Month: April 2019

Licensed, Co-Productions and Wholly-Owned Television Shows…Explained!

A big topic in the streaming world has been who owns what. All I can say is, “Finally!”

For many years, we—sort of speaking of the business press, especially the casual observers—have treated all streaming TV shows interchangeably. If Netflix branded a show an “original” for all intents, the press referred to it as an original and lumped all the originals together. With the Friends on Netflix issue coming to a head last fall, we’ve finally started to unpack what it means to have licensed content on a given platform.

(Here’s a good article by Beejoli Shah at The Information that makes the distinction between licensed and owned content. I hope we get more of this.)

Here’s my hot take, though: the licensed versus owned conversation STILL doesn’t explain enough. Why? 

In one word…co-productions.

This convoluted third category is like the love child between owned and licensed shows. Moreover, TV series can fall into different categories depending on the territory they are licensed in. Someone needs to step in and explain all this. 

Since I need to clarify this distinction for my series on Game of Thrones versus Lord of the Rings versus Chronicles of Narnia anyways, I may as well write a full article on it.

For the streamers each ownership model has different pros and cons, and understanding those different models can explain why certain shows get renewed, while others don’t, why certain shows are branded certain ways and others aren’t and, mainly, the economics of all of them. 

I’ll start by explaining wholly-owned series, then explain licensed series and co-productions. What they are, how they impact the business models and provide some examples. Along the way I’ll explain the traditional licensing windows and a geographical clarification.  And since this article was directly inspired by my big series on GoT versus LoTR versus Narnia, I’ll pull examples from those three streamers for each of these definitions (as best as I know). 


This is simple: the network distributing a piece of content also owns the content. 100% free and clear. 

More granularly, the studio’s in-house production team owns all the rights to it. To get to this point—where a channel owns 100% of the rights—usually requires that the network developed the show itself. That means they either found the show runner—who wasn’t already under a deal with another T V production house—took her pitch and optioned her TV show; or they hired her under an overall deal, so that anything they produce they have first rights to. That’s step one, own the underlying IP. (Yes, if it is based on a book or movie or what not, you have to own all the rights to that too.)

The second step is to then pay all of the production costs. Most of the time, if you do those two things, you own a show outright.

What does this mean for a network/streamer? Well, they can do whatever they want with the TV series. (I’ll explain a qualification to this in a moment.) They can air the show for as many seasons as they want, as long as they’re okay with the production costs. They can keep it exclusively on their channel or syndicate it. They can raise or shorten the number of episodes. In short, they don’t have to negotiate with an outside producer because they are the producer.

The qualification to unlimited control is talent. Even a wholly-owned show has obligations to talent—especially key talent like showrunners or the lead actors—that can influence some of these pieces. If the talent’s contracts are up, and they don’t want to make the show anymore, they don’t have to (until they get a pay raise).

Since the 1980s, roughly, broadcast channels have become more and more likely to own their own shows, or at least air shows under the same corporate parent. (So NBC airs shows produced by Universal Cable Productions or Fox aired shows by 21st Century Fox Television.) This has happened since time immemorial, but became more common when the FCC relaxed primetime air time rules and ended “fin/syn” regulations (which I do not have time to explain today) in the 1990s. When the streamers got into the game, they prioritized “wholly-owned” shows because it enabled them to choose distribution plans they wanted.

(Note on verbiage: I called these “wholly-owned” at my previous job, and I’m sure different places can call them different names. I like wholly-owned much better than “original” because it is about who owns the series financially, not customer-facing branding.)

The downside to wholly-owned is one of costs. If you’re paying all the costs up front, that can quickly get expensive. For a licensed show, you can choose to pay a fraction of the total costs because the production house can make additional revenue later. Same with broadcast shows back in the early 2000s, when networks often paid 50-70% of the costs for co-productions. However, if you’re looking to own all the rights forever, or want exclusivity forever, owning the content completely is actually cheaper.


HBO – Game of Thrones. The Sopranos. The Wire. True Detective. Veep. Silicon Valley. 

(Basically, nearly their entire catalogue. HBO as a premium channel has tried to own 100% of their content. That’s why HBO Go/Now’s offerings have nearly every TV show they’ve ever made.)

Amazon Prime/Video/Studios – Transparent. The Man in the High Castle. Mozart in the Jungle.

(Amazon has a fair bit of wholly-owned content, but some of their biggest swings will fall in later categories.)

Netflix – Stranger ThingsGLOW. All the content coming from the huge overall deals with Shonda Rhimes and Ryan Murphy will fall in this category.

(Netflix is rarely the producer of record, according to Wikipedia. However, as this Digiday article makes clear, Netflix is essentially acting like the wholly-owned studio by owning rights for extremely long time periods. These shows are examples of series that are functionally owned by Netflix, even if another producer originated the project.)


A “licensed” show is a TV show that the streamer doesn’t have any financial stake. They don’t own any downstream revenue. At all. It’s actually about as easy to understand as a “wholly-owned” show. If a wholly-owned show is 100% of the rights of project, a licensed show is zero percent of the rights. Zilch. Nada.

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Most Important Story of the Week and Other Good Reads – 19 April 19: Game of Thrones Adds Viewers in 8th Season

Ever feel like not taking your own advice?

I regularly admonish my readers to avoid overhyping single data points. I repeat this piece of guidance when things flop—Solo, The Lego Movie 2, NFL Ratings last season—or when they go skyhigh—most Disney movies, Netflix datecdotes.

And now a single data point—the Game of Thrones premiere is up to 17.4 million viewers—made my most important story? What?

Most Important Story of The Week – Game of Thrones Grows Its Audience

In my defense, this is more about the phenomenon than the data point: the fact that Game of Thrones has increased ratings year over year. That to me deserves a call out for the economics it implies. Let’s dig in.

The Rarity of “Mega-Hits”

I don’t have a huge data set of past TV shows and all their ratings by season year over year (yet), but based off my experience and some quick Wikipedia searching, I came up with roughly three (technically four) models for a how a series viewership changes over time. (And I saw this repeated a lot when I was analyzing viewership in my previous job.)

The most common model is to start out big and decay over time. I call this the “usual” because if a show doesn’t get an audience to start or build it quickly, well, it doesn’t make it to season 4 in the first place. I’d call this the “decay over time” model. (Again, by “common” I mean 80% of the time or more.) Here’s a great HBO example:

Boardwalk Empire Viewership

Source: Nielsen via Wikipedia

That’s from Wikipedia for Boardwalk Empire. As you can see, the huge names involved and its huge marketing as the successor to The Sopranos got it launched to a huge initial number. Then it declined over time. Looking for drama/genre examples that match this, my current example is Syfy-turned-Amazon’s The Expanse, which started at 1.2 million viewers, and its last season was about half that. I’d put Westworld in here too. (I can and have found more.)

I said “technically four” because a variation of this first model is just a series which never started out big in the first place. Specifically, it doesn’t grow or really decay. I’d call it the “stay flat over time” model. I’d put Mad Men roughly in this category or The Magicians currently on Syfy. (One of the few others fantasy series that has gone for more than four seasons, which is relevant to my Game of Thrones versus Lord of the Rings series.)

