Star Wars did so well in TV this year, that virtually everyone knew which character was the “symbol” for 2020: Baby Yoda! We know Baby Yoda conquered the social landscape, but how does that translate to Lucasfilm/Disney’s bottom line? Well ...
When CBS finally merged with Viacom after a “will they/won’t they” that rivaled Ross and Rachel (and previously Sam and Diane, I’m told…). The big question was, “What is their strategy?” Will they be a content Arms Dealer, as Rich Greenfield suggested? Will they lean into the declining bundle, as NuFox is doing? Or will they go all in on streaming, as I suggested?
Well, last week it looks like we got an answer. Kind of.
Most Important Story of the Week – SuperCBS Plans to Launch a Streamer
In my unofficial straw poll on Twitter—check in most Thursdays or Fridays for it—this was the story everyone wanted me to write about. While folks on “the Twitter” may think ViacomCBS is already too late to the streaming wars, I’m still willing to give them a shot. The news (and technically it broke last week) is that SuperCBS is considering a new streaming service with potentially 4 layers:
– Pluto TV – Ad-free
– CBS All Access – Ad-free
– CBS All Access – No ads
– Showtime Add-On
Honestly, it reminds me of the Spanish Armada.
I’m currently reading the last book in the Pillars of the Earth series. Taking place during The Reformation, the defeat of the Spanish Armada by the British (four hundred year spoiler warning) plays a prominent role. For those who don’t remember, King Felipe of Spain planned to sail to his army to England to overthrow the protestant Queen Elizabeth. With loads of silver coming from the New World, Spain had the largest Navy in the world at the time, and featured huge galleons.
And yet, a more maneuverable English Navy, combined with some fearless maneuvers and an assist from the weather, meant that the Spanish Armada was routed in the English channel. Harassed by smaller English ships and picked off one-by-one, the Spanish Navy eventually had to retreat back to Spain. As always the lesson is that sometimes underdogs have the advantage.
The question for me is who is who in this analogy? Is broadcast CBS (with all of linear TV) the Spanish Armada sailing for England to destroy upstart digital streaming? Maybe, since Catholicism was older and it needed to retake its crown.
But I could make a better argument Netflix is the Spanish Armada of this analogy. With loads of silver from the New World of cheap internet multiples, it’s goal is to crush all comers with a huge war chest of content. (Spain was also at war with the Netherlands around this time, and parts of Italy too.)
Which is what makes the response of the traditional providers so fascinating. Maybe none of them can be the same size as the Netflix behemoth with 6% of all TV viewing (see below). But maybe the old guard can harass Netflix as the English harassed the Spanish Armada. Disney can pick off folks who want the top tier family content. And Peacock can fill a niche for folks who want news and sports. And Discovery will eventually pick off the folks who just want cheap reality shows. And HBO Max will have Friends? (Fine, that last one is not a niche approach.)
My theory? If you have key strengths or can be “excellent” at something, despite your weaknesses you can carve a niche in any ecosystem. That’s my key question for SuperCBS (and whatever they end up offering):
What can a SuperCBS streamer be “excellent” at?
I see a few potential areas:
“Be Middle America’s Streamer” – A lot of CBS’ bench—though they don’t own a lot of it—was built over the last two decades by Les Moonves to appeal to the areas of the country not on the coasts. (Though as I explained in this article, a surprising amount of CBS viewing happens even in the liberal bastions.) I still think there is room for a streaming platform that is deliberately not high brow. Not prestige. Not event TV. Not even peak TV. Just scripted fare designed to sit back and watch. Cop shows. Doctor shows. Lawyer shows. Comedies that have lots of big gags and laughs. With laugh tracks. The biggest benefit to this approach is that they can save lots of money by not competing for top tier talent at exorbitant rates.
“Go after the “franchise” crown – This may be a stretch, but it requires believing that Paramount is actually a viable movie studio. The facts militate against this, given that most years recently they’ve finished behind Warners and Universal (and everyone finishes behind Disney). But Star Trek has continued to do well in theaters and on their streamer. Combined with a Mission Impossible and Transformers smart refresh, and suddenly they look viable in building franchises.
“Buy Roku” – Buying a company isn’t really a strength, but in my mind CBS still has a surprisingly strong “ad-supported” business via CBS (the top ad-supported brand on linear) and PlutoTV (in the free, ad-supported space). So if you buy one of the biggest devices for watching over the top TV, CBS could ensure it’s content gets distributed to a huge number of households. Of all the contenders in the streaming wars, I think CBS may need Roku the most.
“Go for sports” – This piggy backs on their live TV strength via CBS. If you’re about to lose the rights to the SEC Network, you may as well take your money elsewhere. Specifically the NFL streaming rights. The NFL–from all reporting–seems very hesitant to go digital only, so they need a partner(s) who can be both digital and linear. CBS perfectly fits the bill. (I’d add even if they shared rights with an ESPN, having a piece of the NFL ensures some viewership in the United States.)
I’ll add, identifying a strength isn’t’ the same thing as having multiple tiny niche streaming services. The niche services have proven they don’t have the volume to compete with Netflix. The tricky balance is being broad enough to draw in lots of folks, but still having a strength in something.
So…What is SuperCBS’ Strategy?
There is an old saw in leadership drilled into most officers: “The only bad decision is no decision.” I’ve actually changed my mind on this (inspired by Star Wars’s last trilogy actually). Worse than no decision is flip flopping. So the ranking of decisions is…
- Good decisions
- Bad decisions
- No decisions
- Flip flopping decisions.
Overall, CBS is flip-flopping or no-decision-ing their strategy. My two part article from last August really hasn’t changed much from this little news dump and next week I doubt SuperCBS announces much more. From what I can tell they still haven’t chosen a direction. They’re trying to execute multiple strategies. From Arms Dealing to Streaming to Live TV.
M&A Updates – Viacom and Sprint Merger Cleared By a Judge
If ViacomCBS launching a streamer isn’t the most important story of the week, it’s probably this merger saga. Moving from four providers of cellular phones to three will have an impact on competitiveness. A negative impact. It’s hard to believe it won’t be to raise prices and hence profit!
