(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:
In 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:The 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.
By nature, I look at business deals skeptically. I tend to believe that spending hundreds of millions of dollars naturally entails a lot of risk. (My take on the news media is they agree, unless you are Apple, Netflix or Amazon at which point they believe you will invariably succeed.)
Thus, my initial “blink” was negative for Amazon Prime/Video/Studios and for one reason. Er, two hundred million reasons. Yep, the $250 million Amazon Prime/Video/Studios paid for the rights of this TV series. (That payment is also why I believe that even if Amazon “owns” this show, they’ll be paying for it like it is a co-production in profit participation.)
Add in the fact that Amazon did not initially even have a script or showrunner for this thing they bought. Given their track record with past potential franchises like Zombieland, The Man in the High Castle and The Tick, I worry about the execution risk with Amazon Prime/Video/Studios, even though a lot of leadership has changed over.
HBO, on the other hand, has a wildly successful series from creative and business standpoint. They’ve also followed it up with at least one other successful genre series in Westworld. Further, the Game of Thrones universe has a lot of stories to explore, if the Reddit threads are to be believed. I haven’t seen that from a content standpoint with Lord of The Rings yet. In contrast to Amazon’s approach, HBO meanwhile took pitches from elite creative teams, and picked the one it wanted the most. And while it will definitely keep paying George R.R. Martin for the privilege, it likely had the terms reestablished from the initial Game of Thrones deal. That saves them money.
As for Netflix, did anyone even know they have a Narnia series in the works before this article? I just happened to see it once on Twitter. (It also looks to be pretty similar in deal terms to the LoTR deal, just with a smaller up front fee.)
So my blink initial reaction is HBO will win this battle.
Again, my “gut” is a bit deeper than the above “blink” reaction which I wrote, literally, 12 months ago. (I’ve been holding onto this idea for a while.)
As I sit here, weighing the pros and cons, thinking more about the Amazon deal, planning how I’ll write this series, I’ve softened on Amazon Prime/Video/Studios sinking $200 million dollars into LoTR. My initial “blink” was an over-reaction. I’m instinctively skeptical about any huge deal, but it doesn’t mean the deal is a bad deal just because it is huge. Take Top Gear er, The Grand Tour. Amazon allegedly paid a fortune for that, and especially overseas, it has done well for them. LoTR has huge upside and Amazon knows that.
Oh wait, the Hollywood Reporter dove deeper into the terms of the deal. It says that Amazon committed to five season of the TV series. So the deal I thought was huge at $250 million is now well over a billion.
Let me do the math on that. Amazon paid a $250 million up front price. Then they will have roughly five seasons of eight to ten episodes per season (that’s how many they made for past series like The Man in the High Castle and Jack Ryan). If I had to ballpark a cost, I would say they will pay the same as Game of Thrones. So roughly between $10 to $15 million per episode. Let’s assume Amazon markets this series with $100 to $200 million per season. (Which is reasonable for a global release.)
All in, Amazon is paying $1.2 to $2 billion (with a b) to make this series.
(And I’m researching it, but I don’t know that Amazon will “own” the show in perpetuity. This is likely a co-production with the Tolkien Estate, Harper Collins and New Line Cinema. If Amazon doesn’t own future spinoffs, that further decreases the upside.)
So Amazon needs to generate up $1.2 billion dollars to recoup their costs. The math behind this is a bit complicated—accounting for streaming subscription revenue—so when most people analyze streaming video they tend to start doing very fuzzy math that allows streaming video platforms to make a lot of bad decisions. I’ll try to be a little more exact going forward, but it means potentially bringing in millions of paying customers. If the series doesn’t work, or bombs creatively, it won’t do that.
That’s why, if a traditional studio or network tried to pay that much, they would go out of business if the show flopped. They would have no way to recoup the money back based on advertising or subscription sales or merchandise or syndication.
(Prime Video/Amazon/Studios won’t go out of business because Jeff Bezos will fund the losses. But that doesn’t make it a good deal. Just losses that won’t bankrupt a company.)
Let’s key in for a moment on those terms I mentioned: merchandise or syndication. An important, nee crucial, distinction between studios like Warner Bros. Television other TV studios is they make money on multiple revenue streams. They sell merchandise for their shows. They own the rights to sell them into syndication or to other streaming platforms after their initial run. Amazon Prime/Video/Studios doesn’t have another revenue stream. Neither does Netflix. They are all in on one window, the subscription video window. HBO, in contrast, has multiple other potential windows for Game of Thrones and its spin offs.
(Yes, I know Prime Video sells shoes. See my article on MoviePass at TVRev on that. I’ll factor that in.)
