Source: Netflix.
Netflix (NFLX 4.17%) and Amazon (AMZN 1.30%) combined to win nine Emmy awards this year, but nobody knows how many people actually watch their shows like House of Cards and Transparent. Nielsen has been working to figure out a way to determine streaming viewership despite a lack of cooperation from Amazon and Netflix.
And there's good reason for the two streaming giants to keep their viewership under wraps. Not because it would be terrible PR if one of their shows was outed as a complete flop, but because it would give more data to their content suppliers. That data could shed some light on the true value of licensing content to either Netflix or Amazon, causing both streaming services' costs to rise.
SVOD is eating cable
Cord cutting is in full-effect with estimates showing a distinct decline in subscribers during the first two quarters of 2015. What's more, Walt Disney (DIS 1.54%) was forced to lower its guidance for its cable operating income growth after subscriber losses at ESPN. Meanwhile, subscriber growth at Netflix doesn't seem to be slowing down, and all indications show that Amazon Prime is on a similar path.
Without an accurate way of measuring viewership on streaming services, it's still unclear exactly what's happening.
Are people simply watching less television content and spending more time watching YouTube and browsing the Internet? Are Netflix's and Amazon's original programming cutting into viewership of traditional cable shows? Or are people opting to watch licensed content on streaming services instead of watching linear television?
Finding the answers to these questions is key for media companies like Disney, which license their content to Netflix and Amazon. It helps them understand the true value licensing content creates for Netflix, and how it impacts their own businesses. And if they ever get some reliable data, it could cause them to rethink their deals with the streaming services.
Why costs will rise
Simply put: Data is leverage.
Not only will ratings data provide media companies with information about how Netflix and Amazon are impacting viewership, ratings give them an idea of the relative worth of its programming to Netflix.
So, if Disney, for example, knows that its programming is more valuable than Netflix's originals, it could opt to ask for more to license its content than Netflix pays to produce its originals (about $450 million per year).
Additionally, the data may be able to show how licensing content to Netflix or Amazon impacts viewership. For some programming it may have an additive affect (like Breaking Bad), but for others, it could replace viewership, costing media companies lots of ad revenue. In that case, a media company may elect to remove its programming from Netflix in the hopes that ratings of its broadcast will bounce back. Alternatively, it could ask for a higher price to compensate for its declining live viewership.
A rush toward originals
With the dynamic between streaming viewership and broadcast viewership in mind, the purpose behind original content becomes even more clear. Not only does original content differentiate a streaming service from the growing number of other streaming services, it shields them from the potential price increases media companies are bound to demand after Nielsen figures out how to report accurate viewership data.
In Netflix's fourth-quarter letter to shareholders, CEO Reed Hastings told investors that original content was some of the company's most cost-efficient content. What's more, it's acquiring global rights to some of its newer originals, which will make it more efficient as the service expands to its goal of 200 countries by 2017.
It's a good sign for investors that both Netflix and Amazon have garnered such attention for their original series. It demonstrates an ability to find a suitable replacement in original programming if the asking price for licensed content climbs too high for their increasingly stretched budgets.