What does this mean for the entertainment folks, from video to music to gaming? Well, the last line this chart:
Just got a pinch less competitive. And when it’s less competitive they can charge higher rents to reach their customers. If I had to guess—and it’s been my working theory—I think that unless we get more competition in digital video, we’ll find out that customers are paying higher prices for video than they were before the streaming revolution. Without having the specific numbers—I’ve had this bookmarked to calculate for a while—my gut is that cable/cellular bills will eventually reach the price of the old cable+TV bundle, just without TV. Then customers will have to pay for streamers on top of that.
So we’ll pay the same or more, just for less content than the good old days of linear TV.
(Bonus M&A story: That strange news that the FTC is investigating all the big tech company mergers of the last decade. This is either a huge deal, a stall tactic, or busy work. But a lot depends on who is president in 2020.)
Data of the Week – Nielsen Q4 Report
Nielsen released their Q4 “Total Viewing” report. I still haven’t found a copy of the report, so I believe Nielsen just provided a summary to reporters, since they mostly mentioned the same thing. The headline is that streaming is “only” 19% of video viewing or “already” up to 19% of all video viewing in the US. Bloomberg provided a break down by streamer:
After thinking on this for a day, a thought hit me, “Oh hey, we know how much video viewership Netflix is then!” and the answer is a whopping 5.9% of US video time. Which led me to thinking on Twitter that Netflix has previously told us they account for 10% of US TV screen time:
This led me to create this timeline:
Does this mean that Netflix is down in usage? Not necessarily. I’m the first to admit when data isn’t apples-to-apples. In this case, while it measures mostly the same thing (Netflix and Nielsen were both measuring viewership on TV screens in the US only by time spent), Netflix was simply estimating whereas Nielsen was using actual topline data. I dont’ think this means Netflix’s usage is declining, but even with a good Q4 for them, I don’t think it is increasing either.
Still, the pie chart in a lot of ways is the future of the streaming wars. The size of the pie will increase going forward as cord cutting continues. But it’s hard to imagine Netflix’s slice of the US pie getting that much bigger. Especially as Disney+ and HBO Max ramp up. And if that’s the case, well I dont’ think it will go well for their stock price. If I’m wrong, then their stock has no ceiling.
By the way, if Netflix has a lot at risk when new entrants come on board, then Amazon has even more. They’ve been in the streaming game since the early part of this decade, and still only get 8% of streaming hours. That’s a story we don’t cover enough.
Other Contenders for Most Important Story
As usual, we’re long, so let’s go quick.
Mike Hopkins in at “Amazon Entertainment”
I read this description of Amazon in The Information via Byer’s market and it’s a great way to describe everything from Prime Video to Twitch to Audible to Comixology to Amazon Channels. I don’t know if all that will report to Mike Hopkins, but if it did it would simplify Amazon’s org chart.
This is a big move that could change Amazon’s fortunes for good or ill. Unfortunately, I can’t tell you which way it will go. On Twitter I saw folks calling his tenure at Hulu underwhelming and strong. So I don’t know. When Amazon hired Jen Salke, a lot of the trades praised her hire and saw a turnaround from the previous era. Now, The Information says that her shows have been late and over-budget, as were her predecessor’s shows. Will Hopkins be the magic fix? I’m skeptical.
Youtube May Go “Channels”
Innovation in the M-GAFA tech companies is copying each other mercilessly. So since Apple, Amazon and Facebook have or have dabbled with a “channels’ business, obviously Youtube needs one too.
Bosch Renewed at Amazon
Thomas the Tank Engine
Oh and checking in on the, “Pivot to original content” at Netflix move, it’s going about as well as Obama’s “pivot to Asia”, meaning it keeps not happening. The latest iteration is Netflix licensing the rights to Thomas the Tank Engine.
Star Wars did so well in TV this year, that virtually everyone knew which character was the “symbol” for 2020: Baby Yoda!
We know Baby Yoda conquered the social landscape, but how does that translate to Lucasfilm/Disney’s bottom line? Well that’s my topic for today. If you missed it, read Part I for my methodology and the performance of Star Wars films. As I was writing “everything else” I decided that each business unit deserved its own article. It’ll make each article smaller and easier to read, while providing regular content for the site.
We got a lot to cover, so like the Jawas escaping Sand People, we’ll move fairly quickly.
Whether it’s only because of one adorable (non-CGI) character, or the authenticity of this latest series, or just drafting off of the popularity of Boba Fett among Star Wars fans, Disney’s new streaming service launched with one of the top new TV series of the year in The Mandalorian. As always, here’s the Google Trends data:
Other research firms back up this popularity. Parrot Analytics awarded The Mandalorian its “most in-demand new series”. The service TV Time saw The Mandalorian surge in interest as well. So it’s popular. It’s a hit.
This is a big change to my model. I’d assumed a Star Wars TV series would do well. Sort of like the Marvel TV series for Netflix well: lots of doubles and triples, but no home runs. Instead The Mandalorian is a home run with a chance for a grand slam, if its second season sustains what season one pulled off. (Which is no small feat. Lots of great season ones fade quickly. The Black List. Gotham. Mr. Robot. The Man in the High Castle. The Handmaid’s Tale. Every Netflix Show that didn’t make it to season 4.)
So I have a few changes to my model then. (Here’s my article on TV from last time.) First, I increased the value of what I called “the Jon Favreau series”. I calculated the value of the series as a percent of the production budget because, for Lucasfilm, they are acting as a producer here. And this is what I think the series would be worth, roughly, on the open market. (As for their value to Disney+, I’ll discuss that in my last article in this series.) However, hits are still worth more, so in the event of a blockbuster TV hit, I tripled the imputed fee from 30% to 90%. (Meaning it went from 130% of the production budget to 190%.) Also, I lowered the number of episodes to 8, but kept it at a little more than $15 million per episode. (Which is the consensus cost.)
As a result, here’s how the value of The Mandalorian changed from being a “hit” versus being just “another TV show”.
Are these numbers reasonable? Probably, with just a pinch towards the high end. As you can see, if you take my “high case” as a “revenue per sub”, I basically think it’s worth $11.40 per subscriber. Which on it’s own is huge, but more a function of how few subscribers Disney+ has right now.
