Where the Money Is Spent in Hollywood and How It's Changing

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1:28Restrictions apply, including token expiration. See full turns at Vanduul.com slash sportsbook. Gambling problem? Call 1-800-GAMBLER or 1-800-MY-RESET. It is Friday, September 26th. Amid all the disaster talk in Hollywood over the past few years, the question you hear all over town is, who's buying? Put another way, who's spending? Who's investing? Most importantly, what are they investing in? After all, the film and television business is a sales business, convincing the people with the money and the ability to distribute to pony up for a creative product that, for the most part, can't be made without deep pockets, or at least not the most ambitious projects.

2:03That's why when you pull back and look at Hollywood from 30 ,000 feet, it's all about the content spend. And everything I've read recently shows that overall content spend among the major players has declined in the past couple of years, leading to the current content recession and some existential questions about the business. But a new study from KPMG, the big four accounting firm, caught my eye. They argue that annual content spend by the 12 major players, that's traditional media companies like Disney and Comcast, but also streamers like Netflix and Amazon, that annual spend now totals more than$210 billion.

2:37And that number has been growing at a 10 % compound rate since 2020, with only slight moderation recently. Some nuances there, of course. The number includes sports rights, which of course have been getting more expensive, and it includes$32 billion spent by YouTube, which for the most part doesn't pay for content upfront, but splits ad revenue with the talent. And they also have supports rights. It's an interesting report and it gets to the growth areas for the content business, as well as areas that are getting less investment and some recommendations for strategies. They actually think we haven't yet reached peak content, but that it's coming.

3:10So I wanted to have one of the authors of the study on the show. Scott Purdy is a media strategy leader for KPMG US, one of the big four accounting firms, as I mentioned. And he's going to dive into the report called The Future of Content Spend and Business Models in Media. Namely, where is the money coming from and where will it be spent? From The Ringer and Puck, I'm Matt Bellany, and this is The Town.

3:36Okay, we are here with Scott Purdy, who is the media industry lead strategy of KPMG US. Welcome, Scott. Hey, Matt. Thanks for having me. Are you an accountant? No. No, I'm not a CPA. More MBA than CPA. Good. We have a no accountant rule on this show. They're automatically boring. All right. Well, I'll try to be the opposite, although still representing a lot of my colleagues. Yes. Okay, good. So I'm a sucker for a good study. I'm a sucker for a good chart. And this one caught my eye because it was a little counterintuitive. And I know that sports are involved here, but you talk to people in Hollywood and it is like a doom and gloom scenario.

4:23Everyone is bummed out. The content spend is going down, down, down. These streaming companies are consolidating and everybody, you know, Paramount may buy Warner Brothers. But your study suggests that we are not at peak content and the growth rate is 10 % per year on average. and we are a pretty robustly growing business. How did you guys get to that conclusion? Let me take a step back and talk about how we define content. This study takes a wider view of what content is. So this includes all content investment, including your traditional film and TV content production, but also sports media rights, affiliate fees, revenue share with content creators, and music.

5:10Oh, and music. Okay, so music's in here too. Okay. So it's a wide swath of what we see in the overall content ecosystem, right? Because it's hard to ignore companies like YouTube or Meta. Of course not, yeah. So in our definition, that's a wide swath. And what I'd say is, yes, it's grown 10 % a year if you start at 2020. And obviously, we know with the launch of all the different streaming apps and different services and, you know, the call it chase of subscribers, that grew significantly from 2020 to 2022. The past two years, though, have been 4 % growth. And that's a wider definition. Yeah, it certainly has moderated significantly.

5:50And look, and not all contents and formats have experienced the same kind of growth. And you mentioned sports earlier. Yeah, we'll get into that. Let's get into that. So what percentage of this$210 billion content spend is sports rights at this point? Well, the numbers range, and we're looking at, we'll call it the 12 of the biggest media companies in the world, most of which are, we'll call it, domiciled in the U.S. And just to be clear, that's Comcast, YouTube, Disney, Amazon, Netflix, Paramount, Warner Brothers Discovery, Sony, Fox, Apple, Spotify, and Meta. Yeah, that's right. Those are the ones included in the study.

