How HBO Made Billions on Game of Thrones – Director’s Commentary Part I

One of my guilty pleasure TV series to watch is Forged in Fire on the History Channel. Like Making It, there is something really enjoyable about watching people make things, but especially when they do it really well. Especially in a positive atmosphere, which is what Forged in Fire and Making It emphasize.

Well, if I had a version of that hobby, it would be making business models in Excel. Especially bespoke models for brand new businesses. 

I just love it. I love taking a blank spreadsheet and figuring out how to fill in every line. More importantly, figuring out the data behind each number to get a model to be as accurate as possible. That’s my favorite part of the job. I’d do it even if no one was paying me to do it. If I can do that for things I love—like Star Wars, the Pac 12 or Game of Thrones—even better. 

These models don’t come cheap in terms of time required to build. Weeks of work usually. And the final result of even 4,000 plus words explaining them still usually don’t capture all the insights I think a well-built model provides. So—as I did with the Pac 12—today is the first article diving into all my extra thoughts on my Game of Thrones profit model.

I’ll dust off the FAQ format for it. If you have any questions, hit me up on Twitter, Linked-In or email (see the contact page) and I’ll answer those too.

First, can you remind me what your conclusions were?

Sure. In case you haven’t read the model, here is. It’s 35 lines and ten columns, so it’s small. (If you want the actual Excel, email me and I’ll consider sending. I’d have to clean it up first, though.)

Table 4 Final Estimate

The conclusion again is $2.28 billion is my estimate for how much GoT made from this series. That’s what I’d call my “median” estimate if I were running scenarios on this. And again, it is an estimate, not “truth”.

What do you mean by “not truth”?

Most numbers reported by the entertainment press, in my experience, come from one of three sources: the companies (via earnings reports or leaks), bad surveys or an investment bank releasing their analysis. My estimate would best fall in that last category; this is my estimate of the future.

But estimates are just that “estimates”. Since I don’t have every input—what I’d call “the actuals” in an internal document—I had to make a ton of assumptions. Still, estimates like these can be damn useful training for anyone in business. Unless you employ an industrial espionage firm—and I’m not a lawyer but I’d recommend you don’t do that—you don’t have your competitor’s numbers either.

I expect there is a chance some people who are “more in the know” than me can get someone in HBO to give them the real accounting sheets. Though, as Michael Ovitz’ autobiography testifies, there are quite a few people in H*Wood willing to tell you they know something for certain, even when they have no idea.

Let’s get into the model. Starting with the subscribers section. Explain the difference between accounting profit and your projected profit

Well, the key is that HBO (and all TV producers of wholly-owned series) think of a show in two ways. First, what is the “accounting” profit. That’s the amount they need to pay talent. That is usually made in an agreed upon definition called a “Modified Adjusted Gross Receipts” (MAGR). The people who work at the agencies have this knowledge as does HBO’s finance team. If it was leaked to me, we could make these estimates way more precise.

(Same with Star Wars. Feel free, readers, to leak me any info you want.)

MAGR, though, doesn’t come close to capturing the true value of the series. The MAGR definition usually ties the first run license fee (sometimes called imputed license fee) to the production costs. This gets nowhere near the true value of a TV show. It’s so “sub-optimal” that in my articles on subscription revenue, it didn’t even get its own “not-explanation”. I just dismissed using costs as a stand-in for value. Here’s this demonstrated for Game of Thrones.

Screen Shot 2019-05-23 at 4.36.34 PM

To quickly explain, to truly get at how “profitable” Game of Thrones had been for HBO, I needed to know how much subscriber value it added. Since this isn’t a hard and fast amount of cash—the way say theatrical box office or home entertainment sales are—networks like HBO usually set an agreed upon amount before the show airs. As you can see, it’s tied to the production budget of a series, usually at some percentage. Historically, 70% if the show can be sold to other windows.

As this table shows, though, if HBO had to pay off the actual subscriber value, then the talent collectively would have made something like $400 million more off the series. In other words, HBO was able to keep about $1.5 billion in profits from being shared with talent. 

Is this a bad deal for talent?

