Last December, I started a series whose goal was to valiantly defend the theatrical distribution model. This doesn’t come (only) from some soft spot in my heart for theaters, but from the economics of making movies. Studios can earn a ...
(Welcome to my series on an “Intelligence Preparation of the “Streaming Wars” Battlefield”. Combining my experience as a former Army intelligence officer and streaming video strategy planner, I’m applying a military planning framework to the “streaming wars” to explain where ...
If you don’t follow me on social or subscribe to my newsletter, you may have missed my latest guest article at The Ankler (behind a paywall). It’s a short one, but a goody. In it I compared Netflix’s recent Hard ...
Do you remember last year before Disney+ launched and I had this series of recommendations for how they could catch up to Netflix? They were… 1. Go dirt cheap on the prices. [Check] 2. Schedule weekly releases for adults [Check] ...
I hope everyone–and this probably just applies to the Americans–enjoyed the long weekend. The only thing missing really was America’s pastime of baseball. Or any sports really.
But all that has changed. Sports are back! Which is really the story of the week. But I’ll tackle that next week in the next installment of “Coronavirus and Entertainment”. In the meantime, let’s look at another sports-adjacent story.
Most Important Story of the Week – Sports Streaming Price Hikes
Everyone is raising prices, from Youtube TV to ESPN+ to Fubo TV.
While all these services are sports based, it’s also important to note the differences between them. Youtube TV is a vMVPD, meaning they’re trying to replicate the cable bundle via streaming. ESPN+ is a streaming service that only offers sports. Fubo TV is a hybrid: it’s a vMVPD, but focused on sports.
The least shocking price raise should be Youtube TV. Of all the services, it was the most clearly trying to offer a $65 product for $45. Despite the bells and whistles, the vMVPD model is essentially the traditional cable model: the vMVPDs pay each channel a given rate per subscriber who receives it. The only difference is that instead of a cable box it goes through a streaming TV, device or iPad. So if you see the rates for various channels–for example this chart in this article by Dan Rayburn–you see how expensive it is to own all those channels. (Especially ESPN.)
Add all them up, and you quickly see that the reason cable is so expensive is because cable channels are expensive. Hence, virtual cable is expensive because virtual channels are expensive. The core economics aren’t different.
How did Youtube TV last this long without a price increase? Because they were losing money on it!
Frankly, that’s why any articles or tweets I saw praising Youtube TV always baffled me. Of course they were beating everyone on price! Google subsidized the losses! But they hadn’t actually created any value, they were simply capturing market share. (They had created some value with a good UX, but that value is easily superseded by selling at a loss.)
Losses in cable can add up really quickly, and even Google couldn’t stomach the Youtube TV losses. If they were losing $15 per customer per month, at 2 million customers, that’s $360 million a year. Adding customers would just make the situation worse. You can’t make up these losses on volume. Hence the price increase.
The challenge is what happens next. Since there are no natural digital monopolies, I wouldn’t be shocked to see either the FASTs or new vMVPDs rise up to offer “skinny bundles” again. Clearly customers want lots and lots of channels–hence why MVPDs and vMVPDs exist–but don’t want to pay as much as the local monopolies charge. Since the barriers to entry are relatively low, a new skinny bundle can easily enter. The actual solution is to have the cable channels finally start lowering their affiliate fees, but that’s a tough pill for a business unit to swallow.
On to ESPN+. If you look at Disney’s earnings report, you know that Disney is losing money on streaming. How much they are losing on ESPN+ in particular is unknown. ESPN+ doesn’t really have a lot of in-demand live sports, so it’s not like they can increase prices too much before folks will unsubscribe. This could portend some additional sports deals, or just Disney shoring up the bottom line in a world without theme parks and movie theaters. Either way, I expect both to keep happening: Disney will try to get better rights for ESPN+ (think NBA or NFL) while raising prices..
Other Contenders for Most Important Story
WGA Puts Their Strike on Hold?
This happened over a week ago and I missed it, so shame on me. (Thanks to KCRW’s The Business podcast for shouting it out.) The caveat is nothing has been officially announced as of yet. So the deal could still fall apart. From reports, the deal is inline with the gains of the most recent DGA deal.
The headline is that the deal prevents a strike because the WGA can’t add a third tsunami to the twin waves of firing all their agents and coronavirus. Really, this is a victory for the pandemic.
The other victor–as Kim Masters noted–is for the studios and streamers, and I tend to agree. The current deal hurts younger and lower level writers that are caught between exclusively writing on one show at a time, but also the reduced episode commitments of the streamers. Not changing that really hurts writers. But they didn’t have a choice.
Disney World on Track to Reopen this weekend
Theme parks are on track to reopen in Florida, with all eyes on Disney World. (As of this writing.) Depending on how cases, hospitalizations and deaths trend over the next few weeks, this will be a story to monitor. On the one hand, people could end up being too scared to go. On the other, theme parks may not end up being a huge source of transmission if they’re at reduced capacity with lots of effective countermeasures.
I remain bullish for theme parks. Unlike sports stadiums, they have more control over keeping folks outdoors and hence controlling transmission. The analogy is the return to restaurants and bars in June. As soon as lock down was lifted, folks returned to their old behaviors relatively rapidly, with just facemasks and spacing as the key differences. Of course, it wasn’t the same volume as previously, but enough to make the business models work.
If theme parks prove safe, I could see the same thing happening: folks come back as before. That said, America’s outbreaks are surging across the southern states whose temperatures have increased in recent weeks. It’s one thing to open a theme park when cases are plummeting; another when they’re surging. That will have to tamp down some demand.
The Landing Spot of Mad Men is…Everywhere?
Last December, I started a series whose goal was to valiantly defend the theatrical distribution model. This doesn’t come (only) from some soft spot in my heart for theaters, but from the economics of making movies. Studios can earn a lot more money by releasing their films theatrically. I’ve taken to calling this the “Booksmart Conundrum”.
Nevertheless, the question I asked last winter—“Should you release your film straight-to-streaming (Netflix) or to theaters?—is as relevant now as ever. Indeed, it’s almost quaint to imagine an article from last December is still relevant, given all that’s happened:
– Coronavirus came and closed theaters.
– Comcast (via Universal) released Trolls: World Tour straight-to-video.
– Disney put Artemis Fowl straight to Disney+, and later Hamilton.
– Netflix bought the rights to countless films and put them straight on its service too.
Does all that news invalidate my article series? Far from it. Here’s the plan. I’m going to continue my Q&A as I had it planned last December. Then, I’ll dedicate an entire article to the post-Coronavirus landscape and it’s implications.
So let’s do it.
Question: Seriously, you’re going to pretend “Covid-19/Coronavirus” never happened?
Not at all. Obviously the immediate impacts are real and I’m monitoring them in my weekly column. (Example of my latest back in June, here.)
But the core economics of releasing films in one streaming window versus multiple windows starting with theaters hasn’t really changed. They may have been tweaked given some of the new behaviors—but you know I’m skeptical on that—but Coronavirus is the “Asterisk Extraordinaire” of our time. The more confident someone is in predicting the future impact of Covid-19, the more likely they are to be wrong.
What matters for studios in the immediate term is when traditional theatrical releases restart. I still maintain that will happen before the end of the year, and likely in August. And when that happens 90% of the model will be intact. So that’s what we’ll discuss in this series.
Question: Fine, can you remind me where we were?
Sure, because I had to do it myself. To start, I finally built a straight-to-streaming financial model for films. This means that via Netflix Datecdote I can estimate how much money an individual film made for Netflix. How cool!
You can read how I built the model, why it works, and the results for The Irishman here. I built this model at the behest of the venerable Richard Rushfield for his Ankler newsletter, and showed how I can use this model very recently when I calculated the results for Extraction on Netflix too. I would add, Nina Metz at the Chicago Tribune did a great write up on my methodology too.
The most useful part of a model, though, isn’t the results but what the model tells you about how the world works. That’s the point of this series: take the model and use it to draw insights about streaming versus theatrical business models. In Part I, we focused on how much money a film makes in the various “windows” it transitions through. No matter how you cut it, theatrical distribution is a huge part of that window. Over 30% easily, but that’s actually rising as home video declines. (Also don’t neglect how home entertainment, TVOD, EST, and premium cable can add to the bottom line too.)
