Month: May 2019

Most Important Story of the Week and Other Good Reads – 31 May 19: Is Broadcast TV Dead?

I really wanted to figure out a way to make FX turning 25 my biggest story of the week. Fox launched a cable channel that helped define the prestige TV era as much as any other twenty-five years ago tomorrow. (Decider had a good roll up of the top 25 that brought this to my attention.) That feels like it should be a bigger story.

Yet, birthdays aren’t really game changing news, even for the channel that brought us. It’s Always Sunny in Philadelphia, my favorite series on FX. My favorite episode for Hollywood in-jokes is “The Gang Tries to Win an Award” which utterly lampoons the Emmy voting process.

So let’s look bigger than one channel. Like at all of TV.

Most Important Story of the Week – TV Ratings Continue to Decline, in pictures

The TV ratings for the 2018-2019 season are in, so let’s summarize what happened. I have three takes that range from “this is bad” to “oh this is controversial ”.

Bad News/Uncontroversial Take – Broadcast Ratings are Down

Well, ratings are down again. And CBS is still on top. And NBC is on top with the key demo (18-45 year olds). On top, though, means just 8.9 million and 1.6 million people, respectively. Those numbers are pretty small compared to broadcast TV’s peak or even just fifteen years ago. Here’s my version of Deadline’s chart, showing this for the last three years:

1 Table Ratings Broadcast Season

Source: Nielsen, via Deadline

So ratings are down another 7% after falling 3% last year. This matches the annual declines I’ve been monitoring. Here’s the same measurements, but from January to December instead of the broadcast season. (I had pulled these last fall to make a point about CBS.)

2 Table Ratings End of Year

Source: Nielsen, via IndieWire

So two different ways to subtly measure the data, which both show declines. Also, I’ll bang on another point I made about CBS last fall. For the “old people network”, which is the stereotype, it has more young people watch it than ABC, and tied with Fox. So proportionally, yes it has more non-key demo viewers, but it has the same in total numbers. Does one of those things matter more than the other? Maybe, maybe not.

Learning Point – TV Series are declining, but winner still takes all

Every year Michael Schneider does a list of the top 100 shows on cable and broadcast. I love reading through this list. Here’s the top 14, for example:

3 Image Top 14

Source: Nielsen, via Variety

I love it even more as further proof of my favorite learning point, which is to show that TV is, like all entertainment, “winner take all”, meaning that most shows get hardly any ratings, while a few are monsters. Given that FX estimates that between basic cable and broadcast there were 300 scripted series, and that Schneider’s lowest rated series was Hell’s Kitchen with 4 million viewers, we could basically add 200 more scripted series that had under four million viewers. Doing that, here’s how the winner takes all economics look for the traditional TV bundle (with some assumptions for that extra 200 series.)

4 Table Count of Series by Viewership

Actually, since Schneider’s list includes reality and sports, who knows how many more reality shows were made last year? I looked and couldn’t find it. The point is it would make the winner-takes-all shape even sharper.

Potentially Good News/Controversial Take – Top TV Series May Be Getting Bigger

So the inspiration for this hot take comes from Axios’s (must read) media newsletter by Sara Fischer. Her take? Well, TV series finales are getting smaller. She called this TV’s moving goal posts. Here’s the image from her newsletter:

5 Image Axios Goal Posts

Source: Axios

Pretty damning stuff. But it seemed like it was really trying to tell a story about decline over time. To better visualize this, I took the data and put it in a scatter plot by year to see the story over time:

6 Table ratings by Year Live

Still pretty serious decline. Except something bothered me about it. I mean, I’ve been pretty deep into the Game of Thrones ratings lately. And everyone knows that a ton of people watch the series after it airs. With the latest data, Game of Thrones is getting 44 million viewers per episode. If you assume all those people watched within say a week of the final, then GoT is a top 6 show of this data set.

And this makes sense: with DVRs, multiple airings and digital, do we care about how many people watch a show, or how many happen to watch it live? This is always my thing about data: you have to know why you’re asking the question. And so I tried to update this table for all the series with DVR numbers. Along the way, I found this fun image showing DVR’s rise over time:

7 Image dvr-users-590x330

Clearly, the rise of DVRs killed the “live watch” of series finales. (Along with a stretch of not great broadcast series for finales.) But with the 2010 finales like Breaking Bad, Game of Thrones, How I Met Your Mother and The Big Bang Theory, a lot of people tuned in late. So I adjusted some of those series up if I could find the data, and dropped Will and Grace, which wasn’t a series finale, and had my own new data set. I also kicked up The Sopranos since it had delayed viewing and multiple airings too.

