Author
Joel Espelien
Date
September 26, 2017

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Star Trek Discovery premiered on CBS this past Sunday. Future episodes will be available exclusively on the CBS All-Access SVOD streaming service.

Why is CBS putting its highest profile new show behind the SVOD pay wall, and what does this mean for the future of TV? Two thoughts

1. The Legacy Broadcast Model Can No Longer Compete At The High End For Premium Content
The broadcasters once had a virtual monopoly on premium TV content. Broadcast content was so much better than anything else that entire TV channels (TBS, USA Network) were created just to show reruns of these shows for years (and years – Gilligan’s Island is still available if you look hard enough).

Those days are gone. Today’s highest quality shows appear either on basic cable (AMC shows like Mad Men or The Walking Dead), premium cable (HBO shows like Westworld or Big Little Lies) or SVOD services (The Handmaid’s Tale on Hulu or Narcos on Netflix). This isn’t just my opinion – these types of shows dominated the latest Emmy Awards. Other than Saturday Night Live and token awards for NBC’s The Voice and This is Us, traditional broadcasters (especially CBS) were nowhere to be found.

To CBS’s credit, it clearly saw what was happening and placed a very large bet on Star Trek Discovery. Not just on the show, but on the business model. By moving a high-profile, high-value franchise property like Star Trek to SVOD, CBS is voting with its feet and saying that streaming subscription revenue, not legacy linear advertising, is the future of high-quality TV. In the short run, the move will cost CBS some ad revenue from selling ads around Star Trek Discovery. Over time, however, if the venture doubles the number of subscribers on All-Access, then the investment will have been well worth it.

At $6 million per episode, Star Trek Discovery is a very expensive proposition; especially given that All-Access currently only has two million subscribers. How can CBS afford the development? Easy – it sold off the international rights to Netflix for a reported $6 million per episode. It doesn’t take a PhD in math to realize that this deal allowed CBS to fully cover its development costs, essentially giving it the ability to play with the house’s money with respect to the US streaming market. This looks like a good deal for both CBS and Netflix, but at what long-term cost to CBS?

Netflix Now Owns The International Market
TV broadcasting is by definition a local market. This is true all over the world. Other than the UK’s BBC, few broadcasters have been able to successfully make the jump outside their national borders. Premium channels like HBO and CNN, by contrast, show up on cable and satellite systems around the globe. Likewise, streaming brands like Netflix and YouTube are becoming globally ubiquitous.

This puts broadcasters like CBS in a quandary. Although its shows have been viewed abroad for decades (think M*A*S*H), the CBS brand is no more known in Germany, for example, than ProSieben is in the US. By contrast, everyone under the age of about 45 in Germany knows what Netflix is. As a result, if you want to reach a big streaming audience in Germany you either have to partner with a local player like ProSieben or you have to license the content to Netflix. When you scale this analysis up to 100 international markets, there is no comparison. Only Netflix (with Amazon a still-distant second) can get you instant access to a global streaming audience at scale.

The problem with this, of course, is that Netflix is now able to use CBS’s very best content – Star Trek Discovery – to further grow the Netflix brand internationally, creating even greater separation between Netflix and its competitors. CBS (and other legacy networks) better hope that Amazon, Hulu, YouTube, HBO Now, DirecTV Now, or someone else gets enough traction overseas to provide some real competition for the Netflix juggernaut. Otherwise future international streaming deals may not be quite so favorable.

Conclusion
The TV industry is changing. Old models are in decline, while newer models remain fraught with risk. CBS deserves real credit for striking out in a new direction with Star Trek Discovery. We hope they live long and prosper.

Stick with TDG and stay ahead of the curve.

Joel Espelien is a Senior Advisor for TDG and serves as an advisor and Board Member to the video ecosystem and technology companies. He lives near Seattle, WA.

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