Another key insight is how much better the margins are better for theatrical viewing than they are for viewing at home. As a result, if you don’t release in theaters, you’re giving away potential revenue. Did I calculate this specifically for Netflix? I did, and found out, under a pretty reasonable scenario, they could have easily left $750 million dollars on the table in 2019.
Question: Three quarters of a billion dollars? Why would Netflix do that? If you were making the strongest pro-straight to streaming argument, what would it be?
The folks at Netflix aren’t crazy. They can build these models too. And the folks at Amazon tried to release their films in theaters. The most generous explanation I can give would go like this:
When a film goes to theaters first, it risks being viewed as unpopular if it flops. That would destroy the value on the streaming platform. Moreover, by going straight-to-streaming, Netflix and others have the added value of exclusivity on the platform, driving new subscribers. This is really the point of putting films on streaming anyways, to acquire and retain subscribers.
That’s really two explanations in one. First, failure at the box office destroys value and second that exclusivity raises value.
Q: Is this a strawman, or do you have someone making this argument explicitly?
This is the argument Scott Stuber—Netflix head of film— made to Variety at their conference. His quote:
Essentially, he’s more afraid that film will bomb at the box office than it won’t perform on his service.
Well, I have a two word answer for him:
Late Night.
Q: What does Late Night have to do with it?
This isn’t my usual column, is it? I’ll be honest, I plan to take the July Fourth Weekend off, and I wrote this gem ahead of time. (Just like I did last year.)
Instead of commenting on the week’s news, I made a list of the best articles I read over the last year or so. (My calendar year starts in July. It makes more sense.) This is similar to what I try to do in my bi-weekly newsletter (Sign up here!) by offering a “best of the best” reading list.
Unlike the newsletter, this is a bit more discursive and esoteric. It’s not the stories that matter the most for entertainment, but the stories that stuck with me the most when I reflected on the last year. Some of them may not have even made the newsletter. As a bonus, this year I’ll also provide a quick list of my best articles to provide you with even more thousands of words to enjoy.
Newport will be the only author featured twice in this list. But he’s easily been the most influential writer I’ve read over the last five years. I would confidently say that if any of my readers read his books Deep Work and Digital Minimalism they’ll be better performers at work. Easily. These two New Yorker articles take his voluminous research into productivity and apply them to our current era, both before and after Covid-19.
It’s hard to describe what this article is really about. It isn’t just a video game review, though that’s part of it. It isn’t just an exploration into video game mechanics, though that’s part of it too. It isn’t just an exploration of storytelling, though it has that too. What I can tell you is it is as well written as it is long. And I plan to reread it, it’s that good.
This is the best use of data I’ve come across in the last year and I’ve cited it repeatedly in my columns and writing. The best thing is most of the data is publicly available, but Raab was one of the few folks to actually do the analysis. This still sets the baseline, in my opinion, for how Disney+, Peacock and HBO Max can compete with Netflix and Amazon in the streaming wars.
Scrolling through my list of potential articles, as soon as I reminded myself of this headline, I knew that it this article had to make the cut. Former TV critic Goodman explains the hows and whys of cord cutting through multiple parts. From a business perspective, he’s basically laying out how cutting the cord creates value for many customers. Plus, it’s a very clear guide, probably the best of its ilk.
This is an article that is simply the best “how to” advice I used in the last year or so. (It was published in May of 2019, but I used it all of 2020.) While ostensibly about comedians, any entrepreneur or publisher can use the advice in this piece. In particular, I love the advice to use fewer social media platforms, to think like a “magazine” and to actually pay to advertise your creations. That last point in particular resonates: I haven’t been using paid promotion for this website, and frankly it was a business mistake. This has tons to learn for everyone.
Rick Ellis does a great job separating price from value in this “Saturday Speculation” column. He focuses the debate on streaming services to the “perceived value” they create and pulls some implications from that. Along the way he mentions nearly every streamer and how their perceived value, explaining why some are priced super low and some high.
Since it’s my list, I’ll break the rules. This story isn’t even from last year, but 2013. So why is it still relevant? Because the core lesson of the Great Recession still isn’t being learned! In times of recession, we need government spending more than ever, and we’re still debating whether or not we give it in response to the greatest economic disaster since the Great Depression. This decision by Congress will have the biggest impact on the economy for the next ten years. Let’s hope they make the right one.
I too wondered this question, even as I was–seemingly alone with my wife–watching season 4. Zalben tells a story about Mr. Robot that happens to explain the history of streaming over the last four years as well. It also has lessons about network branding, global streaming services and frankly how the quality of a TV show dipping can permanently alienate its audience.
Honorable Mentions
I enjoyed a few other articles or wanted to shout out my favorite writers. Here’s a quick list:
“How AT&T Took HBO to the Max” by MasaSonCapital
“What Economists Have Gotten Wrong for Decades” by Jared Bernstein
“Meet Bob Chapek, Disney’s New CEO and the Tim Cook to Iger’s Steve Jobs” by Julia Alexander
“20 Charts for 2020” by Evolution Media Capital
“Keyboards of the World: How China Made the Piano its Own” in the Economist (and the entire double issue)
The Best of the Entertainment Strategy Guy
If you still need something to read, here are my four most popular articles (probably) from the last year or so:
“Netflix is a Broadcast Channel”
“How HBO Made Billions on Game of Thrones” (Director’s Commentary here)
“Aggreggedon: The Key Terrain of the Streaming Wars is Bundling”
“Netflix is Five Guys and Hulu is McDonalds: How Hamburgers Can Help Explain the Streaming Wars”
Enjoy the long weekend!
(Welcome to my series on an “Intelligence Preparation of the “Streaming Wars” Battlefield”. Combining my experience as a former Army intelligence officer and streaming video strategy planner, I’m applying a military planning framework to the “streaming wars” to explain where entertainment is right now, and where I think it is going. Read the rest of the series through these links:
An Introduction
Part I – Define the Battlefield
Defining the Area of Operations, Interest and Influence in the Streaming Wars
Unrolling the Map – The Video Value Web…Explained
Aggreggedon: The Key Terrain of the Streaming Wars is Bundlin
The Flywheel Is a Lie! Distinguishing Between Ecosystems, Business Models, & Network Effects and How They All Impact the Streaming Wars
If Disney+ has done nothing else, it has given the Disneyphiles tons of extra documentaries to consume. Making of Disneyland here. Insights into props here. More behind the scenes here.
My wife and I have watched some of “The Imagineering Story” documentary and there was a tidbit in the first episode about Disneyland’s launch which has stuck with me:
Disneyland was profitable by the end of the first year.
To compare Disney to the company that led the introduction to last week’s article, if Amazon opens a “BezosLand” in Seattle, do you think it would make money in its first year?
Heck no!
It would probably never make money. It would be created as a unique bonus for Prime subscribers who could attend for free. We would never find out how much money they make and if there were rumors BezosLand was losing billions every year, they’d leak to a few favorite journalists that the “data” makes it all up for them in selling more socks.
It feels quaint what Walt Disney did in the 1960s: He saw a way to create value—have amusement parks that were clean and cutting edge that emphasized decades old beloved characters—and when he launched it, he was quickly proven right. This is capitalism at its finest: for his bet he earned lots and lots of money. Shareholders still are benefitting from his foresight.
Far from being quaint, Walt Disney was actually on to something. For most companies making money is key. This is true even in the streaming wars. But we’ve lost sight of that fact because so many companies entering the streaming wars with plans to lose oodles of money doing so.
This is part II of my three part exploration of “flywheels” in the streaming wars. Last time I defined my terms. Next time, I’ll use the principles of this article to look at a few other new streamers. Today, the lesson is all about why making money still matters, even in streaming. And Disney’s future is the case study.
Summary
– The best way to evaluate any business is still Net Present Value.
– Even in flywheels and deficit-financed business units, the goal is still the same: to invest money in net present value positive endeavors.
– The risk of a “flywheel” with a deficit-financed component is that you simply lose money, not start the flywheel spinning.
– Disney provides the case study in this: if streaming can’t/won’t make money, their flywheel of toys, parks and resorts won’t make up for it.
– Thesis: The best business model makes money at every point, not “flywheels” that lose money in one area to make money in others. This is actually the forgotten lesson of Walt Disney.
