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The common wisdom of the Coronavirus may have calmed down slightly. The hyperbolic take that “Everything has changed”–see Politico here. Or Deal Book this week. Or countless others–has given way to the narrative that, “Recessions/pandemics accelerate trends that were already occurring.”
At first, I bought into this little bit of folk wisdom. Then, as I reflected, I realized I was basing a lot of assumptions on a bit of common sense that frankly, has no evidence to support it. It’s rebutted mainly with this key question:
Wait, what data/research/experiments/history have shown that recessions or pandemics accelerate trends?
My goal is to arm folks with antidotes to narrative-based thinking. Sometimes that just means calling it out when I see it. The above narrative absolutely falls into that category. Just because some trends may get accelerated in a recession doesn’t all trends do. Then, consider that we don’t have enough data points to justify this thinking. (We’ve had two pandemics and only a handful of recessions in the last fifty years. 5 data points does not a trend make.) Finally, since we don’t actually have any data to support this, it’s mainly used as a tool to reinforce pre-existing biases. (If you’ve long predicted tech/digital will disrupt everything, the above saying simply reinforces your priors without any additional evidence.)
If some of the thinkers/forecasters/soothsayers out there led their pronouncements with “I believe this will accelerate trends”, then I’d have less of an issue. But instead, it’s put as if it’s a proven law, “Since we all know recessions accelerate underlying trends…”
Now more than ever, predicting the future is incredibly hard. So be careful out there folks. Especially when you come across fortune tellers disguised as experts. On to the story of the week.
Most Important Story of the Week – Quibi Launches. Success or Failure TBD.
Over the last two weeks, if you squint through the news, you could just make out a front page of a website that entirely ignores Covid-19. For example, this week I was able to stack up a series of important stories, none of which are directly Coronavirus related.
The most important story this week has to be Quibi, a big bet in a time when everyone is making huge bets in an age of tremendous disruption. You almost (but don’t) feel bad for Jeffrey Katzenberg and Meg Whitman when they planned a huge $1.7 billion content war chest…and then Apple just quadrupled that on a TV service that is their sixth most important priority.
Yet, this week we all finally got a look at Quibi. And I read a ton of great takes. Here are my favorite insights I came across:
My Favorite Insights from the Interwebs
Quibi has news…which could be an edge by @TZM
Here’s that thought in Tweet form:
As I wrote in my column on live TV a few weeks back, television is a bundle of five different types of programming: scripted TV, reality, news, sports and kids. Actually, scripted TV, reality TV and films all serve roughly the same purpose: general entertainment. Most streamers are entirely focused on general entertainment and kids.
Which leaves a gap for sports and news.
This is another sub-tweet at Netflix. “Neverflix”, as I’ve called them before, has decided that certain content categories will never appear on the service. Like news and sports. Which means there is white space for people to carve time into consumers viewing habits. Quibi having a good supply of quality news could help drive customer adoption. (Peacock could benefit from this too.)
Quibi Needs to Be On TVs by Variety (and others)
Everything in the subscription game comes down to “total addressable market”, an often wildly inflated estimate used to justify skyhigh valuations. Quibi could point to everyone who owns a smartphone and say, “That’s our addressable market.” This would be wrong.
The addressable market is really people who watch TV. BUT! People tend to watch on certain devices. And despite the rise in mobile viewing, a huge majority of TV viewing is still via television screen. Even for kids! This means that the actual targeted segment for Quibi is a fraction of the total addressable market compared to every other streamer. That’s a huge disadvantage right out of the gate. Why artificially shrink your addressable market?
(BTW, this problem just plagued Spectrum, which rebooted Mad About You and plagued AT&T’s Audience Network. And it doomed Microsoft Studios before it started.)
My benefit-of-the-doubt guess is that Quibi prioritized launching on mobile only (Android, iOS) before providing functionality to all living room viewing. Again, I hope that’s the explanation. But it still feels like a miss.
Is Quibi’s 90 Day Free Trial is Too Long? by Kirby Grines
Yes! Especially since all their content is particularly short to begin with, there’s a very good chance customers will be able to watch all they want in those 90 days. Churn is the name of the game in subscription streaming. Notably, Netflix is moving away from free trials globally.
This seems risky.
It’s Too Soon to Bury Quibi by Andrew Freedman/Alison Herman
I’m giving Quibi a shot and putting them in my ten part acronym for the streaming wars:
NPv-HD-CA-HPQ-Y
Why? Because with the content spend and hype, I think they have a chance. Should they be above Showtime and Starz? Maybe not. But those apps don’t seem to be gaining in customers. Honestly, my upside case for Quibi is 5 million subscribers in a year. Or they could run out of money well before then. Or get acquired. But it is too early to bury them. They have a shot.
My Insights
Another Platform…Another Lack of Library Content
The solution to not having a library seems to be to focus on just having a lot of originals. As opposed to Apple TV+, that didn’t even have a lot of content.
From what I can tell, Quibi is going to start with lots of essentially movies. (An estimated 7,000 pieces of content in year one, but it’s unclear if that counts the 10 minute episodes or not.) If it is, that’s 1,000+ hours of content. Which is good…but that’s over one year. And up to half could be news stories, which isn’t quite the same thing. Add in the fact that lots of content won’t appeal to lots of people and I could see it running out quickly.
Mobile May Just Be a Music/Kids Platform
That was my take earlier in the week and I stand by it. If you look at this quick glimpse at Youtube’s most subscribed channels, then it seems pretty clear that mobile video is not-so-secretly “mobile music videos”.
The Content Deals…
Quibi has also let it leak that it’s deals with talent are very talent friendly. As in after a few years talent can walk away with their shows scot free. I don’t know if that’s genius or madness, but it’s one or the other.
Is the content good?
I don’t know! And honestly don’t trust any analyst who says they can tell. Critics can tell you what is critically acclaimed, but evne that doesn’t hold much sway with customers. Let’s wait a few months for the IMDb, Rotten Tomatoes and Metacritic customer ratings to roll in before we judge quality.
Other Contenders for Most Important Story
Meanwhile, there was a lot of other news!
Jason Kilar joins Warner Media
The trouble with predicting executive performance is two fold. First, there are so many variables we often fail to account for. Sometimes great executives work for terrible companies and other times terrible executives happen to work in great companies. And sometimes, it’s a bull market so everyone looks good. Second, when it comes to most executives, except for those at the tippity-top, it can be tough to figure out exactly what they did versus what they took credit for. To add a third fold, there is also the complication that some executives are great with the media, and get glowing praise regardless, and others aren’t. (So they succeed, make money for shareholders, just never get heaping praise in the press/trades.)
The hiring of Jason Kilar–of very early Hulu and then Vessel–by AT&T to run Warner Media is a big swing. He’s not a content guy, which could either be a big deal or a nothing burger. He ran Hulu well, but he was also sitting on literally the best asset of all streamers in the 2010s, day-after-air television. I could argue that the fact he didn’t keep pace with Netflix despite having that asset–and have no doubt it was/is a huge asset still–is as much an indictment as a credit.
But then the context. Sure, he had those great assets, but he was also stuck in a super messy joint venture, trying to please multiple masters in a cash burning industry that is streaming. Could many executives have thrived in that context?
Then he launched Vessel to acclaim, but it was eventually acquired by Verizon and shuttered. That point about acclaim should give us the most pause. (And a bit of worry for Quibi too!)
