These are strange days we’re living in, when every actor in Hollywood wants to be an angel investor in startups, and every tech company feels like it needs to be making Hollywood-style entertainment.
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Yahoo Microsoft and AOL are all ramping up their TV programming efforts. Yahoo, whose previous original video offerings have mostly consisted of short-form content, is said to be on the verge of placing orders for four “10-episode, half-hour comedies with per-episode budgets ranging from $700,000 to a few million dollars,” according to the Wall Street Journal. Microsoft has greenlit six series across a range of genres and has more than a dozen in the development pipeline, says Bloomberg. And AOL recently inked a deal to produce its first long-form series, a reality show called “Connected” imported from Israel.
Nancy Tellem, the executive in charge of Microsoft’s original video shows, does not sound overly optimistic. “This is not an easy business,” the former CBS Television Studios president told Bloomberg. “There’s a huge failure rate. You have to get up to the plate a lot. Hopefully we can have a higher batting average than most, but it’s a long process.”
Actually, it’s even harder than that makes it sound. That “huge failure rate” is for the networks and studios that make TV shows for a living. For Microsoft and Yahoo, long-form video entertainment is terra nova. They’re venturing outside their zone of competency into a region where success is unpredictable and failure is costly.
What makes them think it’s a good idea, then? Netflix, for starters. The success it’s had with “House of Cards,” “Orange Is The New Black” and “Arrested Development” has dynamited conventional notions about what technology companies can do in the entertainment realm. Amazon may not have minted a bona fide hit yet, but no one’s mocking it for trying.
But Netflix and Amazon both approached TV with a giant advantage Microsoft and Yahoo lack, namely server farms full of data about streaming video consumption habits and sophisticated recommendation algorithms which can tease out the hidden factors that predict a show’s popularity among certain groups of users.
Even more than that, creating original shows makes sense for them in a way it doesn’t for other tech companies, particularly Yahoo. Network-quality programming is wildly expensive to product: Amazon is reportedly spending more than $1 billion a year on it, and Netflix twice that.
They see that as a worthwhile investment because a buzzy show is the calling card that brings in new subscribers. For a subscription service, just one or two of them is enough to make a difference between between a must-have and a nice-to-have. (Notice that Hulu, which has a slew of originals but has yet to have one break out as a hit, has seen slowing growth for its Hulu Plus premium tier.)
It’s much the same for cable networks like AMC and FX, except in their case the “subscribers” are the distributors who pay them monthly carriage fees for their programming. In carriage negotiations, a show like “Breaking Bad” is the ultimate doomsday weapon; no cable or satellite provider can afford not to have it.
Microsoft has its Xbox Live subscription service, and a rather complicated sounding strategy of only producing programming that will have interactive elements and appeal to young men who play video games. Yahoo isn’t a subscriptions company in any real way. It makes money from advertising.
Given a popular enough show, Yahoo can no doubt turn a profit from advertising alone, and there are always secondary ways to monetize it, such as licensing it to Netflix and foreign territories after a window of exclusivity.
But anyone can make money on a hit. The hard part is making enough money to subsidize all the inevitable misses and still have enough left over to justify the cost of capital. That’s where a subscription model comes in handy.