Month: February 2019

Some More Entertainment and Media M&A Thoughts I’ve Been Meaning to Publish

If other writers are like me, when you write a lot on something, well a lot of great little tidbits and nuggets just don’t fit in. The thoughts are interesting, but will ultimately disrupt the flow of the article or series of articles. The joy of having my own site is I don’t have to junk those ideas like a Universal exec junking another monsters franchise.

For instance, last July I dug pretty deep into the M&A (mergers & acquisitions) landscape as it relates to media, entertainment and all communications (that’s my term for the pipes, both real, spectral and bundled) that deliver it. I’ve long been fascinated by M&A, doing some in my career, but this gave me the chance to study the trends at a higher level. So I devoted most of July to this topic. 

But a lot of thoughts didn’t fit into my initial piece. Consider this the DVD commentary/directors edition of that post along with a slight update into M&A in entertainment, media and communications since the huge surge of 2018. Did the pace continue? Has the consolidation worked? And how has the media covered it?

Data Thought: M&A Is a Messy Data Set

What does this mean? It means that with fuzzy definitions, small sample size and exponential effects, you can make M&A data do lots of things.

Let’s pause on that last sentence. Another way to say that is my least favorite quote of all time, “There are three types of lies: lies, damned lies, and statistics.” This implies all of statistics is a lie. And what I’m about to show is how you go about doing that: taking small sample size, selective dating and fuzzy definitions to weave a narrative. 

But the word “narrative” is the key to that last sentence. The quote should be “lies, damned lies and narratives”. Narratives are created by weaving together anecdotes and reasoning from first principles, sometimes using statistics as your anecdotes. Good data analysis is the antidote to bad narratives. The problem is that data analysis is hard to do and takes lots of time.

But maybe if I show you how messy this data set is, the next time The Hollywood Reporter or The New York Times does an M&A article, you can see how they may be selectively pulling data to sell a narrative.

In fact, let’s use the New York Times and Bloomberg to show this. A lot of the inspiration for this series came from the Times June 2018 article showing how huge M&A was in 2018 through the first six months, and expectations it would continue at that frantic pace. Here is they key image from The New York Times:

NY Times M&A by year

Yikes. So M&A in the first half of 2018 was five times the amount of all of 2017. That’s a 5X jump. A jump that big is clearly the signal through the noise in this small sample size data set. So presumably, if Bloomberg wrote a similar article on media & entertainment M&A, we’d see similar results. And here we have that:

Bloomberg M&A ChartFrankly, it is hard to reconcile these numbers. The New York Times divides up telecommunications and media & entertainment, while Bloomberg combines them. But it doesn’t matter because the numbers are way off either way. How could Thomson Reuters data be off from Bloomberg’s data by three times in 2017?

I could make this story even crazier. Here’s an article from Variety from October of 2018, and it uses Thomson Reuter’s information, and it doesn’t even match the New York Times numbers. Then they give PwC’s numbers, which don’t match either set:

Thomson Reuters reported $145.7 billion worth of media and entertainment deals across the Americas in the first six months of 2018 — up from $141.7 billion for all of 2017. PwC, looking through a different lens, found $82.4 billion worth of U.S. media and telecom deals in the first half of the year, up 197% from last year.

Sometimes M&A doesn’t even match at the same paper. Take the Hollywood Reporter. Doing research for my series in July, I found two different charts from articles less than a year apart, one from March 2016 and one from January 2017. Even they don’t match.

H Reporter 2016 early for SITE

H Reporter 2016 M&A

The point is M&A data is messy, as I wrote way back in July.  By choosing either when a deal closed or was announced or what counts as “entertainment” you can draw very different conclusions. It’s confusing enough that I want to do a quick explainer on it.

A Quick Primer on M&A Data Variables

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Most Important Story of the Week and Other Good Reads – 22 February 2019: The Most Diverse Oscars Yet?

If I have one goal with this website, it’s to combat bad narratives about the entertainment business. And the best way to do that is with data. You’ve heard me mention this before, “Strategy is Numbers”. Data is the first step to quashing anecdotes and narratives.

Today I’m going to lightly touch on one of the most important issues in Hollywood: diversity and representation. Frankly, Hollywood does a bad job discussing the issue mainly because it doesn’t use data. Without data, we can’t make good decisions to solve the problems. Instead, we rely on narratives built on anecdotes. (Though some places like USC’s Annenberg School do study the issue and try to bring data to the fight.)

Since all eyes are turned towards the Oscars, let’s ask some questions about representation.

Most Important Story of the Week – The Oscars: The Most Diverse Year Yet?

I took a stab at answering this last August, so now it’s time to update that article with the 2018 data. I’m going to look at three types of representation in the Oscar films: African-American, global and Latinx-American. (LGBTQ has been covered by other publications.) My sample size today is just the Best Picture category, since I haven’t collected the data for actors, writing and so on, and this is a quick update, not a full-blown research project.

First, African-American representation. For all these categories, I count films that have either an actor, director or themes that represent African-Americans. One table notably sums up how well the Oscars have been doing:

Table 1 - AA Representation

The key takeaway–which I really want to emphasize–is that expanding the field to 10 films has been great for featuring more diverse voices. (Along with other changes too.) In 2018, this clearly went even bigger with three films featuring African-American themes and one of them was about superheroes, a genre never represented in best picture before. So chalk up one victory point for expanding the number of films in the Best Picture category.