The next change was moving the Obi-Wan series back a year. And this brings up the biggest risk for Disney, which is getting these TV series out on time. Frankly, The Mandalorian has done a great job at releasing a season 1 and having season 2 ready to go later this year, only 12 months a part. However, the Obi-Wan series recently switched showrunners and won’t be out until 2021 at the earliest. As a result, I moved back a few of the series.
The last change I tried to make was to move my “imputed license fee” model to an “attributed subscribers” model. But I utterly failed. Why?
Well, I just don’t know enough about Disney’s finances. I took a guess at “customer lifetime value” of Disney+ subscribers, but the pieces we don’t know are too huge to make it reliable. For instance, we have no data on the average number of months we expect a customer to subscribe because it hasn’t happened yet! I also have a guess on marketing expenses per subscriber, but it’s all a guess. (We know revenues were $4 billion in the last quarter, so assuming 20% marketing expense on that, and you have about $800 million. But even that could be low.) About the only thing we know is that the average revenue per subscriber is $5.50.
Moreover, trying to attribute subscribers is nearly impossible. Because we don’t know how many folks actually watched the Mandalorian, let alone subscribe to it. Also, given that Disney+ is growing so much, it too tough to attribute subs to Mandalorian versus all the other content. Unlike HBO or Netflix, this is far from a mature service to judge.
The final change I did make was to eliminate my “low case” model. Frankly, I think Disney would really have hurt the Star Wars brand to release anything less than five TV series over the next decade or so as they launch Disney+.
As a result, here’s my current base case model:
You can see how I value kids content as well, which is I only count it as a production cost. If the upside for kids TV series is selling merchandise—which is a simplification, but not entirely wrong—than I’ll calculate the upside in the “toys and merchandise” article.
And the “high side” case:
Money from 2019 (most accurately, operating profit)
So the The Mandalorian is huge. What is that worth? Well, less than you think, especially compared to the films. If the feature films are Executor-class Super Star Destroyers, hit TV series are regular old Star Destroyers. Still huge, but look at the size of Super Star Destroyers!
Thus, in my model, The Mandalorian, in success, is about a $95.5 million dollar profit engine this year. Which pales in comparison to Rise of Skywalker, but that’s because films just have much higher upside in success, due to multiple revenue streams. Next year will be a bit higher, though, because I think Disney will monetize The Mandalorian in more non-toy ways, potentially even via home video.
(What about potential Baby Yoda toy sales? That will be covered in the “licensing” section. And yeah, Disney didn’t have any available anyways!)
Long term impacts on the financial model and the 2014 deal
As for the future, I’m not ready to change my basic model going forward. Repeating huge TV hits is a tough business, and with the wrong showrunner, the Obi Wan TV series could be as middling as anything. Indeed, that series is cycling through showrunners. As a result, through 2021 we’ll still only have one Star Wars TV series.
However, the upside case is now higher for TV. If the Lucasfilm folks can generate just a few more hits, than they’ll be able to drive subscribers to Disney+ and a lot of potential value. The key is getting more huge hits. Even though costs would stay about the same in both my base case and high case, the revenue could jump from $5.6 billion to say the $8 billion over 8 years.
In this case, we can tell that The Mandalorian helped revive any lingering doubts Star Wars fans had about the direction of the franchise. The buzz around Baby Yoda led to countless articles singing his praises. As a result, if you take my critical acclaim chart, you get this:
Look at that! The Mandalorian is the most critically acclaimed of any Star Wars property. (With the caveat that since it isn’t global, the overall number of ratings is fairly low compared to the films.) If you want to know how to make Star Wars, this is it.
I didn’t have recommendations on the film side, but TV really did have one for me. And that recommendation is one person’s name: David Filoni.
He’s been the showrunner on every Star Wars animated projected and he executive produced The Mandalorian. I’m ready to give him a heaping doses of credit for The Mandalorian given that his animated series are fairly well regarded by the fandom too. In other words, if Disney is looking for their Greg Berlanti, this is it for Star Wars.
From an operational perspective, I do think they should ramp up to one Star Wars series per quarter. This seems crazy, but the universe is clearly big enough to support that many stories. Especially if one is a kids series and then you have three adult series and/or limited series filling out the gap.
(And I’ll repeat it until I die to wish it into existence, but if you want a killer limited series, turn the book series Tales from Mos Eisley Cantina into a series. You can thank me later.)
With the Oscars airing on Sunday, it seems appropriate to join the crowd asking, “What will happen to the mid-budget theatrical film?” This seems to always come up this time of year as folks–usually critics–bemoan that Hollywood doesn’t “make these types of movies any more”. But what types of moveis? And for whom?
So let’s dig in.
Most Important Story – Why Timmy Failure Launching on Disney+ Spells the Death of Mid-Budget Theatrical Films
If you’re looking for the canary in the coal mine for mid-budget films–again, hold on a moment for a definition of that–don’t worry about the Oscars or Sundance. Instead, look at this:
Disney, not Netflix, is the place to watch for the future of movies. If even Disney abandons theaters, then all hope is lost. (They won’t; the economics don’t work as I’ve written before. Many times.) But just because Disney will keep major franchises in theaters doesn’t mean mid-budget films have the same hope.
The traditional narrative goes that fortunately, even as mid-budget films abandon theaters Netflix will swoop into save them. Sort of like Disney+ with Timmy Failure.
But will they? I don’t know. So let’s explore this issue fresh. I’m going to ask a few questions to myself to figure it out. (Consider this a mini-extension of this series on releasing films straight to streaming.)
Definition: What is a mid-budget film?
As a business writer, I tend to find a lot of articles about Hollywood tend to play fast and loose with definitions. Take, for example, “independent film”. Most indie films are made or now distributed by giant studios. Which is hardly independent! Instead, we use “independent” as a catch all for “prestige” or “award-contending” films. This makes data analysis tough.
Defining “mid-budget films” has the same challenge. I can probably tell you what is too high to count, anything over 9 figures in production costs. And too low. Anything below $10 million.
But a range of $10-$99 million in production costs seems too big. And likely some films around $75-100 million are still big budget films, just slightly cheaper than others. If I had to pick a number, I’d say production budgets of $40 million is what most people are thinking of as “mid-budget”, with a range of $20-50 million. (This isn’t an exact science.)
What does the narrative say?