To top it off, well his press is too good for the accomplishments. I’ve heard his praises sung for years, but again he ran Hulu 8 years ago. Now, it could be because he is the real deal and watch out Netflix, Disney and Comcast, Kilar is coming. Or…it’s just really good press. (He could be the “Kenny Atkinson” of the NBA, for the Bill Simmons super fans.)
We’ll see. My 95% confidence interval in predicting his success or failure is pretty wide.
Disney+ Launches in Europe; India…then Gets 50 million Global Paid Subscribers
Well, Disney+ is firmly ahead of all analyst estimates. Notably, after launches in India and Europe, they’ve now passed 50 million subscribers globally. Someday, they’ll add Hulu subscribers to these numbers too.
Frankly, even as a Disney super fan I didn’t think they’d do this well this quickly.
Apple and Amazon Strike a Deal
Someone called them frenemies. I think that’s actually too close. I wouldn’t have called Russia and Germany “frenemies” in the lead up to World War II. They were just two enemies who had paused hostilities temporarily.
That’s the same situation for Apple and Amazon. Both run platforms (iTunes/Amazon Video) that sell VOD. Both have streaming TV sticks. Both have streaming platforms that want/need to be on the other’s streaming devices. And they fight like cats and dogs to take as much money from the other as possible. But for now Amazon Prime users can buy shows and movies on Apple devices. Presumably Amazon doesn’t have to pay as high of a bounty as Apple usually demands for in-app purchases. (Normally it’s 30%.)
Still, a big deal for distribution purposes. That Amazon lack of in-app purchases has been a thorn in Amazon’s side for a while. (Now we’ll see if Amazon can get the next Fire Phone right…)
M&A Updates
Sprint/T-Mobile Closed
Going from three to four cellular phone providers is a big deal for customers. (Mostly bad.) Given the role mobile plays in connecting customers to streaming–and the fact that they all provide free streamers too–this is a key move for America. We’ll see how it works out.
This happened right before all the Coronavirus news, but is worth noting, given how popular Univision is, and how far it has fallen in value. Being a broadcast only option just isn’t valued by the markets anymore, and for good reason.
My latest article is up at Decider. The simple answer to the headline is, “No, not really.”
I had mentioned in my weekly column a few weeks back hearing rumors that, well, no one was watching Apple TV+. This article allowed me to dive a bit deeper into the subject then that article, plus talk about the largely disappointing debut of Amazing Stories.
Which is a point I’ll digress on a bit before moving on. If you recall back to the time period of last April, when Apple announced Apple TV+, Stephen Spielberg was a BIG part of that announcement. Like central. The thinking being “They got Spielberg. That’s huge!” But it was just another show he executive produced, like so many other flops in TV, and now it came and went. I’d say the same for Oprah. Another huge get, but is anyone tuning in to her book club?
Read the whole article for the details.
One of my big frustrations with the “debate” over Netflix is how little we know. That’s a gripe I share with a lot of folks.
One of my big frustrations with coverage of Netflix is how seldom folks try to step into the gap and estimate data points for Netflix. In this gripe I’m mostly by myself. I understand that some journalistic outfits can’t do this. They can only report facts or estimates from other established firms.
But I won’t settle. If Netflix won’t tell us how many folks watch their programming, then I’ll take things into my own hands. (See Ted Sarandos’ latest on Reliable Sources. All he said was “Viewership is ‘up”.) I just need enough data to make my estimates reasonable.
And guess what? Over the last three months I think I’ve collected enough.
Normally, at this point I’d launch into a bit of a strategy lesson. I mean, it’s right there in the name of this website. Instead I’m getting right to my results. I’ll put my “Bottom Line, Up Front”, what this is, why it’s a good look and then how I calculated it. Then in my next article, I’ll analyze some implications from all this data, and finally my strategic lesson for folks out there.
Bottom Line, Up Front – My Estimates for Primetime Viewing
The breakthrough for this project came from three summaries of viewing. All came from Nielsen, which means the measurement system is “apples-to-apples”. Even if you’re measuring subtly different things, at least having the same person measuring is better than multiple different measurement systems.
Here’s my prediction of the top 20 “channels/platforms”—across both linear and streaming—in Primetime (8-11pm) in the United States, as measured by “Average Minute Audience”.
To be clear, this is the “average minute audience” during primetime in 2019. The best way to explain “average minute audience” is that it is the average number of people tuned in or watching during primetime. It can be different people who tuned in for only part of a show in traditional linear TV. Notably, it does include delayed viewing of shows, so it’s better described as “shows that debuted during primetime.”
Why use “average minute audience”?
First, because it isn’t subscribers, which is the numbers we most often see reported. (And duly covered by me, for example here or here or here.)
AMA is pretty damn useful because it captures actual usage, not just folks who are subscribed to a service, but don’t use it. While AMA can have wild swings—for example live sports skew ratings heavily—over 365 days it absolutely evens out. In other words, it’s a pretty good sample of the average amount of usage.
I’d add, the business rationale for tracking both usage and subscribers is because they are a chicken and egg problem. If you have lots of subscribers, but they don’t use the service, they’ll quit being subscribers. And if you have lots of usage, that ends up getting more subscribers. (Meanwhile, coronavirus is going to screw all this up as the old models of usage to sub growth will be pretty inaccurate during this time of crisis.)
Here’s a fun example. Who has more subscribers, CBS or Netflix? Well, CBS obviously. Through all the linear cable channels. (If you count those as subscribers, and they do pay a monthly fee, even if they don’t know it.) But since usage is declining, so is linear channel subscriptions.
How the relationship between usage and subscribers evolves overtime will have a big impact on how the streaming wars progress. We have subscriber numbers for the most part; AMA balances it out nicely in the interim. (Though if I had a preference, I’d just prefer total hours consumed by streamer and linear channel.)
The other main reason I used it? Well, it’s the data I have. So you use what you have.
Methodology
How did I pull off this feat of estimation? Let’s go step by step through it.
First, gather your sources.
One. Every year Michael Schneider releases a roll up of every channel by average primetime minute audience. This means for the 3 hours of prime-time (8pm to 11pm) he averages how many folks watch by every single channel. That gave me this chart of the last four years, since he linked to his past columns at IndieWire:
Two. In February, Nielsen released their “Total Viewing Report” for 2019 Q4. They then released some juicy nuggets about streaming and Netflix’s share of viewership. Covered in every outlet possible, here’s the pie chart from Bloomberg converted to a table:
Three. In another scoop, Michael Schneider in Variety got the weekly Nielsen streaming data on a show-by-show, top ten basis, which we hardly ever get:
Second, make an estimate between the first two sources.
This actually just becomes a math problem. To start, I calculated the total viewing of primetime shows each year. You can see on the top line of the 2016-2019 chart that I calculated total viewership year over year, and it’s decline. With Nielsen’s estimate that streaming is 19% of viewership, we can combine these two estimates:
Once we have that, we can just multiply the percentage of streaming by percentage of viewing. Assuming that the percentage of prime-time viewing on Netflix is on average the same as broadcast and cable channels—which seems reasonable—we get this updated table:
That gave me the table above, which I’ll post again because I love it so much…
Third, make some margin of error.
See, Netflix has in the past estimated they are 10% of TV viewing. So I wanted to give them their due and put the number out in case that’s closer to reality. So that number made it in as the “high case”. In this case, Netflix would surge past CBS and NBC to 9.4 million AMA on average.
