Month: January 2019

Most Important Story of the Week and Other Good Reads – 25 January 2019: Video Games Revenue is Up! (Or Down)

Early last week, I thought, “I really hope there aren’t any new streaming launches because I’d love to find a longer view article for this week.” The closest risk was Hulu raising and lowering prices, so phew, we made it. Then, when I saw multiple descriptions of revenue in the video game industry, well I had my topic…

(Sundance and NATPE thoughts? Next week. Maybe.)

Most important Story of the Week – Video Game Revenue is Up! (Or Down)

How are video games doing as an industry?

Head over to “Byer’s Market” newsletter from 23-January, and you see just fine: the U.S. video game industry generated $43.4 billion in revenue in 2018, the same amount of revenue the US film industry generated in 2017. The difference? According to Byers, “The video game industry is growing by 18% annually, whereas the film industry is growing by just 2.2%.”

Then you head over to Bloomberg, and see that one analyst in London is forecasting that global video game revenue may drop year-over-year for the first time. (They also call it a $136 billion industry.) It may shrink by 1%. (Check out the chart in Bloomberg to see how the various categories are divided, between PC, Console, Mobile etc. I won’t steal the chart because I respect people making good nee great charts.) In the Economist World in 2019, they see a smaller $89 billion global revenue industry, according to Statista.

So what do we make of this? The reality is somewhere in between. And a case of definitions. Films make $43.4 billion globally, where video games are do $43.4 billion in revenue the US. Meanwhile, film revenue doesn’t include TV or network revenue, as far as I can tell, and probably Bloomberg/Economist are counting different parts of video games (for example, including or excluding mobile).

Moreover, the huge growth in video game revenue may be due to entirely to Fortnite. Video games are even more reliant on huge hits than movies. Let’s use that idea as a jumping off point into some thoughts on video games, with the caveat that this is an industry I know less well then filmed entertainment:

Thought 1: Video game success is logarithmically distributed.

I have been trying to make a chart showing logarithmic distribution of returns in video games for months now. The problem is most industry sources are behind paywalls. So I don’t have the “proof” in that I don’t have a clean data set of all games produced in a given year, but you can see the signs of the power law at action here.

Basically, every few years, a monster hit become “a thing”. In the late 2000s, the Rock Band/Guitar Hero trend helped boost console revenue. Last year, Fortnite did the same thing. In 2016, Pokemon Go took over mobile screen time. Add MarioGoldenEye, Halo, Call of Duty and Candy Crush at various points to this trend. And yes, those are all US examples. In China, League of Legends is the tops. Meanwhile, thousands of games come and go and are never heard from again.

So yes, if I had a data set of all video game sales–by revenue or by units–broken down by category (mobile, console, etc), we’d see a logarithmic distribution of returns.

Crucially, two trends may be maximizing the gap between haves and have nots. First, mobile makes the barriers to entry for new games even lower. This means mobile game makers can enter even more games into the lottery to get a hit. That’s why the app store has so, so many games you’ve never heard of. And so, so many derivatives of successful games. The effects of “winner take all” are even more extreme in mobile. Not to mention, mobile gaming has opened up new consumer demographics that weren’t previously counted as “gamers”.

Second, in-app and in-game purchases make the revenue upside for winning games even higher. GoldenEye was one of the biggest games for a generation of video gamers (like me). Yet, once we bought the game, that was it. Now, the biggest game in the US is Fortnite, and you can buy all sorts of additional things within the game. That means that the revenue potential is multiples higher. So both the user base and revenue per user are higher, meaning the returns are multiple multiples bigger than the console games of the 1990s.

Thought 2: China is huge.

Another key sticking point in these bearish predictions seems to be China, which had slowed the pace of new, international games from entering under a new censorship regime. Like many fields, video games in China is a huge market. U.S. firms need China for growth, but China has clear strategic goals to support their domestic video game makers. Listen, I don’t have a great take for you should do about China from a strategic perspective. I don’t know enough and would be guessing. But much like feature films, a lot of future growth is in China, and that’s a tough market to crack.

Thought 3: Fortnite is a competitor…to Netflix? (Actually, all of filmed entertainment.)

This was the big quote from Netflix’s earnings report. Of course, I scoffed a bit. While companies should absolutely try to define the “competitors” broadly, they don’t get to define them exclusively. DisneyPlus (spelling) should worry Netflix, especially since they provide so much valuable content to Netflix, even if Netflix wants to win the PR war by denying this reality.

Netflix isn’t wrong, though. On a theoretical level, video games are an excellent substitute for streaming video viewing. And as Twitter follower @JacksonWharf noted, I could put Fortnite into my Google Trends data and would see…

fortnite trends

…that Fortnite is generally more popular than any individual TV show I mentioned. So yeah. They are competing.

My caution? Well, all of entertainment needs to think about this. Not that Disney, for example, isn’t. They’ve repeatedly tried to get into the video game world and repeatedly failed at finding an acquisition that integrates and succeeds. Warner Bros. has also gotten into the gaming space to varying degrees of success, though nothing like Fortnite. Of course, not even traditional video game studios had Fortnite. Or Pokemon Go. Both were independetly made. So yes, Netflix is competing with Fortnite, but should they buy a video game studio? Not necessarily.