If you search for articles on mid-budget films, you’ll find critics or reporters saying they are dead, dying, returning or thriving. So it depends on how you define mid-budget, what you consider success and really whether or not a mid-budget film (Get Out, Knives Out) has come out recently or not to provide an anecdote for the author.
Instead, let’s turn to…
What does the data say?
Well, I don’t have it. Why not? Because no website tracks production costs in easy to download tables. Or in ways that I trust. Wikipedia usually has estimates, but those are often unreliably sourced. Since I don’t have a data set to manipulate, I can’t figure out the answer for myself.
Sleuthing the internet, I did find one data based article by Stephen Follows. I’ve used his data before and I love this work. He used IMDb data and the answer turns out, like it often does, to be complicated. The number of “mid-budget drama” films is actually fine. He tracks the percentage of films that have production budgets between $15 and $60 million and he finds virtually no change in the percentage of mid-budget films.
He did find, though, that drama budgets have been declining. And so have budgets for romantic comedies, action films or comedies. This–combined with lack of box office success compared to franchises, sequels and remakes–does support the thesis that mid-budget films are dying. Of course, data can only tell us what happened. For what will happen, I’d argue we need to turn to the models.
What do the models say?
Well, they do sort of make the case that studios should make fewer “mid-budget” films. By models, I mean this distribution chart of box office:
If you learn nothing else from the Entertainment Strategy Guy, learn “logarithmic distribution”. That’s the shape of the table above. In other words, a few films earn outsized returns whereas everything else fails. On its own, though, the performance of films doesn’t quite tell the whole story.
Instead, the key is the correlations between budgets and performance. Blockbuster budgets and campaigns (which means franchises, sequels and remakes) are highly correlated with higher box office. Again, look at my hit rate from my recent Star Wars series:
Unfortunately, I don’t have the data to compare blockbuster franchises to comedies, dramas or rom-coms. If I did–this is based on my personal experience–I’d tell you that those other categories don’t have as high of ceilings as fantasy, sci-fi or super hero films. They just don’t.
This means—and this is what I mean by using the model–that you may as well make your comedies and dramas for as cheap as possible to get the greatest return on investment. But if this is the case, why did we have so many mid-budget films in those genres in the 1980s, 90s and 2000s?
What are the forces hurting mid-budget films?
I see three major forces, and they aren’t the ones usually mentioned (which is just “streaming!”:
- First, the death of home entertainment. Physical home entertainment had some of the best margins in the revenue stream. The rule of thumb in the 90s was a film could make it’s production budget in box office, then home entertainment could pay for the rest. While DVDs aren’t completely dead, like music they are way below their peak.
- Second, the decline of median incomes. Subscribe here to read my Ankler guest post, but my theory is that the stagnation of American income has stalled theatrical revenue growth.
- Third, the blockbusters are getting bigger. This is because digital distribution in theaters means that a theater can now expand a movie to every available theater if its a huge, huge hit. So when Avengers: Endgame came out, it set a record for the number of theaters showing it, which means all the mid-budget films got crushed. Counter-programming sometimes works, but often doesn’t.
The multi-billion dollar question, though, is can streaming offset all those forces? In other words, can streaming revenue replace the lost mid-budget theatrical movie.
How does all this impact Disney/Disney+?
Which brings us to the House of Mouse. And Timmy Failure, a film very few of us probably heard got released. Unless you went to Disney+ this weekend. As with any film, I like to use “comps”, meaning a comparable film. In this case, not only can I find a kids movie that Disney released for families, I can find one about another Tim:
They both are mid-budget films (Failure was $40 million; Green was $25 million), both based on preexisting IP, both targeted at families. But one went to theaters and made $53 million; the other went straight to Disney+ last week. Hmmm.
Or take films about Alaska featuring canines and aging A-List actors. Togo was a Disney film costing $40 million and it went straight to Disney+ last December. Meanwhile, Call of the Wild comes out at the end of the month. The difference? It cost $109 million.
What do I take from all this? Well, when it can, Disney is deciding that mid-budget films are going straight to streaming too. Even it has started to skip theaters. If you want to know why this is the most important story of the week, here you go.
What about Netflix?
This narrative is both obviously true and frankly also unknown. On the one hand, yes they clearly decided to launch a stream of mid-budget films from their Adam Sandler films to their summer of rom-coms to Bird Box.
On the other hand, are those mid-budget films? In some cases, I think their budgets may actually be more equivalent to low-budget films, especially the rom-coms. In other cases, say any film with A or B-List talent, I think they may blow past my $50 million threshold. (As we know The Irishman did.) So how many “mid-budget films” Netflix actually makes we don’t know.
For a good take on this as well, and partly the inspiration of this series, here’s The Netflix Film Project on a recent Netflix mid-budget film, The Shadow of the Moon that no one is talking about. It’s cool they made a mid-budget film…but if no one sees it did it matter?
Which brings us to the crux of the issue. So Netflix is making mid-budget films? Are they working for them? Or for Disney?
The Implications (and huge worry) for Mid-Budget Films Direct to Streamers
Is anyone watching mid-budget films on Netflix? Or Disney+?
We have no idea.
A point I’ve made over and over and so has half of the journalists covering Netflix.
But I’ll say this. My models that show that you may as well either make huge tentpole movies or small films that cost nothing has the exact same logic on streamers. If you’re going to spend $50 million making a film, you may as well spend $100 and quadruple your viewership. Or decrease spending to $10 million and get about the same viewership for a quarter the cost. What you don’t want to do is get stuck in the middle.
As long as profit and making money don’t matter, then mid-budget films are fine to draw in talent. Why not? It’s not like Wall Street cares. If that changes though, it’s hard not to see mid-budget films as the first casualties in the content budget.
In other words, if you want mid-budget films, don’t hold your breath for streamers to be your savior. They are now, but the forces that decreased the budgets of theatrical mid-budget films (they didn’t die) are coming for streaming. At some point.
Other Contenders for Most Important Story
Meanwhile, the biggest “event” news story was the departure of another CEO from Hulu, with the consequences that Hulu is now reporting in to Kevin Mayer at Disney. The Disney consolidation of Hulu is nearly complete and combined with Disney+ this gives Disney their both shot at disrupting Netflix globally.