Of course, I’ve also heard that Netflix has something like 60% of their viewing is kids or family content. While this doesn’t show up often in their season data, you see this in their film viewing. So if I were estimating total Netflix usage, I’d consider lowering the primetime ratio down a bit, say to 4%. This would mean that Netflix severely under indexes on primetime viewership because it is essentially a kids TV platform. This would make Netflix’s primetime AMA around 3.7 million.
I’d call those two numbers our high and low case for Netflix in 2019. So 3.7 million to 9.4, with a like 5.5 million average AMA.
Fourth, sanity check your estimate.
This is where Michael Schneider’s latest Nielsen scoop in Variety comes in. In his latest scoop, he got the top ten ratings by “average minute audience” from the first week of March for both Amazon and Netflix across a range of originals and films.
We can use these weekly snapshots to evaluate our previous estimates. Because if the top ten had multiple shows in the high 8 digits of viewership, then obviously way more people are tuning in nightly than *just* 5.5 million per night. And since I unveiled this article, well you know the math doesn’t add up. First, here are Nielsen/Variety’s charts, converted to Excel so I can “math” it.
If we add up each of the 30 Netflix data points, we get 34.8 million AMA. Which is way higher than my 5.5 million per night. But…this viewing was spread out over 7 days. Someone could have watched multiple series each night. On a streamer, there isn’t a constraint on viewing. Since this is 7 days of data, at a 5.5 million AMA we’d have expected about 38.8 million. That’s pretty close to the 34.8 we actually had. This is why overall I think my methodology is pretty accurate.
But I have some huge caveats.
First, this is seven days of around the clock Netflix viewing. Which is way more than what Michael Schneider was tracking in his “top channels” run down which is strictly a primetime measurement. (8pm to 11pm) So if we’re trying to balance the books, we’d need to draw down the Netflix numbers to account for non-primetime viewing. Try as I might, I couldn’t find a good data source showing Netflix viewing by time of day.
Second, you could also point out that these 30 shows weren’t the only things available on Netflix. What about all their hundreds of other shows?
Good point. So here’s a table of the Netflix shows whose data we do know.
What should jump out at you right away? The logarithmic distribution of returns. In other words, in the content game, the winners aren’t just a pinch better than the others, but they are orders of magnitude bigger. We see that starkly here. Of just these 30 pieces of content, a plurality had less than 500K AMA and a majority had less than 1 million.
But we know that’s far from all the content Netflix has. They’re a machine churning out, according to Variety’s estimates 371 new TV series in 2019. That’s in addition to a hundred plus original films.
Why does this matter? Well, I made my own estimate of the rest of Netflix’s viewership based on these trend lines. Here’s how that looks:
In other words, even though Netflix has hundreds of other shows, they don’t really impact the ratings after the launch. Likely the majority of series launched on Netflix last year average a ratings-wise insignificant number of views. (Say 10-25K per week. Or less.) If you have 300 shows earning 10,000 views a week, that’s only a 3 million AMA. Which would bring the estimates above right in line.
In other words, after my sanity check, I think my nightly AMA number for Netflix looks pretty good. Arguably the primetime only numbers would bring it down—meaning I was too high—but the other not included shows would bring it back up. And likely still a majority of adults watch Netflix at primetime, regardless of anecdote about binge watching at all hours of the night.
So that’s my data estimate of the day. But what does it mean for Netflix?
Next Time and My Data
Let me be honest: if you unleash me on a data set like this, I generate way more insights than just this one article. In my next article, I’ll run through some implications and provide a piece of strategic advice.
Also, I built a fun Excel for this. It’s not super complicated and you could go get all the data yourself if you wanted. But like I’ve done a few times before, I’m going to give it away. The price? You have to subscribe to my newsletter at Substack. It goes out weekly if I don’t have a consulting assignment; once or twice a month if I do.
Email me from the email you subscribe to the newsletter with, and I’ll reply with the Excel. (Email is on the contact page.)
You can tell we’ve hit peak coronavirus coverage when you see the headline “Did Disney predict the virus?” Because the film Tangled features a “quarantined” character in a town called “Corona”. Yep.
In more serious coverage, the predictions that coronavirus is “no big deal” have shifted to “we’ll be in lock down for 9 months” and folks are as confident as ever. Meanwhile, everyone is quite confident in all their predictions.
I’m not. So my public service is to try to separate what we know from what we don’t in the entertainment business in the age of Covid-19.
Most Important Story of the Week – Linear/Pay TV…Boom or Bust?
In case you missed it last week, I picked a few tools to use to try to figure out how the coronavirus is impacting various parts of the video value chain. Including:
– Ignoring Narratives vs building out scenarios
– Demand, Supply and Employment
– What we know vs what we don’t
– And “what will change” and “what will stay the same”.
If you want a good example of how narratives can take us in the age of Coronavirus, consider Pay TV. This could simultaneously be the end of Pay TV as we know it or a boom time for live TV.
Narratives
Let’s start with the most extreme narrative: This is the death of Pay TV. Lest you assume this is the type of hyperbole only left for social media, here’s a Bloomberg headline with it
Note the question mark, but this still captures the feeling. The narrative goes: as consumers cut spending due to the impending recession, it will hasten cord cutting. In short, less folks will subscribe to traditional linear TV bundles than before.
Of course, this trend was going on before the Coronavirus pandemic came to American shores. So will a widespread “quarantine” and consequent recession accelerate, decelerate or not impact the rate of various cord trimmings? What do we know and not? What are we guessing and what are we confidently estimating?
Demand
TV content falls into five rough categories: Scripted. Reality. Sports. Kids. News. I’m not breaking new ground, but that’s how I’ve always thought about it. So how does coronavirus impact demand for those five areas?
Well, it may cause demand to go up for the first three categories, scripted, kids and reality TV. There is some evidence to support the idea that folks stuck inside turn to more TV consumption to pass the time. This includes films and peak TV series and cheesy reality shows. It will all benefit. So the first few categories should benefit from quarantine.
Given that this is a natural response to be stuck indoors, this is where the “death of pay TV” thesis starts to look shaky for me. Or at least contradictory to the other big narrative “quarantine and chill”. Especially when many folks predict both narratives simulaneously. For both theories to be true requires folks to “watch more streaming” but simultaneously “watch less linear TV”. From a strictly demand perspective, it’s unclear how linear TV doesn’t benefit from increased consumption as much as streaming. In fact, the initial data says both streaming and linear TV are both up.
Notably, it’s not up as much as you’d expect. A healthy chunk of people are still working, just from home. Another chunk have likely added other distractions or hobbies to the mix. But overall TV viewing is up, along with streaming viewing. Demand-wise, they’ve both benefited in the short term.
Will it last? I doubt it. This doesn’t feel like a permanent viewing behavior shift to me; simply a function of not being allowed to go outside one’s home. Same with kids content: if you force a bunch of kids to skip school, parents will have them watch more TV, especially if the park is closed. When folks go back to work and kids go back to school, it feels more likely that demand returns to normal, not some permanent shift.
Arguably, if supply constraints weren’t present, we’d see a ton of demand of the fourth category too. If sports were available (see supply), that’d be a huge amount of viewing right now. A “not cancelled” March Madness would have shattered records if they could have held it with all 300 million Americans stuck at home. In other words, demand for sports hasn’t abated, just been shifted to other topics. (And meanwhile, most streaming doesn’t have sports programming.) As it is, sports channels have seen ratings plummet:
(My big curiosity? Does some of the sports/demand for competition get shifted to pseudo-competition series as in reality game shows? Top Chef is coming back to the air. Survivor is in mid-season. Even MTV’s The Challenge is coming back in April. Maybe they grab some of that demand for competitive sports.)