(Also, I was trained to think of the world in the “3Cs”: company, competitors and customers. I’ve begun to shift competitors to “competitors and potential partners”. In a world of zero sum, sure, it’s all about competitors. In a world of mutually beneficial growth, everyone could either be a partner or a competitor.  That’s a gut reaction of mine opposing Trump-era zero sum thinking. Though CPP doesn’t fit in the acronym.)

Thought 4: Whither VR?

Four years ago, I saw a lot of huge projections for VR. I mean, big numbers with monster CAGRs. Look at the chart in Bloomberg and you see that the pace of integration is slower than some of those initial projections.

M&A Update: Viacom Buys Pluto for $340 million.

We had our first big deal of the year, though by the new standards of mergers this isn’t even a mega-deal. If you aren’t over a billion dollars, than it’s hard to even get noticed in today’s M&A landscape. That said, even for a small deal, I like this deal for Viacom.

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The Most Popular Oscars Ever? Nope. (Why The Academy STILL Needs Fixes to Make the Oscars More Representative)

Records have nearly been smashed! After decades in the doldrums, in this year’s Oscar’s telecast—for achievement in the year 2018—popular movies made a comeback. Here’s Todd VanDerWerff explaining for Vox:

For the first time since 2012, the total domestic box office of the eight films nominated for Best Picture topped $1 billion — and that’s without box office receipts for the 10-times-nominated Roma…Indeed, the $1,260,625,731 pulled in by the seven films we have data for is the biggest total for a Best Picture lineup since 2010, when the 10 films nominated (led by Toy Story 3) made $1,357,489,702…the average box office haul of the nominated films we have data for, the number becomes even more impressive: $180,089,390. Though their combined take falls slightly behind those of 2011 and 2010, the average is well ahead of those years ($135,748,970 for 2010; $170,512,813 for 2009), since 10 films were nominated in both those years.

(I changed Vox’s years to the year prior to match the rest of this article.)

This would seem to refute my thesis from last August; I predicted—based on the data—that the Oscars are nominating fewer and fewer popular films. 

So let’s check back in on those metrics I developed now that we have a new year to add to our dataset. But I’ll go above that simple mandate: I want to make an argument for popular films. I think the Academy has a chance to get higher ratings with more popular films and more importantly, I think this would better represent the state of film each year. Let’s start with defining the problem. Before one can solve a problem, one must understand it. Otherwise the solution probably won’t work.

The Problem: The Academy is Nominating Fewer Popular Films

Collecting the Data

This is true. But it’s complicated. My “rule of thumb” when you have a complicated issue that can be measured in multiple ways—like Oscar voting—is to just measure it as many ways as possible, to see where the trends lead you. If most or all the measurements roughly align directionally—meaning one or two measures could be an outlier—then you can generally trust the trend.

(This process is my refutation to the worst quote every about lies and damned lies. Mark Twain did more to set back statistics than anything._

Some definitions before I use the metrics. First, I’m calling critically acclaimed/awards-focused films “prestige” going forward. In olden times, we called these films “independent” but most independent films now have major studio distribution, so that doesn’t make sense. I’m defining “popular” films as films grossing over $100 million dollars in ticket-price adjusted terms. I’m defining “blockbusters” as films grossing over $250 million. That makes that category very, very small—usually fewer than 10 films per year—but that’s the point of the blockbuster category. Finally, I’m adjusting all ticket prices to 2018 box office, since that’s what my data set used in August. 

With that out of the way, to the charts and tables. Before we start, know that the Academy nominates a different number of films each year for Best Picture depending on the voting totals. This year it was 8 films, where 2017 and 2016 featured 9 films. 2014 and 2015 featured 8 films. And 2009 and 2010 filled out ten slots each year. We need to account for that.

(Oh and I’m assuming “box office” is correlated with “popularity”. But feel free to disagree with that, somehow.)

Let’s start with “average box office” per film. This is the metric VanDerWerff quoted above. Crucially, Vox used the the mean (or arithmetic) average. With mean averages, you run the risk of one huge outlier skewing the results. (In finance, see the “Bill Gates walks into the bar, everyone is richer, on average” scenario.). Avatar did this in 2009; Black Panther is doing it now. (Also, Black Panther box office haul is divided by fewer films (7) compared to Avatar’s fellow ten films.) 

One outlier should not mean the films as a body are more popular. To account for this, I calculated both the mean and median average. I wish I had thought of this back in August, but I’m updating it now. Check it out:

box office unadjusted

So by mean average, yes we’ve done it! The most popular Oscars of all time!