8 Table Ratings with DVRI’ll be honest, I had hoped with this table the trend line would be flat, or near to it. And it didn’t go quite that far. The trend for series finales is still…down.

So this take isn’t that hot. But look at the decline in the equation. Instead of series finales losing over a million viewers per year, now it is down to 700K viewers or so. If you pulled just the 2000s, the line would be flat. Yes, I had to make a ton of assumptions, but in the question of, “Is the monoculture dead?”, well I think Game of Thrones is a pretty good argument that one truly great show can still draw in a significant amount of viewers. I wouldn’t go so far as to say that the trend is reversing, but it’s flat. (The biggest shows on “TV” aren’t getting smaller anymore.)

Bonus Point: Eurovision Viewership Over Time

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Most Important Story of the Week and Other Good Reads – 24 May 19: The Writer’s Breach the Agency Lines (while One Agency IPOs)

Here’s the most important narrative question of the entertainment industry:

Are we overusing war metaphors in our articles on streaming?

Just off the top of my head: Will Netflix kill the studios? Is Disney Plus the death of Netflix? Is the bundle is dying? The #StreamingWars. War, death, murder. Clearly the disruption of the media industry is taking our coverage of what is–at the end of the day–a bunch of people talking in front of cameras to overwrought heights. And yet…

The Most Important Story of the Week – The Writer’s Breach The Agency Lines (While Endeavor Grabs the Money)

I debated when to check back in with the WGA-Talent Agency fight the last few weeks, and this week finally pushed me over the line. Let’s start with WME, or Endeavor, or William Morris Endeavor, all names or former names of a company that filed this week to go public.

Endeavor is hoping to IPO at a price that will impart a market capitalization of about $10 billion, according to reports. That’s roughly the same size as the Sinclair-RSN acquisition of a few weeks back. So it qualifies for my most important story just on size. Though, looking at that market capitalization, does it sell the impact of this move short?

Because what Endeavor means as a publicly traded company could impact all agencies and hence all of Hollywood. The entire point of an agency was to be solely focused on the needs of their clients–actors, writers, directors, athletes, musicians, models–as they negotiated with giant studios and leagues, etc. The talent is arguably the most important part of a film or TV show, but historically compared to massive multinational conglomerates, they have much less power. That’s where agents come in. “We have tons of power and knowledge and negotiating prowess, so we’ll fight for you,” they tell clients, “and you’ll make that much more.” Of course for this to work, they had to be completely separate from the studios. That’s why California passed laws keeping them at arm’s length from producing anything themselves.

Until the agents realized how much power they had. If you have all sorts of power, you should be able to make money off it. Like by making more money producing shows. Or distributing those shows. That’s why the agencies are buying sports leagues and marketing firms and streaming video providers and even starting production companies. You can make more money by owning all the parts of the value chain, instead of tangentially helping talent.

Of course, if you own a production company, and a streaming video company and the marketing first, well that doesn’t sound that much different than the studio system of the yesteryear. If your agencies are just studios, why have agencies? I can’t answer that, just tell you why we’re here. Money. Private equity saw the power of the agencies, saw that it could be monetized more, and it took a stake in the agencies. Now the PE backers are looking for their exit, which means the “exit” which is the IPO.

And while PE started pushing the agencies away from clients as the center of the business, the markets will permanently end it. Since “shareholder value” is the be all end all for businesses, when it comes to clients needs versus shareholder needs, well clients won’t win that war. The clients move from being the core of the business to being one cog in that machine. Maybe the cog that drives the core competitive advantage in the first place, but still just another cog.

That brings us back to the news this week that at least one agency has broken ranks to sign the WGA. I hadn’t heard of the agency–Verve–but this seems brilliant to me. Frankly, if you’re anyone but CAA, UTA or WME, I don’t know why you haven’t broken ranks yet. The huge agencies have PE backing and the best clients already, and as they merge they’re only getting bigger. In a crowded market, you need competitive edge and it seems like one agency finally realized that. Add to the bad branding of the IPO, and upcoming agencies strike now!

Of course, if the writers all abandon WME (and maybe CAA/UTA), are those agencies as valuable on the open market as public companies? How does that not hurt their alleged core competitive advantage?

I’m with others, though, in saying I still don’t know how this ends. The WGA still seems really dug in and at least initially, they can keep getting work. This isn’t a strike. Meanwhile, if other agencies break ranks following Verge, the writers will even have agents. On the other hand, the agents are negotiators, and I could easily see an end where they end up on some compromise that only tangentially helps the writers in the long run, because that just seems like how things go.

(Best read of the week goes to David Lidsky at Fast Company who read the entire Endeavor prospectus.)