However, the expansion of the categories hasn’t been great for what I call “global diversity”. In other words, foreign language films. Movies made outside of America. 2018 is the first year to feature a non-English language nominated film since Amour in 2012. Here’s a table showing that breakdown:

Table 2 Foreign Language Films

This is a small sample size issue, though. Between 1998-2006, four foreign language films were nominated for Best Picture. Since the expansion, only two have been nominated. So the number of films nominated went down, even as the total films almost doubled. (5 films per year to 8 to 10 per year.) So clearly just expanding the number of nominated films doesn’t make the Best Picture category better for global films.

Moreover, this year’s Roma nomination brings up another tricky issue: Latinx representation. If you consider all Spanish language speaking people, well, the Oscars have been on a run. The 2010s have been dominated by Mexican directors–Alfonso Cuaron, Alejandro González Iñárritu and Guillermo del Toro–who have had multiple films nominated for Best Picture.

The problem is if you clarify “Latinx-American”. Those three directors above were all born in Mexico. As far as I can tell–mainly using this Wikipedia article–the only Latinx-American to receive a Best Actor nomination this century is Demián Bichir, and his film wasn’t nominated for Best Picture. Benicio del Toro was nominated for Best Supporting Actor twice in 2000 and 2003, but hasn’t been nominated since.

So using the same definition as African-American films above, I don’t think a single Latinx-American film has been nominated for Best Picture this century. So that’s another strike against diversity in Best Picture films.

As mentioned above, too, Asian-Americans have had a similar lack of representation. (And this year had a very easy, good opportunity to do right with Crazy Rich Asians.)

So we need more solutions to fix the diversity issues still involved with the Best Picture category. Honestly, I’m a bit terrified diving into this territory today. If you write something wrong on race, it can backfire and go viral in terrible ways.

But we need better representation in our films, so I went ahead. Most of the articles I read only use anecdotes to cover the issue. Even the more rigorous data-based approaches usually have clear methodological biases. (Though I avoid pointing these out lest I give ammunition to people who are racist, alt-right trolls.) Moreover, the primary solution for Hollywood–diversity initiatives and diversity showcases–don’t work. So consider today my start at looking for data-driven solutions to help executives and Hollywood as a whole make better decision, especially to be more diverse.

Other Candidates For Most important

So Many Skinny Bundles

Charter is creating a “Spectrum TV” bundle for internet only customers. Viacom signed a deal to get their channels on PlutoTV, together. Throw in Alan Wolk in last week’s TV Rev update about how the growth in the vMVPD space and the conclusion is, “So many skinny bundles!”

The “vMVPD” angle of the streaming wars is an interesting front. Call this the “vMVPD air war” to the “content ground wars” and “naval streaming wars”. Yes, I’m taking the “#StreamingWars2019” moniker to its logical conclusion. Sure, it’s fun to read about who can have a more compelling streaming service between Disney and Netflix, but people still need local news and live sports. And cheap, free content to kick back and just watch. So OTT fills multiple needs.

But how many can the market support? Well, probably not this many. Definitely not this many. The cable component is really the intriguing part here. Owning the device is a clear competitive advantage in owning an OTT. Roku has a lot of devices; same with the AAAs (Amazon, Apple and Alphabet/Google). But cable boxes own even more homes. And some of the companies are innovative (Cox and Comcast) while others are terrible (despite their OTT, Spectrum). So can they take their ability to bundle internet (happening anyways) and move into the OTT space? It remains to be seen.

The Biggest Movie in China: The Wandering Earth 

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Most Important Story of the Week and Other Good Reads – 15 February 2019: Reddit…the Underrated Social Platform?

This week the media armies continued to position and reposition their forces for the streaming wars of 2019. Apple announced some plans, but then other rumors waylaid those. Meanwhile, all the TV critics gathered for TCAs where more studios announced shows and plans, but overall nothing big happened per se. Which leaves us searching the darker corners of the internet to find…

…Reddit.

Ah, social media. A huge player, but will it hurt or help media? Let’s find out.

Most Important Story – Reddit…the “Underrated” Social Site

The “news” if you will is that Reddit got another $300 million dollar investment from Chinese giant Tencent, which values the company at $3 billion dollars. This news came on the heels of an interview of Steve Huffman with CNBC which dropped some other “datecdotes” with which to analyze the company. Including…

– They have 330 million monthly active users worldwide.

– Half of these users are between the ages of 18-26. (And that means that really many of those are below 18 and lying.)

Reddit makes $100 million in revenue (which Reddit will not confirm, since it is private).

That last data point may be the most stark, since it is so low. Clearly, Reddit doesn’t monetize its users as well as places like Twitter and Facebook. Snapchat has eight times higher revenue than Reddit, with fewer users. That signals a lot of potential value, for both investors (to get good returns) and marketers (to get better ROI on campaigns). The latter is who I’ll be thinking about today.

Reddit is low on the marketing radar, in my opinion because Reddit just isn’t very buzzy. On a personal level, I’ll admit that until I started using Reddit last year, I was skeptical of its reach and power. I’m not anymore.