A Reminder about Net Present Value
Fortunately, the key to evaluating flywheels is the same as the key to evaluating all businesses:
Net Present Value
Or NPV. The short hand for calculating “net present value of the discounted future cash flows”. That’s a finance-y way of saying that a company should invest in businesses that promise to make money. Again, we’re talking Finance 101 here. But it’s worth repeating because I’ve seen many businesses or ventures praised in the streaming world who likely won’t make money, even on a net present value basis. (They use narratives, not numbers. And strategy is numbers.)
Read my explainer for this concept here. (And no website can do it justice, you really should read your finance textbook to understand the details.) But for a reminder, since I use it a lot, 90% of NPV decisions look like this:
– You invest a lot of money at the start. (Capital expenditure)
– You slowly start to make some money. (Revenue)
– You still have some ongoing costs. (Cost of goods sold.)
– You subtract the two, and keep the remaining. (Profit)
– You take those future sums and account for the time value of money. (Discounting)
Since we’re talking Disney, here’s a look at my big series on how much they made from Star Wars toys:
The problem I keep running into with streaming video is folks seem very willing to ignore these two core principles when evaluating the streaming wars. Most money losing/unknown streaming or digital video ventures are excused because frankly we don’t know. Since we don’t have the numbers—and it’s hard to calculate them—we use narratives instead.
If you take nothing away from this article, remember that even a flywheel can be evaluated on NPV terms. It’s components can, nee MUST!, be evaluated on NPV positive terms as well. Otherwise, companies run a huge risk.
“A License to Lose Money”: Explaining Deficit-Financed Business Units
Consider:
– Prime Video (money made unknown) isn’t around to make money, but to sell more socks, thus spoke Jeff Bezos.
– Apple TV+ (will spend $6 billion on content) isn’t around to make money, but to sell Apple devices and Apple Channels.
– AT&T (will spend at least $3 billion on HBO Max) isn’t around to make money, but to sell more cellular subscriptions.
In these cases, the explanation is that video is a means to an end. At extremes, defenders of the “lose money in media to make money elsewhere” even call it a “marketing expense”.
It’s worth dwelling on the concept of “marketing expense” more. Because in the previous world—the old fashioned/traditional business world—it wasn’t like you could just label something as marketing and spend as much as you wanted on it. Indeed, marketing was always taken out of your operating profit. So the more you could trim marketing while keeping sales the same, the more you trimmed! That’s what advertising is the first thing to go in an economic downturn.
Despite the branding as marketing expenses, there is real money being spent on video. These are real products from real business units. Not simply “marketing”. We need a new name, which is why I’ve come up with:
Deficit-Financed Business Units.
DFBUs. Yes, I was in the Army so I acronymize everything. It’s worth unpacking the phrases to see why these definition makes so much sense.
First, a venture is “deficit-financed” if the plan is to never make money on it. Or to make money, but so far in the future that current financing is still net present value negative. Thinking about this abstractly explains why. Say I offered you a billion dollars a year starting in 2050. The key is you have to pay me $20 billion now. Should you do it? Heck no! You could just invest that $20 billion and probably double it multiple times before 2050, making more than enough to pay yourself $1 billion per year.
That same scenario is a microcosm of “net present value”. Should Apple invest $20 billion right now to make $1 billion a year in 2050? Heck no! Just keep it in cash or cash equivalents. No matter if it is marketing.
Second, I like business unit because it really distinguishes between streaming video companies and a marketing expense. Plopping down several million dollars for a Super Bowl ad could be a net present value negative decision. (And should be evaluated in those terms.) But we should distinguish from genuine efforts at marketing versus creating brand news businesses, that in most other contexts would need to make money.
The Riskiness of DFBUs: You Don’t Make Actually Make Money on the Flywheel
My worry for companies and investors is that they don’t insist on looking at these business ventures with an NPV lens. As a result, DFBUs become a license to lose money for big tech companies. They may even grab market share—that’s certainly the case with all of them—but that doesn’t mean they actually make money.
That license usually has a justifciation, though. If we lose money on this part of a flywheel, can it make more money elsewhere? In other words, the key question is:
Can Deficit-Financed Business Units Turn a Flywheel?
This is really the supposition that has fueled the rise of streaming video. If you have a true flywheel or ecosystem, getting more customers in will help cause it to spin. That’s expressly Jeff Bezos’ logic. Apple’s too. AT&T even.
The answer? Maybe. It depends on the flywheel.
My thesis is that they can, but they are risky and hence rare. Losing money is easy for a business to do. Allowing someone to lose money means they will. It makes their thinking sloppy. Moreover, it’s easy to get the tradeoffs slightly wrong, and you deficit-financed business unit just becomes a money losing hole.
And I think I can illustrate this with Disney. If you’ve been following me on social, you’ll know that my household has been into Disney’s Inside Out recently. Which is appropriate to call back to, for this scene:
That’s how I’d describe DFBUs, they’re shortcuts that should be labeled danger. The current danger-disguised-shortcut facing Disney is losing money on streaming (Disney+, ESPN+ and Hulu.) to make it on extra toy sales. The rationales I’ve seen justifying Disney’s move into streaming reinforce this money losing narrative. I’ve seen the same arguments used by the tech conglomerates trotted out for the House of Mouse. For example, I’ve seen Disney’s streaming efforts explained as…
– They’ll lose money on streaming to get folks into the “ecosystem” of theme parks and toys.
– Disney has a flywheel and streaming video will bring more subscribers into the flywheel.
– Disney should disrupt the theatrical business model to own the customer relationship in streaming.
So all the buzz words. Of course, since strategy is numbers, the question isn’t what narrative you employ to justify losing money, but whether or not the investment will make it up in the long run. So let’s quantify—for what I think is the first time on the internet—the actual numbers behind those narratives.
The Messy Financials of Disney
One of the first explanations for Disney’s push into streaming was so it could “sell more toys”, just like Jeff Bezos sells more socks. But take a gander at this Hollywood Reporter image I love trotting out:
Toys—from here on “consumer products”—is a small, small part of Disney’s overall operating margin, isn’t it?
Let’s dig deeper. I approach a company’s financials like a hostile witness on the stand. What are they trying to hide? What don’t they want me to know?
For Disney, I looked at their financials going back to 2009. And a huge red flag jumps out, which should be a clue for the quality of the toy business:
If you don’t follow me on social or subscribe to my newsletter, you may have missed my latest guest article at The Ankler (behind a paywall). It’s a short one, but a goody.
In it I compared Netflix’s recent Hard R action films, and their “datecdotes”, to Netflix’s other big swings, like Bird Box and The Irishman. It’s behind The Ankler’s paywall, but worth it to find out about my provocative title. Not to step on the toes, but I don’t see how $15 a month streaming will ever make $200 million production budget feature films profitable. And this has ramifications for superhero, sci-fi and even animated films. Even if you don’t buy that thesis, it has a good comparison of all their films recent performance.
After a few weeks without a lot of news, we finally got a week with some stories to sink our teeth into. But how to choose? The late breaking story that Disney is ending it’s Disney Channel in the UK is a pretty big deal, but then what about Microsoft ceding the livestreaming battleground to Twitch? Or a whole set of TV series moving from traditional TV to streamers. Surely I could oversell the narrative that this is the end of TV?
When in doubt, ballpark the financial size of each story and compare them. Sure, Mixer is a big deal, but how much is Microsoft really spending on that per year? A couple hundred million? We know Twitch is only earning $300-500 million per year in revenue, and Mixer is multiples smaller. What about the TV shows? Well, assuming $3-5 million per episode, we’re still talking max about $100 million in costs. Even the UK Disney channels aren’t worth that much considering they have about 15 million subscribers in the UK
What does that leave us with? The potential end of theatrical filmgoing as we know it. Given that’s a $10-12 billion dollar industry in the United States alone, it’s our story of the week.
(By the way, if you aren’t a subscriber, I have a newsletter. It’s fairly simple and provides links to my latest articles and the best reads/socials/listens on the business of entertainment I come across. It’s published every two weeks and next issue is Monday. Subscribe here.)
Most Important Story of the Week – How Uno and Blockbusters Explain Why Spongebob is Skipping Theaters
The latest studio to take an animated film destined for theaters straight to video-on-demand is Paramount. And in the all too common twist, it will then transition to their streaming service, CBS All-Access. On the one hand, this is another potential tentpole abandoning 2020 for greener digital pastures. Surely, Entertainment Strategy Guy, if anything portends the death of theatrical films, it’s Spongebob too leaving theaters.