Other Contenders for Most Important Story of the Week

Last week was big for TV with two huge American TV series ending. But I’m looking across the pond for another huge TV event most Americans missed.

Eurovision Song Competition Aired

Last Saturday–I back date these articles to Friday–the Eurovision song competition aired. If you’re like me, you may have missed this news.

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How HBO Made Billions on Game of Thrones – Director’s Commentary Part I

One of my guilty pleasure TV series to watch is Forged in Fire on the History Channel. Like Making It, there is something really enjoyable about watching people make things, but especially when they do it really well. Especially in a positive atmosphere, which is what Forged in Fire and Making It emphasize.

Well, if I had a version of that hobby, it would be making business models in Excel. Especially bespoke models for brand new businesses. 

I just love it. I love taking a blank spreadsheet and figuring out how to fill in every line. More importantly, figuring out the data behind each number to get a model to be as accurate as possible. That’s my favorite part of the job. I’d do it even if no one was paying me to do it. If I can do that for things I love—like Star Wars, the Pac 12 or Game of Thrones—even better. 

These models don’t come cheap in terms of time required to build. Weeks of work usually. And the final result of even 4,000 plus words explaining them still usually don’t capture all the insights I think a well-built model provides. So—as I did with the Pac 12—today is the first article diving into all my extra thoughts on my Game of Thrones profit model.

I’ll dust off the FAQ format for it. If you have any questions, hit me up on Twitter, Linked-In or email (see the contact page) and I’ll answer those too.

First, can you remind me what your conclusions were?

Sure. In case you haven’t read the model, here is. It’s 35 lines and ten columns, so it’s small. (If you want the actual Excel, email me and I’ll consider sending. I’d have to clean it up first, though.)

Table 4 Final Estimate

The conclusion again is $2.28 billion is my estimate for how much GoT made from this series. That’s what I’d call my “median” estimate if I were running scenarios on this. And again, it is an estimate, not “truth”.

What do you mean by “not truth”?

Most numbers reported by the entertainment press, in my experience, come from one of three sources: the companies (via earnings reports or leaks), bad surveys or an investment bank releasing their analysis. My estimate would best fall in that last category; this is my estimate of the future.

But estimates are just that “estimates”. Since I don’t have every input—what I’d call “the actuals” in an internal document—I had to make a ton of assumptions. Still, estimates like these can be damn useful training for anyone in business. Unless you employ an industrial espionage firm—and I’m not a lawyer but I’d recommend you don’t do that—you don’t have your competitor’s numbers either.

I expect there is a chance some people who are “more in the know” than me can get someone in HBO to give them the real accounting sheets. Though, as Michael Ovitz’ autobiography testifies, there are quite a few people in H*Wood willing to tell you they know something for certain, even when they have no idea.

Let’s get into the model. Starting with the subscribers section. Explain the difference between accounting profit and your projected profit

Well, the key is that HBO (and all TV producers of wholly-owned series) think of a show in two ways. First, what is the “accounting” profit. That’s the amount they need to pay talent. That is usually made in an agreed upon definition called a “Modified Adjusted Gross Receipts” (MAGR). The people who work at the agencies have this knowledge as does HBO’s finance team. If it was leaked to me, we could make these estimates way more precise.

(Same with Star Wars. Feel free, readers, to leak me any info you want.)

MAGR, though, doesn’t come close to capturing the true value of the series. The MAGR definition usually ties the first run license fee (sometimes called imputed license fee) to the production costs. This gets nowhere near the true value of a TV show. It’s so “sub-optimal” that in my articles on subscription revenue, it didn’t even get its own “not-explanation”. I just dismissed using costs as a stand-in for value. Here’s this demonstrated for Game of Thrones.

Screen Shot 2019-05-23 at 4.36.34 PM

To quickly explain, to truly get at how “profitable” Game of Thrones had been for HBO, I needed to know how much subscriber value it added. Since this isn’t a hard and fast amount of cash—the way say theatrical box office or home entertainment sales are—networks like HBO usually set an agreed upon amount before the show airs. As you can see, it’s tied to the production budget of a series, usually at some percentage. Historically, 70% if the show can be sold to other windows.

As this table shows, though, if HBO had to pay off the actual subscriber value, then the talent collectively would have made something like $400 million more off the series. In other words, HBO was able to keep about $1.5 billion in profits from being shared with talent. 

Is this a bad deal for talent?

I mean, not as much as it seems. Estimating the value of subscribers is pretty complicated, and if you let lawyers into that calculations, it would get messy pretty quickly. Arguably this only comes up for the biggest hit TV series anyways, of which there are less and less.

How did you come up with your percentage for the imputed license fee?