But plenty of others are. In the “power rankings” of social platforms–using my observations of Twitter as the guide here–I’d say that the media generally ranks Reddit last in importance, behind companies like Snap and Twitter, and maybe even Pinterest. My working thesis for this–some of this I floated on Twitter early this week as a trial balloon—is to blame it on media biases. Twitter is the home to journalists, so it gets a natural overhype. Facebook has everyone, so it’s properly rated. Instagram and Snap target Millennials, and media has a natural bias towards anything skewing young.

But media biases can’t explain it all. So I have four additional theories on why Reddit doesn’t get the love:

Theory 1: Brands can’t use it.

Why not? Strong community guidelines that militate against brands placing “native” content to promote themselves. This is the core ethos of the platform. If an individual entrepreneur tries to go on to just promote themselves, it usually backfires and they risk being banned. And their content too. This is a huge disincentive to using the platform. If you can’t use a platform, well it doesn’t matter. (I’d add you also don’t build an army of bloggers trying to sell you on how to make money on the platform, the way it has with Youtube, Twitter and Instagram.)

It could be a truism that no brand can “control” social media sites, but Reddit seems like the least controllable and most likely to backfire on brands if they try to engage there.

Theory 2: Not a lot of journalists spend time on the site.

This is my gut thinking, when compared to Twitter or Facebook. Again, Facebook wanted every media site to have a presence on its newsfeed, so journalist jumped in with both feet. And journalists naturally gravitated towards Twitter. So if you aren’t using something, you don’t write articles about it. (Hence why political trends bubble up in Reddit and 4Chan, which then catch 90% of news sites off guard.)

Theory 3: Reddit feels like it doesn’t target Millennials.

This is one of those ideas that was in my “blink” thinking, but isn’t as true as it seems. If you had asked me, I’d have said that Reddit was the home to middle-aged men spouting their political opinions or middle-aged fan boys with similar opinions or gamers debating tactics. Like most forums. But as I wrote up above, this isn’t true and Reddit skews very young.

Hmm, my gut would have said that the middle-aged men on the Gamergate and The Donald subreddits were the driver of the site. Which leads to a better theory.

Theory 4: Reddit feels associated with the alt-right.

When I say “Millennial” part of that includes a cultural aspect that means “liberal”. And Reddit doesn’t feel liberal. Of the news stories that do mention Reddit, they usually tie it in with clearly alt-right sites like 4Chan and other alt-right movements, like GamerGate or SadPuppies. Or other negative coverage like deep fakes or pornography or stealing copyrighted material. In other words, in its pure, unpoliced state, Reddit hosts a lot of communities that brands don’t want to associate with. So it gets less support. (Though clearly Twitter and Facebook aren’t free from hosting distasteful voices either.)

Conclusion: Reddit may really be underrated.

Add it all up, and Reddit feels like an underutilized resource. This means clever folks can get a great ROI for devoting the effort to a Reddit social strategy.

One of the things I’ve observed over the last 18 months or so, while trying to build social media profiles for various projects, is that getting the platform right is crucial. The targeting of market segments via social platform is far from a well-honed science. It seems like every media company uses Twitter, Youtube, Instagram and Facebook and that’s that. Retailers seem better than media, but new DTC companies seem like the best of all. (This, for example, is an infographic I like, but I’m not sure of its data sources.) Meanwhile entertainment companies are left in the dust. (Though notably CNBC notes that Universal is pushing Jordan Peele’s Us on Reddit.)

(Definitions note. I define “social” really broadly. So traditional players like Facebook, Twitter, Instagram, Snapchat, Linked-In, etc. But also media social like podcasts and Youtube. And I’m always fascinated by “dark social”, email and text threads.)

What I love about Reddit, and why I think the ROI might be high is the “time on site” metric. Look at it on website tracking site Alexa:

Screen Shot 2019-02-15 at 2.03.45 PM.png

It may be the sixth most visited site in the US, but it’s number one in ‘time on site” at 11:30, double some of the sites around it. This may be why it is underrated. Most digital marketing is still woefully underprepared to factor in time on site as the metric to judge a website. (Some other websites note its traffic and its high engagement levels.)

I’ve been noodling with this idea for a bit now: the most valuable things for a website isn’t just pageviews or users, but users who stay on a long time. Even better is websites who get this stickiness without resorting to tons of algorithmic manipulation.

Take for example–back in the Grantland days–a Bill Simmons column. When it went up on Fridays, hundreds of thousands of people like me would flock to Page 2/Grantland to read it its entirety. Grantland followed this up by employing other terrific long form writers like Bill Barnwell and Zach Lowe who were easy to find and also readable. (Now I couldn’t tell you how to read Lowe or Barnwell. It is by chance that I find their articles.) Right now, Matt Yglesias, Kevin Drum and Stratechery are examples of people I read weekly if not daily. That should be really valuable.

In other words, the gold standard is organic traffic from a dedicated audience. Reddit has a lot of that. The problem is algorithmic ad-buying doesn’t distinguish that sort of viewing versus the spam sites trying to get people to click through dozens of images to find a celebrity’s facelift gone wrong. Or at least, they don’t distinguish well enough. Nor do media companies–who usually just use giant ad-buying firms–understand this connection to really drive eyeballs to their marketing. (To Simmons’ credit, his podcast has started doing more ad reads for films, which I think is brilliant.)