As for news? Well, this is the big area that streamers just can’t compete. (For now.) If you want to hear the latest Los Angeles or New York City public announcement on Covid-19, you have to turn to a local station. Frankly, a cable subscription is the easiest way to do that. And the initial data suggests that folks are indeed watching more news content than before. (And I’d expect this too to revert back to “normal” after Coronavirus worries subside.)
Add it up? Well, on the demand side there seems to be plenty in favor of linear TV in “raw demand” terms. Obviously, though, actual sales are a function of price compared to demand. Does a pending recession obliviate pay TV?
Maybe. A recession crunches wallets, which in turn forces high priced luxuries to go by the way side. “High priced luxury” is a pretty good description of cable TV at this point compared to other digital options. So will folks continue to pay outrageously high cable and satellite bills as they get laid off? Maybe. Especially with the proliferation of other options. We know cord cutting is coming. The statistics back that up.
But to make this prediction implies a pretty substantial prediction about the impending recession. And how deep it will be. And whether the cable companies offer cheaper bundles in lieu of losing subscribers or stick to the current business model. In other words, a host of variables (that few folks can predict).
(Not to mention cord cutting is a misnomer as many more folks “cord shift” or “cord shave”. Turns out cord trimming is complicated.)
I’d flag all this as a big “we don’t know.” If the recession continues through the end of the year, absolutely that could accelerate cord cutting, though it may be taken up by cord shifting. If the recession is short? Well, the desire to keep things the same may not have the same impact.
Supply
Again, with coronavirus, the pandemic is unique in that it can wallop both demand and supply.
Coronavirus started by hammering the TV production industry. If groups of more than 10 people can’t get together, well you can’t make a TV show. Period. Right now, nearly every television production is on hold.
The question is how this plays out over the next few months. An extended shut down means that TV will mostly go to reruns or shows—like many reality shows—that were mostly already recorded. However, by June, if production hasn’t resumed on some basis—I imagine at least reduced staffing for the foreseeable future—than linear channels may run out of content.
How long does this last? Well, I’ve seen predictions from 6 weeks to 9 months of shut down. That’s a huge range.
Moreover, it violates the most common mistake in economic forecasting, which is that actors adapt to their surroundings. Productions are shut down because they can’t film in groups of more than 10. But at a certain point, you’d have to imagine that studios and production companies will get creative with how they shoot TV shows or ask for exemptions. Or figure out ways to screen employees. Yes, it may be a while before things are back to “normal”, but shows could return faster than you think.
I’d apply this to the other big supply constraint, the lack of live sports. Honestly, sports could have the quickest rebound of all TV content. Yes, while it’s unlikely that 10,000 people will get together to watch a game in the next couple of months, to film a basketball game all you need is 12 players on each side, two coaches and the referees. And camera crews. Yes, that’s a lot of people, but way less than 10,000. Could the NBA ask for exemptions with strong testing to get games in front of folks? I imagine so.
Will they? Will TV productions get creative? Maybe. Maybe not.
There is one other huge supply constraint that is honestly the biggest threat to linear TV, and it’s usually the area that soothsayers predicting the demise of Pay TV ignore: advertising. If a recession comes in and comes hard, one of the first areas every business cuts is the promotion and advertising budgets. This could hurt everyone from social media to Google to linear TV.
Yet, linear TV also has all those eyeballs and an election on the way. Still, its the biggest “supply” constraint to watch for TV. How do linear advertising payments shift? I don’t know which way it will go, but it will likely have the biggest impact on the future of this industry.
Employment
In some ways, linear TV will have less employment impacts than theaters. Theaters have a mass of low wage employees out there every day. Networks have a lots of people, but not like that.
Still, the economic impact on the below-the-line workers will likely have the biggest impact. They are the economically most vulnerable and will stay so in a recession.
I’d add: I can see remote productions have even more trouble in the future, which could help Hollywood. If actors don’t feel like boarding airplanes for film/TV shoots, the natural location is old-fashioned Hollywood.
Strategic Recommendations
1. Begin quarantines for sports and talk show staffs, if possible. If folks are quarantined together, they can’t share the disease, but they can generate content. “Getting creative” is always my go to advice for companies. And there are ways to get SNL, the Late Shows and other comedies back on the air in an age of “reduced quarantine”. It requires thinking how to do it and figuring out creative ways to house employees early.
2. If I’m cable, get more aggressive with skinny bundles. Cut the fat, and blame it on coronavirus. Folks will still want news and sports. Fortunately for the cable/satellite bundles, the streamers don’t have any real sports or news capability. So skinny linear bundles can fill that need.
3. I see an edge for vMPVDs too. Really, those are just the nu-cable bundles. (vMVPDs like Hulu Live TV or Youtube TV). They can also offer the sheer tonnage of scripted/reality shows that folks want along with sports and news. So price discounts for those will make a lot of sense.
4. Lean in to reality when the quarantine ends. That’s the quickest way to get lots of content back on the air, while getting scripted series back on the air.
Other Contenders for Most Important Story
Quibi!!!
It’s no secret I’m hugely skeptical of Quibi. At the core, it’s because they are avoiding an entire method of distribution, which is living room TV. For all the growth in mobile, I just don’t think you can be viable without TV sets in your arsenal. The latest news is that Quibi is offering a 90 day free trial, which will the longest in the industry. We’ll see if it works. I’m still more bullish on HBO Max and Peacock with their huge libraries. Especially in an age of quarantine.
Crowded VOD
Last week, Universal was moving some films to VOD early. This week it became a flood with Onward joining Rise of Skywalker joining Emma (and then Lovebird went straight to Netflix via Paramount). On the one hand this shouldn’t be too surprising, since these films weren’t going anywhere in theaters. (Variety has a good list of how everything has moved.)
But part of me thinks this is still pretty shortsighted. If we are in for a long lock-down, come May a studio could really benefit by having these VOD launch weekends all to themselves. Crowded weekends aren’t good for film, TV or VOD. In the long run, will this be a huge impact? No, but I think some of the studios are rushing.
The most important thing in this time of crisis is to focus on staying healthy and being good citizens. So don’t hoard food, avoid public gatherings, and try to donate blood.
Still, the economic consequences will quickly become as real as the pandemic ones. This is really what we pay CEOs for; not how you govern in times of booming stock prices, but times of crisis.
For the next few weeks, since Coronavirus will dominate the news coverage, it will dominate this column too. I plan to run through how all the parts of the traditional and digital video value chain could be impacted.
Emphasis on the “could”, because in times of crisis there is a lot more we don’t know then do.
Most Important Story of the Week – Hollywood Pauses Production; Theaters Begin to Close
In my last weekly column, I speculated that the Coronavirus Pandemic had finally reached the “economic consequences” stage. Arguably, I was too late to make this warning very useful. But if any doubters remained, last weekend cinched it. Every big film moved out of the Q2 time period and nearly every major sporting event was cancelled. This week—I’m dating this for the 13th of March, but posting on the 17th—most major theater chains have closed.
Still, I hedged. Especially about predicting what would happen to entertainment companies.
Indeed, I tried to commit to the position that I wasn’t going to forecast the future. Why? Well, it’s impossible.
Which hasn’t stopped folks of course. Within the swarm of actual news came the opinions you’d expect, usually verging on the apocalyptic. “This is the death of theaters” being a typical example.
How do movie studios banking on theatrical releases handle that uncertainty? Well, they have quite a few strategic options. Given that theaters are the most visible part of the video value chain, we’ll start this mini-series there.
