and others are following this Fall. The output at studios has been cut back and layoffs have occurred at virtually every studio with more predicted. Independents suddenly saw their ROI hurst by DVD slowing and AVOD consumers being attracted to studio offers also cut into their digital revenue plans. It has certainly been a wild ride and 2024 promises to be packed with huge trends that will impact all aspects of the entertainment industry. 

2024 Trends and Predictions 

I see four major trends or technological developments that will dominate the 2024 growth agenda. 

The first is SVOD consolidation in the studio ranks. We have all seen the economic pressures that the studios have recently experienced, and my review of the past few years highlights the difficult position that literally all the studios face. Paramount is officially out for bid and is not seen as big enough to survive on its own but dialog to merge with Warner has fizzled. Will Skydance or Comcast offer viable alternatives?  Disney would seem to have scale, but their various brand identities and dramatically different demographic audiences pose a challenge. Does ESPN live with Hulu and how do Marvel Superheroes interact with Disney’s Kids Animation. The final outcome and pairings are not clear, but I am confident we will have fewer mega stand-alone SVOD options at the end of 2024. This will mean less slots for Indie Producers that already struggled to get their content on those big traffic platforms.

While it is easy to focus on the problems facing the studios from over expansion, the Independent Producer and Distributor are also seeing their FAST Channel and AVOD growth coming under significant pressure. FAST Channels offerings went from roughly 200 in 2021 to over 600 by the end of 2023. The first eighteen months also saw a massive consumer adoption as cable cords were cut and AVOD became the replacement of old fashion cable TV with ads. More recently, we are starting to see platforms looking to focus their FAST Channels on the stronger performers that generate ratings that drive ad revenue. Gone are the days when you can stand up a generic FAST Channel just by targeting a demographic like Urban or a genre like Horror. Today you must have a brand or organization or committed audience to drive viewership and secure placement. Bringing meaningful advertising commitments are increasing important as well. Refining your FAST branding approach and spreading to more AVOD platforms will be crucial for future growth at the Indies. 

In many ways, the chord cutting trend of the last few years, precipitated the unbundling of our content. At first it seemed like no big deal when there was only two or three SVOD services you wanted but when that grew to five or six or more, we started to see consumer backlash. The churn rate has increased for many on these services to almost 40% and that is simply unsustainable. The problem is that with so many diverse and unaffiliated content sources, it has become increasing challenging to know where you find what you want to watch. The frustration and program hunting fatigue are an Achillies Heal to the digital revolution and some form of bundling is needed. How that bundling will be executed is still undetermined. Will Amazon be able to play a centralized role like Amazon Channels has tried? Maybe it will be the phone carriers with Verizon and ATT both already experimenting with smaller streaming partnerships. Perhaps it is time for the Smart TV platforms like Samsung and Vizio to play a bundling role. They have the momentum in providing growth for consumer internet access in the home. Or will it be a combination of all these efforts? However it manifests, I am confident that by the end of 2024 we will see bundling representing a meaningful share of how consumers get their digital content. 

The final trend that is on everyone’s mind is AI. The technology will be transformative to our society and will permeate every aspect of lives in the years to come. 2024 will be the first year that tangible impact will be felt across the entire film making and distribution process. Starting in development, AI will provide guidance to genre performance and storytelling engagement. Already we are hearing how script writing is being affected and that has cost implications with possible savings and creative concerns becoming overly formulaic. Cast evaluation and predictive forecasting will see huge influence from AI as well and could make producers smarter and equally could dampen risk taking on “out of the box” concepts. Another area that AI has already started to impact is dubbing. This is especially significant for smaller independent producers that often can’t afford traditional dubbing that costs tens of thousands of dollars using live actors and will now be done for a few thousand dollars using computer generated voices. This allows sales of content in local foreign languages for smaller budget films which historically has been a missed sales opportunities in many territories. I am working with a subtitling company that is developing AI dubbing and could open an entire new marketplace for them. Finally, AI is already having a positive impact on recommendation engines which have always had spotty and inconsistent results. These are just a few ways AI will start to transform our industry in 2024.

Opportunities Independent Producers and Distributors in 2024 

We have reviewed the COVID Bubble and the 2023 Industry-wide correction. We have also identified the mega trends which will impact our industry this year and for years to come. Now let’s discuss the specific impact we will see for Independent Producers and Distributors.

First item that I want to focus on is Casting. The market has reached a level of maturation where competition is fierce, and placement of content at meaningful platforms has become uncertain and risky. Distributors and Producers see that risk and have increasingly focused on cast that have shown strong past performance which increases placement potential. This has led to certain cast names having greater influence in gaining placement and that has provided those actors with new leverage in negotiating higher fees. Already we are seeing a growing gap between the cost to secure these preferred actors and the revenue that can safely be forecasted for new productions. This valuation gap will grow in 2024 and Producers will need to be more cleaver in how they cast those bigger names, often in modest roles with shorter shooting schedules, to keep costs in line with the more modest sales potential. 

Digital Sales have become most of the revenue potential, and the focus has been largely between SVOD and more recently AVOD, but I would also stress the importance that TVOD should still provide to independent productions. TVOD requires the consumer to pay a small fee for each viewing and there are still many consumers that will pay that small fee for early access and dependable viewing to content they specifically want. The key factor is to provide a decent window for the consumer to see the benefit of paying that small fee. I feel that the window needs to be 30 days at a minimum and 60 days being ideal. After that initial holdback period, AVOD exploitation will represent a greater income stream at should be exploited, but by windowing, you generate more revenue and better ROI. 

AVOD has emerged as the single most important revenue source for Indie films and the consumer base is growing rapidly, spread across numerous AVOD outlets and services. This creates opportunities and challenges. Securing broad distribution via AVOD platforms will allow your content to be seen by more people and that drives ad revenue. However, some AVOD platforms and FAST Channels have very low traffic and may actually dilute your title’s importance and where it ranks on larger services. It may also be wise to give an exclusive initial AVOD window to one platform in exchange for better promotion and then widen to other platforms after the promotion is over. Understanding your program’s demographics and how that fits with certain platform demos is an important guiding factor.

FAST Channels are a subset of AVOD and allow a Distributor or Producer to bundle branded series or similar genre shows to create a linear feed that resembles traditional broadcast TV. The viewer tunes into a channel based on the theme and defining that theme clearly and delivering on that theme is crucial for sustained ratings. As the channel landscape has become crowded, platforms have become more selective and that requires stronger well-known brands or more unique genres that are not already overly saturated. 

Finally, Physical Media is finally coming to a close, but it still can provide helpful revenue for Indie films and catalogs over the next 5 years. If your film speaks to middle American audiences with mainstream topics, Walmart can still generate meaningful revenue, but you must be careful to provide impactful packaging to drive sell through and avoid excess returns which have grown. Perhaps more important is the role manufacturing on demand (MOD) will provide. This emerging alternative is dominated by Allied Vaughn who works with numerous Indie Labels and all the Major Studios. MOD allows the Producer to make DVD and BD units as consumers actually orders the product from on-line outlets like Amazon and Walmart.com. There is no excess stock, no returns, and no waste. The cost of goods is higher but the cost of delivery to consumer is dramatically reduced.