When will that happen? Sometime in 2021. Disney is going to roll out Disney+ internationally, learn it’s lessons, then roll out Hulu (backed by FX content) next year. Which is a smart strategy.
Earnings Report Summary – Disney+ gets to 28.6 million subscribers.
This week’s buzziest story was all about the Disney earnings report. But, like Netflix, it’s really a tale of two numbers for me. The headline number is the Disney+, ESPN+ and Hulu subscribers, which were all up in big, big ways. Obviously, this was driven by their aggressive pricing and discounts, but it worked:
(Yes, Disney+ is available in Canada, Australia, New Zealand and the Netherlands. Even if you subtract 25% from the Disney+ total, it’s still likely Disney has more “subscribers” than Netflix by the end of the year if not the next quarter.)
If I had a caution, and it’s the same one I have for Netflix, it’s that these costs are being born by Disney in the terms of declining free cash flow. Disney in 2018 Q1 made $900 in cash; in 2019, that dropped to $292 million. In other words, they are on track to lose $2.4 billion in free cash flow this year. Just like Netflix!
Pay attention to this story as HBO and NBC join the money losing crowd this year.
Data of the Week – Youtube Earnings
I’ve long had the wish that Google would disclose Youtube’s financial numbers. Well, it must have been my birthday because I got my wish. The headline numbers are that Youtube makes $15 billion dollars a year, has 2 million Youtube Live Subscribers and 20 million Youtube Music and Premium subscribers. In other words, Youtube is the behemoth we thought it was.
M&A Updates – 2019 Off to a Slow Start
That’s the headline of this Financial Times article and it matches the broader feeling of the landscape. I still think the fundamentals mean that M&A will likely stay slow for the foreseeable future in entertainment. (My series on M&A provides a good long term look at M&A in entertainment, without some of the hyperbole you see.)
EntStrategyGuy Update – Checking Back in with Luminary/The Ringer
When a company launches as the “Netflix of Podcasting” you have my attention. In a negative way. I was skeptical folks would pay more than Disney+ for access to a few exclusive podcasts. (And I’m also skeptical of companies founded by the children of billionaires with access to capital.) Sure enough, Luminary has lowered their price.
The biggest worry, though, has to be Spotify’s continued gobbling up for podcasting companies, the latest being Bill Simmon’s The Ringer for $250 million.
Lots of News with No News – Super Bowl Ratings Are Slightly Up
The ratings for the Super Bowl were up year over year for the first time in five years. Why is this not “news”? Because any one year’s ratings can be noisy, and despite being slightly up are still in line with the historical average. My recommendation? Check out Wikipedia for the charts that tell the best story:
So while I’d love to tell you this means the Patriots are bad for ratings, I can’t in good faith do that. (Though I was glad I didn’t have to watch them again. Sorry Boston fans.)
If I didn’t have a little Padawan join my family in November, one of my goals was to update my massive “How Much Money did Disney Make on the Lucasfilm Acquisition?” series. That delay actually helped because I wouldn’t have been able to get that article up before Rise of the Skywalker came out. Meaning I would have had to guess on a billion dollar variable!
And since I didn’t have to guess, we know that Rise of Skywalker joined the caravan of Disney billion dollar box office film in 2010s. Still following Lucasfilm/Star Wars in 2019 had a sense of dread. For every good news story there was a bad one. So how do we truly judge—from a business sense—how well Lucasfilm did in 2019?
We use numbers. Strategy is numbers, right?
Since Disney doesn’t release franchise financials—why would they?—I have my own estimates. I last updated these in the beginning of 2019 (with films updated in 2018) so I’ll do a big update to the model to learn what we can about how well Lucasfilm did in 2019. I’ll break it into two parts. Today’s article will cover movies; next week, I’ll review the rest of the business units, TV, licensing and theme parks. Previously, I only focused on the price Disney paid compared to their performance. Today and next week’s article will instead act as a report card on how 2019 impacted Lucasfilm and Disney’s business/future.
What this Analysis is NOT
There are so many cultural takes on Star Wars, especially since The Last Jedi, that I feel it’s important to clarify what I’m NOT doing here. (A UCLA forum I follow, for example, had a 60 page “debate” on the latest two films.)
To start, this isn’t my “fan” opinion on the franchise. My opinion is just one person’s opinion, so whether or not I “loved” the latest film, or the one before it or “the baby of the same species as Yoda” doesn’t matter. In the aggregate, Disney does and they track this via surveys and focus groups. But lone individuals online? Whether they love or hate recent moves? Not so much.
To follow that, this isn’t a “critical” perspective either. I haven’t been trained in the dark arts of cultural and film criticism, so my opinion again just doesn’t matter. (Does Disney care about the critics? Controversially, I’d argue not really.)
What this Analysis IS
Instead, I’ll focus on three areas per business unit for Star Wars (read Lucasfilm):
Profit from 2019 (most accurately, operating profit)
In my big series on the Lucasfilm acquisition, I was looking at a specific question about the value of Star Wars vis a vis the price Disney paid. But if you’re Disney, that deal is now a sunk cost. What matters for Disney strategists or brand managers is how much money the franchise is making now. That’s the focus.
Long term impacts on the financial model and the 2014 deal
Since I have a gigantic spreadsheet filled numbers that I can update putting this all in terms of the $4 billion (in 2014 dollars) context, I may as well update how the model has changed. Further, some decisions Disney makes now will directly impact how much potential profit they can keep making on Star Wars. So I’ll update that too.
This last part is the hardest part to quantify, but is crucial as well for putting the above two decisions into context. See, a brand manager doesn’t just care about making money this year, they care about making money next year and the year after and so on. And there are ways to make money in the short term that damage a brand in the long. Threading the needle of making money while building brand equity, not just drawing it down, is crucial for a brand manager.
This is admittedly a tough section to quantify, but it still feels particularly important. (Again, the goal is not to sneak in my opinion, but use data where possible to figure this out. Though narratives will likely figure in.)
With those caveats, let’s hop into the most important business unit, the straw that stirs the blue milk, films.
