Screen Australia Drama Report
At a time when streaming services (also referred to as subscription video on demand, or SVOD) are growing internationally at a frenzied pace, various countries are pondering how to deal with this phenomenon, particularly when it comes to local production. Streaming has some of the characteristics of broadcasting yet operates on a different business model. Everyone thinks of Netflix or Amazon, but there are many streaming players both large and small, ranging from Disney+, HBO, Paramount+ and Apple among US players, to Britbox, Stan in Australia and others such as CanalPlus in France and Crave in Canada. Broadcast regulators, who for the past few decades have habitually regulated what is transmitted over the airwaves and cable through their licensing powers, have tried to get their arms around this new, husky kid on the block. However, instead of providing incentives to stimulate more local production, many have decided the streamers are a potential cash cow that can be tapped to fund domestic drama. Various regulatory options are being floated.
In this rush to regulate, national authorities need to be careful not to kill the golden goose (t0 mix a metaphor) of funding for local production coming from offshore, mostly US, producers. The streamers operate in a global environment and can always shift investment elsewhere if costs get out of line in a specific market. As a result, the degree and type of regulation instituted by smaller but important players like Canada, Australia, and others, is critically important. Regulators need to be careful to avoid creating a domestic cost base that is uncompetitive or else both the domestic industry and consumers could suffer. Denmark is a case in point where its proposed 6% levy on streaming revenues, combined with a contractual standoff between unions, producers and the streamers, has led to a catastrophic drop in production of Danish series. That is the risk currently playing out both in Canada, with Bill C-11, and in Australia, with the government’s consultation process for Australian screen content requirements on streaming services.
In Australia, the streamers are currently the leading source of production funding for Australian adult drama. Streaming services now invest more in this genre than public, commercial and subscription broadcasters combined, despite having no legal obligation to do so. Expenditures on streaming productions increased from A$371 million in 2018/19 to A$680 million in 2022/23. As a result of this record level of investment, local production costs have shot up, with labour costs rising more than 40% over the past five years. Because of rising costs, and the relative newness of the industry (which has resulted in a scramble for subscribers and market share), most streamers are currently losing money. The Australian and New Zealand Screen Association (ANZSA), which represents the MPA studios as well as several local screen businesses, estimates that its members collectively lost A$3.6 billion in the past year. Looking just at the traditional Hollywood studios, that loss was a stunning $A12.6 billion globally, a margin of minus 21%.
The industry will undoubtedly settle down to a greater equilibrium once the initial phase of market establishment is over, including rationalizing and becoming more efficient in production costs. However, one of the models being proposed by the Australian government is to impose a required contribution to Australian scripted drama (excluding any financial contribution made to other forms of Australian content) of up to 30%, based on the previous year’s amount of expenditure on programming. There would be a sliding scale dependent upon the number of Australian subscribers. Given the constant flux and evolution in the industry, there is no business logic in basing required contributions on program expenditures at a given moment in time, when labour costs are inflated, and streamers are temporarily running unprofitable businesses in order to secure market share. It is not only an unfair burden based on an unsustainable expenditure pattern but will lead to expectations that whatever contributions are made in a given year will constitute a floor and should grow. In short, to lock that formula into long term legislation is like taking a snapshot in time and setting it in amber.
A possible alternate formula proposed for financing the production of Australian scripted drama is to base the contribution on revenues. This is even more problematic from a business point of view. Revenues are growing but so are expenditures. Remember all the red ink referred to earlier? At the present time, revenues are not a good proxy for the state of the industry and would negatively affect younger services, or those yet to launch. Moreover, the contribution expected from streamers based on revenue is disproportionate when compared with commercial and subscription broadcasters. Streamers are expected to contribute 10% of revenues (less sports programming revenue) whereas the current contribution from traditional broadcasters is between 1 and 2% of revenues. Not only that, but the consultation paper also indicates the 10% would constitute only a floor for Australian drama expenditure. It could be doubled to 20% over time.
Both of these proposed formulae threaten to place an unsustainable burden on the industry. For example, the 6% revenue levy in Denmark compares unfavourably to other countries in the EU where levies on revenue range from zero to the 1.5 to 2.5% percent range in Greece, the Netherlands and Germany. The Australian proposal is to start at 10% and moves up from there!
What will be the result? Who will the losers be? While the Australian government’s desire to increase spending on the production of local content is understandable, every policy initiative needs to be examined in the light of possible consequences. Australia is a big and important market so, frankly, it is unlikely but not impossible that the streamers will pull out (as happened with Amazon in Vietnam or with Warner Bros in Denmark, in terms of production), but a certain result is that new streaming services will be reluctant to enter the market. If the expenditure model is adopted as proposed, with increasing tiers of contribution dependent on number of subscribers, there will also be a perverse disincentive to avoid growing the subscriber base. Instead, businesses will be encouraged to raise subscription fees to keep the number of subscribers constant while maintaining needed margins. The big loser will the Australian consumer, who will have fewer or more expensive viewing options, as well as the Australian production industry as streamers take steps to control expenditure on productions to minimize compulsory contributions to one relatively narrow genre of content. Increased costs have to be covered somewhere and if costs of production in Australia soar owing to government intervention, they will either be underwritten in the final analysis by the Australian consumer, or production will seek more competitive environments.
Given the current rate of investment by the streaming industry in Australian content, one wonders what problem the Australian government is trying to fix. To box in an evolving industry, one that is offering plenty of local content to Australian consumers and providing lots of well-paying jobs to the local production industry, seems to me–to say the least—very short-sighted. The streaming industry clearly has incentives to invest in Australian content. Those incentives are the good production values that exist in Australia, good stories serving both local and international audiences and a growing subscriber base that will one day be sustaining from a business perspective, as well as a reasonably competitive market from the perspective of production costs. To impose a disincentive on this virtuous circle by distorting investment decisions through the imposition of an inflexible formula mandating a significant investment to support only specific forms of production is a good way to undermine this positive scenario.
Australia, like other “middle countries” such as Canada, need to be careful not to be regulating in ways that are unsustainable for the market. Canada has just had to swallow hard and put a considerable amount of water in its wine to come to a deal with Google over payment for accessing news content, and has had to watch Facebook block news for Canadian subscribers. Australia managed to reach more successful deals with these large internet giants, although there are reports that Facebook might not renew the deals it made in Australia. Having been bloodied once, the web giants subsequently decided to hold the line in Canada lest the “contagion” spread. While the comparison with Google and Facebook is not exact, (these companies dominate their digital industry in a way that no streaming service does), the streaming industry is not an inexhaustible cash cow to be milked dry; it should be expected to contribute a fair share to domestic production, but it operates on a global scale and overly restrictive demands from any one country can upset the balance of models that contribute to win/win outcomes. Getting that balance right is critical, especially in a mid-sized economy like Australia.
In the meantime, the streamers have been asked to provide input into the Australian consultation paper issued in November. This paper identifies the costs/challenges and likely benefits of each of the two proposed models, based on either program expenditure or gross revenues. From the industry’s perspective, this is like having to decide whether it’s better to be shot or to hang. Surely Australia can do better. It is not too late to dial this back to find a balanced solution that works for everyone–Australian consumers, the Australian production industry, and the international streamers.
© Hugh Stephens, 2024.