Of course, sometimes series turn out to be so good, they build an audience overtime. This is my second model, what I call the “build then decay” model. Wikipedia doesn’t have a neat chart for me to demonstrate this, but the example here is The Walking Dead. It started at 5 million viewers per episode, eventually hitting its stride at 16, 17, 14, and 17 million viewers for premieres between seasons 4 and 7. However the last two seasons have finally seen the decay at 11 and 6 million viewers respectively for the premiere episodes. So it tripled its ratings, and has since seen ratings decay over time.

Doing some quick research, The Big Bang Theory followed a roughly similar path. Starting small, comparatively to itself, and then hitting peaks, with an eventual decline. If I kept searching, I bet I could find a few more examples. This category is more common than the next type, but is still pretty rare.

Even harder, though is building an audience and not having it decay…ever. That, my friends, is the far right of my logarithmic distribution chart. In fact, I can only think of really two shows that have pulled that off. First, the king of the hill in modern TV, Game of Thrones:

GoT Viewership

That’s certainly impressive. Even better is this one other show, Breaking Bad.

Breaking Bad Viewership

I’d argue that hardly any other TV shows have had this sort of progression where they build and build, rising to 6 or 10x multiples of their initial viewership and never losing them. Especially in the post-2000s world of declining TV ratings.

Streaming Viewership: Even faster decay?

This is a particularly relevant time to look at these numbers, because my working theory is that streaming exacerbates the decays of all shows. Again, from my view of the numbers and experience. In short, streaming video accelerates the decay of viewership because of binge releasing (if you don’t like a season, you decide quicker to stop watching), the lack of set viewership time (meaning if a show isn’t working the algorithms bury it) and the “too much to watch” state of TV (meaning if a show starts losing creative steam, well you have a lot of other options). As a result, my gut says TV shows decay viewership faster than ever.

I realize, I’m not presenting any tables with an exhaustive view of how many shows fit into my four models of viewership decay and to prove this thesis. I wish I had that data, but let’s just stipulate it for now.

Streaming Business Models: The Economics of Fewer Seasons

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My Questions for Netflix’s 2019 Q1 Earnings Call

I did something fun for the first time last week: I emailed questions for a corporate earnings call. Obviously, it was Netflix.

I’ll let you know why.. (And I’m under no illusions that I’ll actually have one of these questions asked.) Normally, if you asked me if earnings calls matter, I’d say no. Sure, the letter to shareholders will have some data, and the quarterly reports matter to investors, but the presentation is the most self-interested presentation imaginable. It would be like listening to just the closing statement of the prosecution in a trial. You’d get a lot more guilty verdicts, don’t you think?

But I have a much larger project I hope to unveil sometime this year where I make a “power ranking” of streaming/bundling services. From ad-supported to sports, anything digital video I will rank in one definitive list. Like sports power rankings, if you go to ESPN or any sports website nowadays.

To build that ranking requires good information, like all good decisions. And right now the company that has the most black holes in data, for me, is Netflix. Since I’ve written about their data and even coined a phrase about how selectively they pull it (read here for “datecdotes”), I naturally had the most questions for Netflix, and they convinced me to finally write an email.

To be fair—meaning unbiased across all digital video companies—I hope to roll out this type of feature semi-regularly with other digital video companies. Google, Apple and Disney are the most relevant, though Disney gets a brief reprieve with all the information they dropped on us last week. Youtube deserves a ton of questions and so does Apple with their paucity of information.

With that preamble, onto the questions. I have three big areas: Viewership (to see how valuable their content is), activity (to gauge how subscribers interact with the site) and subscribers (to probe their business model a bit). After each question, I’ll explain my reasoning in parentheses. These explanations I didn’t send!


– In the last earnings call, Netflix reported that Bird Box was viewed by 80 million customers over the first four weeks. During that time, was it the most viewed movie on your platform? Over 2019 as a whole, was it the most viewed movie on your platform? Have any Star Wars, Marvel or Disney Animated films had more viewers than Bird Box since their respective launches?

(As we look to the battlefield of 2020, churn is the name of the game. Is the most popular content on Netflix leaving? I believe it is with either Friends (or other long running TV shows like it) or all the Disney content. This question helps get at that for the movies side, especially the Disney content.)

– In the Q3 earnings call of last year, you said that 80 million unique customer accounts had watched one or more “Summer of Love” romantic comedies on your site, was that using the same standard as Bird Box, where you counted “watched” as 70% completion of a film?

(If Netflix answers this, I’d be shocked. My guess is they moved to the 70% threshold after minor pushback on their Q3 report. They knew they had to explain the calculation, but waited for a film that did well enough, like Bird Box, to justify it. Still, if they say, “No”, then that “Summer of Love” number can be severely discounted. Likely they won’t ever answer either way.)

– How many people watched The Christmas Chronicles? Or The Ballad of Buster Scruggs or Private Life? How many hours have customers viewed for any of this content? (You reported in the last earnings call that you do track hours viewed on site.)

(Again, this is to help flesh out the context of whatever numbers they do release. And the scale of losses. This is the best example of how one-sided an earnings report is. If there were a “defendant” making the bear case, these are the numbers their defense lawyers would seize on to make their case, to continue the prosecutor announcement from earlier.)


– In 2018, what was your monthly active users? What has been your monthly active users in 2019?

(Monthly active users is the metrics that “feels” right for me when it comes to truly understanding the people who love your service. I don’t have data, but my gut that it explains usage best. Monthly users are the people who devoured some piece of your content in their entertainment diet. Subscribers is not that. If I were “entertainment czar” all streamers would have to release this.)

– You reported the service “averages” 100 million hours a day of viewing in the US in a month. How much does that average vary by month? What does the time on site distribution look like by customer decile? What was the annual daily average?

(We all hate averages, don’t we? Well I do. They don’t tell use anything. And since someone quoted the “2 hours per day” number to me for Netflix usage recently, it made me want to know a lot more about it. Also, related to this is the variance overtime. December happens to be a huge month for Netflix, so touting numbers from December is deliberately overselling the annual performance.)


– In your Q4 report, you mentioned a net add of 29 million customer accounts. What was the number of gross adds versus net? How does this breakdown internationally versus US? You used to report gross adds in 2011, why did you move away from this metric?

(I didn’t know Netflix used to report this, and this is the type of number they should report, if you follow the standard, “Does the CEO get this information?” Because Reed Hastings definitely does. [I love that standard, by the way.] Again, churn is the name of the game, and the great thing about Netflix’s 60 million or subscribers is that it grows steadily every year. Which gives an illusion of stability the gross number would help understand. International is even more curious for me.)

– What is the total unique subscriber base you have had in the US since you launched streaming?

(My final way to get at the churn questions. Say Netflix had had 140 million unique subscribers in the US since launching in 2008. Some of those are duplicate accounts—people who signed up, then switched—surely. But some aren’t. That gets to the idea that it isn’t like Netflix is convincing people to try Netflix for the first time, but to come back. Which is fascinating, to me, and a different business challenge.)

Most Important Story of the Week and Other Good Reads – 12 April 19: The Rise of Disney+

The best lingering question from the Disney presentation has nothing to do with Disney:

How long until we get these type of details from Comcast-NBCU, AT&T-Warners or Apple?

The wild enthusiasm that accompanied Disney’s parade of content is what Apple was going for two weeks ago. But Disney actually did it because, well, they have the content. Content is still king. But I’m getting ahead of myself.