Eh.
I’m still less pessimistic on theaters surviving. And I write this as cases are noticeably ticking upwards in the US and deaths (my preferred metric) remain plateaued. I’d explain this latest move as less of a portend of the future disruption of all theaters then as the logical extension of coronavirus keeping theaters shut.
Let’s explain that.
(After this column was written, news that Tenet had moved back an additional two weeks broke, which only reinforces the point of this column. You’ll see.)
Two Ideas. First, blockbuster strategy.
The big trend in feature films over the last four decades has been the move towards larger and larger blockbusters, and the hollowing out of the “middle-class” of films. The mid-tier, if you will. The magnum opus on this trend is Anita Elberse’s book, but everyone has written something about it. I wrote about mid-tier films in a column back in February, and one of my first deep dives explains the economics of blockbusters.
But there’s a related concept that is key to understanding this pressure. As more blockbusters have come to theaters, the number of weekends a film has “to itself” has shrunk. Which makes it even more important for a blockbuster to win the opening weekend. In some cases, the goal is to make most of your money on this opening weekend.
Second Idea: Uno Strategy
The second idea I’ve been tossing around is what I’ve decided to call Uno strategy. For those not familiar with the card game, you deal out cards, then toss them on the pile to match the color or number of the recently tossed out card.
The game doesn’t have a whole lot of strategy to it. Most of the time you can only play one or two cards, so it’s not like you have a whole lot of choice. If it’s a “blue 8”, and I only have a “red 8” and the rest are green or yellow, I’m playing that blue 8.
A lot of business strategy–for all our high-minded discussion of it–is usually obvious moves like this. Here’s an example for Disney+. Despite this article I wrote for them, if pushed there is really one move that would have the biggest impact on their year: finish Falcon and Winter Soldier and trust that Kevin Feige will make it great. That’s not innovative advice, but the obvious “Uno strategy” move.
So let’s apply these two ideas.
The Situation
It seems clear to me that theaters will reopen soon. In some fashion. The current rise in cases delayed the July time frame, but at some point theaters will reopen. Especially if deaths don’t rise at the same rate as past outbreaks. I see calls on Twitter to cancel all theaters until a vaccine is developed, but frankly I doubt that happens. I think the theater going experience can actually be safer than a lot of other activities, especially with a few appropriate precautions.
(It’s unlikely to happen, but the current cases are definitely skewing younger. The converse is that hospitalizations have increased, but not as quickly as the first few montsh. Meanwhile, some treatments are emerging, including better diagnosis of severe cases and some moderate therapeutics. Meanwhile, better knowledge about the threat to institutional facilities like nursing homes and retirement communities has helped protect the most vulnerable. But this isn’t a Covid-19 column.)
Moreover, these trends have us headed directly for the “median case” I had forecast back in April. My best case was films releasing by July 4th and my median case was August for releases. Still, July is gone, which has implications.
Implication One: A Limited Number of Weekends Cause the Cascade
The biggest impact of Covid-19 has been to compress the back half off the release calendar. Nearly every week will have a blockbuster vying to win that weekend. Just doing the simple math, if theaters had reopened in the beginning of July, that’s 26 weekends left in the year. Meaning 26 potential blockbuster releases. If that moves to August first, that’s four more weekends gone. 22 movies for those slots.
We were already in one of the most condensed calendars for a second half of a movie year.
Every weekend lost just makes it tighter.
In comes Uno strategy. The studios know where their films fit on the hierarchy of potential blockbusters. Spongebob is much smaller than Top Gun 2. Or Mulan. Or Tenet. Or A Quiet Place Part II. Hence, as the number of weekends to win shrinks, it gets pushed around the most.
Implication Two: Release or Delay?
In a way, this where the decision-making for each executive comes in. Once your film is bumped, you could move it back in the calendar, or accept that the production costs are in a lot of ways sunk. Same for a lot of the marketing costs. And since a lot of films for 2021 are already in some state of production, you can keep delaying your 2021 slate–which would cost money–or you can get what you can.
But this is where blockbuster strategy comes in. It’s not like Spongebob is “as blockbuster-y” as Mulan. It doesn’t surprise me that so many of the “straight to VOD” films are kids films. A true blockbuster is a “four quadrant film”, meaning old, young, men and women. (Yes, crude, but that’s still how studio’s look at it.) Is Spongebob four quadrants? Absolutely not. No couples are going to it for date night. Same with Trolls: World Tour.
The one strange caveat to me is the timing. Spongebob won’t hit VOD until 2021, with a premiere on CBS All-Access later that year. In this case, the studios also have the added incentive that theatrical films on streaming are going to have their biggest “bang for the buck” when streaming services are small. Hence Disney seeing huge value for putting Hamilton and Artemis Fowl on Disney+ right away.
So does the latest move mean the end of theaters? No.
Theaters will have a downright awful year. And AMC Theaters has a lot of debt that will hurt their growth prospects in the near term. But the current moves are tweaks to the schedule, not major disruptions. The biggest sign is that even though Warner Bros keeps moving back Tenet two weeks at a time, they aren’t moving it all the way to December.
(Fun bonus: Steven Spielberg is crushing the box office, which is mostly drive-in theaters. The shame is that theaters should open cautiously with more of this library fare, but they are waiting for the blockbusters.)
Entertainment Strategy Guy Update – Microsoft Shutters Mixer
I’ve never written about Microsoft’s Mixer before this, and won’t after, but I have written about livestreaming before.
Before we get to Mixer specifically, let’s start with understanding the livestreaming landscape. And correcting the most common misunderstandings I see. Take this chart from Evolution Media Capital (a good newsletter subscription by the way):
Now, your eye is drawn to the shiny object of the growth during coronavirus. But remember my magician analogy from last week. Or the Kansas City Shuffle from Lucky Number Slevin. While everyone is looking at the shiny object, the con man/magician is doing the real work where you can’t see.
My eye ignores the shiny growth and looks at the numbers preceding it. From December 2018 to December 2019, Twitch saw year-over-year growth of…1.7%!
Honestly, what unicorn has 1% growth?
Sure, the lockdown has been great for live-streaming. But in the future we’re going to call this time the “ Asterisk Extraordinaire” in every chart or graph. Meaning, things will return back to normal-ish and any analysis will have to caveat these last four months. My guess is Twitch sees a big decline in the fall when schools reopen, but not as far down as they were. In other words, they brought forward say 2-3 years of real growth due to lockdown.
Meanwhile, note too that Twitch also tends to be compared only to other gaming sites. This chart is specifically comparing all of Twitch to only Youtube Gaming. When I’m watching a live stream of an EDM show on Youtube, that doesn’t make it in this data set. Which is why I remain tentatively bullish on Youtube on livestreams long term. If the biggest network wins, they have it (and the ability to save videos forever).
Which brings us to Mixer, the story another M-FAANG practicing “innovation”, which in today’s context means shamelessly copying other business models in search of another way to spend down their huge pile of cash. (Except Netflix, which doesn’t have the free cash flow.) Meanwhile, it turns out paying for high profile talent doesn’t matter if your video service is more of a network with demand-side increased returns (see my article for an explanation) than a true channel.
Other Contenders for Most Important Story
Let’s run through some smaller stories that caught my interest.
Streamers Grab a Lot of Content
It’s hard not to see a story in the stream of news that happened in rapid succession this week…
– Youtube Original Cobra Kai Moves to Netflix
– Y: Last Man and American Horror Story move to Hulu (permanently)
– AT&T Original Kingdom Moves to Netflix too.
These moves are notable, for sure, but at least two are from dead or dying platforms (AT&T and Youtube Originals). Even Y: The Last Man is more notable for being stuck in development hell for ever than anything else. The point is that streamers will continue rescuing sub-par projects in the near term.
Disney Shutters Their Pay TV Channels in UK
As I said in the introduction, this is a big move to get rid of a cable channel, but it’s not as big as the United States. Whereas Pay-TV has pretty widespread adoption in the US, in the UK the Disney Channel was only on Sky and Virgin, which amounted to about 15 million households. Given that Sky also offers–from what I understand–Disney+ access, this move makes a bit more sense.