So if you’re a marketer looking for an edge, consider Reddit. Many of your opponents haven’t. Or if they have, well it hasn’t shown up in the revenue for Reddit yet. So the ROI potential is still there.

(Final theory: Reddit has a bot problem like every other social platform. I don’t know how it compares though to other sites, and my theory is whatever population is fake on Reddit is the same proportion as Facebook and Twitter.)

(Final parenthetical: By the way, as bearish as I am on most VC/M&A news, I think the $3 billion valuation sounds super low for Reddit. This could be a deal like Google buying Youtube if my “undervalued” thesis is right. Let’s just hope they don’t launch “Reddit Originals” any time soon.)

Other Contender For Most Important Story of the Week – The Latest Lego Movie Disappoints at the Box Office

Again, don’t try to read into “why” this happened. That’s hard to judge. But, like many other potential franchises, holding on to greatness is really tough. So three movies in a row have declined for the Lego movies, which make them just average as a film franchise. (If indeed all four movies count as a franchise.)

I bring this up because pre-Lego movie, I thought that Lego was crushing it. And overall they are crushing it. Lego Ninjago did wonderfully as a TV show at selling product. Lego toys still sell really well. But it looked like after the first Lego movie that they could be another franchise in Warner Bros bid to beat Disney. Well, not yet. In other words, in entertainment success is difficult to sustain.

Lots of News with No News

TCA Edition

I saw a lot of Twitter headlines from TCA, but I don’t know that any one presentation or even the whole thing had a “lot of news”, but again did help “prep the battlefield” for the streaming wars to come. Instead, some shows were announced, some release dates set, everyone was positive about all the shows, and Netflix loomed over all the conversation. Actually, the only change may be that Disney Plus has joined Netflix in looming over all the conversations.

Sam Esmail Renew Deal with Universal Cable Productions

This is just a reminder to myself that I need to write a longer article on all these HUGE executive producer/creator deals from Ryan Murphy to Shonda Rhimes to Jordan Peele to Sam Esmail to Ava Duvernay. What is the hit rate for these deals? What is the VORP of a showrunner? Which are good and which are bad?

Fingers crossed I tackle this in 2019.

Long Read of the Week – Tim Goodman in The Hollywood Reporter “The Curious Cases and Future Fates of Starz and Epix”

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Most Important Story of the Week and Other Good Reads – 8 February 2019: A Lionsgate/Starz Check-in

Here’s why this week’s column is late. I started writing a Tweet thread, and then it went long. So I moved it to this column. Then that went so long, so I moved it to its own post. (Fingers crossed Wednesday.) So I’m starting from scratch midway through the weekend.

What was the formerly number one topic? Last week, when I wasn’t thinking about Disney, I was thinking about the debate over “niche” versus “broad” in the media ecosystem. So much so–and with news about layoffs, profitability and the general opinions on the future of media–I had anointed it this week’s “Most Important Story”. So what second place article climbed into the top spot?

Most important Story of the Week – Lionsgate (and hence Starz) moving on from Chris Albrecht

Consider this my “check in” with Lionsgate. I haven’t written much about this once high-flying studio–late 2000s Lionsgate was the mini-major king of the world–and Albrecht leaving after some internal turmoil gave me an excuse to check back in.

To overly summarize, they faced a common challenge of movie studios since the 1990s: replacing two great franchises, after milking them for what they could. In Lionsgate’s case, they haven’t found anything that approaches the highs of Twilight and Hunger Games. With some great ROI on the Saw franchise. (Warner Bros. had a similar challenge on an even greater scale with Lord of The Rings and Harry Potter.) Lionsgate has also tried to take advantage of the boom in “prestige TV” and “peak TV”. Though, to date, it seems like their main hit has been Orange is the New Black, with not a lot of other huge hits.

Their prospects in 2019 look better than 2018–where they only did about $388 in domestic box office–but they still don’t have a billion dollar franchise, with John Wick 3 as their best bet in 2019..

If your studio isn’t flying high, of course, your strategy can always be “M&A”–reminder M&A isn’t a strategy–and so Lionsgate acquired Starz in 2016. I liked this deal at the time. It gave Lionsgate a toehold into the streaming wars. Now, Chris Albrecht leaving isn’t the end of the world–very few executive team departures are, which someday I’ll write about–but it does show the challenges incorporating even a smallish entity into a larger one. We’ll see this with Disney and the impending 4,000 to 5,000 layoffs expected there. (More on that later.)

Speaking of M&A, I still expect that Lionsgate’s long play is–and has been–to let someone else buy them after getting a big enough return. They’ve been floated to be swallowed by Amazon more than anyone, though when it comes to M&A, I think guessing on eventual suitors is usually wrong more than right. Even if M&A may not be a strategy, it is still really hard to pull off.

If I had a pitch, instead of Amazon, I could see a fit with Comcast-NBCUniversal. Hear me out (and read my predictions of a super-consolidated future for more insight onto my thinking). First, Universal as a movie studio is facing the combined Fox-Disney behemoth, and this would give it another mini-major (with Dreamworks animation) with some franchises to try to leverage. But really Comcast does this deal to get Starz. NBC-Universal has a great cable portfolio it will use for its ad-supported streaming service. But it doesn’t have an HBO like Warner or Showtime like CBS. Starz would give them a “prestige” platform as the expensive add-on to the base model in their streaming service. (And more leverage in the digital retransmission wars to come.)