Before that, though, a rant…
Probabilistic Scenarios vs Narratives
The biggest “narrative” impacting actual stock prices goes like this…
…the impending quarantine will leave Americans (and the globe) stuck at home.
…Americans (and the globe) like Netflix.
…Therefore, they will binge a lot of Netflix.
…So Netflix wins the coronavirus sweepstakes.
Um, maybe?
Like most things “Netflix” when it comes to the narratives the only thing larger than the impact of the narrative is the stridency of the belief. Once the “Quarantine and chill” narrative started, it quickly went from “hypothesis’ to “thesis” to “inevitable outcome”.
But consider this: if all the studios have to freeze productions, and Netflix is a studio, then they will have to freeze productions. While that could definitely help Netflix’s near term cash flow, it also would kill the new content used to bring in new customers. Speaking of cash flow, if credit markets freeze up, then getting new high yield debt could be tricky.
Or consider this. With the impending budget cuts, cable MVPDs may aggressively cut prices to keep customers around in a pandemic-cause recession. They know folks are stuck at home; don’t let the recession kill your business.
Or this. Free, ad-supported streaming TV service (FASTs) may actually take up viewing. They have the same volume as Netflix for a better price: free. Or Twitch. Or Youtube. Both free too.
Which one of those scenarios will happen? I don’t know. Maybe all of them. Or none of them. We’ll need to set up good metrics to measure the signal of what’s actually happening with customers, not the noise of social media.
Which is my point. While narratives feel good, they don’t tend to make good strategy, since they tend to reinforce stereotypes and biases instead of generate insights and understanding. We need a more systematic approach. Which is what I’ll try to provide. (And I’ll get to Netflix in the streaming article.)
My Tools for Understanding Coronavirus Impacts
To try to think about Coronavirus strategically, I ended up pulling out three tools that I’ll use together.
– Supply, demand, and employment: The impacts of the coranavirus are unique in that they impact both supply and demand, making this a unique crisis.
– What we know; what we don’t: In times of crisis, it’s often good to separate what you know from what you don’t and what you believe from what you assume. Otherwise, you’re likely just building a narrative that reinforces existing and preconceived biases.
– What could change permanently versus what is temporary. This ties back to my “question of the year” I speculated before we started. The question was, “With streaming, what is the same and what is different?” This same question applies to the Coronavirus: what is a temporary change in circumstances, and what could lead to a permanent change in how we consume content and entertain ourselves?
Along the way, I’ll try to call out the biggest narratives I see emerging and I’ll conclude with my tentative strategic recommendations. These are the strategies I’d pitch to CEOs if I worked at a theater or a film studio.
Theatrical Film Going – The Narratives
Theaters hold a special place in the entertainment industry’s heart. For as much as it is being displaced by streaming it still has that “je ne sais quoi” embodied by the Oscars every year. That experience of going to a theater to see a film with a bunch of strangers on opening weekend. And for my money, big budget epics just look better on the big screen.
But how will the industry fare in the Covid-19 times?
I’ve seen a few narratives. Most prominently, is the “This is the death of theaters” theory. Theaters had merged for several years, then spent significantly to upgrade the experience (better seats; alcohol). Meanwhile, theaters have always been a low margin business even in the best of times. While those are true facts financially, the narrative piece seems to be the prediction that somehow customers will turn against theaters as an experience.
Will being stuck inside for 8 weeks really prove to Americans how little they enjoyed going to theaters in the first place?
Let’s dig in.
Supply
What we know: Supply gets hit in two ways. First, theaters themselves are now closed in Los Angeles and New York. This will likely spread to other states and cities. Obviously, if folks can’t go to theaters, they can’t see films in those theaters. As of this writing, most major chains have gone dark and most films scheduled for Q2 have been postponed or moved to VOD.
As for release calendars, we know that studios are now getting creative. Some films have moved back to later in the year, some to 2020, some up to VOD and some indefinitely. As a result, we can say that the end of 2020 and start of 2021 will likely be fairly crowded release calendars.
What we don’t know: How long theaters will have to stay closed. As of two weeks ago, it looked like April was gone. Then last week, most would have predicted though the end of May. Now June and July and beyond are on the table. But this crisis is moving quickly, so if by the end of April cases start declining, who knows? Maybe June is available.
The bigger unknown is what happens to the release window now. While Universal has “broken” the theatrical window with Trolls and The Hunt, they have a pretty damn good explanation: theaters are literally shuttered. It’s not breaking a window that doesn’t exist. Some studio chiefs likely would like to experiment with smaller theatrical windows like NBC, while others, especially Disney, like things the way they are. I personally wouldn’t be confident predicting the future of the window in either direction.
As for release calendars, even these are pretty unknown. A few weeks back Richard Rushfield wondered aloud if any big budget films would venture to streaming. There are big financial differences between VOD—which has great unit ecnomics—and straight-to-streaming, which doesn’t. But more than anything none of these moves sets a precedence.
Meanwhile, studios will be desperate to get films in theaters. Especially blockbusters. Studios make roughly $5 billion from domestic releases alone. You can’t remove $5 billion and expect the same level of production. Globally tosses in another $15-20 billion. And remember, the economics are much better in theaters than even VOD.
Demand
What we know: Honestly? That folks like going to big budget movies. But we also know that America is afraid and as a result no one is going to the theaters.
What we don’t: How folks will feel about movies in the future. This is a classic narrative you can build to support both sides. Maybe the Coronavirus creates a new normal where Americans decide to permanently live sheltered in their homes. Streaming satisfies all their filmgoing needs.
Or maybe after a two month quarantine, stir crazy Americans flood back into theaters to escape their home. Maybe the theater experience really does have something to it. (Most theater attendees have Netflix right now!) That feels more likely to me. But when and how and if this can happen we don’t know. And how theater attendance fares in a potential extended slump is another unknown.
Meanwhile, if theaters do go bankrupt in the quarantine, the impact on demand could be felt in the death of super hero films. Frankly, without home entertainment and theatrical releases powering billion dollar grosses, major studios will have to cut special effects driven films. What type of content will replace those films, if anything? Will folks miss super hero content when the next round of streaming series don’t have quite the same budgets?
Employment
What we know: Well, theaters employ lots and lots of people. From staff taking tickets to contractors cleaning the theaters. If there are no show times, there are no jobs to be had. And unlike sports teams which could choose to keep salaries going for the foreseeable future, theaters run much tighter margins.
What we don’t know: What happens to these workers in an extended slowdown.
My strategic recommendations
Since I started writing this column last Friday, things have already changed. The headline of headlines being that Universal broke the theatrical window.
1. Get creative. The Troll World Tour move to VOD makes a lot of sense. (I’m honestly surprised the price isn’t higher.) I’d recommend this for lots of films that are in this window; triage for what can go to theaters later, what can go to streaming now, and then theaters later and what will go to VOD never to emerge.
2. Be prepared for a “summer snap back”. If the virus is under control, I think August could shatter records as folks desperate for distraction seek entertainment out doors. This requires a lot of things going right, but seems on the table.
3. Assume a government intervention. Or reach out directly. Part of the reason I don’t think the window is irrevocably broken is that thousands of theaters going out of business would put tens of thousands of folks out of work, which would exacerbate the impending recession. If you can get a bail out for lost blockbuster revenue, VOD seems more attractive.
Other Stories
Well that was the big story, but some other new stories were there too.