Most Important Story of the Week – Disney+ Announcement

When Apple unveiled Apple+ and Apple Channels, I mentioned how much I love the traditional “marketing framework” of 3Cs-STP-4Ps. My biggest gripe about Apple was they didn’t tell us anything. Price? Distribution? Content even? We knew hardly any of it. Not so with Disney! In fact, we can use my “Digital Video 5Ps” to evaluate the offering. (I added a P, you’ll see.) Though, to quote myself, you can’t use the 5Ps until you know who you’re targeting.

(In the parentheses, I’ll put my unasked for recommendations, as if Disney needs them.)

Who are they targeting?

Disney families.

That’s my gut, without seeing the actual marketing plan. Disney has always been about the family and it is the king of tent pole films that the entire family can see, from Star Wars to Pixar to Marvel. They want families to buy, watch and travel Disney. So how do their 5 Ps reinforce that target segment?

(Recommendation: None. This is the right segment. And yes, everyone should have a segment. “Everyone” is not a segment.)

Product – Content

Content is still king, so it goes first. This is the most important piece of any digital video service. And Disney owns the best real estate on the content landscape. My working hypothesis is that Disney films were the most popular content on Netflix. And since Netflix doesn’t release data, I can’t be proven wrong. When it comes to box office, toys, even TV ratings for its movies in the second window on TNT, FX and other movie channels, Disney’s content gets the most eyeballs. Launching with such an incredible bench of content is a huge advantage.

That will help the launch, and presumably the movie teams under Alan Horn will continue to work their magic–though, I do have a “Disney Nightmare Scenario” article half-sketched out about how it could all go wrong here–but are the new TV teams up to the task? That I honestly don’t know. A lot is riding on the armored shoulders of The Mandalorian.

(Recommendation: Dig through the Disney TV library too. Gargoyles, Rescue Rangers and old Mickey cartoons are all prime candidates for this service. That can instantly add hundreds of hours of kids content. Kids need “new” less than any other demographic.)

Product – UX

No one chooses to watch Netflix because it has a good user experience. In fact, people are complaining that the UX can be hard to navigate with so much content, so many scrolling windows and auto-playing previews. But people still use it. Because the content and price.

Still, don’t neglect the product experience. Hulu, with its tremendously long ad-breaks that repeat the same commercials, makes people crazy. Apps that crash drive people crazy too. Amazon Prime pretending you can watch a movie, but then asking you to pay for it bugs people.

Behind any product from a UX perspective are teams and teams of product managers, with senior product managers, and eventually bosses up at the top. (Or sometimes at an outsourced company. Sigh to that.) I wish I could tell you I had some statistical way to measure how good product teams are at fixing and improving their products. Especially, before they launch. (In fact, I’ve thought about how to measure this.) BAMTech–the company Disney acquired that the MLB launched to handle its sports streaming–has a lot of experience, and they launched the ESPN+ app, so they’re getting experience on the ground. And I like this initial UX look, even if it will likely iterate ten times before launch:


That feels clean. People said it looked easy to navigate. So I like it. Not needing to support ads also eases the technology burden, while reinforcing the family friendly image by not having to worry about your kids seeing bad ads. And the experience overall will be safer than Youtube. Throw in unlimited downloads and they’re on the right track.

(Recommendation: Avoid auto-play. Use that clever positioning to say, “We’re not Netflix trying to hook you or your kids like a drug.” Engagement is the new tobacco.)

Placement – Distribution

This is the one area we didn’t learn much. Will Disney+ be available everywhere, or only on certain apps? My gut would be they will for sure be available on Hulu (duh), but everything else is up in the air.

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Who Will Win the Battle for the next “Game of Thrones”? Part I – The Introduction and POCD Framework

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

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

Everyone wants the next Game of Thrones. Executives from Netflix to Amazon to Disney to AT&T—the current owner of HBO, the home of the reigning champion—are all scrambling to find the next mega-hit that can launch a network, er, streaming platform now. Jeff Bezos said he wanted this most explicitly.

Fortunately, the well-heeled streamers have told us how they’re going to do this: by copying Game of Thrones.

– HBO is preparing up to four sequel/prequel/spinoff series set in the A Song of Ice and Fire universe.
– Amazon is bringing a Lord of The Rings series to its platform.
– Netflix is going to bring us another adaptation of C.S. Lewis’ Narnia series. 

Whenever a streamer announces a new huge fantasy series, the coverage is usually universally positive. That was my read of the media after Jeff Bezos’s Amazon Prime/Video/Studios went all in on Lord of The Ring. Everyone called it a huge coup for Bezos and team. Almost like it couldn’t not succeed. (Acronym alert: Game of Thrones will be GoT mostly from here on out and Lord of The Rings will be LoTR, and the Chronicles of Narnia will just be Narnia.)

Here’s my rule of thumb: we never know things with 100% confidence. Especially people opining on the future. Whether or not the LoTR series will be a huge hit is a legitimate question, not preordained fact. Yet I can’t deny the audacity of spending that type of money on arguably the greatest fantasy books of all time. 

This really will be a game of thrones for the title “the next Game of Thrones”. 


That sounds like a great topic to explain a LOT of the business of entertainment and future of streaming, while getting to mess around with one of my favorite franchises of all time. If the entertainment press wants to compare Lord of the Rings to Game of Thrones, I’m happy to oblige. We can use this battle as a stand in for HBO vs Amazon Video/Studios/Prime vs Netflix. I also love both of these franchises as a fan-boy, though I’m definitely more invested in GoT than LoTR.

So for the next six weeks or so, I’m going to write my next big “Analysis” article on this question:

Which franchise has a better future, Game of Thrones, Lord of the Rings or The Chronicles of Narnia?

Setting the Terms

First clarification, better future for whom? This is why I spent Monday and Wednesday discussing the “value chain”. Here’s the simplest TV value chain:

TV Value ChainIn some cases, the TV producer and streamer are the same people. Take HBO with Game of Thrones. They’ve made all the monies from that show because they produced it and own it. Sometimes, the same corporate parent owns both the production studio and the network/streamer, for which I’d refer you to Fox and the Bones controversy. Sometimes, the streamer just buys the rights. So we can see one of two places to make money in this question:TV Value Chain overviewThe production part isn’t as interesting to me as the streaming portion. Making hit TV shows has a lot of factors outside your control. But picking hit TV shows is vital to succeeding as the #StreamingWars2019 commence. Customers will have more options than ever. If you don’t pick good shows and make money off them, you won’t survive. 

Really, we want to know that—given what all the players are paying—which series will benefit their streaming channel the most.

How do we define “benefit”? Well, when in doubt, money. And I won’t debate this. Buzz is good, as long as buzz leads to paying subscribers. Awards are good, as long as it leads to more viewers, who are paying you money. At the end of the day, these are businesses, and you judge those based on profit, cash flow and return on investment. When in doubt, I focus on cash flow. 

Also, to keep this fair, this is future looking. I don’t care that Game of Thrones has already made billions potentially for HBO, I want to know who will win the future. With that, we have this final question: 

Which franchise will make the most money for its streamer in the future, Game of Thrones, Lord of the Rings or Narnia?

Blink and Gut Reaction

When I decided to launch this site, I decided to roll out a new process for myself, inspired by the best practices in decision making that I’ve read. Before I analyze a topic, I capture my initial reaction and my gut reaction. Then I dig into the numbers. Then I see what others have written. This allows me to understand my biases. For a full explanation, see here.

Blink Reaction

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Porter’s Five Forces…Explained

The trouble with value chains—which I unveiled Monday—is that they don’t stay the same forever. They are constantly changing. Disruption, right?

