Getting inside the landmark Sesame-HBO deal

Will HBO be making Netflix-sized moves into kids TV? What are Sesame Workshop's plans for its own SVOD service? Kidscreen spoke to HBO president of programming Michael Lombardo and Workshop COO Steve Youngwood to get more insight into the historic deal.
August 19, 2015

Last week, Sesame Workshop grabbed headlines with the announcement of its landmark HBO deal that will see the subscription-service giant broadcast the next five seasons of Sesame Street nine months ahead of PBS KIDS and help to finance no fewer than two new Workshop productions - a Muppet spin-off and an unnamed educational series.

The pact has caused a bit of an uproar in the US consumer press over its placement of the iconic series’ first-run eps behind a paywall and out of reach for families that can’t afford an HBO subscription. However, anyone working in the children’s television business right now knows that it was a smart move made in an increasingly tough financial climate that will stabilize funding for the 45-year-old program and its parent org. Speaking to Sesame Workshop and HBO, Kidscreen has more info on the details of the deal, including whether or not HBO will be making Netflix-sized moves into children’s programming.

According to Sesame Workshop COO Steve Youngwood, the deal really picked up momentum this past spring. “We spent a lot of time working with PBS, and for us to keep making Sesame Street available for free across the country, it became clear that we had to find another revenue source,” he says. “We talked to a bunch of people, and early on with HBO, it became apparent that they appreciated our mission and the fact that making the series available for free to PBS was a pre-condition.” And with those parameters set, the deal crystallized fairly quickly.

License fees from PBS amounted to just 10% of the production costs associated with making Sesame Street, notes Youngwood. And it’s well-known that the Workshop covers its expenses and educational outreach costs primarily through content distribution fees (30%) and consumer products licensing (40%). Revenues in both categories have been on the decline for the Workshop. Its audited financial statements show that between fiscal 2013 and 2014, distribution revenue fell from US$39 million to US$31.6 million and consumer products sales dropped from US$46.5 million to US$41 million. Meanwhile in 2014, associated production and development costs - covering all Workshop productions, not just the flagship show – rang in at US$41 million, while its operating income incurred a US$10-million loss for the same period. It was an untenable situation.

Specific financial terms of the deal have not been disclosed, but Youngwood says, “HBO is paying first-window rights that are standard for a top-tier television program. They are not underwriting the whole thing, nor is [the US$41 million spent on production and development overall ] the amount that they’re underwriting.”

For HBO’s part, it is getting first-window and SVOD rights in the US for the next five seasons of Sesame Street, along with domestic SVOD rights for 150 eps of the 4,500-ep series and Workshop productions Pinky Dinky Doo and The Electric Company, and similar rights for the upcoming Muppet-based spinoff and brand-new educational series. As to why HBO has re-entered the children’s content scene in a significant way roughly eight years after making its last original preschool series Classical Baby (under former HBO Family exec Dolores Morris), it’s clear that that the increasing competition for SVOD subscribers – and kids love of streaming content – was a big factor.

“We have been discussing the children’s area more and more recently, especially in light of our expansion into streaming platforms with HBO GO and HBO NOW,” says Michael Lombardo, president of HBO programming. “Children’s programming plays very well on those type of services. So, when [Workshop CEO] Jeff Dunn began talking to us about Sesame Street, it didn’t take very long to realize that it was a perfect fit for us. There is no more iconic or distinct children’s series than Sesame Street, and across all of our genres, that is what we hope to provide our subscribers.”

So, will HBO be making a land-grab for library rights to expand into non-preschool demos and augment the Sesame acquisition as Netflix did to build its now massive kids offering? Not exactly, says Lombardo - likely to the dismay of eager kids TV producers. “The HBO brand stands for quality and distinctive programming, and that is the measurement we will use if we pursue additional children’s programs,” he says. “We believe our platforms can benefit from the right kind of children’s programming, but we aren’t in a race for volume.” He adds that “we are exploring, but have no specifics to share at this time” in response to the question of whether or not HBO will be hiring an exec to solely oversee kids programming.

As for the Workshop, it is now thinking through the knock-on effect the deal will have on other parts of its business. Sesame Street episodes will cease streaming on Netflix and Amazon as soon as their current licenses expire, while HBO will start broadcasting the 46th season of the show this fall, which will double in size to 35 eps. Additionally, Youngwood says that its eight-month-old  Sesame Street Go subscription SVOD service and app “will be wound down as a standalone service.”  The org’s efforts on YouTube, where it has built a substantial channel with more than 1.4 million subscribers and billions of views, will continue as scheduled. “It’s been a really great platform in terms of reaching our audience and fulfilling our mission,” he says.

For the nonprofit’s key revenue stream of consumer products licensing, however, things might prove a little trickier to manage. HBO has roughly 36 million subscriptions in the US. While it has not released numbers for its SVOD service HBO NOW, Sesame’s longstanding home PBS has close to 100% penetration of TV households in the US, making exposure on PBS KIDS the more likely retail driver. So, mounting season-specific consumer products programs with a nine-month lag between audiences could ostensibly create some scheduling challenges with licensees and retailers.

“From an exposure perspective, we’re still going to be available to all kids on PBS for free,” says Youngwood. “We’re thinking through how the [retail] window works right now. It may be like having a theatrical and a TV window. But our first filter for this deal was not consumer products. It was about ensuring that we could build a sustainable model to make the show for the next 45 years.”

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