Netflix Biz Model Keeps Evolving
First, Netflix ended 30 day free trials in Australia. If I had to speculate? Well, churn is the name of the game. Second, Netflix is expanding their very cheap $3 plan to new territories. If I had to speculate? Subscribers are the name of the game.
Pixar’s Onward Stumble
If I’d gotten this column out on time last week, I would have noted the soft weekend opening of Onward. The most obvious explanation? It was Covid-19 worries. But the film felt like it had soft buzz even before it came out. Why is this big news? Well, I’m monitoring Disney Animation/Pixar for the first sign of stumble post-Lasseter exit and that was Onward. One is a data point, so we’ll look to Soul for a trend.
Fox Sports Brings Back Written Content
The “pivot to video” may be the worst strategic decision universally adopted by media since the dawn of the internet. And no surprise Fox has slowly reversed itself. Now if only ESPN would make their website more functional to read their great writers.
In times of crisis, it’s important to thread the line between adequately explaining a crisis and avoiding exacerbating the worry about that crisis. Enter the “coronavirus” (or Covid-19), the global pandemic–even if it hasn’t been called that yet–that is impacting economies from China to America, and whose full impact won’t be known for years.
If you want the “panic” side, well look at the market. Is this panic or warranted? Well, as I look at the industry I follow closest, the worry seems warranted. The impacts of Covid-19 will be particularly acute in the entertainment industry. Let’s explain why.
Most Important Story of the Week/Context Update – Coronavirus Impacts on Entertainment and the Economy
Before I explain my worries, let me iterate the caveat that all speculation about the economy should be taken with heaping grains of salt. One of my bibles for making predictions is The Signal and the Noise by Nate Silver, and he devotes a chapter to how bad economists are at forecasting growth or retraction in the economy.
Take last year. Everyone worried about a recession. Sure enough, the fundamentals stayed relatively strong. Employment dropped to lows and median income growth actually started growing. This chart from Derek Thompson on Twitter captures the bullish case for the economy:
Thompson is right that the economy finally started turning around in 2015, and incomes have been rising. But the pessimists out there worry that if a deep recession starts right now due to Coronavirus, then middle America will likely be worse off than post 2009 great recession. That’s a terrible result for America, particularly lower income workers who just started to see income growth.
Frankly, I think the Coronavirus could cause a recession on its own, and it would start (partly) in the entertainment industry. We saw the contagion start as conferences were cancelled. But then, for entertainment specifically, this:
Recessions accelerate when consumers change their behavior. Specifically, restrict spending. All signs point to consumers restricting travel and avoiding large gatherings due to the global pandemic. Here’s an example that’s stuck with me since high school, when explaining why recessions/depressions start:
Farmer Fred has a bad crop due to weather. This means he can’t sell as much wheat at the market as he did the year before. As a result, he doesn’t buy a new pitch fork to replace his broken one. Since he doesn’t buy a new pitch fork, Store Owner Sally can’t replace her broken roof. So Roofer Ralph misses out on a job he thought he would have in the fall. Roofer Ralph starts spending less at Grocery Gina’s store. As a result, the next year even as Farmer Fred’s crop comes in, Gina can’t buy it.
The moral? A decrease in spending in one part of the economy can spiral out and cause a recession. Usually, this is really hard to predict. Hence why Nate Silver said economists are bad at it. (Matt Stoller has made this case too.)
But…isn’t it pretty obvious we’re headed for the recession scenario at this point? Here are the entertainment industry specific examples that feel fairly obvious are about to happen:
Theater Terry, Concert Carla: Folks decide not to leave their homes to avoid being out in public.
Conference Carl, Theme Park Tom – Folks don’t want to leave their home, and they don’t want to travel.
Producer Paul: If gatherings of individuals or travel is restricted, studios may have to decrease production.
Expand that list to sporting events, airlines, hotels, tourism, travel, car rentals and more and you get an idea of the potential scope. The best thesis for a recession right now, is that this is a “human capital freeze” the way the Great Recession was a credit freeze. That freeze is hurting revenue, and hence profits. If all those industries see reduced revenues in the range of 10-25% (or even more), then layoffs will obviously happen. As The Indicator pointed out, travel and leisure makes up 13% of the work force.
Those layoffs mean less spending–especially if unemployment insurance isn’t adequately deployed–and that turns this into a recession. Once a recession starts, then companies restrict advertising spending, and that only exacerbates the entertainment industry’s worries.
So all the signs seem there. At this point we face a choice: do we want to wait to know for sure we’re in a recession to respond, or begin deploying countermeasures now?
I’d say now. Notably, the country American politicians most fear–China, our latest boogeyman–fully believes in Keynesian economics. Thus, as soon as they began experiencing supply shocks, China began encouraging banks to avoid defaults and started pumping money to keep their economy moving. America needs to do the same thing, and encourage a global response that includes fiscal as well as monetary stimulus.
The challenge for America is that our economic crisis is as much a supply problem as a consumer spending problem. America fortunately started on the right foot and the emergency spending measure just passed includes $7 billion in spending on small business loans. That’s great, but I’d recommend more. Specifically, measures designed to shore up consumer spending from the 90th income percentile on down.
Step 1 – Provide $500 to every tax payer in America. Via check in the mail. This would cost $70-100 billion dollars. And is inspired by this talk by Matt Yglesias and Claudia Sahms. The “Sahm rule” says to employ this as soon as the rolling three month job losses are over 0.5% of the last twelve months. Frankly, this is a lot better than waiting six months for two quarters of retraction. If anything, I wouldn’t wait for to trigger the rule since all the news says this is coming.
Step 2 – Do Trump’s payroll tax cut. This would cost another $50-100 billion. While Step 1 is more effective, this will help lots of employers.
Step 3 – Do Richard Neal’s infrastructure plan, but not the way he’s thinking. For some reason, the leading Democrat wants to do an infrastructure project in response to the financial crisis. Unfortunately, infrastructure is slow and would likely not happen until after the crisis has started. My proposal is to use the low interest rates in the treasury to build solar panels. This would help add money into folks pockets long after the recovery has started and fight climate change. Win, win, win.
Step 4 – Provide banks/high income earners a bail out. (The Fed already did that by cutting interest rates.)
My four steps provide a range of stimulus, but importantly, everyone gets to partake in the gains. Consumers win; employers win; infrastructure fans get their win. And banks have already got what they want. I will add the biggest hurdle is the lack of trust between both parties and the desire not to work together. The best way to ensure cooperation is to guarantee that any stimulus will be continued under a Democratic administration.
What Do You Do if You’re a Studio
Well, don’t panic. That’s first.
Second, ask for government bail outs. As long as we’re providing stimulus, the government should provide targeted bail outs to all those industries most impacted by the pandemic.
After that, while I’d love to have detailed recommendations for each part of the entertainment value chain, I just can’t provide that. Recessions are tough to predict. Generally, I’m skeptical when folks say they can forecast who will win a recession. It can be easy to say who will lose–because we see that directly–but the winners are usually the folks who develop smart, recession proof strategies quickly. Sometimes that’s who you think it is; other times you don’t know.
So if you do run a company, that’s how I’d think about it. Your customers are about to worry about a financial crisis: how do you create value for them? How do you make and deliver content to folks under huge emotional and financial stress? It’s not an easy question to answer, but it is the most important.
Other Contenders for Most Important Story – Judge Judy is a Free Agent
Judge Judy is one of the most watched television shows. Period. Not just in syndication or in daytime, but every day period. (And yes this includes streaming shows.) So when that iconic show ends, it matters.
And Judy Sheindlin will launch another show called Judy Justice. That was fast. As for where it will go, we don’t quite know. Hence, the free agency.