I mean, not as much as it seems. Estimating the value of subscribers is pretty complicated, and if you let lawyers into that calculations, it would get messy pretty quickly. Arguably this only comes up for the biggest hit TV series anyways, of which there are less and less.

How did you come up with your percentage for the imputed license fee?

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GoT vs LoTR vs Narnia – Appendix: Subscription Video Economics… Explained! Part 2)

(This is an “Appendix” to a multi-part series answering the question: “Who will win the battle to make the next Game of Thrones?” Previous articles are here:

Part I: The Introduction and POCD Framework
Appendix: Licensed, Co-Productions and Wholly-Owned Television Shows…Explained!
Appendix: TV Series Business Models…Explained! Part 1
Appendix: TV Series Business Models…Explained Part 2
Appendix: Subscription Video Economics…Explained Part 1)

The best analogy for content libraries on streaming services, for me, is theme parks. When I tried to value the new Star Wars land Galaxy’s Edge at Disneyland and Disney World, I wrote about this future scenario:

Next year, I’ll walk into Disneyland in the off-season (probably September-ish). I’ll be wearing a Star Wars shirt. My brother will probably rock a Marvel shirt. That said, I’ll also have a four year old wearing, if current trends hold, either an Elsa (Frozen) or Belle (Beauty and the Beast) dress. Other family members will likely have Mickey shirts on.

So how much of that trip do you allocate to the opening of Galaxy’s Edge? My family already averages one trip to Disneyland every year, and my daughter knows that Mickey lives at Disneyland. So she’d go anyways. But what about me? I’ll definitely go to see the new park at some point. 

Something about theme parks—maybe the permanence of the attractions—helps crystallize in my head the challenge of valuing content libraries. A theme park is a content library of rides, shows, shopping and food. Some of those attractions at Disneyland have been there since the 1960s. Those are the “library content” of Disneyland. Others are only one or two decades old. Those are the “recent library” of rides. Then there are the brand new attractions: Star Wars land, Cars land and a Guardians of the Galaxy ride. Those are the “new TV” of Disneyland rides.

The trouble is trying to value each of those pieces and disentangle them. At the end of the day, this both matters—because you need to make the best decisions possible to maximize revenue—and doesn’t—because at the end of the day the goal is to have revenues exceed costs on a total basis. Do the latter and how you get there doesn’t really matter.

My approach to valuing theme parks—calculating the money spent by both existing and new customers—gives us a good idea for how to value content libraries on streaming platforms. So let’s explain that. In today’s article…

– The rules guiding my approach to valuing content
– The “dream method”, which is what we’ll try to emulate
– The steps to the optimal method
– The HBO and Game of Thrones example explained
– Some other variations, caveats and thoughts

The Rules

As I wrote these last two articles, I kept coming back to the “rules” that define good business models. A few stuck in my head for valuing streaming video. Thinking that way…

– First, no double counting. If a customer gets attributed once to a piece of content, they don’t get to count twice. (A good rule of thumb, you can’t attribute more than 100% of your customers!)
– Second, CLV trumps monthly revenue and other calculations. If you attract a new customer, CLV is the best way to capture their true value to your business.
– Third, be humble in attributing success. No single show or movie accounts for 100% of its viewers in a library model.
– Fourth, use real data as much as possible.

The Dream Method – The Probability of Resubscribing

The dream method for HBO would be, basically, to be God Almighty. Looking down omnipotently, reading the mind of every customer subscribed to HBO and knowing why they subscribed, and what percentage of that should be credited to Game of Thrones. Add all the percentages together and you have it. (Maybe our Google/Amazon/Apple AI overlords will be there soon…)

In the meantime, we have data. Especially streaming data if you’re Netflix, Amazon or (partially) CBS or HBO. 

This data means you can track every customer. When their account starts. When it renews. When it lapses. And, crucially, what they watch the entire time. From the people who only watch movies to the people who complete every episode of Game of Thrones. In a big data sense, then you can compare their behavior to the customer who never watched Game of Thrones. 

Say the results looked like this…

…GoT Viewers resubscribe after a year period at a 92% rate.

…non-GoT Viewers resubscribe after a year period at a 80% rate.