6:30And they're not the only ones who control media rights. And there's not a breakout of how much of their total spend is on media rights. But that includes all the NFL. Those companies have all the NFL rights. Yeah. And assume they own 80 %-ish of all the sports rights out there, right? Other studies, we haven't looked in particular, but other studies have said U.S. maybe$30 billion, globally$60 billion. So if we're looking at global spend, which is what this is, it's 30 percent-ish of that total. And that's got to be growing as a percentage. Yeah. Most peg that growth at high single digits, 8 or 9 percent.

7:08And if you look at the major studios from 22 to 24, they're flat to down overall. But if you think sports rights are included in there, obviously there's a reallocation of spend towards sports rights in that. Every one of these big sports deals ends up taking money out of these budgets for other things, which Netflix's case today, they just announced an MLB deal where they're going to be taking on opening day and some other things. And that's a$250 million a year deal, according to The New York Times. Necessarily, that money's got to come out of somewhere and their budgets can increase. But likely, the professionally produced content is going to suffer because of that emphasis elsewhere.

7:47So the people in Hollywood that are freaking out about lower content spends on entertainment content by the traditional players, they're not hallucinating. They're not wrong. It is flat to down. No, no, that's right. Yeah, they're not hallucinating like AI. Whatever they feel and see is definitely real, right? The budgets have come down from those areas and have been reallocated or have just gone away. Right. And one of the surprising things from this chart that you put out is the breakdown and the number one content spend company, I would not have guessed, would be Comcast. How are they bigger than Disney, which is at 28 billion?

8:33Comcast is at 37 billion, according to your chart for 2024. And then it goes to YouTube at 32 billion, which makes sense. And then Disney at 28 billion, Amazon at 20. So why did Comcast get to$37 billion? That's not a music service. Yes, they have NFL rights, but I wouldn't think that they would be as prolific of a spender as Disney. Yeah, going back to the definition, this includes also, and a big driver for Comcast, of why it's up there is affiliate fees. So those are going to be the fees that are going into the cable service. Oh, so they, sorry, explain that. This is what they're spending on affiliate fees or what they're getting in affiliate fees?

9:12because they own a cable system. Yeah, yeah. So this is the money that comes into those cable systems. Mm-hmm, that's right. Ah, okay. So that makes sense. They are one of the largest cable providers and Disney does not have that business. Yeah. Interesting. Okay. So I want to get into some of the trends that you are seeing. Other than the rise of sports rights, what trends are you seeing in where content is being invested in and where is it being pulled back? another place where the overall landscape in terms of what drove the growth to get to the 210. I mean, a lot of that is the user generated side.

9:49So that would be from YouTube and also meta. That's another driver. And then with the rise of all the fast platforms out there, licensed content is certainly also a key component there. So this is services like Tubi and Pluto that are paying content owners to license their old shows for these new platforms. Correct. And many of those are on revenue share models as well, where they don't pay very much upfront, but it's an ad-driven model on Tubi and Pluto where you get a percentage of the ad revenue that's generated by that content. Yeah, that's right. A shift toward the ad-supported model is what we've all seen over the past couple of years.

10:29So that's interesting and significant because what it's doing is it's taking the money being invested in content away from the upfront model where a company will pay you to create something and putting the onus on the content creator to create something, give it to a platform, and then you get revenue from whether it's an old show that was produced decades ago or whether it's a cat video or doing a skydiving video, you have to create the content before you can make the money. And that's a pretty significant shift in where the investment is going in professionally produced content, right? That's exactly right.

11:10That's the second part of our paper about the business model change. Before you have essentially an upfront investment in the content you create it and then hope to get paid on the backend. Now you're in what we're calling a platform model where it's essentially pay for performance, right? And so you get paid when the content does well. Yeah, and I think that is something that is going to continue. I mean, your modeling shows that's gonna, to essentially eat a big portion of the entertainment economy. I mean, you already see it in the numbers, right? And so it's not like, oh, this is in the future.

11:45This is going to happen. We already see this. We already see examples of this. And we call this kind of crossover between the two models. We don't think it's going to shift from one model to the other. But we think all these companies are now going to have, call it crossover, where, for example, you're going to get the IP from the different platforms that got famous there, move over and start to be on the more traditional platforms or the more traditional studios and distribution areas. Mr. Beast on Amazon is a good example. Sure, or Cocomelon, the perfect example, where Cocomelon's big on YouTube and then they go on Netflix and Miss Rachel and that kind of stuff.