Take filmed entertainment. In 1980, it was just movies and TV, with movies in theaters and TV on broadcast. But home entertainment, cable, digital and the internet have all disrupted those two models. Plus toys and merchandise are sold for all of it now at unconsidered levels back then.

While the value chain shows how things currently flow, it is pretty silent on how the things relate. Who has the power in the relationship? Who creates the most value? And for people at the same part of the value chain, what is it like? So we need another tool.

And thus enters perhaps the most famous tool in strategy.

Porter’s Five Forces…Explained!

The second tool is similar to the first one, but focused on a single part of the value chain. The competitors at one layer. And to complicate it, after Porter unveiled it, he added a sixth force, so it’s the five forces, plus one. Here’s the shell of that model:


That’s from Wikipedia, so I hope they don’t mind me borrowing. (And yeah pro sports tip: Wikipedia is pretty damn good at explaining a lot of economic, statistical, business and other scientific concepts. It doesn’t replace reading the underlying books, but is great for refreshers.) My change is to tilt the model from the Wikipedia version:

Screen Shot 2019-04-10 at 3.11.17 PMValue chain analysis and five forces analysis serve two different purposes. The value chain is really about analyzing who creates and captures value at each stage, with the specific costs, gross margins and profits at each potential stage. (Twitter follower Simon pointed me to the Exponent podcast from 2017 that digs in to this usage a bit deeper.)

Five forces analysis is about the power of each of the inputs or outputs of an industry on the potential to make a profit. But usually limited to one stage. It helps explain why profit margins are high or low given the biggest inputs on those margins. Here’s the picture from my text book. It combines how my model (listing the players) and the Wikipedia model (showing the forces). (Again, I love my Strategic Management text book, and they have it oriented my way):


As I clarified, I could build a “Porter’s Five Forces” model/run a five forces analysis on potato chip manufacturers or stores or distributors or even potato farmers. Since we’ve been doing manufacturers this whole time, let’s keep with that:

Screen Shot 2019-04-10 at 3.11.38 PM

The key insight of a five forces analysis is explaining how strong or weak each of the interactions is. This is usually described as as high or low power. The power of each part is relative to your strength/situation. If someone has a lot of power, that means they can demand lower prices to buy, or higher prices to sell. The power of this model is it visualizes the strength of the various relationships. 

Still, let’s walk through the steps, to explain the value in the various components. And that pesky “plus one” that doesn’t fit neatly into the chart.

You start with suppliers to the west. Say your main supply is a commodity, like oil or corn or even energy. Well, the suppliers don’t have a lot of power to charge you higher prices since commodities tend to be priced at what the market can bear. If, on the other hand, you have a monopoly on the supplies—say a patent on a new drug—you can charge exceptionally high prices. 

For potato chips, you’ll notice there are many more supplies required to make the final product than just potatoes. However, for the most part those other supplies are still commodities, so my gut is the suppliers have low pricing power for the potato chip manufacturers.

On the east side of the model, you have buyers. Buyers are not “customers” necessarily and absolutely not necessarily “consumers”. If buyers have lots of power, they can demand lower prices. Take gas stations: I can always drive to the next one. If their power is low, it means they have to price low to get your business. Another currently relevant versions is tax returns. Only a few company offer the services, and they’re really hard to do, so consumers have less bargaining power. (The fewer options, the less bargaining power, in general.)

Let’s head to the middle of the model. The value chain is usually silent on this part: what is it like for you at your part of the value chain? If there are lots of players, then competition can be very fierce. Again, think commodities and all the potato farmers showing up to the farmer’s market at the same time. Or the ice cream truck wars of Portland. On the other hand, in heavily consolidated industries like cell phones or cable companies, isn’t it funny how they all sort of charge the same price, for usually bad products? That’s a lack of rivalry among firms. 

For potato chips, the main thing is that while it seems like there are a ton of potato chip options, uh, there aren’t. Frito-Lay owns them all. Doritos, Cheetos, Tostitos, Ruffles. All Frito-Lay. While there are smaller brands that have entered and expanded business in the last twenty years—Kettle Chips mainly—I’d say that rivalry is low among firms, because Frito-Lay buys most competitors, or uses its power to keep its shelf space with buyers. 

In general, the CPG companies have about 5-6 huge companies that own all the brands. I’m not sure if I’d call this rivalry fierce or not. I could argue either way. On the pro side, there is a lot of battles over price and the companies run small margins (see Kraft and Buffett right now). On the con side, with only 10 major players, there is a lot of unspoken agreements on behavior and sharing shelf space.


The other thing that can really drive down margins is the ability for new firms to enter. (And this will probably be the key to discussing entertainment next week.) Look to the north of the model for this. If it is really easy to enter a market, then the barriers to entry are low. This can also force firms to keep prices low to ward off entrants. If the barriers to entry are high, then you can keep charging high prices or capturing value. Think cable companies for forty years in this way. Since it costs a fortune to lay fiber optic cable, the barriers to entry are very high. (Notably, Google’s adventures in fiber optic cable have been bad, but every tech company wants to launch a video service.)

The barriers to entry are high in consumer packaged goods, even though they shouldn’t be. This come from the massive consolidation at the center of the industry, which means the current players can try to box out upstarts. This is complicated to explain—and I don’t have enough numbers to prove my point right now—but it is easy to start a hot sauce, barbecue, or even chip company. It can be impossible to get national distribution. (And I don’t credit some sort of clever business strategy for this, but industry consolidation.)

The only new entrant I can think of is Kettle Chips, at least nationally, in America. Twenty-five years ago, they weren’t a thing and now they are. (Why? To summarize, a family company sold their company to a British PE firm, who later sold it to one company, who was bought by another and that company was bought by…Campbell’s Soup. Who didn’t even make the above chart.)

(Oh, all of these business examples are from America, for my foreign readers. That’s the market I know best.)

But while it can be hard to break in, that doesn’t mean there aren’t alternatives for customers. This brings us to the “south” and a perfect example of how a Five Forces analysis can provide insights the value chain can’t on its own. Substitutes are things that can fill in for the core product. You can either think of these super broadly or narrowly. An Oscar worthy example of this was when Reed Hastings said Fortnite is a bigger competitor than traditional TV for Netflix, he really meant it is a substitute for leisure time.

Potato chips have many substitutes. Say consumers want something healthier, they could eat pop chips or Hippeas. Those are healthy items that fill the same need of something to snack on. Or nuts for protein. Or pretzels. Or Cheetos. Even tortilla chips substitute for potato chips. If you go natural, apple slices! Those are examples of other substitutes for snacking and you could even go into candy. (Though we risk starting up the “snack vs treat” debate.) Moreover, you could decide to just NOT eat chips, which is healthier anyways. So here’s our chart with my “back of the envelope” perception of power:

Screen Shot 2019-04-10 at 3.11.46 PM

So my take on potato chips that the biggest piece keeping prices down is that you can always choose not to eat them. You don’t need chips to survive, and actually will live longer if you eat less of them. But that’s my gut take without pulling specific pricing numbers. (And if someone knows CPG better than me, which is a lot of people, shoot me a note if I got something wrong.)

Oh, did you notice that new piece, in the upper right? After rolling out these forces, Porter later added the “plus one”, complements. These are things that add value to the core product. For potato chips, think ranch or onion dip. Dips take a plain potato chip and kick it up a notch. Or salsa on tortilla chips. They aren’t in your value chain (presumably), but they definitely impact your bottom line.