As of publishing, Rise of the Skywalker grossed $1.05 billion, with a 48% US/Canada to 52% international split. In my model—which I’ll repeat is a lifetime model, meaning all future revenue streams—I’d expect Rise of the Skywalker to net Lucasfilm $798 million, nearly identical to Rogue One. (As I clarified before, my model is a bit high compared to Deadlines’ model. There are a few reasons, but mainly I calculate lifetime value.) So that’s the first building block for how Star Wars did in 2019. In my framework of films, I’d have called this a “hit”. Here’s a table with Disney’s 5 Star Wars films in the 2010s:
But what does this mean?
Star Wars Feature Film Trend Lines
That’s where things get tricky. The key question for me is context. If we were using “value over replacement” theory, and you looked at the last Star Wars in “value over replacement film”, well it does terrific. Very few films get over a billion dollars at the box office!
However, I’d argue that’s the wrong context. This is a Star Wars film. So how did Episode IX do in “value over replacement Star Wars films” context? Not very good. To show this, I updated my giant “franchise” tracker through 2019.
Let’s start by just charting Star Wars film performance. First by category, separating “A Star Wars Story” into their own category. Second, by release order by decade.
The worrying issue for Star Wars brand strategists are the trend lines. This isn’t a series trending upwards or even maintaining consistent film launches. If Disney wanted to reassure themselves, they could say it isn’t their fault, lots of franchises lose their mojo over time, like Lord of The Rings, Transformers or Pirates of the Caribbean. Here is the chart I made in 2018 for franchise performance, updated through 2019 launches. They show the US adjusted box office and how series have trended over time:
Hopefully everyone enjoyed the annual football spectacular known as the Super Bowl. Instead of parsing which ads did the best–we don’t have a data driven way to do that–or reviewing the half-time show–that’s what critics are for, I guess–we need to look for business lessons. Since we don’t have the ratings for the game, it seems like a good time to check in with “NuFox”, my name for the leftover assets that Disney didn’t buy from 21st Century Fox.
Most Important Story of the Week – NuFox’s Super Bowl Strategy
I’ve recently been playing a Euro board game called Terraforming Mars. Board games aren’t quite as good an analogy as sports for business, but for teaching strategy, they are pretty useful. (And they’re fun.)
In a boardgame, at some point everyone can realize the end game is coming and plan accordingly. (This is especially true in the newer generation of board games that use victory points, instead of the oldies like Risk that go on forever.) As the final rounds approach, all of a sudden all the players start trying to sell resources to get victory points. In Terraforming Mars, this means you start buying special awards and milestones to get those points, instead of just accumulating cash. (You see this on Ticket to Ride too.)
This made me think of Rupert Murdoch the last few years.
Murdoch knows he won’t live forever, and it’s unclear how much his combined 21st Century Fox was worth on it’s own. So he found a buyer, played them off another buyer, and he had $71 billion dollars. Those were his victory points, if you will, for a life spent in media and entertainment.
(Side question: Who won the Disney-Fox deal? I’d actually say it could be “both”, since Disney was able to launch Disney+ and gain control of Hulu because of the deal. But if anyone won the deal, it’s Murdoch. It’s hard to see how he didn’t cash out at the absolute top.)
Where boardgames are different than real life is that real life keeps going on. If you’ve lived your life as a media mogul, you don’t stop pioneering business models just because you sold most of a company for $71 billion dollars. Since he had a few pieces left–Fox broadcast, FS1 and Fox News, mainly–well, he had to develop a plan for those assets.
This is, in my mind, the genius of Rupert Murdoch. (And as I’ll clarify later, genius in the business sense doesn’t translate to him being a good person. One could argue he caused Brexit in the UK and hyper-partisanship in the US, which is a level of influence no media outlet should have.)
The genius is he sees the entertainment landscape, and when he sees a new strategy, he focuses all in on that strategy. Then, when he’s maximized that strategy, he sells high on the assets. Take broadcast TV. All the broadcast and cable channels see the same declining live TV viewership numbers. And declining Live+3 numbers. And declining Live+7 numbers. You get the picture.
So what do you do? Well, make more live entertainment.
And so every broadcaster is doing more live-ish entertainment. Live musicals like Grease or The Little Mermaid Live or Jeopardy in Primetime or NBC’s Sunday Night Football. Fox has those too, but it looks like soon that’s all they’ll have. It seems obvious, but only Fox has decided to throw almost everything away for that one goal. Sports, wrestling and reality shows like The Masked Singer and Lego Masters. We’ll probably see a few more live-ish reality shows and sports coming soon. I could see more integration of Fox News as stunt programming.
If Fox keeps scripted shows, it will only be at a price it can afford. Since they sold the TV studio–which is almost a duplicate effort to Disney’s processes–it unburdened them even further. Fox broadcast isn’t trying to help make the sister TV studio profitable because there is no studio to please. Moreover, of the assets which are at the most risk of the cable bundle disintegrating–cable channels and RSNs–it sold those to Disney.
The key question is “Will this succeed?” On one hand, it won’t. In that folks looking for a return on their investment will continue to see skyhigh growth in tech stocks like Netflix or Amazon or Apple. That’s the “future” of entertainment, and one shouldn’t mistake this strategy for winning the future.
On the other non-stock price hand, though, they likely will generate free cash flow. Which is nothing to sneeze at. Cable and live TV are definitely decaying users, but they are far from zero. And even then Fox will live on in vMVPD bundles if those survive. Sometimes we forget that business isn’t about conquering an industry, but generating positive returns for shareholders. NuFox has a strategy to do that.
Are there any challenges to this strategy? I’d say one in particular, which is the price of live sports. This is the “curse of the mogul” in action, where the talent ends up collecting it’s share of the profits. Since the NFL, NBA, WWE and other sports leagues know how important they are to live rights, their prices will go up concurrently. This makes it tricky to keep generating outrageous returns.
I admire focused strategies. Most strategic thinkers would say the same thing, whether it’s business, sports or board games. A good strategy is a focused one, which can be hard to find in today’s tech/entertainment landscape. NuFox won’t experience double digit growth anytime soon, but they will make money, which is something.
Other Contenders for Most Important Story
Troubling Earnings for Telecom Giants Imply that Content is Not the Savior
It’s earnings season once again, which provides a wealth of data to shift through to figure out, well, who is winning and who is losing. In entertainment, if last week had a theme, it was the struggle for the “communications” folks–my catch all for cable, satellite, cellular and anything managing the delivery–who decided to go all in on “entertainment” to drive subscribers.