Would this happen? Again, with M&A it’s tough to say. Brian Roberts likes buying things, but for that reason Comcast has a lot of debt. Also, the government may grant mergers to Disney, because the current president likes Iger and Murdoch, but has already said it may relook at the Comcast merger, possibly because MSNBC/NBC News has reported bad news on the president.

ICYMI – My Articles from The Last Two Weeks

I spent the last week going all out to finish my series on Lucasfilm. My dramatic conclusion dropped and the answer is, Disney crushed it. Here’s the best table that summarizes what I found:

Table 1 Totals

So take a read here (for building the final model), here (for my thoughts on the terminal value) and here (for my summary of the whole thing) including how much Disney would make without theme parks, Lucasfilm’s present value and the break even date. And spread the word to anyone who wants to know how to value an M&A deal beyond narratives and try to calculate the specific impact.

M&A Updates – Gimlet bought by Spotify for $230 million

This was the big headline of the week. (Getting StraTECHery coverage is my rule of thumb on this measurement.) It also pushed back slightly on the “media is dead” narrative, if you think media includes podcasts. (I’d say yes.) Spotify paid a huge price for Gimlet, but everyone seems to be pointing to the Anchor acquisition as the real win. This big deal comes on the heels of the announcement that Spotify is finally making both profit and positive cash flow, and the podcast acquisitions (with more to come) will deliver the next iteration of growth.

The challenges for me are twofold. (And yes, it is my job to be the one skeptic in entertainment business coverage of the tech companies. Read another positive take on Substack by Web here.)

First, it is a possible overpay for Gimlet. They paid an amount equivalent to all podcast revenue, which is a lot. I looked on Podtrac as a quick gauge for how well Gimlet is doingand Gimlet isn’t in the top ten. Meanwhile, the top ten list is filled with major media companies like NPR, ESPN and even independents like PRX and Wondery. Moreover, between PodcastOne, The Ringer and Radiotopia and huge independents like Joe Rogan and Hardcore History, there are quite a few companies in this space, so buying one producer may not be the edge it portends.

Which is why everyone rightly emphasized this is about the aggregation play on podcasts, emphasizing the acquisition of Anchor. My second worry is “overestimating the effect of originals”. Basically, I see this a lot where every decision from the streaming companies–mostly video–is justified by acquiring new customers. Prestige TV shows like House of Cards? Acquiring customers. Amazon spending at Sundance? Acquiring customers. Kids TV, stand up comedy, nature documentaries, event TV? Customer, customers, customers. The problem is when you add each customer up, well you may have invested too much and overestimated the customer you would acquire.

Frankly, it is a big ask that customers will go to Spotify exclusively for podcasts or even permanently. If there is one podcast exclusively on Spotify, maybe you only listen to it on Spotify. But maybe you skip it because, if you’re like me, you already have too many podcasts in your feed. And maybe their UX isn’t as good as your current app, which is optimized for podcasts, not all music.

For podcast producers, it still may not make sense to go to Spotify exclusively either. If it your podcast is still ad-supported–meaning Spotify isn’t paying you a license fee for it–than exclusivity to Spotify could cripple your ability to build an audience. Launching on one platform immediately limits your monetization potential by artificially shrinking your potential audience. So I have worries.

Other Contenders For Most Important Story of the Week

HBO Changing Launch Days for (some) Series

This had the longest shot to become an actual story of the week. I mean, one premium cable channel-cum-streamer moving some of its shows (a distinction some headlines didn’t convey) isn’t the biggest move on the planet. But it did get me thinking about the value of launch days in general. In some ways, Sundays being the “best” days for cable/premium launches is a “tragedy of the commons” problem in that everyone in prestige from AMC to HBO to Showtime launches on Sunday nights, so no one wins.

Yet, some of the logic behind the move was more likely about competing against yourself if you’re HBO than others. At one point, I watched four Sunday night HBO shows. (Game of Thrones, Silicon Valley, Veep and Last Week Tonight with John Oliver) If they all come out on Sunday, well some were DVR’ed and saved for later. Moreover, for PR purposes, four of those shows demand a recap story on the Slates/Vox/HuffPo’s of the world. If all four air on the same night, they can’t all get on the front page. So that’s two compelling reasons to move the air dates of some shows. (Also, as the NY Times points out, they may have so much content they don’t have a choice.)

I can argue against this, though. Nothing in the broadcast era was more powerful than tune in viewing as people stuck around all Thursday night on NBC. Maybe some of that effect still works, even for a premium channel like HBO. (Though, yeah obviously it is shrinking.) Moreover, claiming a night for when people can expect premium TV makes sense and, according to some stats, Sunday is the most viewed night of TV of the week.

Sum it all up, and I can’t predict if this is a good move or a bad move. What I can say is it isn’t meaningless. Netflix constantly tweaks their product launches, so HBO should too to maximize impact. I’m always for tweaking a model or business to maximize your competitive advantage, and I could see the arguments for this, especially if it helps dominate the PR impact.