That means, of customers who started the year subscribed to HBO, by watching GoT, they were 12% more likely to stay subscribed to HBO. That’s the best number if you can find that, because it basically means that GoT increases the probability of staying subscribed by a huge, statistically significant margin. Now that GoT is cancelled, if those GoT watchers suddenly flee HBO, well we can also reverse engineer that to know that GoT had been keeping them subscribed.

This could also be applied to new customers. If you take all the new subscribers for a given time period, you can look at the ones who watch GoT versus the ones who don’t and model their behavior. You can also tell which are the customers signing up to watch GoT right away, and which ones don’t. Add those up and you can attribute all the best approximation for value we have. (With heaping doses of regression analysis and machine learning.)

Yet, we don’t have the big data to do this. I mean me, as a commentator on the strategy of entertainment. If I were managing content strategy at a streaming company, I would set a team of data scientists working on. But I don’t have that team or that data here. As an outside observer, well, we need to make some assumptions, but we can try to replicate that method.

My Method – Attributing New and Remaining Customers by CLV

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Read My Latest at Decider – How HBO Made Billions on Game of Thrones

I’ve been in a bunker these last couple of weeks and that bunker was an Excel bunker with internet access where I had one quest: to estimate how much money HBO made off Game of Thrones.

As I was writing my big series, “The game of thrones for the Next Game of Thrones”, I realized I needed a starting point. And figuring how much money Game of Thrones made was that starting point. It helped me understand exactly how the GoT Prequel could make money, but also tested my model. And I learned a ton figuring it all out. I’m up to 20 pages of research for this series and growing by the day.

(And I’m not close to being finished…this model inspired at least two more spinoff articles and maybe more guest articles.)

It was so good, I pitched Decider on it, and they accepted all 2,000 words of it (with tables).  Go check it out and share it on Twitter, Linked-In, Facebook and everywhere.

Seriously, I don’t ask for a lot of favors from my small, but growing, audience and this is one of those moments. If you’re a journalist, consider picking up the story, and I can answer any questions you have. (Email on the contact page or DM.) If you’re just a fan, still consider or emailing it to your entire office. Any little bit helps. Thanks in advance!

Again the story of how HBO made over $2 billion on Game of Thrones here.

GoT vs LoTR vs Narnia – Appendix: Subscription Video Economics… Explained! Part 1)

(This is an “Appendix” to a multi-part series answering the question: “Who will win the battle to make the next Game of Thrones?” Previous articles are here:

Part I: The Introduction and POCD Framework
Appendix: Licensed, Co-Productions and Wholly-Owned Television Shows…Explained!
Appendix: TV Series Business Models…Explained! Part 1
Appendix: TV Series Business Models…Explained Part 2)

Consider my current relationship with HBO’s Sunday night programming. Right now, I record two plus hours of content to watch during the week: first, Game of Thrones, then Barry and finally Last Week Tonight with John Oliver. Then, for the rest of the week, I don’t record any other HBO shows, but will watch the occasional blockbuster I didn’t see in theaters. (In full disclosure, that included The Meg and Skyscraper. Don’t judge me.) Oh, and on Saturday mornings, we often watch Sesame Street. To access this content, I pay $15 a month to my cable company. 

So the fun question is…

…if I were HBO, how much credit do I give each series?

This is not a trivial question or easily answered. Sure it seems simple—the highest rated shows are the most valuable—but quantifying that value is the tricky part. In fact, this requires teams of finance folks and economists and statisticians running “big data” analysis. Literally measuring millions of customer accounts engaging with billions of pieces of content across potentially hundreds of categorical variables. (Unless, of course, you don’t have streaming data, in which case HBO doesn’t actually know what shows I watch, because I’m DVRing them for later.)

The current HBO lineup is a good illustration of how personal motivations can be obscured over the millions of people watching HBO. I’d definitely subscribe to HBO only for Game of Thrones, but would I subscribe to keep watching John Oliver when GoT goes on hiatus? What about Barry? Is it enough to make me stayed subscribed? Probably not on its own. Of course I will wait for Silicon Valley and Westworld and maybe Watchmen and/or His Dark Materials…so…I mean I don’t have an answer for you.