But the “median average” shows a huge split. This is evidence that overall, these films aren’t that popular compared to years past, with one tremendous outlier. As I said though, we could look at this in both adjusted and unadjusted terms. Adjusted box office is the equivalent to accounting for inflation in economics: it’s something you should ALWAYS do. Time value of money, and what not. This won’t lower this year’s average, to be clear, but raise past years. So I included both below, with again both the mean and median averages:

box office adjusted v02

The trend lines are the same, but a little even more decline in popularity. However, one of the purposes of nominating the films is to have multiple popular films. Even one blockbuster isn’t enough to get lots of people interested. That’s why I liked counting the number of popular and blockbuster films. (Last time, I included these in both percentage terms and adjusting for inflation, but I think the story is roughly the same without those views.)


This looks a little bit better, though arguably we have been flat at 3 popular films per year. (If you use percentages, it may even look a bit better.)

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Prediction Time: Forecasting the Effect of Netflix’s Price Increase on US Subscribers

Netflix moves the PR needle. Even I jumped into the Twitter maelstrom to generate clicks based on their two announcements last week, especially the decision to increase prices on US customers.

The problem, for me, is that Twitter, as a medium, is really bad at digging into numbers. It isn’t Twitter’s fault; spreadsheets just don’t really fit. (See my last big analysis article for another debate taken off-Twitter.)

As a result, a lot of the “debate” on Twitter devolves into “this is good” or “this is bad”, with some anecdotes thrown in and the occasional Twitter rant. The fun thing in the #StreamingWars2019 is we’ve all clearly taken a side and this war will only end with all our heads on pikes. (I’m rereading Game of Thrones/ASOIAF in preparation for April 14th and George R.R. Martin ends lots of events with that outcome.)

We can do better than Twitter debates. Today, I want to make the subtext of all the discussion on Netflix text. I want to change the terms of the debate around Netflix by moving into concrete specifics. Strategy is numbers, right? 

That means putting our predictions into quantitative terms. I described my process for this regarding M&A back in July and my series on Lucasfilm. So here’s the question:

How will Netflix’s price increase in 2019 impact US subscribers in 2019?

The results will come in when Netflix announces their annual/quarterly earning in January 2020. For the record, Netflix currently has 58.5 paid memberships at the end of Q4 2018, among three tiers of pricing. Over Q1 and Q2 of this year, they’ll increase prices $1 to $2, raises of 13-18%. 

I’m going to walk through my process to make a prediction. First, I’ll explain why I’m predicting customers in 2019, not other financial factors. Second, I’ll evaluate what we know and some good and bad ways to look at the problem. Third, I’ll talk a bit about the data and finally make my prediction. Feel free to leave yours as a comment on this article or in my Twitter feed.

Stating the Problem: If the number of subscribers who leave is lower than 18%, it’s a win.

This is the simplest of simple microeconomics that Netflix is practicing here. If you raise prices, but the units sold (in this case, customers) decreases less in percentage terms than the price increases, you make money. (Assuming no increases in costs.) Since this is digital and each additional “unit” sold has a marginal cost of zero, that math works. (Note: this is still an “assumption”. If you continue to need a larger and larger content library to woo subscribers, well then our magic “marginal costs is zero” isn’t actually true.)

economics model


Like the “value creation” model, the above chart is the simplest explanation of price and supply and how they interact, but it is woefully incomplete. Many, many other variables ultimately impact the number of units sold or customers who subscribe.

Yet, as rule of thumb, it works. The number, therefore, to watch out for is the subscriber growth or decrease. If Netflix decreases its subscribers to 55.6 million paid subscribers, that’s a 5% decrease. Since that is still lower than the 18% price increase, the move made financial sense. Thus, the terms of the debate change to, “will Netflix customers grow, slow or halt?” Here’s the past 7 years of subscriber numbers (paid, US):

subs from earnings reports

Predicting the Effects: How Many Subscribers will Drop from Netflix?

There are a couple of ways to try to triangulate this number, but let’s start with how not to do it.

The Bad Prediction Method: Using yourself as a data point.

Many people when discussing TV or film use themselves as the ur-example of a customer. I saw multiple people say on Twitter something along the lines of, “I use Netflix all the time. I don’t care about a $2 increase. Ipso facto, this doesn’t matter.”

Now, if you are a representative sample size of America, then congratulations. This analogy works. (Also, I have a ton of other questions to ask you. Like who will win the 2020 election? You should know.) If instead, you are a single data point, then we need something else.

The Trust Method: Believe in Netflix’s army of economists.

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Most Important Story of the Week and Other Good Reads – 18 January 2019: NBCU Streaming & Netflix Has Very Ordinary Economics

If you judged importance by following my Twitter feed, the most important story of the week is Netflix and Netflix and Netflix. For business leaders plotting the future of entertainment, though, remember to always look for the “signal” through the noise. A lot of Netflix news is Netflix noise. “Buzziness” may justify Netflix’s original programming goals, but it doesn’t tell us what stories really matter. (But yeah, I’ll have a Netflix take later.)