Woody Allen Sues Amazon

Since most of the #MeToo era started before I launched this website, I haven’t written a lot on it, though it definitely has impacted a lot of the business. Often that’s because individual stories don’t really impact the business, and fall into the category of “celebrity news” than business news. This iteration is different and I’d refer you to The Business podcast from last week for why.

There is a difference between refusing to work with someone for future projects and cancelling already signed deals. Cancelling deals could cause lawsuits. Or a studio could choose not to work with someone, but keep paying them. Paying people who have inappropriate conduct on set could cause bad PR coverage and internal moral problems. So lose lose. (Refusing to work with someone results in neither of those outcomes, unless you misjudge the PR angle, a la James Gunn and Disney.)  In short, with challenges like Woody Allen, there aren’t any good options. It’s probably a tough case for Amazon to decide, which means the courts will settle it, and as they say bad cases make bad case law.

Disney May Layoff Thousands

While I’m talking about The Business podcast, I heard this news again on THe Business this week, and for some reason it stuck with me. I need to think more on this, but I would love to figure out more of the business ramifications of layoffs of this size.

Lots of News with No News

Disney Earnings Report – Streaming will cost money

Since Disney has two different groups of fanboys (Star Wars and Marvel) in addition to a bunch of diehard fans following it–wait, does that include me?–usually the biggest stories involve random drops of trivia. So Disney repeated on their earnings call that they will keep making R-rated movies (which they had already said) and that the theme parks will come in later half of this year. The non-news financial news is that ESPN Plus has 2 million subscribers, which I’d call neither good nor bad. It just is, and we’ll see what it means.

They’re also going to lose money as they transition from sellers to streamers. Hmm.

If I were really cynical–and I am–I’d say that if starting your own streaming company loses lots of money–and we’re now 4 for 4 (Netflix, Disney, Hulu and Seeso, if not more) on data points in that regard, with a “TBD” in Amazon–then maybe we’re all investing our capital inefficiently? Or that there are “bubblish” elements where certain players are overpaying, which causes everyone to lose money, which makes these bad investments? If I were cynical though.

Super Bowl Ratings were Down

There is no smaller sample size than one.

If you understand that, then all the discussions about why the Super Bowl had low ratings feel a lot more hollow. I’d call them “narrative explanations” as opposed to data-based, because, again, it is a sample size of one. So maybe people were sick of watching the Patriots, or OTT actually showed higher ratings (it didn’t) or football is losing popularity, Or maybe the Chiefs and Saints make the playoffs and the highest ratings in history happen? I don’t know. (I explained the difference between narratives and data when Solo came out and with M&A hype.)

(Also, the TV ratings were US only. From now on, headline/Twitter headlines should include geography when numbers or effect are measured.)

Long Read of the Week – Reality is Closing in On Netflix

Since I haven’t mentioned Netflix yet, I’m required by entertainment journalism bylaws to do so now. Check out the work of New Constructs from after Netflix’s earnings report. I love their writing in general as they apply the type of data-based analysis that is missing often in the discourse. Strategy is numbers, right? Speaking of which, they show their math in this Excel spreadsheet.

Disney-Lucasfilm Deal Part XI: Disney Will Make A 107% Return on Lucasfilm Acquisition (And Other Conclusions)

(This is Part XI of a multi-part series answering the question: “How Much Money Did Disney Make on the Lucasfilm deal?” Previous sections are here:

Part I: Introduction & “The Time Value of Money Explained”
Appendix: Feature Film Finances Explained!
Part II: Star Wars Movie Revenue So Far
Part III: The Economics of Blockbusters
Part IV: Movie Revenue – Modeling the Scenarios
Part V: The Analysis! Implications, Takeaways and Cautions about Projected Revenue
Part VI: The Television!
Part VII: Licensing (Merchandise, Like Toys, Books, Comics, Video Games and Stuff)
Part VIII: The Theme Parks Make The Rest of the Money
Part IX: Bibbidy-Bobbidy-Boo: Put It Together and What Do You Got?
Part X: You’ve Been Terminated: Terminal Values Explained and The Last Piece of the Model

This series has been the equivalent of an all day trip to Disneyland for me. Arriving when the park gates open, I stayed all day, walking the park and going on every ride. I’m exhausted, and now all I have to do is wait for the fire works. My feet are killing me, but I’m almost there. So yes, today is the fireworks of this process, though the rides (articles) have been great along the way.

I spent Tuesday and Wednesday building our exhaustive models, so let’s  “generate insights” from the data, since insights are a hot business term. I’ll start with the big numbers. I’m going to do this as a Q&A.

What is the Bottom Line, Up Front?

Or “Bottom Line, 10 Parts Later”? 

Here it is: Disney will NOT lose money on this deal, even discounting for the time value of money. So yes, the people claiming success on behalf of Disney are indeed correct. They crushed it.

To show this, here are the totals for the deal. But, to show what “making money” means, I’ve broken my three scenarios into unadjusted, discounted for cost of capital and discounted for inflation. Again, these totals include my estimates for the last six years, the next ten years, and a terminal value for all future earnings:

Table 1 Totals(All numbers in millions, by the way.)

Here is how those values relate as a percentage of the initial price ($4.05 billion). (So subtract 100% to get the return.)