12:19Right, and if you pull the string, why can't you drop series on some of these user-generated platforms and then they start there instead of starting on linear? So I think you're going to see companies experiment quite a bit more because you have to go where the eyeballs are. Well, and that gets to another point that you make in the study, which is that a lot of these decisions now are being made by data. And if you have data on something like Miss Rachel, who bubbles up and says, oh, this is a thing that the toddler crowd is gravitating toward, then you make a move and put it on Netflix. And it's essentially a testing ground for data to tell you what to program.

12:59That's right. I mean, everyone knows what engagement looks like. across all their content formats and types. And you are using that to selectively figure out where to distribute, where to put it, how much of it to make. And companies will still need to do a better job of doing this because I know, based on the conversations we have with the industry, people have a lot of data. They still need to harness what they can do with that data, especially using AI, just on the decision-making side, without impairing any of the creative process and those sorts of things. I mean, you say that, but a lot of the creative process requires money.

13:34And if the onus is on the creator to come up with the money to execute their creative vision, it necessarily will impact it if these outlets are investing less upfront and waiting for the data to tell them what to make or what to platform. Yeah, that's right. That just shows there's a market. Private equity could come in and identify people and get good at seeing talent and giving them money and then they create it on their own and then it gets big on user-generated platforms and then transfers over. That's right. I mean, I think it opens up a wider, call it set of potential bidders for different kinds of content.

14:11Yeah, we're seeing that a little bit with some of these private equity-backed independent studios, but it seems like what you're saying is that we're looking at a future where you, instead of taking out a pitch to the 10 potential buyers of traditional platforms and studios, you could potentially take out a pitch for a show or a movie to a ton of money-backed ventures, and then they decide what to make and what to experiment with. And then of the 10 that they back, one becomes good enough on YouTube to get a Netflix deal. Yeah, I mean, that's certainly a possible... Or you keep it on YouTube. Right, right.

14:52And there are all those companies out there that are backing creators, and we know. Yeah, and the content is going to find its way ultimately to where it generates the most value. Yeah, it's just a democratization of the gatekeeper model that has run Hollywood for 100 years. Yeah, I would say that's opening up. We already see it, right? And we already see it that paying creators directly for content, that's happening at much more scale now.

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16:39And they're a little jargony, so I want you to kind of explain. One is strategic partnership around IP. What does that mean? so where do companies traditionally get their ip and where should you be getting it in the future i mean i think you have to rethink that so are you typically trying to do a pilot on tv right and and where are you getting all the ideas from write a pilot sell it to a network or a studio and then they make a pilot and decide whether to make a show i mean that's already kind of going away in a lot of ways there's no pilot season anymore a lot of these streamers go straight to series if it's a hot project.

17:16But you're saying there's an evolution going on. You know, where are you going to get some of these stories? Where are you finding your talent? Where are you finding the IP? And I think that is something that companies need to re-engage, revisit around how they're doing that. So where are the hot places for next generation IP? I mean, I get a press release once a day from some companies saying, we're generating the next version of the IP universe that is going to take over the world. And it's like, what? IP is IP because people care about it. And it has meaning and brand loyalty. And you can't just create that out of thin air.

17:55It's got to be a book that hits. It's got to be a comic book that people care about. It's got to be a game. It's got to be something that has gotten traction. And so where is the next generation coming from? AI? Is there going to be AI generated IP? key? Well, I think as a supplement, it's certainly going to help enhance a lot of the derivatives off of some of the original content, for sure. I think internationally is another place where companies need to look. Because I think the US used to be kind of like an export model of taking all of its content and sending it out. Now, it's starting to become both an import-export model.

18:29Yeah. And there's a lot of it coming in. I mean, what's going on in the box office right now with this Demon Slayer movie. That's Japanese anime IP that is going to grow seven, eight hundred million dollars worldwide. Exactly. So the next one is data, just a greater reliance on data. And how does that play out? Because you talk to development executives, you talk to people in the creative community, and they're like, OK, yeah, we use the data. We see what's there. But ultimately, a trained professional human needs to make creative choices about what to put on these platforms so that humans will enjoy them.

19:04It is not going to be taken over by AI or by data alone. I think that's right. I think when people say that they use the data and use all the data, I'm not sure if I fully believe that it's being used to the full capabilities and extent. Well, you happen to be selling data to these companies so that you can be of use there. Right, right. I mean, we help build out their capabilities around this. And And you would be surprised around how disconnected a lot of the different pieces of the company are around some of these things. And it's really just trying to make it available such that humans can make the ultimate final decision.