(Side story for Disney+ that could be a bigger deal: Apparently customers do in fact love it. My caveat with any brand survey like this is that I think they’re fairly noisy. When you read past the headlines, you see that Disney+ has a rating of 80, and Netflix has a rating of 78. And Prime Video is a 76. Does that seem within the “margin of error” for a survey like this? Absolutely. So the most accurate conclusion is Disney+ has matched Netflix.)
Charter Seeks to Charge Net Non-Neutrality Fees to Video Streamers
Charter is calling these “interconnectivity fees” but I like “Non-Net Neutrality” fees better. A lot of folks are worried about this move, but I’m a pinch more sanguine. Who occupies the White House next January will have a lot more to say about the future of net neutrality.
The Netflix Effect Again
Netflix’s global top ten lists have been a welcome oasis of data in a desert of silence. I wish I were tracking them by country daily, but I don’t have the time, and others like Flix Patrol are on it.
For those who do have time to track, some interesting tidbits are emerging, like Josef Adalian spotting the latest “Netflix Effect”. The “Netflix Effect”–which I think Kasey Moore of Whats-On-Netflix has coined, or at least pointed out a bunch–is that when a show goes global on Netflix it gets a renewed boost in popularity. Adalian pointed this out for Avatar: The Last Airbender, which has trended in Netflix’s top ten since it premiered. Moore pointed this out using IMDb data for Community.
The only small amount of cold water I can splash on this–and this is like tapping water in the bathtub, not a cannonball into the deep end amount of splashing–is that I’m still wondering if some of the ability for Space Force, Avatar or Community to stay on Netflix’s top ten list isn’t a function of the fact that their content quality is decaying somewhat with the coronavirus. I don’t have the data yet to prove this, but my thesis is that Netflix has slowed the pace of US original releases globally, but haven’t admitted it yet. To be seen.
Data(s) of the Week
HBO Max Had 1.6 million Downloads over First Two Weeks – Sensor Tower
This data is the best corrective I saw to the narrative that HBO Max *only* had 90,000 downloads on day 1. Sure, that was probably accurate, but they also had months to add customers. And they indeed still bested previous HBO Now download records.
Prime Video Leads on Most High Quality TV Shows – Reel Good
Reelgood has a simple yet effective way to measure quality for streaming services, by just tracking which services have which number of films and series with a given IMDb rating. This method is fairly simple, but sometimes simple is pretty accurate. I’ll admit, Prime Video did better than I would have guessed on high quality movies, with the caveat that they still have the most “things” in general, which means a clunky interface problem. (And in full disclosure, Reel Good PR folks reached out to me to point out this article.)
M&A Updates – It’s as Down as You Thought It Was
If you’re right for the wrong reasons, to be clear, it doesn’t count. So I’m not taking a victory lap over my series from two years ago–wow is that date right? Two years?–where I predicted that M&A wasn’t accelerating in media and entertainment, but progressing at the same rate if not slower. (Read the whole series here, for the introduction, or here, for the conclusion.)
As I just wrote, coronavirus is the big “Asterisk Extraordinaire” for the future. Every time series graph will have a giant asterisk for this time period saying, “And then covid-19 happened.” Meaning the lessons we draw will be less confident, because coronavirus is the categorical variable that will screw up our models.
Same for mergers and acquisitions. We’ll go back to normal eventually, which means mergers and acquisitions will continue as they have for the last two decades.
(Welcome to my series on an “Intelligence Preparation of the “Streaming Wars” Battlefield”. Combining my experience as a former Army intelligence officer and streaming video strategy planner, I’m applying a military planning framework to the “streaming wars” to explain where entertainment is right now, and where I think it is going. Read the rest of the series through these links:
An Introduction
Part I – Define the Battlefield
Defining the Area of Operations, Interest and Influence in the Streaming Wars
Unrolling the Map – The Video Value Web…Explained
Aggreggedon: The Key Terrain of the Streaming Wars is Bundling
This is probably the most popular image for business school students about Amazon. Heck, anyone describing Amazon has probably used this image.
If we’re supposed to be neutral observers of businesses, you can’t help but notice after a moment of reflection how insanely positive this take is. Man, Jeff Bezos can really sell his positive vision and have it repeated universally.
If you were really cynical—hey, I am—what would the pessimistic version of this flywheel look like? The “Flywheel of Evil” if you will…
What changed? Well, first, the idea that you “sell more things” is great, but if you lose money on every transaction, that’s “sub-optimal” in business speak. Or bad in human speak. And Amazon does in many cases.
To fund these losses, you need to start a really successful company that is totally unrelated to your retail business or its membership program, which is where Amazon Web Services comes in. There’s an alternate history where an Amazon without AWS (cloud computing) doesn’t take over retail because it doesn’t have a cash flow engine driving its growth. (In that timeline, Ebay becomes our overlords.)
Even more potent, though, is combining already low prices with Amazon’s decades long refusal to pay local taxes. Could you point to the continued imprisonment of poor Americans to online companies not paying local taxes? Maybe! (As local tax bases erode, some communities turned to police forces to extract rents, like in Ferguson, Missouri. Seem relevant to our current times?) Amazon does pay some local taxes—now—but only after it became an advantage to them in furthering their monopoly power.
Now that it has this “flywheel” rolling, Amazon uses its size to both crush new entrants who want to compete and to punish suppliers, capturing all the value from their product creations.
Which flywheel is “right”, then? Well, both actually. Both describe valuable methods for how Amazon grew to the size it did. Some of those methods were good for customers; some were bad for society. You can’t tell their story without both.
What’s the lesson? Flywheels are simple whereas reality is complicated. As tools, flywheels are fairly inexact. They’re not even really tools, but narrative devices we use to help make sense of a complicated world. In other words, a “heuristic”. As behavioral economists like Kahneman and Tversky taught us, heuristics are useful, but can carry pitfalls if we aren’t careful.
What’s the point for the streaming wars? Well video has become a spoke on multiple company’s supposed “flywheels”. Everyone from Disney to Amazon, but most critically Apple last fall. Whether or not these were actual flywheels was less important than merely invoking the term and using it to justify nearly any amount of spending.
Let’s call this another key piece of “terrain” in the streaming wars. The “Forest of Flywheels” if you will. The problem is the business and entertainment press has been fairly sloppy with our language when it comes these types of endeavors. Due to this sloppiness, we’ve allowed a lot of companies to launch video because they’ll “lose money on video to make money on X”.
Today, I’ll explain the key terms. In my next article I’ll critique deficit-financing in particular. And then I’ll finish it off with an analysis of some of these business models to show their potential strengths and weaknesses.
Summary
– Flywheels are the most overused term in business, and it’s important to know what different terms mean.
– Ecosystem is probably the most commonly confused term with flywheel. Ecosystems are also rare.
– A true flywheel is a self-perpetuating cycle of growth that is incredibly rare in practice.
– As such, in pursuit of flywheels, we’ve seen many digital players launch money-losing video efforts. I call these “deficit-financed business units”. And they’re one of the biggest factors in the streaming wars.
Defining Traditional Business Strategy Terms
You’ve read articles bemoaning jargon in the workplace. (This New York Magazine piece is the latest in hundreds on the subject.) Even I just denigrated “sub-optimal” above, a term I really don’t like. Still, I don’t take that extreme of a position on business nomenclature. Often, jargon really does have a role in explaining new concepts.
The problem comes in overuse. That’s what is currently happening with “flywheel”. It’s almost become synonymous with “successful business”. But it’s much more specific than that.
So let’s define our terms, so we can better understand what is and is not a flywheel.
Business Model
It turns out if you want to stymie business school students, just ask them “what is a business model?” Indeed, they’re taking classes called “Strategy and Business Models”, but answering, “What is a business model?” can stump them. I’ve seen it.
At its most basic, a business model is a plan or process to make a good or service and sell it for more than it costs to make. Make a widget for $1, market it for $1 and sell it for $3. Or replace widget with service. The model is how you make money. On a financial statement, this is usually called the income statement. When I build a “model” for this website, that’s usually what I’m building.
How do business models relate to flywheels? Well, you can have a successful business model that isn’t a flywheel! It’s just a good business. In the olden days, you would have probably described the dividend producing stocks as just good businesses. They don’t have huge growth prospects, but they still generate a return on investment. Cable companies in the 2000s fit this bill. They had good business models, but were absolutely not flywheels.