Table 2 PercentagesIf you said, pick one as “the truth”, I’d pick my median scenario—that’s what median is for, right?—and I’d chose the cost of capital line. That really is the best way to look at investing in entertainment properties, and Star Wars is as pure entertainment as you get. (It’s also what the finance text book would tell me to do.) So it is smack dab in the middle of the table.

Using that number, the only conclusion is that Disney crushed it. Disney got a 107% return over the lifetime of the deal. (A 5x deal in unadjusted terms.)

Even looking at the high and low cases, this makes sense. Even the most pessimistic scenario shows a 38% return. (Which is a 3x return in real dollars. Again, huge for a low case.). Bob Iger and Kevin Mayer made a huge bet and it still had a nice return. In the high case, Disney will make an unadjusted 9x on the asking price. That’s a great deal.

Why do you focus on the discounted numbers compared to the totals?

I ignore “unadjusted” numbers—unadjusted is my best term for it—because I can’t help myself. One of my biggest missions with this series is to remind all my readers of this key finance point. A point—leveraging the time value of money—that the New York Times made when writing about President Trump’s taxes (and which he incorrectly criticized). So it needs to be repeated: A dollar today is worth more than a dollar tomorrow. Financial models need to reflect this reality.

To illustrate it, here’s an example. Disney could have take $4 billion dollars (and yes, they paid half in cash, half in stock) and put it in the S&P 500. If they had done that, they’d have earned a 10.5% inflation-adjusted CAGR from 2013-2018. So if Disney had done nothing, they’d earned 10.5% on their money. This is why the “cost of capital” exists. It accounts for the return you should expect for the risks of a given industry. If you make an investment, it isn’t just good enough to make some money, you need to beat the industry costs of investing in said industry.

Well, why did you also include inflation?

It’s easier for many folks to understand. The cost of capital is what we should judge the deal on, but “cost of capital” is a finance term that most of us don’t deal with on a daily basis. Inflation is easier to understand. It is the everyday reality that the things around us get more expensive over time. Inflation is the cost if you don’t do anything with your cash. It’s just another way to look at it. (And while it fluctuates, it’s hovered around 2% for so long that I’m using that as a placeholder.)

How does the cash flow look by time period?

Glad you asked, because I want to answer this question to keep this Q&A flowing. Essentially, this question asks how earnings flow in by our three major periods: what has happened (2013-2018), the near future (2019-2028) and the far future (the terminal value). Here are 3 tables showing this by model:

Table 3 Totals by Period

To make it easier to read, here’s that breakdown in percentage terms of the total for each line.

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Disney-Lucasfilm Deal Part X: You’ve Been Terminated: Terminal Values Explained and The Last Piece of the Model

Disney-Lucasfilm Deal Part X: You’ve Been Terminated: “Terminal Values Explained” and The Last Piece of the Model

(This is Part X of a multi-part series answering the question: “How Much Money Did Disney Make on the Lucasfilm deal?” Previous sections are here:

Part I: Introduction & “The Time Value of Money Explained”
Appendix: Feature Film Finances Explained!
Part II: Star Wars Movie Revenue So Far
Part III: The Economics of Blockbusters
Part IV: Movie Revenue – Modeling the Scenarios
Part V: The Analysis! Implications, Takeaways and Cautions about Projected Revenue
Part VI: The Television!
Part VII: Licensing (Merchandise, Like Toys, Books, Comics, Video Games and Stuff)
Part VIII: The Theme Parks Make The Rest of the Money
Part IX: Bibbidy-Bobbidy Boo: Put It Together and What Do You Got?

Yesterday’s article was pretty audacious, trying to estimate 6 years of past revenue and 10 years of future revenue. But the eagle-eyed among you may have noticed I left out a crucial detail:

What about the future? 2029 and beyond? Surely Lucasfilm is worth something then too?

Yes, it is. But predicting the far future is the toughest part. Which ties into one of my biggest pet peeves in valuation. I loathe business models that project near term middling performance (or even losses), but a far future of wild success. 

Usually, this wild success is summarized in an outsized “terminal value”, one of the most crucial concepts in equity valuation. It can be hyper-dependent on the growth rate. If the growth rate raises by a point, then the model’s value can shoot through the roof. (And yes, many tech valuations follow this model.)

Yet, terminal values are the best tool we have to solve this problem. If we use them properly. Today I’m adding that last piece to the model, but explaining how I got there and what it is.

Terminal Values…Explained

What is the terminal value? Well, the last number on the spreadsheet that captures all “future” earnings. Look at my model (this is the median scenario), with the new lines added:

Table 1 - Empty ProForma wTerminal Values

In a word, the “terminal value” tries to capture the value of all future earnings after your model stops. Say you feel confident you can predict revenue out five years. Okay good enough. (I mean no one can really predict revenue, costs and hence earnings, though we still try.) But what about 10 years? 15 years? There are too many variables.

You can see the need for this in the Lucasfilm acquisition. Can I really predict what will happen with release dates of films, even two years out? I already had to remove Indiana Jones 5 from my models. Take another line of business, licensing. If you used the toy sales of 2015 to forecast the future, well you’d be much, much too high. (2015 was probably the peak of Star Wars toy sales.) Back when this deal was signed, Disney didn’t know if they were going to launch a streaming service (I assume) but they still could have sold Star Wars TV series. Possibly for even more money. Not selling to others changes the model.