Multiply my anecdote by millions of individuals—all with different profiles and behaviors, and you see the challenge facing both cable channels and streaming networks. Throw in the fact that I’ve now been a loyal subscriber for 5+ years, and it can be hard nee impossible to determine which, if any, specific show kept me on board versus built up brand loyalty and/or inertia

Yet, this question will be crucial to our three streamers to determine the winner in this future-of-TV-series I’m calling “The battle for the next Game of Thrones”. The goal for these three series is to bring in and retain new customers to help win the streaming wars. Since strategy is numbers, I need to quantify those subscribers.

That’s the goal of today’s article. Streaming video economics. With my usual caveat that this is a subject that we could write books on. (Though, it’s obscure enough that there aren’t actually a lot of books on it.) My plan is to…

…Explain a brief history of content libraries and why this is a contemporary problem.
…Briefly remind everyone that for decades TV and movie studios tried to value libraries poorly on purpose.
…Then, I’ll debunk three bad ways to do this. 

Tomorrow, I’ll show my way, but mainly to describe the incredible amount of assumptions I’ll need to make to pull it off. And guess what? I’ll dig into a valuation of a current TV series. Or better said, a just ended TV series.

The Growing Importance of Valuing Content Libraries

When I built my TV production model, I debated making bespoke models for the four main types of TV, broadcast, cable, premium and streaming video. Ultimately, though, I realized that I didn’t have to because among those four business models, there are really just two types of revenue, advertising and subscription, and each model is just on a spectrum for how much they rely on each: 

Spectrum Ad vs SubscriptionThat’s a fun table and way to look at it because over time, we’re moving more and more to streaming. But as we move there, we also see that the ability to determine which piece of content is the most valuable went from “easy and/or not necessary” to “much harder and/or crucial to growing subscribers”. Let’s describe that in the various phases.

Phase 1: Broadcast starts with all Advertising

At the dawn of TV, life was simple. All broadcasters had to do was look at ratings. The higher the ratings, the more money made from advertisers. The math here is pretty simple for networks: keep the highest rated TV shows. And since Nielsen kept a scorecard for everyone, they didn’t even need to do this math themselves. 

Phase 2: Cable starts collecting retransmission fees

This was really the first time that channels needed to start considering TV series as more than just advertising revenue drivers. As cable expanded, the channels insisted on fees per subscribers. Eventually these fees—the per subscriber fee a cable company paid each channel to air its content—surpassed advertising for cable channels as the largest source of income. 

The best example that comes to my mind was the dual Mad Men/Breaking Bad success of AMC, followed by The Walking Dead. Those three shows allowed AMC to drastically increase their retransmission fees, and it wasn’t all related to viewership/ratings. Mad Men was never a monster in ratings, but its fans were diehards and it was critically acclaimed, so it was of outsized importance to AMC. They used this to negotiate higher retrains fees. Since individual customers don’t pay retransmission fees, you still, as a cable company, didn’t need to value individual shows precisely, though. Just general feelings fit in, and still most cable companies ended up buckling in retrains battles.

Phase 3: Premium cable doesn’t have any advertising, so libraries are a bit more important

Really, HBO was the first subscription TV company. For years, it justified its extra cost by being exactly what its name portends, the “home box office”. The home for theatrical movies before broadcast and cable. With no commercials.

Then, it bolstered this with The Sopranos and Sex and The City. They weren’t the first series on HBO, but the ones that put them on the map. Really, this is the first time a platform had to grapple with how to value their TV series versus the rest of their content. But HBO didn’t really have the data to do this. It didn’t know if someone who watched The Sopranos was the same subscriber as someone who watched their movies.

It also didn’t really matter, because HBO wasn’t selling the subscriptions in the first place. The cable companies were, so it just needed to give off the imprimatur of value and keep people subscribing. Which it did. To guide its behavior, it could also keep using ratings data in general as guides to what is profitable and what isn’t.