Most Important Story of the Week – Comcast NBC Universal Announces Free Streaming for Comcast/Sky Customers (and ads)

Sometimes, disagreements about the strategy of a company boil down to disagreements over who a company should be targeting with their newest products. For instance, at first, I was really skeptical about Quibi, the short-form, subscription video service. (This was a hold-over from my skepticism for Vessel.) My main criticism is I don’t think it will work on TV sets in living rooms. But that’s not Quibi’s plan: they’re focusing on mobile to reach even-younger-than-Millenials. In that sense, my critique of their distribution strategy doesn’t make sense.

That’s why I thought some of the criticism of Comcast NBC-Universal didn’t make a ton of sense either. (Beyond the criticisms that are just, “If you aren’t Netflix, you have already lost.” I can’t really debate that.) Instead, I think a lot of the criticism compared NBCU’s new plan to Netflix, when first you need to ask, who are they really going after here? Are they they same segment?

To evaluate a strategy fairly–and many times in business we don’t do it fairly–starts with understanding who they are targeting, then judging the tactics based on that plan. Or you explain why they shouldn’t target a given segment. The disingenuous way to do this is to assume a company should target a different segment, then evaluate their tactics in that vein.

With that mini-preamble, who is Comcast NBC-Universal (NBCU from here on) targeting with their latest offering?

This is where it gets tricky, as NBCU has both B2C (business-to-customers) and B2B (business-to-business) masters it is trying to serve. Starting with the customer side, the generous interpretation is that NBCU is trying to focus on customers who haven’t cut the cord yet. Essentially, get them used to streaming by offering it to them for free. (This could also be a different segment entirely, focusing on people who want a free streaming service.) In other words, making a streaming service for older-than-Millennials who already have cable.

In a lot of ways, this reminds me of the “TV Everywhere” push of the mid-2010s, just more centralized. TV Everywhere failed because it had too many offerings (an app for every channel and cable company), confusing offerings (5 rolling episodes), no guiding force (every channel was on their own) and lack of in-house technology and data analysis. This deficit extended from NBC Universal to Fox to Disney. That said, the purpose of TV Everywhere made sense. Even if this is just “TV Everywhere on steroids” or “alt-Hulu”, the focus on adding value to the traditional TV bundle could work.

Of course, the second set of masters for Comcast will appreciate this too. That’s all the MVPDs that Comcast risks offending by offering this new streaming service, including it’s own cable/satellite services. The problem plaguing the traditional studios is how to respond to Netflix while not trading streaming revenue (that is actually negative cash flow) while forgoing valuable subscriber fees (that is a huge free cash flow positive). The potential answer from Comcast seems to be a giant punt on the issue, which could be brilliant. If it works–a big “if”–then they’ve essentially cracked the most difficult nut of the whole “traditional studio with network transition to digital” piece.

Further, if “subscribers” are the only metric of performance that matters then with a stroke NBC-Universal can take a lead in the streaming wars. Of course, the skeptic could and will say, “Sure they claim 50 million subscribers, how many use the service?” But neither Netflix, Amazon or Hulu has released Monthly, Weekly or Quarterly users yet. Why should Comcast be the first? In the meantime, we’ll have to triangulate with device installs, Nielsen/Comscore measurements and new subscribers to triangulate. But we won’t know for sure.

(Final note: Using the (3C–STP-4P Marketing Framework for the new conglomerates streaming platforms is a tremendously useful way to look at this problem. That will be fun, and take me weeks to make. Expect it in March or later.)

Data of the Week – The Extremely Ordinary Content Economics of Netflix

Where are my thoughts on Netflix raising prices? Well, my rule of thumb is if I write 2,000 words on something, it becomes its own article. So tomorrow I’ll release my thoughts on the Netflix’s price increase. That would have been a candidate for “Most Important” event in many weeks, but the NBC-Universal announcement bumped it. Earnings reports usually don’t make it in, unless they have ground-breaking news.

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Our Incredibly Consolidated Future, Part II: My Thoughts on Mega-Corporations

(To read my vision of a super-mega-conglomerated future—where six companies control all media, entertainment, technology and communications, click here.)

Maybe I spent too much time on Wednesday’s essay. While I haven’t been working on it non-stop, I’ve been dabbling with it since December. Planning the next 12 years of mergers and acquisitions is fun. And time consuming.

That’s a lot of time, though, for a vague prediction of the future. Isn’t it a bit frivolous to decide, without any data really, how a bunch of companies could hypothetically merge in a potential future? That seems more fiction than fact.

But I don’t buy that. Beyond the fun, “Map of the Universe” I made—which is a pretty useful tool I’ll leverage in future articles—a strange hypothetical like this can often unlock ideas I wouldn’t have thought of via traditional means. And those ideas in some ways are more important than the exercise. Essentially, consider yesterday’s albeit hypothetical article the data set for today’s insights. 

So we’ll start with those, after one quick diversion:

Behind the Scenes – This was harder than I thought.

For two reasons. First, getting the companies “right” meant a lot of moving around to find what seemed to fit (Apple and Disney; Comcast and Vivendi), what didn’t seem to fit (Google, Apple and Amazon merging, for one) and what capabilities filled what needs (Netflix and Facebook). So playing around with that took some time.