Where it gets complicated is usually a given company is actually a collection of many business models. Arguably for every product they sell. Or you have distinct models for different business units in the same conglomerate. Which is actually a good transition to our next definition.
Business Unit
Most companies on the S&P 500 aren’t just one business, but multiple types of businesses lumped together. This is the reality for most conglomerated businesses. When analyzing a compnay, it’s key to differentiate between its overall success and the success of its various pieces.
Amazon is a perfect example here. Retail is one business unit. But then it also has media businesses from live streaming to streaming to music. Then it also sells devices like Amazon Echo. Oh, and it has Whole Foods groceries too.
And then there is the cloud computing (AWS). Which I called out above. And it’s worth noting just how distinct that wildly financially successful enterprise is from the rest of Amazon’s consumer-focused retail efforts. It’s a business-to-business service that is powered by lots of fixed capital expenditure data warehouses. It barely relates. Yet, it’s part of Amazon.
How do business units relate to flywheels? Well, flywheels often fail to take into account entire business units. Take the Amazon flywheel of success…it totally ignores AWS! For years Amazon survived because it had an incredibly high margin business in cloud computing that could provide necessary capital that enabled Amazon to continue building its retail business. This also kept Wall Street happy.
That makes the Bezos flywheel not just wrong, but almost negligently wrong.
It’s business malpractice to point out that a flywheel helped Amazon to succeed if you don’t include AWS’s role in propping up the balance sheet!
I would add, many of the “flywheel” charts you see out there are often just describing a company with multiple business units. (I’ve seen this with Disney and Epic Games.) Every business can benefit from owning multiple business units, from lowering costs or providing learnings. That used to be called “synergy”. Now we call them “flywheels”.
Ecosystem
Does anyone else watch Penn and Teller’s Fool Us? Probably, though it’s not cool to admit it with all the great peak TV shows to watch. In my defense, if you have a four year old, it makes for good family co-viewing. (Narcos does not.) Anyways, I love the magic analogy for how business leaders should use the entertainment biz news.
Your eyes will be drawn to the shiny object, where the magician wants you to look, but the real action is happening elsewhere.
Take this week. You may have your eyes gazing at the AMC mask controversy. It’s buzzy and everyone’s talking about it. (I’ll mention this story with the bigger news, which was the Tenet date move.) Same for new email service Hey and their fight with Apple. (Which in fairness was inches from being the biggest story this week.)
If you’re looking for the story that really is important, shift your gaze to lowly cable channels TNT/TBS…
Most Important Story of the Week – Turner Sports nearing (another) record MLB deal
Before I started writing this week’s column, I was thinking there was a chance that I’d finally update my series on “How Coronavirus will Impact…” on sports. Alas, there is too much to cover to fit in this column.
However, I can tell you that this little nugget of news will make that column. This Sports Biz Journal headline says it all…
Now first the caveat. The headline is that the average value of the baseball deal increased 40% for the average price per year. This is “true”, but also a bit misleading. And I’m here for nothing else but to take headlines and put them into a more precise context. So the raw numbers are that the previous deal cost $325 million per year and the new deal is $470 per year. A 40% increase.
However, the previous deal was 8 years long. The new deal is 7 years long. What this means is that in practice, year over year, the growth rate for sports media rights is about 5%. Here’s how this looks in a chart if you assume a 5% increase in sports rights year over year:
Is 5% a good growth rate? Absolutely. Many businesses would kill for their revenue to increase that much year over year. Is it much less than 40%? Yes. Be careful out their when reading big numbers.
Besides quibbling over context, what else does this mean for the business of entertainment?
First, we keep waiting for the big tech giant to make a splash…
Another major deal without a M-FAANG plunking down for sports rights. The biggest barrier to me seems to be reach. The worry is if you go exclusively with Amazon or Apple, for example, you’re artificially cutting off a big chunk of your potential customers. Sure, lots of folks have Prime, but many less know how to watch Prime Video. So the wait continues.
..And linear channels are NOT abandoning sports rights.
Most likely, because we live in times of huge uncertainty, the sports leagues continue to go back to their current partners. And they are continuing to spend the same amount even as always. Which is notable because there are definite signs of reckoning for both advertising spends and affiliate fees as customers cut the cord. If you revenues go down while your costs go up–which seems to be the case for TNT/TBS–that’s bad. (The likely thing to give is scripted programming at both.)
Second, for now, the market sees the impact of coronavirus limited to this year.
This is the first deal of the coronavirus era and it looks shockingly like the old deals. (See my next point.) If Covid-19 cancels the next MLB season, then this deal wouldn’t make any sense. Clearly the buyers of sports rights are assuming it won’t. Even then, it seems to me that most sports leagues are assuming business as usual when it comes to live sports. (More on this in a future article.)
Fourth, prices keep going up at a steady rate.
At the end of last year the PGA extended its deal with CBS/NBC in a deal very similar to the MLB deal. (An announced 60% increase, but spread out over 9 years.) This point is worth repeating since the common sense seems to be that rights are increasing, when I’d say they are holding steady. Meanwhile, I have wondered before if we’ll see the sports media rights bubble pop. Instead, sports rights are fairly resilient. As such, I’d expect 4-5% combined average growth rates to continue.
(If you want to read my deep dive on sports rights, I’d send you to Athletic Director’s U where I went fairly deep on the subject. You can also download my data here.)
Runner-Up for Story of the Week – Apple vs Hey (and the streaming wars)
This week I happened to be rereading Deep Work by Cal Newport and he mentioned David Heinemeier Hansson, one of the partners of Basecamp and the inventor of Ruby on Rails programming language. I happen to follow the Basecamp folks on Twitter and I hadn’t made this explicit connection yet. (And yes, rereading Deep Work is a reminder that I need to “quit social media” and spend less time on Twitter.)
If you follow the Basecamp folks, though, you know that this week they launched their solution to email called Hey. They let users pay on their website, and of course the application is downloadable to iPhones–since likely most of their new users have iPhones and iPads. This is where the problem comes in. Apple objected to Basecamp, telling them that unless they authorize payments through their app store they’ll blacklist their application.
As others have laid out better, the core of this fight is over the fact that Apple controls the gateway, and Basecamp isn’t big enough to hurt Apple’s business on paper. (For example, Apple does not enforce this rule with Netflix.) But since they are a gateway, they can charge a 30% fee to essentially offer very little ongoing value. (Setting up the app store added value; maintaining it much less so.) What do we call a 30% fee for little value? Rents. Or taxes.
We’ll see where this goes as for the anti-monopolist energy rising across America. In the meantime, I see two insights for entertainment:
Insight 1: Apple’s Service Revenue May Be Rising for Non-Entertainment Related Reasons
I’ve been fairly skeptical of Apple TV+’s performance since before it launched. (See here or here.) Yet, last quarter, when they had record services revenue, many analysts and observers credited this to their new multimedia efforts. Yet, take a gander at this quote from Stratechery’s Ben Thompson:
The challenge for us as analysts trying to determine how Apple TV+ is doing is that it’s the blackest of black boxes in streaming right now. Well, Prime Video is pretty unknown too. But with Apple TV+, we don’t know how much revenue, subscriber or viewership they have. And given that Apple bundles everything from insurance to payments to music in “services”, untangling that knot will be impossible.
This Thompson quote speaks to the idea that it is much more likely that other service revenue (think Apple Care or App Store) is driving the business instead of the multimedia stuff (think Arcade, News, TV+ and Music). That’s going to be my position until I see good data otherwise.
Insight 2: Any Decrease in In-app Purchases Would be Great for Streamers
In other words, this fight between Hey and Apple is just an extension of the AT&T and Roku/Amazon fights. Indeed, the terms are fairly similar. Roku, Amazon and Apple are hardware/operating system owners that allow third party apps. And they charge a 30% tax to work on their system.
If the antitrust authorities get involved, it could be a game changer for the streamers. Imagine a ruling in the EU that Apple is capped at 5% rents on in-app purchases. At 5%, the streamers would likely all allow in-app purchases. That’s much more reasonable fee. That would mean they could also potentially lower prices and still make the same revenue.
Is this likely? Not in the United States, but maybe in the EU. So it’s worth monitoring to see how these fees evolve.