Connecting the Value Chain to Five Forces

You may have noticed my sellers, incumbents and buyers had the same shapes I used in my value chain. I used the same shapes, because frankly, you can see that the value chain is really just the middle line of the Five Forces model. A connection that literally no one (that I know of) made in business school. They were basically two pictures of smaller parts of a much larger image, which is roughly the interlocking pieces of any industry. So I combined them, and since I felt like I was creating something new, I gave it my own name:

The Value Web

I call this my “insight” because again I really haven’t seen it in other places. And most of the maps of entertainment ignore the value chain component, instead using company names. the value pieces, as opposed to just company names. The name is simple: Value, because I love it above all else, and web, because it explains not just one layer but all the interlocking pieces. 

(I haven’t seen this term in other places, but Clay Christensen uses the term “value network” in The Innovator’s Dilemma, so it may not be that clever of an idea. And Deloitte uses it here, but focused on the supply chain.)

So let’s look at a value web for potato chips. 

Screen Shot 2019-04-10 at 3.12.03 PM

Some insights. Well, the traditional buyers are under threat from web sales. Not everyone (liquor stores are fine), but eventually, lots of things will be sold online, so every brand needs a web presence. Notably, some data shows that this means smaller CPG companies can expand their presence to new markets, so maybe the incumbents have less power. So that’s why understanding substitutes and multiple parts of the chain can be useful.

This is why I like the larger view. A value web will help a company at one level understand the substitutes and new entrants across the range of the value chain. And how that may impact their business. So Popchips are a substitute for potato chips, but online shopping is a substitute for grocery stores. A potato chip company probably needs to understand both those potential substitutes. 

Digital video has new digital entrants across a range of the value chain from producers (shooting video on cell phones) to streamers and eventually even bundlers. Youtube is taking eyeballs in a different way than Netflix, which is both at the end of the value chain. Online shopping is changing toy sales. Going back in time, even reality television—with its cheaper production costs—was a substitute for scripted television at the production level. 

The challenge with building a strategy web is one of simplicity and scale. Honestly, I’ve just about maxed out what I can build on Powerpoint (a tool which works for 95% of my image creation on this website) and what 95% of business folks use. I’ll need to look up other drawing tools to build a true strategy web. And even then, it will probably get update too frequently to last long. 

But we do have the two tools needed to analyze this industry in slightly deeper depth. Which I’ll start to do with my next big series and next week as I try to define digital video.

Value Chains…Explained!

2019 is off to a great start for “maps of the entertainment universe”. When I was writing on media consolidation, I wanted to make one of these to help explain this crazy industry in better detail. But I doubt it would have looked as good visualization as this Wall Street Journal visualization I saw on Twitter last week:

WSJ Map of Universe.png

Source: Wall Street Journal

What I love about that image is that it conveys multiple pieces of information in a 2D fashion. That’s really hard to do. That’s the gold standard of charts/tables/maps. This image conveys the names of companies, types of entertainment they offer, who competes in multiple areas and who doesn’t. Good job.

But while I love that lay out for what it does, it still has limitations. Mainly, you don’t know the directions of the various branches. Are they all separate types of services or are they interrelated? Are some companies distributing the other types of entertainment? How do they relate? How distinct are live TV, ad-supported and sports content anyways?

So while that visualization is good, it is still incomplete. (To be clear, I liked the image. A lot.) I want to build on that chart and others, but to do so, I need more tools. My goal is to explain the business of entertainment, and to do that requires first explaining some of the tools I plan to use. These tools explain not just what the companies are competing in, but how they compete and relate to each other.  Today, I’ll explain the “value chain; tomorrow, I’ll explain a different tool. Then we can build our own map of the entertainment universe. 

Note before I start: These two tools are both super complicated. My explainers do not do them justice. I mean chapters and chapters in strategy text books have been written on this. And I felt I needed to reread those chapters in my still saved text books as refreshers before writing today. So at some point I’ll make a reading list if you’re interested.

Value Chains

Let’s start a series of shapes. 

A shapeOkay, that didn’t help. Let’s add three words to make the simplest value chain imaginable:

Image 1 Simplest

The “chain” here is the journey of a product to a customer. Essentially, someone makes a good. They sell it to a store who sells it to a customer. If each step “adds value”, that’s your “value chain” in action. (What if someone doesn’t add value? Well, they’re still here in the value chain. That’s what we call it.) Here’s a pic from my strategy text book, just vertically rotated:


Same really simple principle.

In my experience, good strategy starts with this core tool. Even if you think you know your industry top to bottom, back to front, you should still use this tool. First, it’s a good refresher to challenge how your industry has changed over time. Second, as new industries emerge, you can use this tool to understand their emerging value chains. In my previous role, when I dug into a new business opportunity, I would sketch out an initial value chain and use that to figure out how to research the new industry. It never failed to generate some insights.

(An aside, yes, I’m explaining a “strategy 101” concept here. The basics of industry analysis. Some super smart executives definitely don’t need me to teach this to them. If you’re one, skip ahead. That said, at three different companies, I never saw this tool used. Even as business models changed rapidly. It’s a basic yet powerful tool, like value creation. And I doubt business affairs, creative development or production executives have ever seen it.)

The value chain is a little tricky for digital goods. It started its life as a tool for manufactured goods. You know, the hey day of American might and exceptionalism in the 1960s. So I’m going to explain the tool with a manufactured good. Trust me, we’ll get to digital video.

Let’s use a delicious example, potato chips. This will pair nicely with my example for value creation, craft beer. Throw these two articles together and you got a party. The first step? The potatoes:


How do farmers add value? Well they grow a crop that wouldn’t exist if they didn’t. Harvesting the raw supplies. But now we need someone to come in and turn potatoes into something:

Potatoes and ManufacturersThe manufacturers add value in two ways. First, by turning potatoes into chips, they make a tasty treat. Then, they also pay for the marketing to make you want to eat that tasty treat. But potato chip companies like Frito-Lay don’t own all the stores. And often don’t have the distribution to sell everywhere. So they use:

Full Value ChainThe distributor has the logistic excellence the factory doesn’t to get the chips out there and the store has customer service and variety of products. (Again, in an ideal world.)

You can see that you start with potato farmers, who sell to potato chip manufacturers. They sell to distributors or wholesalers who sell to stores. At each level, they take their margin, so that a potato sold for say $0.25 becomes a $3.99 bag of chips at the store. In an ideal world, each level is “creating value” for the end consumer. The potato farmer creates a potato that wouldn’t exist otherwise, the potato chip manufacture transforms it to make it delicious using special techniques. We need one last piece though.

True Full Value ChainI like adding customers even though it is redundant in someways because it clarifies if the end of a value chain ends in customers or a business. And I always believe in reminders of the value of the customer. 

I’ll make one last point. I mentioned that the problem with the Wall Street Journal article was that it didn’t explain the relationship between the layers, and the value chain doesn’t either. What it does is explain what pieces feed into what to make a final product. So we need to start adding some numbers to get this thing rolling. And since I mentioned value, ideally we’d fill out a chart like this:

Value Creation Chart

Again, this is a vertical form of the horizontal value chain from above. (I’ll explain tomorrow why I left it horizontal.) But now if you can estimate the “willingness to pay” for customers, and you know the values of potato, then you can figure out all the prices and see who is capturing what value at what level. If I knew the actual numbers, I’d fill this out, but don’t want to lest I get something wrong. But you can see where you would put the numbers in. 