Here is where the science of modeling has come back to the art. (Which isn’t a bad thing, despite current connotation. Good art is really, really hard to make. Great art even harder.) The traditional way to model a terminal value is to use the future cash flows of the last year of the model, and assume those hold steady into the future. In other words, you make a “perpetuity”, a cash flow stream that continues forever. Alternatively, if your company has a large variance in cash flows year to year, you can use a three or five year average to get the base number. To be even more conservative, you can assume instead of a perpetuity, it is an annuity, where the future revenues only last for a given period of time, say 10 or 20 years. (If you need a refresher on “time value of money”, go here.)

The Specific Terminal Value Calculations

How long will Star Wars be valuable? Davy Crockett was the Star Wars of the 1950s, and it isn’t worth $4 billion dollars. Mickey Mouse has been Mickey Mouse since the 1920s, and he’s worth well more than $4 billion dollars. Which way will Star Wars go? I’m going to assume for a long time. Essentially for decades, but with one scenario where it shrinks over time. Which I’ll control for by tweaking the discount rate. (Either having it grow or shrink.)

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Disney-Lucasfilm Deal Part IX: Bibbidy-Bobbidy-Boo: Put It Together and What Do You Got?

(This is Part IX of a multi-part series answering the question: “How Much Money Did Disney Make on the Lucasfilm deal?” Previous sections are here:

Part I: Introduction & “The Time Value of Money Explained”
Appendix: Feature Film Finances Explained!
Part II: Star Wars Movie Revenue So Far
Part III: The Economics of Blockbusters
Part IV: Movie Revenue – Modeling the Scenarios
Part V: The Analysis! Implications, Takeaways and Cautions about Projected Revenue
Part VI: The Television!
Part VII: Licensing (Merchandise, Like Toys, Books, Comics, Video Games and Stuff)
Part VIII: The Theme Parks Make The Rest of the Money)

Many of you are interested in knowing how much money Disney made when it bought Lucasfilm for $4.05 billion dollars. How do I know? Well, one of the Google search terms that directs to my site is, “disney profit lucasfilm”. (And really I should be higher in that search ranking!)

This interest comes from that fact that very few people know the answer. Disney CEO Bob Iger does. Kevin Mayer (Iger’s chief dealmaker) does. Christine M. McCarthy (Iger’s CFO) does. And likely many other Disney employees. 

As for the public, though, we haven’t the foggiest. 

Few other news websites have tried to answer this question. It’s too speculative. Instead, they usually rely on some version of, “Disney has grossed more at the box office than the acquisition cost of Lucasfilm” type articles. These are so obviously wrong—a studio doesn’t collect all of box office for one; it doesn’t account for other revenue streams for two; it doesn’t discount for the time value of money for three—that many of the Disney & Star Wars super-fans want something more. So I did a bottom’s up analysis. (I’m the strategy guy and a super-fan.)

Yet, I’ve left you all wanting. I never finished the damn thing.

Today, it all comes together. Totaling over 66 pages and 30 thousand words with dozens and dozens of charts, tables and financial statements, this article series is my Ulysses. I’ve calculated all the revenues and costs to finally answer the question that started this:

How much money did Disney earn on the Lucasfilm acquisition?

Today, I’m going to walk through building my final model. I will include the final numbers for my three scenarios (through 2028), but today is really about adding in the final estimates to the model. Like a final Harry Potter film—or uncompleted ASOIAF book—this dramatic conclusion will need multiple parts. I’ll explain the model today, tomorrow I’ll calculate the terminal values and then on Thursday, I’ll draw tons of fun conclusions. That’s right, it’s a Lucasfilm week!

Calculating the Final Piece

At first, I was going to make just one model, call it the “average” and be done with it.

But that didn’t make any sense. I’ve been using scenario modeling through out, building best and worst case options where appropriate. In one case—film—I made 8 different scenarios. Scenarios are great because they account for the inherent uncertainty in predicting the future.

To add everything up, I built three versions, the traditional “best case / worst case / average case”. I’m a big fan of using three versions of a model, if they are all realistic. (If you want to goose your numbers with three scenarios, make the worst case very nearly break even.) I treat the high and low case as the equivalent of our 80% confidence interval. The average then acts as my best guess of what will happen. The final summary model looks like this:

Table 1 Empty Proforma

The shaded green cells are what we need to fill in, based on our past calculations. Sure, it looks like a lot of cells, but it is really just 11 lines. A lot of time, we act like high finance is really hard. It isn’t. All you do is add and subtract. We don’t even have to do the math ourselves since Excel does that for us.

As I was building this, I realized that in some lines of business, I forecast revenues out to 2027 and 2028 in others. Don’t ask me why I didn’t keep things uniform. For consistency, all these models will go to 2028, the next ten year estimate. Building this final summary was a good proof read of the Excel models as well.

The Final Calendar

To help build the models, early on I built a calendar that represented my best guess for the future of Lucasfilm under Disney. Remember, this deal was signed in December 2012, so I started the calculations in 2013. This calendar didn’t make sense for any individual article, so I’m putting it here, so that everyone can understand the scale of what Disney is rolling out here:

Table 2 CALENDAR of Lucasfilm

The Three Scenarios

Let’s walk through what I put in each model.

The “Average”: Status Quo Continues

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