19:39There's always that place for curation, for tastemaking, etc. But give me an example of where data is not being used to its full capability. Is it just like these streamers are not looking at what is successful on their own platforms when deciding what shows and movies to buy next? Or is they not looking at external factors? Like, where is the data disconnect? One example I would use is, and we relate it to sports as well, but like, do you really understand who your audience is? Like, do you know who they are, why they watch, and what is the purpose? Like, you do know how many times someone started a video and how long they watch.

20:19But do you actually know a little bit more around the personas of those people? Yeah, that's interesting you say that because Netflix has always said that they don't know anything about their customers except what they watch. You could be male, female, transgender, 80 years old, 7 years old. They don't know you except what you watch. And I think that's changing a little bit with the ad model where they have to kind of know a little bit more about their demos and who these people are. But that, I thought, was a little bit interesting to me because you would think that a data-driven company like Netflix would dive deeper and survey their audience and kind of know who they are rather than just what they watch.

21:00Right. I mean, and that's a little bit of a holy grail, right, to really understand who's on the other side, watching, understand the preferences. And there's obviously kind of restrictions around how much data you're able to gather around the person that is on the other side. But that is what all companies will ultimately try to need to understand better, whether it's on an individual or a cohort or, you know, a persona. I think that's important. And I think going back to my other point, companies are typically disconnected. We've seen a lot of mergers and acquisitions in the space. Those systems are not kind of, you know, there's no one single glorious dashboard that anyone has to be able to use to make all these different decisions.

21:37Well, that's what the Ellisons think they're going to get when they combine the power of Oracle and perhaps TikTok with the Paramount Studio. Yeah, I mean, it's a vision worth chasing, though, right? I know. So far, it's just a vision. We haven't seen any real proof that this works, but that's what you're talking about. Yeah, exactly. Having all the data at your fingertips, trying to understand it. I know companies have really struggled with some of this. And I think, you know, and it goes to maybe one of the other points around kind of the KPIs and metrics that you use to understand if you're being successful or not.

22:11One I've always thrown out there is return on content. Like, so, you know, there's a return on investment, but like, what's the return on the content? Because if you license it, it's easy to understand, right? Like, oh, yeah, I get this much for a year. But like, for any examples we've talked about, whether that's K-pop demon hunters or whatever, What is the actual return on that? Well, isn't that the efficiency metric that Netflix and others have where you divide, you know, they have the cost of the content versus the engagement? I mean, that that is the return on your investment, right? Well, it's it's a proxy for for what that is.

22:46I mean, can that translate into, you know, real dollars, et cetera? You're saying that some engagement is better than others. Yeah, right. You know, and there's value to that and there's the kind of indirect value of the marketing and, you know, the online media and all that. Maybe the demos watching K-pop Demon Hunters are more valuable because kids can be marketed to on the ad tier more than others. All right, so the third of your strategy recommendations are hybrid models that can scale. What do you mean by that? Is that just all of these services should have an ad tier and all different ways of making money?

23:19and that's the way to growth here? I think the industry started off as B2B and then with direct-to-consumer and what was called OTT and all that, it had to shift to direct-to-consumer. What you mean is the wholesale model where the television content providers would essentially have deals with the distributors, the cable systems, and that was the model. And over the past 10 years, they have slowly shifted to Netflix to a direct-to-consumer model. And look, you went from like 20 customers to millions, tens of millions or hundreds of millions. And it's a different business. People are like, people don't see that.

23:56It's a very different business. And a lot of these companies, they didn't have brands. What does Paramount mean? You don't know that brand. You know CBS. We still see companies straddling both or trying to straddle both, but with one leg heavier in the B2B side and one leg a little bit lighter in the B2C side. And we think, you know, to really compete, You got to make both work, right? And then you have to be at least agile or nimble enough to also adjust some of these payment mechanisms. Like we were talking about before, upfront payment for production versus kind of, oh, pay for performance afterward, right?

24:32And if you're dealing with talent and IP that's coming from the different worlds, like trying to make them form fit into what you're used to is not a very compelling position. Yeah, try to convince an agent that your client should not be paid upfront. Sure. So that's what we mean by hybrid. Right. Okay. The last one is redefine your investor story. That sounds like something that you would read in an unsolicited email. What does that mean? So we work with a lot of companies, a lot of public companies. We see a lot of different metrics that are put out there. We also see kind of a retrenchment of some of the metrics that are put out there because companies don't think it tells the story.