The next key insight, though, comes from using those numbers to see who captures the biggest share of the pie. (Technically, PIE, but do not have time to explain that in one article. That’s some math.) If one level captures an inordinate amount of the value, well, they are pretty powerful. 

Well, how do we explain that? With another tool for tomorrow.

Other Ideas/Notes

First, if you search “value chain”, or go to Wikipedia, you usually get this phrase tied to Michael Porter’s “value chain”, which is about a company internal value chain. That is specifically not how I am using it and again my professors teaching me were using value chains to discuss larger industry analysis. Which is how I use it. (And we’ll get to Porter tomorrow!)

That said, I do love always thinking about creating value and the similarities between a company and an industry. And this type of value chain analysis can be insightful. For entertainment, a development exec adds value by finding a great project, business affairs gets the talent signed for good prices, a production exec adds value by producing it on time and on budget, finance gets the money on time to pay for everything, and then marketing gets customers to pay for it. 

Second, value chains don’t always have one straight line. You can sell to multiple distributors, with their own value chains and outputs—say liquor stores or super markets or online—or have multiple suppliers—how many things go into a car, for example? But still, understanding them at a high level is usually useful. 

Why I’m Unveiling These Tools Now

I don’t like referring to strategic concepts that are even slightly advanced if I haven’t explained them. And on Thursday, I’m going to need to use the value chain to explain my next HUGE analysis article. (Analysis articles are where I use numbers to draw definitive conclusions. Like my series on Lucasfilm-Disney Acquisition, M&A in entertainment or the Pac-12. Just look to the column on the right for ideas.) I’m not telling what it is, but it involves dragons, orcs, talking lions, white walkers, rings and multiple media companies.

Also, the definition of digital video”, it seems to me, needs a better explanation. Understanding the value chain helps get there. The roll out of Apples Plus/TV product two weeks ago seems to necessitate better explanations of digital video’s value chain.

Oh, and last week, I mentioned value chains with agents! So if I see value chains all over the place, and they need explaining, well, I’ll help out.

Most Important Story of the Week and Other Good Reads – 5 April 2019: #WGAxit

I’ve been distracted from one part of the entertainment world (the filmed part) because of my deep dive into another (the sports part). But we had BIG news this week. Big enougth to deserve my use of the caps lock key. That’s right, the writers (specifically, the WGA, the Writer’s Guild of America) voted to end package fees. (Technically, to leave agents who accept package fees.)

This is so complicated that one column can’t cover it all, but let’s do what we can while the clock ticks. (The agreement expires on Sunday.)

Most Important Story – The WGA Votes to End Package Fees

Here’s a question that I’ll hopefully explain in detail next week:

How do agents fit in the “filmed entertainment value chain”?

I ask because it is tough. Talent makes shows, that are paid for by studios, who sell them to networks or streamers, who get customers to pay them. So maybe agents are talent? Or related to that? But they don’t actually provide any talent to the actual product, do they? More like they sit between talent and studios. And collect 10% of paychecks for that privilege.

So what is it that agent’s do?

Let’s try to explain it in two ways, charitably and uncharitably. When we’re done with that, we’ll probably have our answer. And I’m not going to focus on just package fees here, but the very idea of having an agent in the first place. (The best package fees explainer is this WGA–so admittedly self-interested–video.)

Charitable Explanation

An agent adds value by finding more work that pays more for the talent. First, they find additional projects for the writer to work on. This increases the number of projects the writer gets paid for. Once they are working, an agent negotiates the payment of the writer, and since they take 10% of the writer’s paycheck, they are incentivized to maximize the writer’s salary. Second, the agent maximizes the pay of a writer by negotiating for the highest possible amount on the projects they do get.

The problem with that explanation is a couple fold. First, do agents find more work for their clients? One of the big complaints with the bulk of the writer members of the WGA is that they tend to use personal networking to get future jobs. Moreover, writers really only work on one TV show at a time. So it is unclear if agents actually do increase the number of jobs. There are also plenty of horror stories from writers where  agents slow played projects that were less financially valuable for the agency as a whole. And do they really negotiate higher payments? Especially for junior writer getting paid guild minimum? The word “minimum” implies…no?

This leads us to the uncharitable explanation.

Uncharitable Explanation

In Hollywood, every writer has an agent. In fact, studios tend to only hire writers with agents. The agents have positioned themselves as gatekeepers to getting access to this extremely walled garden of movie and TV studios. By creating a role for themselves as gatekeepers, they can extract extremely high rents–so they are rentseekers–on people trying to work in Hollywood. (Their currency is top talent. If studios try to go around the agents, the agents will threaten to withhold top talent.)

Consolidation has only increased the size of the walls and the fees to get past the gatekeepers. The agencies have merged into a few super agencies, which work to block out other agencies trying to get into the space. Or they acquire those they can’t block. The biggest agencies have almost all the major talent, so the studios have to work with them.

Which is Right? Neither and Both.

Likely, neither the uncharitable or charitable view is completely true. Or they are both true simultaneously. Agents can help increase the value of certain writers–especially say the top 10% of writers, the showrunners–but are probably extracting value from the middle and lower level writers. Package fees make this whole situation worse, as agents become de facto producers.

(By the way, I’ve punted on the agency’s “costs” issue for today. I’d love to know how a job that can essentially be done from home demands high costs. But I’ll stipulate that for today.)

Unfortunately, US antitrust law is so weak from decades of being hollowed out that it can’t do anything about the fact that agencies are consolidating and/or gatekeeprs. Sure, agents may be rentseekers, but how does that hurt “consumers” in the “consumer welfare standard”? Since prices likely stay the same–writers are just poorer for it–the US Department of Justice spends its time fighting…AMPAS?

(Wait, that has to be a typo. Nope, it’s real. How could the DoJ go after an awards show? Sadly, this is our state of antitrust law.)

Does this situation make for good movies?

Let’s tie this back to my literal first article on this website: “Why does Hollywood Make Bad Movies?” (And maybe my theme of the week since I talked about “misaligned incentives” and the Pac 12 yesterday.)

If you talk to a fantastic chef, they’ll always tell you great food starts with great ingredients. So if development execs or producers are the chefs, well talent is their ingredients. But development executives don’t really pick ingredients anymore. Here’s the best quote from The Ankler two weeks ago:

In private, [writers have] put it to me that not only is this the way the system has evolved and become a fact on the ground but that it reflects what the agencies actually do at this point. As they put it, the studios have basically withdrawn from the work of developing a show, leaving it to the agencies to turn a concept into a more or less ready to go package, if you want to sell it and get it on the air, that is.

Sadly, this matches my experience. A lot of development teams have outsourced talent acquisition–in the writer, actor, director sense–to the agencies. Many development execs wouldn’t know what to do if agents didn’t send them lists of people to hire. The problem is the incentives of the studio–make great films–isn’t actually aligned with the agencies–maximize salaries for current talent. The agencies have some incentive to make great films–it leads to better paychecks–but only obliquely. Mostly they just want people to get hired and they’ll blame failure on the writers if they rep the actors, actors if they rep the writers, the director if they rep actors or writers or if all else fails, the marketing. If most studios wanted to improve the quality of their movies and TV shows, relying less on agents and finding innovative ways to do identify great talent–which will cost time and money, admittedly–would be my first recommendation.