Last point. Judge Judy has always been an excellent case study in how in certain situations talent can extract almost all the value for their creations. Syndication is a fairly well understood marketplace. Since Sheindlin is Judge Judy, she’s almost the entire value of the show. For a good explanation on this, see the latest PARQOR newsletter.
M&A Updates – FASTs on the Block
Here’s a fun question: are FASTs the new MCNs?
In the early 2010s, MCNs were growing rapidly and got snatched up by traditional studios just as quickly. With Maker Studios to Disney, Machinima to Warner. Awesomeness TV to Dreamworks. Fullscreen to Otter Media and then AT&T. And so on. They’ve since almost all been dissolved or written down.
FASTs–the free, ad-supports streaming TV services–have seen a similar boom. ViacomCBS started the trend by buying PlutoTV. Amazon launched IMDb TV, Roku has Roku TV and Walmart bought Vudu (and added a FAST element). Just last week Comcast bought Xumo and NuFox (the channel business) is rumored to be in talks with Tubi.
The big difference is that FASTs have a bit more control over their business model than MCNs, that relied 100% or more on Youtube. However, the FASTs do have a big dependency on the DVBs (digital video bundlers). If you can’t get on a Roku device and get prominent placement, it’s a lot harder to survive. Meanwhile, if every service is fiercely competing for ad-supported eyeballs, that makes every part of the business harder.
Related: IMDb TV Paying $500K Per Episode
Lot of sites/newsletters I follow called out that IMDb TV is reportedly paying $500K per episode for IMDb TV original series. My only response? That’s peanuts in today’s landscape. Few buzzy dramas come under the $5 million per episode tag nowadays, especially if there aren’t additional revenue opportunities. That’s cheap reality content on cable budgets, not scripted cable budgets.
Entertainment Strategy Guy Update – More Apple Worries
Two stories that cause me to worry about Apple TV+. First, an executive left Apple to go to 20th Century Fox TV. We’re so used to traditional execs leaping to streamers, not the other way around. Second, another Apple TV+show–Shantaram–is indefinitely delayed.
Third, Steven Spielberg helmed Amazing Stories dropped on Friday and had zero buzz, and negative reviews. That’s bad.
Sometimes, you really don’t need to overthink your weekly column. Thank you, Disney, and really Bob Iger, for making this easy.
Most Important Story of the Week – Bob Iger Steps Down
Bob Iger stepped down from his role as CEO of Disney on Tuesday, but will remain as the company’s chairman of the board. What else do we know for sure?
– Iger said he’ll stay on in an active role to guide and manage content.
– His replacement, Bob Chapek, has had roles throughout Disney, from studios to merchandise to theme parks.
– Iger has long been speculated to want to retire, but kept staying on, first to see the 21st Century Fox Acquisition, and then to see the Disney+ launch.
Everything else is speculation. And there was plenty in the aftermath of this genuinely surprising news. The question for this column isn’t what happened or why or what fun rumor to promote, but what it means for the strategic landscape
The Entertainment CEO Hype Cycle
I occasionally write about CEO departures, but usually not as the most important story of the week. Why not? Well, frankly, most CEOs are “average”. Their company is moving along before they get there, and will mostly continue after they leavd. (Unless, of course, you’re a CEO reading this. I think you’re above average. Definitely. This is about all those other CEOs.)
This is especially true for lower level executives. For example, Discovery hired a new DTC boss from Hulu, Hulu promoted a new president, and CBS rearranged programming execs at All-Access, but neither will get a mention in my “other contenders” section down below. (Again, unless you’re a lower lever exec. You’re above average. Definitely. It’s all the other ones I’m talking about.)
To be clear, this isn’t because CEOs aren’t important. It’s more a comment that I don’t think anyone is really good at accurately judging who is good or not. Especially via the Hollywood trades. When a new head of a studio is hired, one or multiple trades/important papers (roughly, Variety, Hollywood Reporter, Deadline, NY Times, LA Times, Bloomberg and Wall Street Journal) writes a long in-depth article based around an interview with the executive. Their strengths are highlighted; their weaknesses minimized.
This makes sense. If you want to get Jen Salke to join your executive roundtable, you better talk her up right after she takes the job.
Then comes the downfall. Kevin Drum mentioned this on his blog a few weeks back and I’d call it the “candidate hype cycles”. UCLA political scientists have called this process in elections the “discover, scrutiny and decline” cycle.
Well, the same thing happens with CEOs. They start, get tons of hype, and inevitably either fail or retire quietly. We could call it “hype, status quo and departure”. Like a politician, they have two paths at the end: If they get fired, you bury them; if they retire you celebrate their run.
Meanwhile, we never hear the bad things until they get fired or leave. For example, The Information revealed that Amazon hired Mike Hopkins was hired due to concerns about shows being late, over budget and, presumably, not that popular. Which would speak poorly of Salke, but again I’ve never seen a trade report that.
Every so often a CEO comes along though, who never loses the hype cycle.
Value Over Replacement CEO
In the knowledge economy, the best workers aren’t just a little more valuable than their peers, but multiples better. The returns aren’t linear, but logarithmic. This applies to CEOs too; the best CEO isn’t just a little better than their peers, they are miles and miles better in terms of return on investment.
The best way to think about this, as I’ve written before, is the “Value over Replacement” concept from baseball and basketball. In basketball, this is LeBron James. His dominance is so much that singlehandedly he gave Miami and Cleveland championships and may do the same for the Lakers. As a result, he’s worth much more than any other player.
Let’s put this in a chart. Imagine every executive is ranked on a zero to 100 point scale. A fifty is the “average” employee or student or basketball player or CEO. The top is the 99th percentile employees, the one delivering outsized returns. The 1% are the folks who don’t just do average work, but actively damage your organization.
(And by the way, this is how I categorize every person I work/worked/could work with. At business school, since we did so many group projects, I was constantly scouting for who would help deliver outsized returns. Which made getting good grades easy. And yes this doesn’t apply to you if I worked with you. You were way above average. It’s about everyone else.)
This is how the chart would look. The percentiles are on the right; the returns on the left.
The question for Disney is…where is Bob Iger on that chart? Where is Bob Chapek?
The Disney Challenge
As I said above, I’m pretty brutally honest about where executives are on that “value over” chart and so often I’ve seen that when one executives gets replaced, despite all the internal worry, it usually ends up being about the same. So 95% of the time, say, if a CEO leaves a big company, since they were probably average, and their replacement will be average, everything will go on just the same. (Just usually paid more. See next section.)
Iger, was, though, firmly planted in the top 99%. Here’s Disney’s performance the last 20 years compared to the S&P 500. (He took over four years in to this chart.)
That’s an elite performance. And if like me you think stock performance isn’t the be-all-end-all, well, all the other narrative stuff from the acquisitions to the box office dominance to the pivot to streaming reinforces this. Iger was an elite CEO, which is a statement. Being top 1% of CEOs is supremely rare and valuable.
The challenge for Chapek is that no matter how good he is or isn’t, odds are he isn’t a 99% CEO. Just run the numbers: if we can’t predict how a CEO will turn out, then we have a “uniform distribution” meaning each outcome is equally likely. Therefore, Chapek has about a 1 in hundred chance matching or exceeding Iger’s performance. (That’s obviously why the board tried to cling to Iger for as long as possible.)
The Disney Nightmare Scenario
Does this mean the “end of Disney’s run”? Absolutely not. The situation Chapek is walking into is about as strong as you can get. Just being average means the company will be fine. If he’s slightly above average they’ll keep growing.