Phase 4: Streaming means direct-to-consumer, which means valuing content libraries

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Most Important Story of the Week and Other Good Reads – 17 May 19: The CW Ends Their Netflix Deal (and that Hulu/Disney news)

Distracted by a new birth in my (extended) family, and a big article that will launch next week, I didn’t get to write a lot for this website this week. But I’ll be back in a big way next week. In the meantime, I had lots of stories to choose from for this week’s round up of entertainment business news.

(Seriously, if you’re a TV journalist, be on the lookout around Tuesday for a big number you should definitely retweet or pick up as an article. It involves GoT. So you’ll get clicks. Consider this my first “hey, pick up this story” plea.)

The Most Important Story of the Week – The CW Ends Their Netflix Output Deal

This story made the usual “Upfronts” news cycle, but I think it deserves a bigger look than that. And yeah, I think it is bigger than the Hulu news. Disney was going to get Comcast’s Hulu portion eventually. Meanwhile, I don’t trust AT&T and CBS to pass up cash when they can get it, so kudos for making the right call here. We may look back on this move as when AT&T finally took control of their streaming future. (CBS has already done that.)

That said, the headlines gave a different flavor of the news than the full articles did. Even my headline is slightly misleading, so before the strategy implications, let’s correct some initial misconceptions.

First, “The CW” is less accurate than “Warner Bros TV/CBS TV”

Because The CW is a network. The shows are produced and eventually owned by the parent TV studios of Warner Bros TV and CBS TV. These are licensed shows on The CW, not shows owned by The CW. I explained the difference between owned and licensed here.

The CW has been one of my favorite channels since business school. They are the subject of a pretty widely used Harvard case study–if you take the entertainment biz classes–and I’ve followed them since. The CW is is a fascinating joint venture between CBS and Warner Bros (get where the C and W come from, if you didn’t know?) that only exists so that those TV production studios have another broadcast channel to sell to. So the vast majority of CW series come from Warner Bros/DC, Warner Bros TV, CBS TV or, in a lot of cases, both. So that’s really who we should say ended this output deal, those parent library companies.

Second, this only applies to new shows going forward.

This is key, because these CW series are really valuable to Netflix. In the last two weeks, Netflix has started releasing weekly “top ten most popular” lists in the UK and Ireland as tests. Assuming the data is accurate–and with the caveat we have no idea how this is calculated–here is what Netflix is telling us is popular on their platform in the UK (hat tip to All Your Screen Rick for the data)…

Screen Shot 2019-05-17 at 3.10.09 PM

So in the UK, CW series make up 3 of the top 10 in these last two weeks. That’s really valuable. Is it irreplaceable? Surely not. But you can only lose so much content before it begins to impact engagement, retention, acquisition and general content performance.

The key, though, as I first read in The Verge, is that these shows won’t be leaving. If a show premiered before 2018/19 season, it will eventually wind up on Netlfix. So it’s not like suddenly a lot of Riverdale fans will need to subscribe to another streaming service to catch up.

Third, Netflix will still bid on individual series (and may have cancelled the deal).

Meanwhile, it seems like both sides wanted to end a library output deal and move to individual series acquisitions. I can see the logic. For the TV studios, you can now put the series directly on your aspiring streaming platforms. For Netflix, the entire deal may not be as worth it as individual series–so Riverdale isn’t worth the tax of the underperforming series in the deal–especially if you won’t control the rights in perpetuity. As Netflix moves to a wholly-owned strategy, this makes sense.

(Though, I’ll be honest, most of the tech sites seem to default to “Netflix is right” in their commentary, so part of me thinks this may be Netflix positive spin, and Netflix may have wanted to keep the deal going.)

The Strategy Impacts for the Future

With those misconceptions cleared up, it’s time for the lessons for us for the streaming strategy going forward. Well, as I started saying, AT&T and CBS are getting serious about streaming. Couple this with the AT&T news that they plan make Friends and ER exclusive to their new streaming platform, and you start to see a serious strategy. (I’m focusing on AT&T, because CBS has at least already launched its streaming service.)

 

If you’ve been following me, you know how valuable I think some of these library TV series are. Both at engaging customers–especially as no Netflix shows make it to fourth seasons–but even for acquiring customers. When you scan the homepage of a streaming site, it helps to see a bunch of shows you recognize. Warner Bros TV has a killer library catalogue, in this respect, and finally getting it all on their own streaming platform could be a huge head start.