Listen, I don’t mean to come down on the entire agent/manager system. (Managers are a part of this even if this issue doesn’t address them immediately.) And agents were an improvement over the old studio system, which treated talent incredibly poorly. But just because the current system is better than the old one doesn’t mean we can’t make it better.

Good Reads on WGAxit

Want more WGAxit explanations and thoughts? I have you covered.

The Ankler – Richard Rushfield from two weeks ago covers tons of ground. I’d point out two great ideas in particular. First, California and federal laws prohibit a lot of the current behavior by agents. But since agents donate tons of money to politicians, the regulators don’t do anything. Second, he paints a nightmare where only four entertainment buyers exist in the future. This is the worst case. If you want everyone to get paid better and prices to go down, encourage competition. If you back big business and consolidation, well expect worse shows for more costs as everyone gets paid less.

Variety – And once we’re through with this current fight, we’ll move to a renegotiation of the WGA with the major studios, which probably will include even more digital players. Good read by Cynthia Littleton on what that could look like.

Deadline – Has the best summary of the plans of the WGA going back to last year.

ICYMI – The Entertainment Strategy Guy is Everywhere!

Even as social traffic is increasingly important for traffic to websites, old fashioned “guest posts” have really helped my site this week. So I have been incredibly grateful to Decider and Athletic Director U for letting my write for their two websites under my pseudonym.

First, I had two articles up at Decider since I last shouted myself out.

Why Did Hulu Lower Their Price to $5.99?

Six Crazy Theories about Apple

Which features my favorite art of all time:


Second, I dug into the Pac 12 for Athletics Director U. I think the Pac 12 is a delightful case study in how to optimize an asset, in this case media rights. The Pac 12 bet on themselves to launch their own network with no strategic partners. Well I dug into that decision, with numbers, and the time value of money, net present value, back of the envelope, top down, a director’s commentary and finally my opinion on it, which is the Chancellors and ADs need a second opinion.

Other Contenders for Most Important Story – The Record Industry is Back

Read More

Opinion – Should the Pac 12 Sell a 10% Equity Stake? Why the Pac 12 CEOs Need a Second Opinion

(This article is Part 3 of my series on the Pac 12, including whether they should have brought on a strategic partner in 2012:

Did the Pac 12 Need a Strategic Partner in 2012? Part I at Athletic Director U
Did the Pac 12 Need a Strategic Partner in 2012? Part II at Athletic Director U
Did the Pac 12 Need a Strategic Partner – Director’s Commentary)

If you found out you had a serious medical issue, a life threatening condition, you would get a second opinion, wouldn’t you? I mean, this is your life we’re talking about.

However, say you have a toilet running in your house. You call a plumber and he says he can fix it. Do you call a second? It’s one toilet and the guy can fix it for probably a hundred bucks or so. No second opinion needed.

Really, it’s a cost-benefit analysis, even if we don’t think of things in these stark of terms. A life is valued—no really, governments around the world calculate this—between a few hundred thousand to millions. A toilet getting fixed costs a couple hundred dollars…maybe.

When Larry Scott proposes to the Pac 12 leadership that they sell 10% of their future media rights, are they contemplating a small repair or major surgery?

This is major surgery, and the Pac 12 patient needs a second opinion.

That’s the message I’m here to deliver today, along with how to do it right. Hopefully all my readers have read my two articles analyzing the Pac 12 decision not to use a strategic partner in 2012. (And my follow up yesterday.) If you have, you know the Pac 12 likely made a big strategic mistake in 2012, and this decision could exacerbate it further. But let’s focus on the “how” of making the right decisions, not the past, with some other thoughts for the Pac 12 CEOs.

Thought 1: Hire a Devil’s Advocate

I’m a big believer in using a “Devil’s Advocate” when making tough decisions. Essentially, you need to pick someone who will make the strongest case possible for the opposite case of what you are pursuing. (The key is—in a corporate environment—that you don’t judge them for zealously doing this, if they do it respectfully.) There is a reason why we have an adversarial justice system; having two dueling cases helps uncover more information and discourages confirmation bias.

Confirmation bias is really what the Pac 12’s strategy screams to me. You have a charismatic leader in Larry Scott who believes in his vision. Which is great. And you need that. But if he has made serious strategic missteps in the past, he could be making them again. By the time all these bills come due, it may be too late. 

Now is a crucial time in the life of the Pac 12. My read of the news coverage is that the Pac 12 is very serious about selling some portion of ownership of their media rights. Whether it gets $750 million for 10% remains to be seen, but it seems likely they will try. (My gut is that they get $750 million, but for a lower valuation. Say for 20-30%.) That decision absolutely needs someone to come in, look at it, and tell you if you’re making the right decision over the long term. Here’s why and how to do it:

Why to get a second opinion

Two reasons. First, despite what they may tell you, this decision is likely irreversible. If the Pac 12 appreciates in value, then the partners who bought in at $750 million may ask for $1 billion to get your equity back. Where are the universities ever going to find that type of cash? So basically, once this deal happens, you never get that equity (of your media rights) back. You’ve permanently sold your ownership.

Second, do you really think you are getting a great deal here? That’s a huge judgement call. Do the universities really think they can outsmart the investment bankers (or ex-investment bankers at giant tech companies)? They have teams working on this. They do it all the time. And they usually win. You hired an investment bank which may have compromised judgement. (I’ll explain that next.) So why not just keep your ownership unless the offer really is too big to pass up?

Why to hire an outside advocate: Combat personal economic self interest

One of my eventual themes will be “understand economic self-interest”. In short, a lot of behavior can be explained by profit maximization. I mean, that’s economics 101, isn’t it?

Unfortunately, in the business press, individual economic self-interest is usually ignored. Here’s an example of what I mean. Say a biz dev guy sees a huge potential deal with a partner, but his firm has no ability to deliver on it. Still, he pushes and pushes, gets the deal through, collects a big bonus. Six months later, he bounces to a new company. That’s a decision that was bad for the company—when they fail to deliver—but good for him personally because he got a big bonus and resume bullet. Individual and firm incentives are often not aligned.

The Pac 12 likely has quite a few potential “individual versus collective” conflicts in this deal. Start with your lead adviser in The Raine Group. They are an investment bank. They don’t collect pay checks on deals that aren’t done. So they have an incentive to find a deal and, more importantly, to sell it really hard. If you know that, you can see why you need devil’s advocate, or you’ll only hear the positive case from the bank. Again, it’s not their ownership, and they get paid more based on a successful deal. Do you see that conflict of interest? (And if they get paid either way? Well, I mean that’s money straight from the university’s pockets.)

Second, I think there is a good chance that Larry Scott has a bonus structure tied to the distributions to schools. If that is true—and I don’t know for sure—then if he sells an equity stake and gives that to the schools, and calls it an increased distribution, he could collect a bigger bonus. That’s surely a conflict of interest, isn’t it? We can’t want the head of the Pac 12 to have a financial incentive in selling a portion of the equity because he would personally benefit in the short term do we?

How to Do it Part 1: Insist on the skeptical approach

Insist that the consultant you hire gives you the bad news. The skeptical approach. The takedown of your current strategy. At best, you’ll decide not to pursue an unwise course of action. At worst, she’ll identify flaws in the plan that can be corrected in time. So the key is an approach that interrogates the numbers harshly. That identifies all weaknesses and flaws in reasoning up front.