The leader here is AT&T. They lost another host of customers, leading to (it feels like) every analyst again pointing out they overpaid for WarnerMedia, with one analyst going so far as to predict the company will break itself up.
Comcast is a little better in that they didn’t lose as many customers, but it’s not like their cable business is growing either. They desperately need Peacock to succeed to shore up that part of their subscription business.
In the most explicit version of this, Verizon has just written down their content investment. Again. So all the acquisitions in pursuit of building Oath (AOL and Yahoo) just didn’t pay off. (Relatedly, Verizon added subscribers–which bodes well for Disney–but didn’t add profit. Meaning these content deals may do more for the content owners than the telecom firms.)
In short, it turns out that owning content/content production may not be the flywheel driver all the communication firms hoped it would be. That isn’t a hugely controversial statement, since many folks predicted this at the time.
But let’s be controversial for a moment: I don’t think entertainment will be the flywheel driver that Apple, Amazon, Facebook and Google desperately want and pretend it to be either. If entertainment really does acquire subscribers, it should work for the communication companies. But there is so much entertainment, that offering free TV shows isn’t as much of an inducement as it seems. We’ll see. (And more to say on this.)
The People Carousel: Disney, Apple, CBS Edition
The Los Angeles region, and the entire basketball universe, is reeling from the death of Kobe Bryant, the legendary Lakers basketball player. If you’re looking for the “Hollywood” connection, I have two. First, the Lakers and “showtime” basketball have always been an influential part of the entertainment ecosystem in Los Angeles. A place to go to see and be seen. Second, Kobe was an emerging film producer who won an Oscar. His contribution to his passion for film was tragically cut short.
As a long time Lakers fan–read here for some insight on this–this death is shocking and hurts.
Most Important Story of the Week – Facebook Watch Decreases Investment on Scripted Originals
This news is two-fold for Facebook Watch. First, two big series–Limetown and Sorry For Your Loss–were not renewed for subsequent seasons by Facebook. Still, cancellations happen. When you pair that news with reporting from Deadline that Facebook is generally pulling back from scripted original content, well you have a new story.
Mostly, though, this story seemed to pass by in the night. But it’s the perfect story for my column because the significant doesn’t seem to match the coverage.
So let’s try to explain why Facebook may be pulling back on scripted originals. And we have to start with the fact that Facebook is a tech behemoth. Facebook resembles the cash rich fellow M-GAFA titans (Microsoft, Google, Apple, and Amazon) that throw off billions in free cash each year. Really, companies minting free cash have three options to do with it:
Option 1: Give it back to shareholders.
Option 2: Invest it in new businesses.
Option 3: Light it on fire.
Well, as Matt Levine would note, Option 3 is securities fraud so don’t do that. Of course, we could just change it to…
Option 1: Give it back to shareholders.
Option 2: Invest it in new businesses.
Option 3: Enter the original content business!
They’re the same thing anyways. Companies come in with grand ambitions, realize the cash flows in don’t match the cash flows out, and they leave the originals business (or dial back their investment). Facebook follows on the heels of Microsoft and Youtube in this regard. Heck, even MoviePass had started making original content at some point.
The key is how the original content supports the core business model and value proposition. With that in mind, let’s explore why Facebook Watch is leaving the original scripted business, floating some theories, discarding others and looking for lessons for other entertainment and tech companies. Since I’m not a big believer in single causes, I’ll proportion my judgement out too.
Theory 1: Ad-supported video just can’t scripted content.
If this theory were true, woe be to the giant cable company launching a new ad-supported business!
Let’s make the best case for this take. The working theory is that folks just don’t want to watch advertising anymore, so they just can’t get behind a video service like Facebook Watch that is only supported by ads. With the launch of Peacock, I saw this hot take a bit on social media.
Of the theories, I’d give this the least likelihood of being true. From AVOD to FAST to combos (Hulu, Peacock, etc), advertising is alive and well in entertainment. Despite what customers say about hating advertising, they end up putting up with quite a bit. It’s not like Youtube is struggling with viewership, is it?
Judgement: 0% responsible.
Theory 2: Scripted content is too expensive (or doesn’t have the ROI).
If this theory is true, woe be to the traditional studios getting into the scripted TV originals game.
This is the flip side of the above theory. It’s not about the monetization (ads versus subscriptions) but about the costs of goods sold (the cost to make and market content). What I like about this theory is, if you’re honestly looking at monetization, it’s not like entertainment has seen booming revenue in the US. If anything, folks pay about what they always have.
So what’s fueling the boom in original content? Deficit financing and super high earnings multiples.
Worse, deficits are financing a boom in production costs as everyone is fighting over the same relatively limited supple (top end talent) so paying increasingly more. Consider this: in 2004, ABC spent $5 million per hour on it’s Lost pilot, up to that point the historical highpoint. Most dramas cost in the low seven figures. Now, word on the street is that Lord of the Rings, The Falcon and Winter Soldier and Game of Thrones could cost 5 times that amount. Meanwhile, each of the streamers, I’d estimate, would have double digit shows that cost $10 million plus. Did revenues increase five times over the last fifteen years? Nope.
Thus, Facebook may just be on the cutting edge–with Youtube–of realizing that scripted originals aren’t the golden goose Netflix and Amazon make them out to be. It’s not that they can’t make some money on them, just not nearly enough to support the skyrocketing budgets.
Judgement: 25% responsible.
Theory 3: Facebook Watch needed more library content.
If this theory is true, woe be to the giant device company that launched a streaming platform sans library.
The best case for this is that after you come to watch a prestige original, you need to find something else to occupy your time until the next original comes. That’s library content. While I josh on Netflix for lots of things, I do absolutely believe that Reed Hastings is right when he says he’s in a battle for folks’ time. But I’d rephrase it slightly in that you’re also battling for space in people’s mental headspace. When they decide to watch TV, they then pick a service to watch. Library content’s purpose is to keep permanent space in people’s mental headspace. Having loads of library content makes it more likely that you’re folks’ first choice to find something.
The problem is Facebook Watch doesn’t have this. Fellow ad-supported titan Youtube clearly does. It’s purpose was videos first and foremost, so there is always something else to watch. Netflix has it. Even Amazon has it. Facebook has socially generated videos, which aren’t the same ballpark as scripted video.