Meanwhile, I love the approach used by The CW. If you believe internet Twitter, literally no one watches broadcast TV. Not a soul. That’s what some Netflix bulls will tell you. And yet, these shows often get 500K live viewers and multiple in later viewings. Those are real customers, in just one windwo. Here’s a Salil Dalvi tweet that explains the CW business model:

I’m a Mark Pedowitz fan in general, and he sees his job to launch TV series into future windows. This strategy for the CW makes sense given both the state of his network and his dual corporate ownership. He provides a channel to build awareness, and meanwhile he lets his corporate studios sell into lucrative second windows.

He also got on the comic book trend early–while finding a hit maker in Greg Berlanti–and meanwhile he doesn’t cancel all his shows every year, meaning he can let shows build audiences. He also saw how much more valuable scripted series were than reality series for the streamers, so almost all of his programming is scripted dramas.

 

As to the comic books, and since whenever we mention AT&T, invariably we find some messed up part of their strategy their screwing up, what the hell is going to happen to DC Universe, their streaming platform? I mean, if you’re taking back the rights to Batgirl, and it could be a hit, why wouldn’t you put it on your DC streaming site instead of the WarnerMedia site? I don’t in general believe in the niche approach to OTT sites, and I can’t tell if AT&T does either. Sometimes they support niche sites and then other times they don’t.

Other Contender for Most Important Story – Disney Acquires the Rest of Hulu Stake (Eventually)

Early this week, we had our lead contender for “the most important story of the week” and it is big enough news I’m giving it it’s own section.

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Most Important Story of the Week and Other Good Reads – 10 May 19: M&A in Media and Entertainment Stayed Flat in 2018

Let’s get this update out on a Friday like it is intended.

Most Important Story of the Week – Mergers and Acquisitions in 2018 Update (Finally!)

For some reason, PwC never released their 2018 update for Media and Telecommunications merger & acquisitions update. Or if they did, I never saw it. But PwC did release a first quarter 2019 update and it happens to include the quarterly data for the last two years, so we can update our table from last July! First, the data update, then some insights. (Also, hat tip to Axios’ Sara Fischer who pointed wrote about mergers in her weekly newsletter.)

Before I dig into, the basic headline is above: despite the headlines in June, M&A in media, entertainment and communications was basically flat in 2018 compared to 2017. Yeah, it didn’t seem like it, but it was.

The Data Update

I’ve been looking at three measures for mergers and acquisitions (which PwC calls “deal activity, including some investor activity) which is: total number of deals, total deal value and the number of “mega-deals” or deals valued over $5 billion. Fortunately, PwC has been keeping this data for a few years now, so, for the most part, I’ve been able to figure out the data going back to 2009 in a consistent way.

(I’ve been meaning to write a post with all the links, but search PwC and mergers and you can find regular articles in Variety, The Hollywood Reporter and their website going back a few years.)

The basic trend for M&A is that the deal activity was there, but it wasn’t as big as past years. Total deal value fell from $140 billion or so in 2017 to $122 billion in 2018. Which is still one of the five biggest years for deal activity, but also the lowest in the last five years. Here’s my updated table:

MA in 3 Measures.png

Oh, you don’t like tables? Okay, here’s the total number of deals going back to 2009 in visual form:

Chart Number of Deals

Like I said, that looks flat, doesn’t it? That’s why I use three measures and that’s just the first. Here’s the other two,  total value and mega-deals:

Chart Deal Value

I like this chart because you can definitely see that M&A has been picking up in terms of mega-deals and total value, but the last two years we’ve been coming back down. Also, the PwC report didn’t include the number of mega-deals in 2018, so I can’t speak to how that number has changed, though my gut says it stayed about the same.

Looking at all this, I’d say that M&A will continue, just on the same path it has been. What is that? Well, my favorite look at M&A has been the rolling five years, and here’s that updated chart which is a pretty good prediction for me for this year (so another 800 or so deals, with say about $120-$175 in total deal value with 15-20 mega-deals, again).

