Happy Holidays! I’ll be off next week as will most other entertainment news outlets and hence news. As I said in the last update, I won’t be writing a “year in review”–though I’ll be putting up some old posts over the next few weeks for new followers on Twitter–because I only wrote articles for half of 2018, and I also think that “the year” should “end” in August for entertainment coverage. It’s a more natural stopping point.
Either way we still had some fun stories this week, and a lot of good reads as people started their year end coverage.
Most Important Story – CBS May Drop Nielsen
Variety reported an exclusive story that CBS and Nielsen were negotiating a contract renewal, and CBS may drop Nielsen. Part of me said, this is actually “lots of news with no news” because the contract hasn’t actually been dropped. (And Hearst re-upped their contract.) I prioritize events happening over coverage of potential events–like potentially dropping coverage–because so many non-events happen in the news.
But, this wasn’t actually “lots of news”. It was barely covered. I saw the exclusive on Variety, but didn’t see a lot of echoes of it because measurement services aren’t the biggest drivers of clicks, are they?
That said, the future of measurement is a TREMENDOUSLY HUGE issue for the future of entertainment. Especially as it regards to transparency. It’s tempting to make exaggerated predictions going either way on this:
Exaggeration 1: Nielsen will die and we will have no measurements!
Exaggeration 2: Netflix and Amazon watch out, someone will figure out all your measurements!
I’ve made both predictions. So silly me.
The future is likely somewhere in between, which is bad for consumers and talent (with smaller production companies included in talent). It is definitely possible to have measurements of streaming video and everyone from HubResearch to TVTime to Nielsen itself has started tracking this. So we will have the visibility into some of the viewership metrics that Netflix and Amazon fear. At the same time, this won’t be as granular as the data they have in-house, so we won’t be even better at tracking cross-platform. And we also will have less clarity because the era of a dominant researcher providing universally accepted metrics–Nielsen–will end, which means firms can cherry pick from the different measurement services even more in the future.
Long Read of the Week – “The Year in Netflix” by Joe Adalian
As a news media, we need more “longer views”. Like my fifty year newspaper reference from las tweek. And this week we had a great one in this look back on the year of Netflix by Joseph Adalian at Vulture. Man, I really want to steal this idea and do a “year back look” on every major company in entertainment and am debating doing that in 2019. (There are only about 5 entertainment companies, left so it won’t be hard.)
Joe really covers the content side of the house, with some remarks on what this says about Netflix’s strategy. If I had a complaint, though, it would be that I didn’t see enough on the business-side. That wasn’t Joe’s intention, but it’s obviously what I care most about. For example, while he referenced subscriber growth to indicate success, he left out a key number:
Where was the Netflix free cash flow numbers?
Listen, lots of metrics are good and useful at forecasting future financial performance of firms. Revenue, EBITDA, Profit/Loss and subscribers, for example. Throw in return on assets too, if you like The Goal. But in my opinion, Free Cash Flow reigns above them all. Because it is the absolute hardest number to fake, which some accounting tricks still do.
Way more importantly, free cash flow is the basis for “Net Present Value” which is a core–if not THE core–foundation of finance. Add current and future costs, and subtract future revenues discounted for the time value of money (all of that explained here in a great explainer on the Time Value of Money that even President Trump doesn’t understand!) and you understand if something was a good investment. Right now, Netflix streaming video has lost its shareholders something on the magnitude of over $4-5 billion dollars since it launched and will lose another $3 billion this year. That will take decades to earn back, if they ever do. Which would be, you know, negative net present value. That seems bad.
Oh, and as I referenced in a tweet, the section on international productions being a huge advantage for Netflix is an opinion I don’t share. It really got my goat. But when you write over 40 tweets, well then you need to write an article on that, not tweetstorm. Something to look forward to in the new year.
M&A Update – Deaths of the MCNs
Here’s a serious question for my serious readers…are there any MCNs left?
I bring it up because when I was in B-school, MCNs were hot. (MCNs stands for multi-channel networks, and were collections of Youtube channels that shared marketing, branding and ad revenue, for those who don’t know.) The business news events of the years while you are in business school have an outsized impact on your thinking. So for me, MCNs circa the early 2010s were a hot business. Lots of the “entertainment-focused” students were targeting them for employment. Shortly after I started work, Disney made a huge splash with a reported, but then downgraded, $1 billion acquisition of Maker Studios.
But a few weeks back Warner Media–formerly Warner Bros, and now part of AT&T–rebranded Machinima and revamped distribution. I think people were let go. Viacom now owns AwesomenessTV, but mainly acquired the debt as opposed to acquiring the value of the company. I haven’t heard much from Makers Studios at Disney, but believe they wrote down that deal too.
The lesson is always pay attention to the fundamentals. And don’t let large acquisitions convince you something is worth that high valuation. Always look at the fundamentals.
Fun idea – David Nevins on Making TV Shows
In an interview at a UBS conference, CBS Chief Creative Officer David Nevins said this, (bolding mine):
Nevins was asked about CBS’ content strategy, as it produces some 75 television shows for its own platforms — the broadcast network, Showtime, CBS All Access and The CW — as well as for third parties like Turner. He said the media company would continue to do deals that make the most financial sense, and wouldn’t be restricted to creating shows exclusively for its own platforms.
Remember “net present value” I just described above? Another way to describe what Nevins said is, “We will do deals that maximize our “Net Present Value” of produced content.” To simplify, if a competitor offers to pay you $100 million dollars for something you could make $10 million on your own platform, you sell it to them and give the $90 million extra to shareholders. His math is right.
The implications, though, aren’t for traditional media & entertainment conglomerates. They’re great at valuing media. The implications are for streaming channels like Netflix and Amazon Video/Prime/Studios. If someone offered them $100 million dollars for something they could make $10 million on–meaning generate retained and acquired subscribers whose CLV (explained here) would equal $10 million–they’d pass. That seems…bad. As I’ve written a variation on this theme a dozen times by now, I’ll have to walk everyone through that in a future article.
Management Advice – Pay Attention to Biases in Hiring
If you want to read a great article on how subtle biases effecting decisions, I recommend this Kevin Drum piece on astronomers. No really.
Listen, I’m not asking you to read it because of the obvious reasons like improving diversity in the workplace or decreasing socio-economic inequality. Diversity and equality are good values. Instead, I want to appeal to you the capitalist looking to compete. If you’re hiring worse workers, that’s bad. Your biases could cause you to do that. So consider ways to remove your biases from the process.