Judgement: 20% responsible.
Theory 4: Social video can’t support scripted content.
With that, the final major entrant of the streaming wars has called their shot. (Besides SuperCBS. Is holding on to CBS All-Access and Showtime really their entire plan?) So we didn’t have to go very far to find our…
Most Important Story of the Week – Peacock Announces Their Plan
Investor day presentations are the ultimate in needing to see through the flash for the substance. In data, it’s all about “signal versus noise”. In presentations, the noise is deliberate. It’s designed to confuse, overwhelm and mislead to get you to invest, support or buy. (Which is why I think most biz presentations internally should be in black and white. Let ideas stand on their own merits, not the quality of powerpointing.)
From that angle, I’d put Comcast-NBC-Universal’s Peacock debut above HBO Max and Apple TV+, but still lagging Disney+ (who knocked everyone’s socks off). They leaned into the “30 Rock” angle, which is smart branding. This is all the more reason we need to wear our skeptical glasses to look for what NBC-Universal didn’t tell us, or what Comcast overhyped.
Overall, my gut take is more bullish than when I first heard of “Peacock”, with some huge lingering caveats. Reading my draft today, I found the positives more compelling than negatives, which surprised me. I’ll dive into this area in three parts: The upside case, the downside case, and implications for (selected) competitors.
The Upside/Bull/Optimistic Case for Peacock
Strategy: Zigging while others zag means becoming the “broadcast streamer”
By the time Peacock is fully launched–while April is the target date, it won’t go national until July–it will be the last streaming platform to the party. NBC’s logic seems to be, if you’re late to the party, be free.
Not a bad plan!
Then that way all the already spent wallets still have room. Since broadcast has always been “free”, you just pay with your time, there is some justification in saying, “We’re the broadcast platform of streaming.” I’ve always felt that NBC-Universal had the most broadly appealing cable channel offering. They have sports, news, dramas, comedies, and reality. Now it’s all coming to one platform.
Really, the way to look at this isn’t that Peacock is a slow follow of Netflix, but a fast follow of Pluto/Tumi/Xumo. Since I think those companies really do fill a customer need, I like the idea. Moreover, they have a differentiator, as they themselves pointed out, Peacock is essentially the premium FAST.
While I respect the “zig while others zag” approach to business, it doesn’t work if you don’t have a strategy. My initial take is Comcast has a strategy here.
Customer Targeting: Latinx viewers
A natural part of business analysis is to assume everyone is like you. Avoid this temptation. In entertainment, this means I, for example, have huge blind spots in international viewership. This even applies to the US, where I lag in coverage on Spanish language programming. Comcast has owned Telemundo for a bit now, so they don’t have this blindspot:
Credit to Peacock for seeing this customer need and serving this demographic. (Netflix does serve this too, and entered Latin America very early on.) The “Spanish Language Streaming Wars” are probably worth a deep dive article.
Company: A surprising willingness to be innovative.
Consider this an extension of the “zigging while others zag”, but I had a genuine worry that Peacock would end up as another clone of Disney+, Netflix, Prime Video and HBO Max. (Mostly the same product and similar content profiles.)
Except Peacock is definitely trying out a few new things, which shows a commitment to change we don’t usually see. Specifically, the “live channels” approach, which only furthers the “fast follow of PlutoTV” thesis. If you know what you want to watch, the UX will have on-demand video. But for everyone else–or the folks who just want something on in the background–Peacock will have live/streaming channels. Will this work? Maybe, maybe not, but at least it shows some innovation. (For example, nothing in the Disney+ launch was innovative to that platform, just more streamlined than Netflix.)
Content: Pretty darn strong, especially in TV.
Peacock helpfully provided a list of the shows they plan to air. (Probably not an exhaustive list.) And it’s pretty strong. I’m as impressed as I was during the HBO Max roll out. (Also credit to NBC PR for making the document available and hence easy on journalists to absorb.) Here are some specific content pieces I think will be strengths:
The USA Network Shows: This is the bread and butter that built Bonnie Hammer’s career–former head of NBC Universal Cable Productions, she now runs content for all NBC Universal–so naturally a lot of these shows will be on Peacock including Suits, Covert Affairs, Monk and Psych. It remains to be seen if they are “exclusive” digitally, but still a good slate. USA Network is historically underrated because it’s popular in middle America, not one the coasts.
The big broadcast shows: Everyone knows about The Office, but everything from Cheers to Brooklyn 99 to Frasier to Everybody Loves Raymond to Two and a Half Men will be on Peacock. That’s a hefty dose of rewatchable series. And lots of rewatchable procedurals in Law & Order and Chicago series.
Bravo/E! tentpoles: One of the strengths of NBC-Universal, I’ve always felt, is that they have a broad reach of channels to draw content from, for example, the unscripted reality space. At first, I didn’t see these shows on the list, but a lot of them will be on Peacock. While most reality doesn’t fare well in bingeing long term, some does.
Late Night: Premiering their two Late Night shows in the primetime window is a great change for customers, such as myself who usually watch tape delayed. This feels smart to me, as more and more content gets time shifted.
Content: New categories to one streaming platform: sports and news.
HBO Max won’t have sports; Disney is pushing all sports to ESPN+, and Netflix refuses to even consider it. Thus, NBC steps into the breach and says their streaming platform will have sports in the same interface. (Amazon, of course, has toyed with sports for a while and offers a few sports channels as add-ons, plus one NFL game in America.) Thus, ignoring the type of content, NBC may have an advantage here. ESPN+ and DAZN remain separate apps which could decrease engagement, except for hardcore sports fans.
But we can’t ignore content forever. The question is whether English soccer, NHL and two weeks of Olympics every two years is enough to sustain sports. I don’t think so, which is why I think Comcast could be a buyer for additional sports rights, be it more NFL, NBA, MLB or college rights. (The great pitch too is that this is both digital and physical, keeping both windows. I think professional leagues are rightfully scared of a “digital only” approach that risks losing viewership/fan engagement overall.)
As for news, the best thing about news is it’s much cheaper than sports to get into. Plus, NBC has a fairly strong brand, if titled toward one side of the political aisle on cable.
The Downside/Bear/Pessimistic Case for Peacock