MA Rolling Ave

Explanations

To start, I’ll toot my own horn. I called out last July that the “tsunami of deals” soon to swamp entertainment, media and communications may not ever land. And sure enough it hasn’t . That’s what the numbers clearly show.

My working theory is two fold. Part I is about how even though deals were approved, they haven’t been approved easily. AT&T still had to go to court and fears of deals not getting approved scared of Comcast and AT&T from bidding on Disney’s RSNs. Moreover, a Democratic congress looks to be hungering to take on Big Tech, which may discourage them from doing more deals.

Part II is about uncertainty. There have been rumors of a trade war with China since last year and a few stock market scares. So I think that has scared of some mergers and acquisitions, along with the fear that already bloated balance sheets with debt can’t really absorb more mergers. So unless an Apple or Google or Amazon want to buy something, there aren’t a lot of available buyers. Also, as the table above shows, in a recession all deal-making basically freezes and it takes years to recover.

Other M&A News – Netflix buys Story Bots (kids TV Producers)

As if to prove the point above, the recent deals that I’ve seen again fall into the bucket of smaller deals that are far from needle-movers. Like Netflix buying Story Bots. 

Apparently, Netflix has only ever acquired three companies. All I can say is, “respect”. One of my favorite questions in b-school was “build it versus buy it?” My natural leaning is to “build it”, though most people on the finance side tend toward the “buy it”. Netflix appears to really, really insist on the “build it” approach, really only buying a production company for studio space and two other companies for IP. (Though I see the counter that if they had bought a content library, they’d be in a better place content-wise. But with what money?)

Other Contenders for Most Important – Earnings Reports Galore

As I’ve started writing full-time, I’ve found myself paying more attention to earnings reports. The logic is fairly simple: they’re news generating juggernauts. Over the span of a few weeks, we get all sorts of news tidbits dribbled out. While we do get some fun facts, most of the time we don’t learn that much. Most of the coverage regards earnings estimates compared to actual earnings, which is vital for investors, but from a strategic standpoint how does it matter that Wall Street is either good or bad at its job?

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GoT vs LoTR vs Narnia – TV Series Business Models (Scripted)…Explained! Part 2

(This is an “Appendix” to a multi-part series answering the question: “Who will win the battle to make the next Game of Thrones?” Previous articles are here:

Part I: The Introduction and POCD Framework
Appendix: Licensed, Co-Productions and Wholly-Owned Television Shows…Explained!
Appendix: TV Series Business Models…Explained! Part 1
Appendix: TV Series Business Models…Explained Part 2
Appendix: Subscription Video Economics…Explained Part 1)

Today, we continue our journey explaining how a TV show makes money for its producers. Last week, I started describing the model along with describing costs and the first set of revenue. Today, I continue explaining the revenue piece, touch on why I didn’t build this model for the upcoming Star Wars series, describe some of the fees involved, and provide some final thoughts. Finally, I link to my two main sources.

Revenue (continued)

The bulk of the value of a TV series—especially non-hits or mega-hits—comes in the first window. Especially when you talk about value as “money”. For 90% of TV series, the initial license fee usually represents most of the money a show will ever make. But if a TV series takes off, then the other windows will have much more value. And let’s start with one of the newest of those windows.

Home Entertainment

TV came to home entertainment late, and may be out of it soon. This window couldn’t take off like movies in the 1990s because the number of VHS tapes required was unwieldy. When DVDs made entire seasons the same size as a VHS, right as the quality of top series drastically improved (I’m thinking of The Sopranos here), then the TV home entertainment market took off. With the rise of digital you could buy series without any space at all. (This is a great example of technology enabling a business model.)

Yet, as soon as digital sales started, they ended, didn’t they? So the lifespan of this window was fairly small. I mean, why buy or rent a TV show episode if Netflix will buy the rights and stream them all for you? Still, I’m including it in the model because home entertainment is still something, but more importantly, it was REALLY a thing for Game of Thrones. Franchises that inspire super-fans—which is a short list—can still generate home entertainment sales. At the height, these can be in the millions of units sold per season, at least when GoT started. That can add up and really offset production costs.

So including the first-run licensing revenue, here’s our model so far.