Second, it never ceases to amaze me how much more there is to learn about entertainment. This is an admission from someone who calls themselves, “the entertainment strategy guy”. But you can always overturn another rock and find a whole bunch of new stuff to read and discover. In this case, the foreign conglomerates were my biggest blindspot. I knew about Vivendi (thanks to an HBR Vivendi Universal case study), but didn’t know much about Endemol Shine, Entertainment One and Bertelsmann (in particular) beyond name recognition.

I’d also add, you forget that even with all the consolidation in this industry, there are a ton of players. In the last 15 years, there have been plenty of new entrants from A24 to STX to Relativity (that is also now gone). 

Insight #1 – Europe is why this doesn’t happen.

After I’d assigned out all the American conglomerates, the missing piece was Europe. So I looked there to find the potential European champions, and ended up adding Vivendi and Bertelsmann, who I ended up lumping into Microsoft/Comcast/NBCUniversal and AT&T, respectively. 

But this won’t happen.

Likely many of my proposed mergers never happen. But this is one of the bigger leaps of faith. Even if I see a world where antitrust enforcement all but evaporates in the US—and even there I don’t see that—Europe is already tacking in a different direction. Even if, as a recent Economist article pointed out, Europe is looking for “European champions”, that doesn’t mean they suddenly love media consolidation. It also really means they don’t want their media companies being swallowed by giant American media and tech companies. The EU has gone after Google, Apple, Netflix and Amazon in various ways, so I don’t see it happening. This exercise further reinforced that in my mind.

(I did debate joining Bertelsmann, Vivendi and ITV, with maybe others as the European company, who could then swoop in for Dish, AMC Networks and Discovery (Scripps), but again tried to limit it to the rule of 6. But I do really like that company. I may have to update the article now…)

Insight #2 – Companies still ended up with “weaknesses”.

Even in a world of six massive, super-mega-corporations, they each still had weaknesses. This result surprised me, even as I was the person deciding on the fake mergers. In this new world the following companies have the following weaknesses:

Disney-Apple: No cable, cellular or satellite distribution.

MCV-NBCU: No social

Google-Mart: Limited film or TV production

Facebook-Flix-Ify: No TV channels

AT&T All Media: Limited technology

Amazon would be the most well rounded, especially if they buy Twitter. Amazon is the only studio without one of the former “Big Six” studios, but between Lionsgate, CBS Films and Amazon Stuidios, this isn’t really a big weakness. Some years Lionsgate beats Paramount for box office. Still, it was interesting that as you build out mega-conglomerates, it is still really hard to own it all and dominate every field.

Insight #3 – Device carriage will become the new “retransmission fee”.

One conclusion I had that wasn’t in the initial prompt was for “device makers” to get heavily involved. Obviously, Apple buys Disney. Everyone predicts that. But then I paired Microsoft with Comcast-NBCU and Sony with Facebook. Amazon and Google already make devices. 

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Our Incredibly Consolidated Future: What if all Media, Entertainment and Tech Companies Merged into 6 Mega-Conglomerates?

It’s been two weeks into the new year, but M&A is back!

Well, not officially. As I wrote about in December, despite the first six months of movement (with all its tricky ways to calculate), the last six months were relatively quiet in M&A in media and entertainment. (The biggest deal was Pandora getting snapped up by Sirius. Big but not earth shattering.)

But January is for predictions! With the end of year surge in “predictions for 2019” articles came the old standby prediction, M&A! I’ve seen predictions that Viacom and CBS will merge, that they won’t merge, that Apple will buy something (Disney?), Walmart will buy Roku, and Verizon will buy CBS.

On Twitter, I wrote at some point that with all the M&A expected, at some point between all tech, entertainment, media and communications companies we’ll have four companies left.

Huh. Four companies. Is it possible? 

So I started deciding who would join with who. Apple buys Disney. Easy. But who would Comcast buy next? Oh, Cox to expand its footprint. Amazon buys a cell phone company, because “Prime!” Others were harder. Who wants Sony? What happens to Facebook?

Once I started, I couldn’t stop. And now that joke turned into an entire article. But fear not! We can learn something about the strategic strengths and weaknesses of our current media & entertainment conglomerates by trying to imagine their hypothetical future.

The interesting part is that it isn’t like we were short on media overlords before this point. In 2000, we had six giant media conglomerates. In 2010, we had six even larger media conglomerates, but a cable company had just offered to buy one. In 2019, we lost a media conglomerate (Fox), but Netflix arguably replaced it. And AT&T bought another media conglomerate (while buying another communications juggernaut). If Paramount goes away, but Amazon buys Lionsgate and a some TV networks, arguably we’ll be back at six.

So that’s the goal: six mega-corporations who control our media and entertainment futures. Once the vertical integration barrier was broken, it was only inevitable that the rest join up. So let’s push this to it’s logical conclusion. Who are the six companies that will remain by the end of say the next decade? 

The Ground Rules

– I’m focusing on entertainment, media, communications (meaning telecoms/infrastructure) and technology firms. The tech firms are the big addition from, say, 10 years ago. However, if fun tangential companies pop up (they will), I’ll include them. 