Data of the Week – Xfinity VOD From Vulture’s Buffering Newsletter
With no “big” entertainment news, my gaze fell on a story simmering all month. Call it the “story of the month”, which is that TV is planning its return to the small screen. By TV, I mean broadcast and cable television. Which are, obviously, dead. That’s the narrative.
But since they still, somehow, impossibly, are watched by tens of millions of people in American and rake in billions of dollars, it’s worth at least one column.
Most Important Story of the Week – When Fall TV returns, It Will Look LIke Old-School Streaming
Here’s the plan, first I’ll explain the logistics of producing an episode of TV. Next, I’ll drop my big theory. Then, I’ll run through each network and my thoughts on their strategy. Good? Good. Let’s do it.
(By the by, everyone should listen to all of May’s TV Top Five podcasts. I don’t listen to as many entertainment biz podcasts as you’d guess because podcasting is my escape from my day job. But they do such great coverage it’s a must listen. May was basically explaining what we know and don’t about each broadcast network.)
TV Series Production Timelines…Explained!
First, it’s important to understand what the three to four month shutdown of TV production means. (Sets were shutting down in mid-march, and may return in June or July.) My rule of thumb for producing an episode of TV looks like this
X Weeks – Writing
6 Weeks – Pre-production
1-2 Weeks – Shooting (5 biz days for half hour; 10 days with a weekend for dramas. Single cam)
4 Weeks – Editing (sometimes up to six)
4 Weeks – Post Production
This is explained in this thread here, but it’s what I used when I did content planning a streaming company. That’s the calendar for scripted TV content. Reality can move faster, also depending on whether it’s a slice of life, game show, documentary, competition or what not.
What matters is adding them all up. Or about 4 months. Give or take a few weeks. (It’s my ballpark estimate.)
With coronavirus even that four months has a lot of uncertainty. Will pre-production take longer with coronavirus? Same for post production if folks have to edit from home or can’t work as closely. (I can’t imagine editing a show via Zoom!) Plus, if you want all your shows to launch simultaneously, like fall TV seasons of yore, you have to build in slacks for delays.
Add it all up, and if we start shooting in June, we’ll, fingers-crossed, have some half-hour shows ready by October. (Again, my schedules were for streaming, but are mostly the same.) More likely, we won’t have most shows until the end of November, and no broadcaster wants to launch shows then, for pre-existing biases. (We’ll get to whether those concerns are valid shortly.)
My Big Theory – Without Content, the Broadcasters Will Look Like Old School Streamers
I’m really talking about Netflix at its licensed content peak. Shows from other networks that were cancelled? Sure. International dramas that are surprisingly good? Absolutely. Random old shows refurbished? Yep, that too.
That’s what the hodgepodge broadcast season will look like.
It makes sense because the forces impacting the broadcast business have the same outcome as the forces impacting Netflix at the start. When Netflix started, it needed cheap content. Reruns provided that. Even better were “gently used” content, as Lesley Goldberg brilliantly describes it, that felt new, even if they were old. And they needed a lot of it.
Broadcast needs that now. They’re perfectly calibrated release schedules are in shambles with the shutdown. Meanwhile, they can’t afford to over-produce Netflix-style. So “gently used” content it is. Especially interesting will be how much content from their owned streamers will make it onto networks.
Each Network Ranked
So with these constraints, each network has to figure out how to get back to normalcy as much as possible. Here’s my ranking of how well I like each network’s plan, balancing roughly their plan to get “originals” back on the air and their plan for rep
Other Contender for Most Important Story – Unions Release Back to Work Schedule
The other big news was that the unions and studios released a set of guidelines to get production back this or next month. It’s a 22 page document and it’s fine.
No one loves regulation more than me. I’m being serious: the idea that regulation strangles business is just wrong. Smart regulation adds tremendous value to society. (See Clean Air Act. See FDA. See antitrust, back when that was a thing.)
This report by committee is a regulation of a sort and it seems to go slightly overboard. I think 90% of the marginal benefits of preventing coronavirus will be seen by three policies:
That’s it. So the rest of the 22 pages have what? Tons of stuff on cleaning surfaces? That in particular feels outdated because surfaces have largely been shown to not harbor the disease. Something like 98% of transmission is via airborne droplets. In my mind, that’s where you should focus your efforts. Instead, most of the recommendation is on cleaning surfaces. In my mind, that’s “cleaning theater” the way airport screenings were “security theaters”. They provide the illusion of preventing disease spread, while largely not doing anything.
Still, we have a plan and we’ll get back to work. That’s what matters. And once it happens it may surprise us how quickly it starts.
Data of the Week – Those HBO Max/Roku/Amazon Numbers That Bug Me
Let’s start with this: HBO Max is only launched in the United States.
Therefore, when Warner Media went to war with Amazon Channels and Roku Channels last week–read all about it here–the important thing was to index the size of those services for how big they are in America. If half of your users are in Europe, then it doesn’t really matter about this negotiation, does it? So when you see a headline like this…
You immediately should think, “Wait, is that global or US only number?” As usual, it’s using the global number for US customers. So I went searching to find the answer.
Now, for Roku, this isn’t as big of an issue. Less than 5% of their revenue comes from international sales, so if we apply that percentage to active users, then we still have a whopping 35 million active users in March. Watching about 4 hours per day.
What about for Amazon? Well, I have no idea how many folks are international versus US users. Because Amazon doesn’t tell us. Meanwhile, most folks speculate that a big chunk and maybe a majority of sales are overseas. So I looked for data and eventually Andrew Freedman of Hedgeye provided the data I craved:
If we assume usage is roughly correlated to active users–and I do–then we can see that while Fire TV is huge, it’s also significantly less than Roku. Arguably about 44% of Roku’s audience. I’d add, they may not be perfectly correlated. In that sense, I feel like more Roku users are full-time Roku users, and Fire TV users are a bit more sporadic. A good chunk of customers got Fire TV or Fire Sticks as a gift or add-on and use it way less. So let’s call it 15 million Amazon customers. (Also, this data has Amazon and Roku as 63% of the market, which is lower than the 70% often thrown around.)
So that nets out to about 60 million devices. Which is a lot! But 25% less than 80 million. For the last piece of context, from 2017 Pew had this breakdown of how many devices are in each home. It repeats the point that likely no home has a single solution for TV. And imagine how much it has likely grown since then.
Entertainment Strategy Guy Updates
We’re going long, so let’s go quickly.
Apple and Sports
Apple hired Jim DeLorenzo from Amazon. At Amazon, DeLorenzo helped launch the Amazon Channels biz, specifically the big sports deals. So is Apple looking to get into sports? Definitely maybe. DeLorenzo has that expertise. Although, he can also just help with their Channels business in general. I’ve been monitoring sports rights for a while, and this another sign the big tech players are circling, without any major commitments yet.
Disney+-Japan deal
Disney+ is coming to Japan. This is a no brainer territory for Disney, but it likely required extra programming and product management to get a viable product. Japan loves Disney content as seen by the success of Tokyo Disney, though it is particular about lots of other TV, mostly preferring originals. This is more of a problem for other streamers than Disney, because of the catalogue.
Also, you’ll note they have another local partnership for distribution. Which is now their modus operandi. Does this invalidate my bundle recommendation from last week? No, as that’s more of a content recommendation and think they could still do that with these distribution deals. (Read that recommendation here.)
Disney+ plays with weekly releases
I held on to this one for a bit, but Disney+ released a series “binge-style”. I doubt this presages a new form of distribution for their tent pole series, but even Disney+ is experimenting with release styles. Which is fine! As long as they maximize their tentpole series. (Read that take in Decider here.)
Youtube Sells the Rights to Cobra Kai
Emphasis on the scripted. Meaning, the pricey originals. And really this is just an extension of their pull back I first wrote about in 2018. “Originals” are a buzzy, seductive trap that haven’t paid off for many of the folks running that strategy. And Youtube didn’t need them either. (Hat tip to Kasey Moore.)
HBO Max launched last week! A $4 billion endeavor that required a monumental merger to make it happen. Can one measly column capture all my thoughts on HBO Max’s launch?
Of course not.
So here are my extra thoughts, strategic insights and, in a first, a mail bag of questions/comments from folks on Twitter. (Be sure to follow me here or connect on Linked-In here.)