This person will need all the Pac 12 financials, ideally. They need the Excels and data too, not just power point summaries. Then they can build alternative models.

How to do it Part 2: Don’t hire anyone else who can profit from the Pac 12

Category one of this group is the Wasserman Media Group or IMG or any other sports media related entities. The bummer is they have tons of great knowledge to apply to this problem. The reason I still recommend avoiding them, though, is because their advice will likely come back to, “You should hire us instead!”, which is still conflicted. So only consider hiring them as a consultant if they sign something like a no-work clause for 20 years. (Or let them do a free analysis, and still have another Devil’s advocate.)

Category two is non-sports consultants, who are better but not perfect. The challenge with every consultancy is they also just want more business. Most of the recommendations will conveniently include “hire us for more analysis”. So you have to be careful. They are also plenty expensive and the Pac 12 is already spending some unknown fortune on consultants.

The problem with this recommendation—no matter how important it is—is that I’ve sort of eliminated the entire universe of potential partners. So consider getting creative with it, Pac 12 leadership. You have how many business schools in the Pac 12? Everyone or nearly all? Why not hire one of them to do this analysis? UCLA’s business school handles consulting projects all the time and even has a Sports Management club. They’d leap overthemselves to answer this question. In a dream scenario, have each club come up to an undisclosed location for a week, and make it a case competition. (And you know what? I’d take that work over a lot of consultancies…)

(Oh, I’m available too. And I guarantee my day rate is much less than all the people the Pac 12 is currently paying. If you are an athletic director and reach out to me, I’ll answer your questions. Seriously, my email is on the contact me page.)

Thought 2: Don’t Pay Bonuses Tied to This Deal

The key to “creating value” is to increase the willingness to pay for customers (in this case, distributors) or lowering the costs of producing your product. This is how smart strategists think about their customers and how to deliver products to them.

Selling ownership is neither!

Really, I can’t emphasize this enough. If you sell a part of yourself, you aren’t generating revenue, you’re giving part of you away. I’ll try to explain this in two ways. First, the traditional finance explanation. When you sell equity as a publicly traded company, you don’t report that on the “income statement”, which is about revenues that flow down to profits or losses, but on the “statement of cash flows” under “cash flows from financing activities”. This is because it is about generating cash, but not from business activities.

Here’s the common sense case for that. Take your house. If you take out a home equity loan, did you “generate” additional revenue? No, you got cash in your bank account, but you have to pay it back. In an equity sale, you do that by paying out a proportion of future earnings. If a company sells more stock, they don’t say they boosted revenue.

If the Pac 12 increases its distributions to schools based off this equity sale, then claims that this increased distributions to schools and hence bonuses tied to distributions should be paid out, then yell, “STOP!”. That’s using an accounting gimmick to boost salary. That would be crazy. (And if it happened, the UC Board of Regents should investigate or consider litigating, if their own universities won’t.)

Thought 3: Demand Accountability in All Consulting Payments

Just casually looking at the books of the Pac 12—via the Form 990s and Jon Wilner’s reporting—a lot of people get paid millions from the Pac 12. This is one of those situations that has me scratching my head. You pay your CEO the most of any conference, he has more higher paid lieutenants than other conferences and yet he still pays millions to other people to advise him what to do. (Right now another consultancy is reviewing officiating, but I definitely agree with that hire.)

If the Pac 12 wants to increase distributions, insist that the Pac 12 find the cash savings in consulting fees. I bet the Pac 12 could find $1 million per year, easy. You could likely do this immediately. (And if he or his lieutenants won’t, find someone who will.) I’m also not the first to suggest this, as both Pac 12 Jon/John have suggested it. 


(But seriously, keep the independent review of officiating. That’s needed.)

Did the Pac 12 Need a Strategic Partner – Director’s Commentary

(This article is Part 3 of my series on the Pac 12, including whether they should have brought on a strategic partner in 2012:

Did the Pac 12 Need a Strategic Partner in 2012? Part I at Athletic Director U
Did the Pac 12 Need a Strategic Partner in 2012? Part II at Athletic Director U)

When Athletic Director U reached out a couple months back, I knew I wanted to collaborate with them on an article. Live sports will be a key component of future digital video bundles, and they currently prop up MVPD bundles. And I love UCLA and college basketball/football. So that’s a no brainer on my end.

I don’t know if Athletic Director U knew what they were in for. When I finally sent in my finished piece, it had exploded to 3,000 words. It’s like a New Yorker article, destined to sit in an unread pile for being too long. (So we split it into two.)

I went deep into the Pac 12’s finances so, of course, I had extra ideas. Those ideas would have interrupted the flow I had and since I was long already, many of those thoughts ended up on the cutting room floor. So here they are, including additional homework assignments for myself (and hopefully follow-ups to Athletic Director’s U). Today is thoughts about the model and what I learned; tomorrow is an opinion article with my advice for the Pac 12 CEO Board, from a business perspective.

The Missing Piece: Bottom’s Up Analysis

My initial “concept of the operation” to value the Pac 12 was to roll out a back of the envelope, top down and bottom’s up look. Like most plans, it didn’t survive first contact with the enemy, which in this case was a lack of data. Here’s my half-built bottom’s up model:

Table 1 - Bottoms Up Model

It was still useful to build, even without the data, because I got a great sense of the drivers of the Pac 12 Network, and what I did and didn’t know. Still, a model with that many guesses instead of estimates would have misled more than it educated. How much does it cost to run the Pac 12? In what areas? How much do they make on advertising? I just don’t know.

Though, if I can ever get my hands on Pac 12 financials…

New Scenarios

One of the great things about building a model is, if you do it right, it can be very easy to update the model with a few inputs or tweaks and you can get a new output. And a few jump out that I absolutely want to build:

The $750 Million Equity Sale for 10%

I conveniently used $750 million valuation as the middle case in 2025, because that’s the number currently being trial ballooned by the Pac 12. (And it’s about one-third higher than the amount initially expected.) The key difference is this $750 comes a few years earlier than the 2024 “all distribution deals expire” scenario. Being 5 to 6 years earlier means the Pac 12 gets to keep more of the cash in a “time value of money” sense. So an equity sale could change the model. 

But not quite so fast. As hinted in today’s column by Jon Wilner, an equity sale isn’t a long term solution. If you get money up front now, presumably your equity partners gets paid later. (Otherwise, how do the bankers make their money back?) This would mean estimating how much distribution the partner gets starting in 2025. It’s really a trade off of cash flows. It isn’t about generating more revenue or cutting costs, but timeshiftimg your flow of cash. (More on this tomorrow.)

The ESPN Extension

This is an intriguing deal too. As reported by the Sports Business Journal and confirmed by Jon Wilner, instead of getting $750 million in equity sales, the Pac 12 could have extended their deal with ESPN to 2030, and ESPN would have taken over distribution (with a split of revenue, presumably) of the Pac 12 Networks. The Pac 12 passed on this deal and my gut is that makes sense, but I could still run the numbers on it to prove it.

A Higher Cost of Capital

Sensitivity analysis is the name of the game here. Basically, you test your model on various inputs to see how much it changes. I sort of already did that with the low, medium and high revenue loss scenarios. But the other big input is the “cost of capital” which is how much the Pac 12 would lose or gain depending on how much return it expects on its capital. As you’ll recall, the current WACC is 9.4% for entertainment, but I used a lower 8%. That was generous to the Pac 12.

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