Image 1 The Model So Far

Licensing – Renting Your Show to Other People

I don’t like the word licensing in TV. It sounds too close to selling either naming rights or toy rights. But it is used constantly in television. Instead, I’d call it “TV renting” because that’s really what you’re doing: renting the rights of your TV show out to various players. Still, licensing it is.

For all the sturm und drang about streaming video, in a lot of ways, they were just another window for licensing. Instead of counting the number of runs and paying broadcast residuals, you sold them for unlimited runs to a streaming network, and because it was digital (and not covered by guild agreements), the studios also had to pay less in backend compared to syndication. 

The variations in licensing come down to who you licensed to, when they get that license and where they are. Typically, production companies expend the most energy on the first, domestic window and everything else is a bonus. To summarize:

International Sales – The US TV model built up around selling to American domestic broadcast. Once you did that well, you could sell the rights of a TV show to the international market. That’s the big form of potential revenue. However, the shows that fit international market tended to be broad comedies, crime procedurals or genre series. (Many prestige shows don’t travel at all.) This has also blended in with digital sales as streamers can now buy out global rights instead of just US versus international.

Syndication – Again, another legacy of US TV model, syndication was selling a broadcast show—and sometimes a cable show—to TV broadcast network groups to run in off-primetime hours. This still goes on for shows like Friends to Mom to Law and Order: TBD. Since this was done for whole of series runs, often, this could be worth literally billions for a handful of shows. (Again, the kings are Friends, Seinfeld, Cheers, Simpsons, Everybody Loves Raymond, Two and a Half Men and other broad comedies.) 

Second Window Licensing – I’m using this to refer to cable channels getting in on the game. You could take your broadcast series, and instead of selling them in syndication, sell them to cable channels in deals that looked roughly similar, but had less impact on residuals and participations. And premium channels could get in on the game too (HBO sold Sex and the City, The Sopranos and Entourage). Recently, even streaming series (Bojack Horseman on Comedy Central) have been sold into syndication. Really, what you need to know is that a lot of TV producers made money by selling their shows to a second channel after the first window ended. And then…

Digital Sales – Digital sales can happen in the first, second or library windows. And many times it doesn’t even conflict with the syndication window above (unless the streamer pays for exclusivity on that window too) which is why Friends is on Netflix and TBS right now. (Friends is such a mega-hit in the TV business I use it a lot.) Since so much money is involved in digital, sometimes the streamers buy out global rights simultaneously, which is a change in business driven by the rise of global streamers.

This gives us four new revenue lines, the three categories above plus “library” which is the placeholder value for time periods after a series is fresh, say five years from the last season and older.

Image 2 With licensing Revenue

Tax Credits

Tax credits are a great euphemism. We could just call them, “government bribes to movie studios”. What else do you call a straight cash payment to a business to come to your state or country? It’s the utter opposite of the “free market”, and states of all political stripes take advantage of it. (*Cough* Georgia *Cough*)

I didn’t calculate this explicitly for films because at the size I was working—hundreds of millions—it would wash out in the production budget. (Though lots of big budget films, including Marvel films take advantage of these credits.) I’ve also seen these accounted for as “negative COGS” as opposed to revenue, if that makes sense from an accounting perspective. (It isn’t money you make, but money that offsets your costs.)

That said, for TV shows in the low millions of dollars range, a couple million dollars can really hit the bottom line. Some TV producers—I’ve heard—have the goal to breakeven on everything else, and their profit is the tax credit. Starting research for this series, I found this Variety article where Penny Dreadful managed to convince California to pay them $25 million. That’s a hefty bribe, er, paycheck.

Smaller Pieces – Merchandise, Product Placement

For 98% of shows (my assumption) licensed merchandise will never be a thing. People just didn’t buy NYPD Blue shirts or Cheers hats. Yet, that has changed as nerds have taken over the world. I own not one but two Game of Thrones shirts. Breaking Bad—another megahit—had two iconic shirts in both the Heisenberg and Pollos Hermanos t-shirts. So I’ll include this line item because if any of my fantasy series becomes a “megahit”, they’ll make some money off of that.

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