– I’m going to avoid stealing M&A pitches unless they are very obvious (Disney and Apple) if I can. (I loved the if “CBS and Viacom don’t merge, and Verizon buys CBS” prediction from THR, for example. Since they came up with, I’m not stealing it. Though I am stealing the idea that Viacom and CBS ultimately don’t merge.)

– Microsoft gets invited to the technology party. Why? Well they have briefly overtaken both Amazon and Apple for largest global company by market capitalization. So they’ll join our other tech giants.

– This isn’t realistic. Especially from a regulatory perspective. This is contingent on the Department of Justice, FCC and FTC just about giving up. So basically, a second Trump presidency. Maybe just a Pence presidency.

– The mergers should make sense, from size, culture and need perspectives. I mean, since this is all fake, I can’t call this realistic. But economic rules should apply. For example, Netflix has a larger market capitalization than most entertainment companies, so an entertainment company can’t acquire it. On the other hand, Netflix has tons of debt, so it would struggle to acquire a movie studio. It’s complicated.

– My main criteria for matching up firms will be linking synergies, needs and then cultures.

– I need to end up with six. Some much smaller companies can be left out, but the goal is six super-giant conglomerates. 

The Candidates

Here’s my rough lay out of the “media, entertainment and communications” universe as it stands in 2019:

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Theme 3: Strategy is Numbers

(To read previous “themes”, click here:

Theme 1: It’s Not Data, It’s Decision Making

Theme 2: It’s Not Value Capture, It’s Value Creation)

Imagine an officer in the military addressing his troops. The time period doesn’t matter, be it the Peloponnesian War of ancient times or the Iraq War of the 2000s. I’ll give you two versions. Here’s version one:

“So we’re heading out to confront the enemy. Our goal is to bring decisive energy to the battlefield. We’re going to overwhelm them with superior firepower, ensuring we make decisive action. Once we defeat the enemy, we’re going to consolidate our gains, ensuring we have accounted for stable post-conflict efforts to capture our gains.”

That hurt me to write. If you’re a subordinate, what do you even do with that?

It’s pretty much the worst possible version of a mission you could give. It’s like the consultant or PR speak version of a mission statement: all buzz words with no actual meat or substance. (And yeah, I hear you. The mission statement for the Iraq invasion probably had a slide with that sort of non-speak on it.) 

What’s the better real world mission statement? Here:

“Our mission is to conduct an ambush on location WT 8940-4569 in order to destroy enemy patrols no later than 1700. We’re going to depart at 0700. We’re moving from this location…”

[point at a map]

“…to this location”

[point at another location on the map]

“and lay in an L-shaped ambush here. This will look like this…]

[Point to a sketch of the position with unit names.]

“First squad, your task is to lay a support by fire here in order to…”

Then the hypothetical officer would continue.

Though I’m a little rusty, that second briefing is pretty close to the text book version—technically Ranger Handbook version—an American officer would give his troops in today’s U.S. Army. (Maybe I would know.)

What’s the difference between the two briefings? Well, one is completely vague and the other is detailed. But the main difference is the second briefing has the locations on the map. 

In the military, you can’t have a strategy without a map. If you don’t have locations, you don’t have a strategy. Sure, you can talk about Hannibal conducting a pincer movement, but really without a map you can’t visualize it. Sure, you can “defeat Hitler”, but you can’t say that to your men. You have to tell them you are invading, and point out where and when with a specific unit (or tons of different divisions and brigades), moving along given routes. Even a counter-insurgency campaign is about controlling territory, winning elections and decreasing violence. A map helps explain all those things.

Another way of saying this is that to win wars, you need a strategy that understands the territory. That understands that you have to seize territory to win. Yes, lots of factors go into it, but controlling territory (with the people on it) is the point.

So what’s the business equivalent? Well, numbers. 

Strategy—in business—is numbers.

You can have a great company culture and be innovative or be disruptive. Those are all things. But what matters—the point in business—is how the numbers move. The vague version? Deliver customers a great product. The specific version is answering the questions: How much revenue will a new product generate? Is your company earning more money than it sends out? What is its return on investment on its assets? What is its profit? Those are the numbers. Hypothetically, they directly impact the stock price. (There is an argument about the efficient market hypothesis I don’t feel like getting into here.)

What aren’t numbers? Feelings. Strategic focus. Energy. Motivation. Even culture. 

(Those things are important, but at the end of the day they can’t be strategy on their own.)

A lot of other things could be quantified, but aren’t. Customer experience. Brand equity. Customer affection (or hatred). Investments into strategic priorities

(These are also important, but without quantification you can’t judge how well you’re doing. Or effectively build plans to improve them.)

Put at the end of the day, any business strategy is a business strategy with numbers. Usually, an income statement/pro forma/business model that explains how the company will make money. That model is the business equivalent of the army’s map. The numbers are the territory being fought over.

I bring this up, because I see this all the time. 