HBO owns the rights to the series so can do what it wants with the universe and profit on all of it. And because it has a currently successful series, it has a lower bar to get customers to watch the new series. HBO also could take advantage of all those additional revenue streams, especially the shrinking home entertainment market with cool DVD packaging, because it is already doing that. Even better, HBO didn’t pay $250 million up front to George R.R. Martin. The books were popular before the series came out, but popular in book isn’t blockbuster movie or TV series popular. Martin likely collected a great fee (a couple million up front, maybe) but gets great back end and got to write an episode each season for the first few seasons. Amazon acquired the rights to LoTR after it had already been one of the biggest movie franchises of all time.
The final piece in HBO’s favor is the content side, which I’ve largely avoided discussing. Describing what content will work from a creative standpoint is just hard. Not that nobody knows nothing—a quote for me to discuss in the future—but that it is fundamentally very noisy. So when I found out GoT was making a prequel, well I had my doubts because prequels can be tough sells. But Amazon is making an LoTR prequel. So at best we call this a draw. (And like I said above, HBO had talent signed on before buying the series.)
Here’s how I conclude my gut. I’m still siding with HBO. I believe they have a better future at a lower cost. But it’s closer than my blink reaction. And Narnia is trailing in third place.
Organizing Framework – POCD
First, I’ll use a pretty basic equation to explain how to judge who will make more money:
(The probability of success X The revenue upside in success ) — Costs = Likelihood of money made
I know, I should pretend like the entertainment business is super complicated to justify why you need to read my website every day. But it boils down to the above equation. How likely are you to succeed? And in success, how much money will you make? Then, subtract your costs.
The challenge is finding a framework to quantify the above pieces. And I have one that I think is fantastic for this challenge.
People, Opportunity, Context and Deal (POCD)
I’ve always thought that TV studios could learn a lesson from venture capital when it comes to building portfolios. Note: I don’t always recommend listening to VCs. Arrogant venture capitalists—especially myopic technology VCs—want to teach us/America lots of lessons, many of which are misplaced, but their techniques for building portfolios are useful.
VC firms get pitched by hundreds of companies every year. Their goal is to spot the potential Facebooks and Ubers from the, er, um firms you never heard of because they went out of business.
TV studios and networks aren’t much different. A studio takes hundreds of pitches from talent ranging from directors to actors to writers to producers. They’re trying to spot the potential Friends and Game of Thrones from the, er, um, TV shows you’ve never heard of because they were never made into TV series.
The VC framework I was taught is POCD, or
I used this exact framework when evaluating new business opportunities for a streaming company. Even though I wasn’t a VC, I think looking at new businesses in this manner is pretty useful. It can lay out the key elements of a new business.
“People” evaluates the executive team behind a company. It asks, “Is the team capable of building a company that can deliver on its business model?” In TV, I’d evaluate the creative and production team in a similar way.
“Opportunity” is the upside. In a VC sense, this is asking, in success, how much money can we make? (Uber could replace cars versus say a potato chip company could take 10% of the market.) In TV, I use it to mean the upside potential of a genre. A successful superhero movie has a larger upside than a one woman play. It also distinguishes the revenue upside of a wholly-owned, licensed or co-production show. (Terms I will explain.)
To tie this to my equation, people helps explain the “likelihood of success” while “opportunity” helps explain the revenue upside.
“Context” is a catch-all that explains the competitive and regulatory factors that could enable a company to succeed. A good example is how the iPhone unlocked the next wave of mobile tech companies. In movies, the equivalent was how CGI enabled super heroes to dominate multiplexes. For this series, I’m using “context” to evaluate the streaming companies themselves. HBO owning all of GoT’s rights and having a ton of licensing experience gives it an advantage, but Amazon being able to sell additional things to Prime subscribers gives it an upside too. Netflix has a huge base of customers.
The final element is often overlooked, but crucial. Of all the pieces, the “Deal” can make or break the entire thing. Even with huge upside and a great team in an ideal context, a bad deal isn’t worth it. If you watch Shark Tank, you’ve seen this. Companies come in with great sales (say a million plus per year) and the team seems great. But they ask for $500K for 2%. That valuation is nuts. The Sharks know that if they put their money in, they won’t get it back.
Can you guess where I am going with this? The Lord of the Rings opportunity may be huge, with a great context, but the deal could still kill the upside. The higher the initial investment, the less likelihood to get a good return. You subtract the deal costs from the revenue to get the true money made. I’ll factor in other costs too, like if one series costs significantly more than the others.
Each article in this series, I’ll try to explain what you can learn from my writing. But as a head’s up, throughout this series, I plan to explain:
– TV production financing
– The POCD model
– Streaming video content valuation
– The current digital video value chain for TV
– The comparable model of fantasy TV series
– And more…
Summary: So Who Will Win?
Oh, um, I don’t know yet. I wish I could tell you I’ve already written this epic series, but I haven’t. So I don’t know yet, but over the next six weeks we’ll find out.