But every company has upside scenarios and downside scenarios, and the downside scenario feels a little more likely for me. If Chapek turns out to be worse than “average”, and there’s a fifty percent chance of that, then the company could regress.
But it could pair with four other potential risks:
– First, Lasseter turns out to be have been crucial for animation. (Like Frank G Wells was in the 1980s.) Arguably, since Iger moved Lasseter to Disney Animation, that side of the business rebounded. (Why might this not be true? Read Kim Master’s take here.) We’ll find out in about 1 to 2 years if this is true.
– Second, something happens to Kevin Feige. He runs the Marvel golden goose, If another company poached him, that would be “sub-optimal”.
– Third, streaming ins’t profitable and cord cutting accelerates. This your regular reminder that for all the value in parks and merchandise, uh, networks (specifically ESPN) actually powered Iger’s rise.
– Fourth, the studios run out of creative energy on all the non-Marvel, Star Wars and animated films, having mostly coasted on remakes of classic Disney films.
Those five risks could, to be clear, could not happen. And probably not all together.
But if I’m a Disney competitor, I’m happy with this news. I’d be optimistic that my studio/network/streamer has a chance to catch up to Disney. It’ll still be tough, but the chance is there.
Other Thoughts
– Is there another shoe to drop?
I have no idea. And based on all the reporting and speculation either way, I don’t think anyone knows anything. So your guess is as good as mine, so I’d guess status quo.
– What about the dual bosses structure?
I’m a little more concerned about this. Dual CEO structures are tricky. Sometimes a minor change like this can actually muck things up, more than the previous boss retiring and just exiting stage left. But we’ll see.
– Was Iger really that good?
Yes. I love hot takes as much as anyone. I’m one of the few folks who think that Plepler leaving HBO and then joining Apple could be the most overhyped stories of the year. But even I can’t with good conscious argue against Iger’s run.
That said, the context was also tremendous. While we rightfully praise Iger for his acquisitions, we sometimes forget that the real income driver in the 2000s was ESPN and it’s sky high sub-fee. (Look that chart just above!) Take that revenue/operating income from Iger and arguably he doesn’t have the cash for Marvel or Star Wars.
– If so many CEOs are average why do they get paid so much?
Bad oversight. Most corporate boards are fairly poor at actually identifying the value their CEOs generate. This is mostly to do with institutional structures. Even though they have average CEOs, they don’t realize it and pay them above average.
Data (?) of the Week – Apple TV+ Ratings?
In a few different conversations, I’ve been hearing that Apple TV+ is underperforming expectations. Honestly, even that isn’t strong enough. The ratings, the rumors imply, are so low that most observers wouldn’t actually believe it.
The challenge is to separate out the rumors that end up being completely false from those based on a nugget of truth. And fortunately, I spent some time doing this in a completely different field: military intelligence.
In intelligence, the hardest part is to manage “human intelligence”, meaning people. Specifically people who are usually betraying their country or allies and providing you information. The goal is to run a “source” who is well placed, so that they can provide a track record of accurate information. That builds trust.
Still, you only trust them so far. Even if one source tells you something, you always want to confirm it. Multiple sources is always better than one source. And ideally from multiple types of intelligence. So a good analyst pairs signals intelligence (tapping phones) with human intelligence (people telling you what is happening) with imagery and other analysis.
I trust the rumor mill in this case. And I wouldn’t pass this rumor on if I only had one source. Like I said, I’ve heard this in a few conversations and from folks I really trust. I know they’re hearing this from folks on the inside. (None of my sources come from Apple directly, in full disclosure.)
Still, that’s just human intelligence. Can we triangulate this? Sure. Take this “open source” intelligence from Bernstein Research via Bloomberg. According to their research, via analyzing Apple’s earnings report, fewer than 10% of eligible Apple customers signed up for Apple TV+, or about 10 million folks.
My rumor is about viewership specifically, but the two are correlated. If you only get 10 million folks to sign up in the first place, the available folks to watch the shows is just smaller. Similarly, if the content isn’t resonating or buzzy, then you won’t get folks to sign up.
Moreover, the rumors I’m hearing are about recent viewership. As in since the new year started. The key driver there is, of the folks who signed up, how many hung around? Well, when in doubt, Google Trends…
In other words, this look at Google Trends implies that Apple TV+ has never quite had the brand resonance as either Netflix or Disney. Notably, this is just using search terms, which tells a slightly different story than this Google Trends look, by topic, which shows a Disney+ decline. Google Trends is just one measurement I use, and it can have some quirks that don’t capture the true underlying awareness.
For Apple TV+, I still think the name is clunky. Which may hurt it in Google searches. So let’s look for specific shows instead. In the rumors, I’m hearing that Apple is seeing a big decline since the launch. So look at this chart:
In other words, the decay is real. It’s a little slower than Netflix or Amazon series, because the weekly release still generates news stories when the series concludes, which you see in The Morning Show, but the decay is there. Worse, the new shows aren’t launching nearly as well as the initial batch and accompanying marketing spend.
And how do the Apple shows do compared to, say, The Mandalorian?
They disappear entirely.
This matches other metrics that are publicly available. Say what you will about IMDb and Rotten Tomatoes, but the volume of reviews actually is fairly predictive of viewership. Not everyone leaves a review, but more viewed shows tend to have more reviews. Which makes sense. You can see the decline in popularity in Apple shows recently in reviews too:
Here’s my whole table if you want to see the by show look:
Maybe Amazing Stories comes out in April and completely arrests this slide. But Apple will have to rely almost entirely on paid marketing to get the word out since usage of their app seems to be low. Moreover, the biggest challenge is just that Apple TV+ won’t have a lot of shows for the rest of the year, if the lack of announced shows is to be believed. Here’s that table converted to chart form:
And that’s assuming a lot of the renewed shows make it by the end of 2020, which I bet doesn’t happen.
What Does this Mean for Apple’s Plans?
This week Tim Cook repeated that he’s not in the business of renting content. Apple TV+ is originals. That’s the brand.
This strategy doesn’t make sense. Netflix and Amazon had tons of licensed content to keep folks engaged while they built out originals. Disney+, HBO Max and Peacock will have loads of library content as originals ramp. Apple TV+ has none of that. So Apple needs to either ramp originals much more quickly than they are…or they need to rent some TV shows.
Here’s the analogy I’d use. Say about 25,000 people per night tune into Apple TV+. Using Michael Schneider’s annual look at cable channels, that means Apple TV+ is the El Rey Network. Which is bad.
Would you buy a phone for the El Rey Network? Probably not.
Other Contenders for Most Important Story
A+E Networks signs a big licensing deal with Peacock
The definition of a conglomerate should be any firm so big you forget they own half of another big company. In this case, A&E Networks is a legitimate cable business, but Disney quietly owns half. Instead of licensing their highly viewed unscripted originals for Hulu, Peacock got the rights. This is another bold move for Peacock. They are leaning into broad content, which I respect. (The History content pairs well with Law and Order and Chicago series.) Meanwhile, Hulu seems increasingly falling into the prestige lane. This leaves a gap for Disney: they need a streaming service that’s broad, but not genre like Disney+. It should be Hulu, but they’re not making the moves for that.
Discovery May Launch a Streamer
Discovery had their earnings, which were overwhelmed by the surge of news about stock market declines. On the streaming side, they’re contemplating launching a streamer in the US later this year, while happy with their other efforts. So continue to monitor for now.