In business—and worse at business school—the powerpoint presentation is the easiest way to obscure the numbers. You use big fonts, shiny graphics, lots of stock photos with smiling Millennials (see above) and a few, purposefully selected charts/graphs. You have a lot of opinion without a lot of numbers. Or numbers that haven’t been interrogated properly. Consultants may be the experts in the field.



In journalism, I see even more of this. Journalists have pressures to get stories out. Building an income statement takes lots of time. So I don’t really blame them. They’re mostly trying to get news out quickly.

However, I do blame anyone who is providing an “opinion”. Opinions are easy; numbers backing those up are a lot tougher. It’s the the primary thing that takes up my time writing for this site. 

For example, I had a big article I wanted to publish last year, but I just hated it. It’s my titanic battle between three huge fantasy franchises on three (!) competing streaming services. HBO versus Amazon Prime/Video/Studios versus Netflix. Game of Thrones versus Lord of the Rings versus The Chronicles of Narnia. But the first few drafts were missing something. That something was numbers. I made a lot of predictions, but didn’t have the numbers to hold myself to. So I’ve been waiting until I could get numbers I feel better about it. (That and I realized I needed to explain a lot of accounting to get there.) 

It’s tough though. The problem with numbers is they put problems into sharp relief. They can also be wrong. Every time I put numbers into the world I stress and stress and stress that I got something wrong. That I’m missing some key detail. With numbers, it’s really easy to hold me accountable. Undoubtedly I’ve made some mistakes. That’s even truer for business. (Without the holding accountable part.)

I don’t want to gloss over, the numbers, though. I want to do strategy right, and that means giving the numbers. That’s why this is a theme of this website.

Most Important Story of the Week and Other Good Reads – 11 January 2019: Apple is Coming to a TV Near You

This week was CES in Las Vegas. It seems like everyone had a great time on Twitter. Sarcastic question: do we need a few MORE conference in entertainment?

The biggest “news” seems to be that TV screens are rollable now! Meanwhile, the implications for the steaming wars were less obvious. But we got two tidbits which is all we need to start leaping to conclusions.

Most Important Story – Apple Announces Partnerships with Smart TV Makers for Distribution

Before we talk about Apple, let’s talk about Microsoft. The poor man’s Apple, who sometimes has a larger market capitalization. Back in 2012, Microsoft had a genius idea: we’ll launch XBox Entertainment Studios, and make exclusive content for the XBox, which will drive device sales. It lasted about two years before Microsoft shuttered it when they realized it wouldn’t work.

Apple, it seemed to me, was headed down that exact path.

Device sales aren’t like signing up for streaming. Heck, even switching cable companies may be easier or more affordable than switching devices in this day and age. If Apple was going to use content–and lord knows they spent all of 2018 buying a lot–then I was prepared to hammer that strategy. Frankly, their content just wouldn’t reach enough people to justify the wild costs.

It’s hard to price discriminate when it comes to content. Take the theater: most people pay the same price for the same movie ticket. Like all things, this isn’t an iron law (for instance, there are senior and student discounts; same for matinees), that said at the movie theater you can’t check to see if someone is a millionaire to charge them more. The fundamental conclusion from this is if you can’t price discriminate you need to reach as many people as possible.

A device-centric strategy is the opposite of this.

If you have a fundamentally smaller audience–say only the people who use Apple devices–it means you are automatically shrinking the number of potential viewers. This means the content will have to be extraordinarily well-received by the remaining customers to justify the costs. Since it is hard to switch devices and hard to make extraordinarily good content, this is a huge structural problem. But Apple signaled this week they are willing to partner with other companies to increase the potential audience for their originals.

Apple may still not succeed. Honestly, we just don’t know enough about their ultimate strategy to judge yet and their cash reserves are enormous. (We’ll save the discussion on how “cash reserves burned in unprofitable ways are bad for shareholders” for a future article on “net present value”.) But at least this small announcement tells me they recognized the trap of trying to use original content to push devices, and won’t make the same mistake as Microsoft.

Quick Notes:

First saw this story in Byer’s Market, which I’m now reading daily.

Alan Wolk in TVRev says the companies to keep any eye on are whether Apple gets distribution on Amazon and Roku. I agree. To really maximize distribution, Apple will need to be on those platforms as well. Remains to be seen.

The Verge called this decision “inevitable” that I don’t quite agree with, but don’t hate either. It’s also a good summary of how CES goes.

Other Candidate for Most Important – Hulu is DoIng Pretty Okay (Up to 25 million Subscribers)

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The Economics Behind Not Releasing Star Wars Films Exclusively on Disney Plus – Part II

(If you missed yesterday’s post, click here.)

Let’s continue with where we left off yesterday. The risk for eliminating theaters and associated early windows (home entertainment and pay-per-view) is in the hundreds of millions of dollar range. So can Disney make that up by releasing new Star Wars films directly and exclusively on Disney Plus?