Strategic Thought – AT&T Really is Going “All In”
If you favor bold, decisive action in strategy—and I do—then AT&T deserves some applause. Two specific readings have helped push me further on this take, both quoted in my recent newsletter.
First, writing in TMT and Chill, anonymous Twitterzen Masa Capital makes the case that AT&T has made a big financial commitment. AT&T is devoting billions just to HBO Max, in addition to whatever they were going to spend at Warner Media, TNT/TBS, and HBO to make original content. That’s a financial spend many analysts said AT&T would never do.
Second came from Kirby Grines in his latest newsletter. AT&T isn’t just serious about spending money, but owning the customer relationship. That’s why AT&T “spent” the legitimate customer dissatisfaction of last week. Long term they know that controlling the data, identity and experience of customers will pay off long term.
In particular, last year Grines called out how bad Amazon Prime’s UX is for third party content. Frankly, Amazon doesn’t treat third party content well. So if you’re spending billions making content for HBO, is it worth it for Amazon to use your content simply to build their platform, while not even making it easy to use? Strategically, that’s a huge no.
(I mean, has Amazon launched customer profiles yet for Prime Video? For years they didn’t have that basic feature.)
It comes down to this: the streaming wars are divided into the major players and the niche players. Niche players will go to bundles like Amazon, Roku, Apple channels and Hulu and others. The major players will insist on their own apps.
So yes, AT&T really is all in. Because they insist on their own app.
Media Coverage – It Really Was Anemic
Are you really a major player if you launch and no one cares?
That was partly my take from the coverage. Yes, the usual Twitterati were obsessed by it. We always would be. But did regular America care? Not the way they cared about Disney. To use one example, the Byer’s Market newsletter put HBO Max news “below the fold” on the days up to and after launch. Facebook/Twitter drama beat it out.
Hey, bring some data to this, EntStrategyGuy. What does Google Trends look like?
Yikes. Maybe no one can catch up to Netflix.
My “Business” Review of HBO Max?
Given that the HBO Max that just launched is essentially the HBO Max we were promised last fall, I could just push you to my column form last November.
Now that’s it’s launched, do I have any priors to update? Sure, with the caveat that a lot of “reviews” of a new streamer are often excuses to just find examples to reinforce preconceived biases of whatever narrative we came in with. My process is always the “5Ps” of launching a streaming product: Product (Content), Product (UX), Placement (Distribution), Pricing and Promotion, which is how I’ll look at it.
Product (Content)
From everything I see, this content really does rock. That was my take in the fall and using the service I still see that. From Harry Potter—the big surprise—to all the HBO content to lots and lots of movies, this is a strong lineup. (Also, kids content may be a secret source of strength.)
Warner Media also decided to have the content move in and out of the HBO Max catalogue. I’ll be honest, I love that decision. Given that customers can’t identify all the Warner Media content the way they can with Disney’s content, this will provide a lot of reasons for folks to keep their subscriptions.
Last point, since content is the most important piece, is that the loss of all the Warner Media/HBO content will be felt on Netflix, Amazon and Hulu. It’s such a big library that all the other libraries will get weaker.
Product (UX)
It worked fine for me, though I had my gripes. The UX doesn’t let you turn off autoplay. For me, I can’t stand kids content that autoplays. It invariably causes fights with my daughter, especially if I miss the opportunity to disconnect. It also didn’t have any playback flaws, which is to be expected since HBO Now made up the backbone of the system, and it’s worked for years.
As for everyone else, some folks didn’t like it; others found it easy to use. So where does that leave me? Honestly, I’m gonna call it a “we don’t know” since that’s my call for most UX.
Also, I’m beginning to suspect that customers fall into two categories on UX: Those who want the unending scroll and those who don’t. Netflix and Prime Video will appeal to former; HBO and Disney+ to the latter. More to come.
Placement (Distribution)
If we’re judging on results, not the “why”, which I explained in my last column, this is bad. Getting near 100% distribution is key to reaching the most customers. As I just said, they’re in a majority of connected houses, but not over 80% as Disney was. While they’re on lots of cable providers, video games and Apple devices, the Roku and Amazon devices is a big black hole.
Pricing
It’s expensive, that’s for sure. And we’re in a discounted streaming world right now. So this has to count as a negative as well. Is it a negative for HBO customers? No, but likely anyone who isn’t already “borrowing” HBO from a parent isn’t going to start paying for it at this price point.
Promotion
They were never going to be able to promote as Disney could, but overall they’ve done a strong job. Not to mention, ad rates are so low right now I suspect they’re getting a terrific bang for their buck.
Add it all up?
Well, HBO Max has the content, but it’s expensive and not widely available. So not the worst launch, but definitely far from perfect.
The Lack of Datecdotes Is Deafening
This exchange on The Verge’s podcast is a must read for Julia Alexander’s dogged pursuit of a nugget of data. Anything to indicate it’s working.
Did she get any data? Nope. Meanwhile, the Sensor Tower data is all over the place. And no one has any leaks yet.
So my judgement? The lack of a datecdote on performance is probably a bad sign. Though it’s just the second quarter and we have a lot of game to play still.
Mailbag!
First up, Andy’s Very Good Tweets asks…
Why has HBOMAx not just taken over the whole DC Universe library? DCU can’t be making enough to justify two streamers, especially with so much overlap, so what’s the sense in sharing licensing on many (but all) DC titles and only Doom Patrol from the originals?
Let me start by saying I have no inside information so can’t answer concretely. But this is the most glaring error on the platform. My second or third click on the website was the DC universe button, and the general impression was, “Eh.” Call it the inverse of when I clicked on the Marvel button.
My gut is that HBO Max wants to do the opposite of Disney and rotate content in and out frequently, promoting it when it comes in. Add to that the fact that Netflix still owns the rights to a lot of CW shows that streamed in the last decade, and potentially a lot of the best content just isn’t available.
Last note on this is that DC Universe is also an amalgam of both video content and digital comic book subscription. Which means Warner Media can’t just kill DC Universe and port it to HBO Max. Which means it’s tricky.
Second up, Masa Capital asks about the biggest immediate strategy change by HBO Max…
Takes on the decision to accelerate the release of Love Life. And if that means HBO Max may be considering stepping off the no #BingeAndBurn promise or not.
I bet this is a Jason Kilar special. Most digital media execs preach at the alter of binge model, and I could see Kilar coming in and insisting on this. The other potential explanation is that a lot of content was in production and crushed by Covid-19. Meaning, normally they would have so many originals they could space it out. As is, they need to keep folks on the site until new content arrives.
Are they right? Well, you know I love the weekly release if a show is a hit. But lots of customers don’t. (This could be the second big divide between customers: there are those who love the binge and those who hate it.)
Penultimate Point – The Big Negotiating Hold: Amazon is the New Standard Oil
Last week, I wrote a bit about Spotify’s monopoly play, and I’m returning to that well this week. Not because I want to focus on this issue, but because you can’t understand why Amazon is doing what it is doing without seeing the monopoly implications. It launched Prime Video using profits from AWS. It launched Fire TV the same way, mostly getting expansion by essentially giving away the sticks for free.
Now, Amazon wants its ROI on Fire TV.
That will come as a tax on applications on its service. This tax is passed on to both creators/talent—who will make less money—and customers—who have to pay more because of the tax to be on Amazon’s platform.
The counter is that Amazon is providing a unified platform. As one Twitterzen pointed out, it’s very convenient to have all your TV shows in one place. This is true.
Of course, if that’s the value Amazon is providing—in other words, the service Amazon offers—Amazon should actually pay streamers to be on its platform. If the value is bundling all the services, then they need to entice the streamers into that user experience. That’s what happened to cable providers. To get channels onto their services, they had to pay the channels a set amount per customer.
So why aren’t they? Because they’re betting on market power, not value creation. If they have market power, they can outlast their competitors.
Last Point – AT&T Wants to Be a Platform as Well
I speculated this back in the fall, when John Stankey rolled out his thoughts on HBO Max and I’m more convinced hearing the executives talk over the last week or so.
Part of the reason AT&T won’t just cave into Amazon Channels is that someday they’ll have AT&T channels as well. Heck, AT&T TV is essentially that, just not streaming focused. Yet.
It’s a monopolist’s world, we’re just living in it.