Part II: Calculate the value of “exclusivity” and “day and date”

Running your own streaming service could be worth all the revenue per film you exchange in box office, pay-per-view, EST and DVD sales. Maybe. The bulls like me would say, “So Disney should exchange making money in theatrical sales for losing billions like Netflix or Hulu?” Hmm. The bears would say, “Look at Netflix’s market capitalization.”

But we’re not looking at the whole platform. We’re looking at individual films. The problem is most of the ways people calculate the value for an individual title on a streaming platform are more wrong than they are right. Or let’s say “suboptimal”. Let’s review how NOT to calculate this number. (With the caution that I can/will write a bunch of articles on this)

Suboptimal Method 1: “Multiply number of people by price per month”

Let’s say 50 million people watch a Star Wars film when it releases on Netflix. (Yes, I think that’s a pretty good estimate. Call it “one Bird Box”.) So the math is:

suboptimal 1

Bingo! $550 million! We should skip the theatrical window.

Hold on. I see some problems with the math. Actually, that method is simultaneously both too high and too low.

(And I bring this up because I hear this discussion of streaming economics all the time on podcasts. I don’t know why podcasts in particular do this math, but it happens.)

First, on the, “this math is too high side”, how do we account for a customer who subscribed to the Disney platform, binges 12 “tent pole” movies, then unsubscribes? Do we have to divide by the number of films? Or what about the new Star Wars series, if a customer watched both? This is why you factor in the total value of the catalogue. So it’s too high.

On the converse side, I could be shortchanging the film. What if it acquired customers? Attracting new customers has to be more valuable, right? They aren’t just worth one month, they’re worth their “lifetime value”. A good model should account for that. And that happens to be…

Suboptimal Method 2: “Multiply number of people by CLV” (even higher)

To start this analysis, we need to estimate a “customer lifetime value”. Note, when Disney launches their service, they won’t have a clue what this is. They’ll have estimates—which aren’t much better than guesses—but they won’t know. If you have no subscribers, you lack the best data to judge retention rate. Sure, you can use Hulu’s data, but there are a host of variables you would need to account for. (Say how their price fluctuates wildly to bring in customers.)

So back of the envelope, let’s assume a new customer stays for on average two years. They pay $11 per month, and you paid $30 to acquire them through partnership bounties and direct marketing. Here’s the math:

sub optimal 2

So if Disney releases a film, and 50 million people watch, that’s worth nearly $12 billion dollars! Release 12 movies like that and then it can make 144 billion dollars!

Do you see the flaw in this logic? 

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The Economics Behind Not Releasing Star Wars Films Exclusively on Disney Plus: Part I

Last week, Bob Iger said in an interview with Barron’s that Disney had no plans to start releasing new Star Wars films—by which he means the ones that will come after Episode 9, releasing later this year—on Disney Plus, their soon-to-be streaming service.

I agreed with this move. Some didn’t. Here’s a tweet that Rich Greenfield of BTIG and prominent Netflix bull, retweeted:

There were others and I got into a debate with Jason Hirschorn of MediaREDEF fame on Twitter:

Twitter is a great medium for some things (getting me exposure to a lot of people for one thing) but bad at others (like the racism and and sexism). I’d also add its bad at discussing things that revolve around numbers. Hard to pull out a spreadsheet on Twitter, you know?

So my case for keeping Star Wars films in theatrical releases is here instead. As I look at it, theaters represent a huge proportion of potential revenue for feature films. For any company that wants to maximize shareholder value, capturing that revenue by releasing in theaters makes sense. To ask Disney to release its blockbuster tent pole films day & date, exclusively on its streaming service is to ask it to forgo billions in potential revenue. 

That just doesn’t make sense for shareholders of Disney.

I often rely on an aphorism that “strategy is numbers”. (I stole it from a professor in business school.) When you skip putting numbers to a business strategy, well, you’re at risk of cutting corners. In other words, you’re still talking numbers, but you just don’t have to hold yourself accountable to them. By not calculating the numbers, it makes qualitative or narrative points much sexier.

Fear not, today, we’ll put numbers to this debate. The goal won’t be for me to “decide” the debate, as this is the type of strategic decision that is impossible to decide with numbers alone. Instead, the numbers will help define how big a leap our qualitative judgments need to make. In other words, it will define how “strategically valuable” skipping theaters to support streaming needs to be. We’ll go in three parts: the Disney numbers, the streaming numbers and the qualitative arguments.

Part I: Weigh the specific economic risk for Disney

This is fortunately really easy. I spent a large part of 2018 writing a novella on the Disney acquisition of Lucasfilm. As a part of that series, I created individual film accounting models per Star Wars film to “show my work”, partly to help the audience learn about feature film accounting and partly to run the numbers myself. 

First, here’s my assumptions on the current distribution for revenue for the lifetime of a feature film (emphasis on lifetime):

film revenue model

As you can see, I currently project that 30% of a feature films value come from theatrical rentals, which is how much a film actually collect on box office results. (Roughly half of the box office, but less overseas, particularly in China. Read the whole series for more.) Taking that  with some estimates on production budgets and marketing budgets, here are my estimates for various types of Star Wars films:

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