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GoT vs LoTR vs Narnia – Appendix: Subscription Video Economics… Explained! Part 2)

(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)

The best analogy for content libraries on streaming services, for me, is theme parks. When I tried to value the new Star Wars land Galaxy’s Edge at Disneyland and Disney World, I wrote about this future scenario:

Next year, I’ll walk into Disneyland in the off-season (probably September-ish). I’ll be wearing a Star Wars shirt. My brother will probably rock a Marvel shirt. That said, I’ll also have a four year old wearing, if current trends hold, either an Elsa (Frozen) or Belle (Beauty and the Beast) dress. Other family members will likely have Mickey shirts on.

So how much of that trip do you allocate to the opening of Galaxy’s Edge? My family already averages one trip to Disneyland every year, and my daughter knows that Mickey lives at Disneyland. So she’d go anyways. But what about me? I’ll definitely go to see the new park at some point. 

Something about theme parks—maybe the permanence of the attractions—helps crystallize in my head the challenge of valuing content libraries. A theme park is a content library of rides, shows, shopping and food. Some of those attractions at Disneyland have been there since the 1960s. Those are the “library content” of Disneyland. Others are only one or two decades old. Those are the “recent library” of rides. Then there are the brand new attractions: Star Wars land, Cars land and a Guardians of the Galaxy ride. Those are the “new TV” of Disneyland rides.

The trouble is trying to value each of those pieces and disentangle them. At the end of the day, this both matters—because you need to make the best decisions possible to maximize revenue—and doesn’t—because at the end of the day the goal is to have revenues exceed costs on a total basis. Do the latter and how you get there doesn’t really matter.

My approach to valuing theme parks—calculating the money spent by both existing and new customers—gives us a good idea for how to value content libraries on streaming platforms. So let’s explain that. In today’s article…

– The rules guiding my approach to valuing content
– The “dream method”, which is what we’ll try to emulate
– The steps to the optimal method
– The HBO and Game of Thrones example explained
– Some other variations, caveats and thoughts

The Rules

As I wrote these last two articles, I kept coming back to the “rules” that define good business models. A few stuck in my head for valuing streaming video. Thinking that way…

– First, no double counting. If a customer gets attributed once to a piece of content, they don’t get to count twice. (A good rule of thumb, you can’t attribute more than 100% of your customers!)
– Second, CLV trumps monthly revenue and other calculations. If you attract a new customer, CLV is the best way to capture their true value to your business.
– Third, be humble in attributing success. No single show or movie accounts for 100% of its viewers in a library model.
– Fourth, use real data as much as possible.

The Dream Method – The Probability of Resubscribing

The dream method for HBO would be, basically, to be God Almighty. Looking down omnipotently, reading the mind of every customer subscribed to HBO and knowing why they subscribed, and what percentage of that should be credited to Game of Thrones. Add all the percentages together and you have it. (Maybe our Google/Amazon/Apple AI overlords will be there soon…)

In the meantime, we have data. Especially streaming data if you’re Netflix, Amazon or (partially) CBS or HBO. 

This data means you can track every customer. When their account starts. When it renews. When it lapses. And, crucially, what they watch the entire time. From the people who only watch movies to the people who complete every episode of Game of Thrones. In a big data sense, then you can compare their behavior to the customer who never watched Game of Thrones. 

Say the results looked like this…

…GoT Viewers resubscribe after a year period at a 92% rate.

…non-GoT Viewers resubscribe after a year period at a 80% rate.

That means, of customers who started the year subscribed to HBO, by watching GoT, they were 12% more likely to stay subscribed to HBO. That’s the best number if you can find that, because it basically means that GoT increases the probability of staying subscribed by a huge, statistically significant margin. Now that GoT is cancelled, if those GoT watchers suddenly flee HBO, well we can also reverse engineer that to know that GoT had been keeping them subscribed.

This could also be applied to new customers. If you take all the new subscribers for a given time period, you can look at the ones who watch GoT versus the ones who don’t and model their behavior. You can also tell which are the customers signing up to watch GoT right away, and which ones don’t. Add those up and you can attribute all the best approximation for value we have. (With heaping doses of regression analysis and machine learning.)

Yet, we don’t have the big data to do this. I mean me, as a commentator on the strategy of entertainment. If I were managing content strategy at a streaming company, I would set a team of data scientists working on. But I don’t have that team or that data here. As an outside observer, well, we need to make some assumptions, but we can try to replicate that method.

My Method – Attributing New and Remaining Customers by CLV

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Read My Latest at Decider – How HBO Made Billions on Game of Thrones

I’ve been in a bunker these last couple of weeks and that bunker was an Excel bunker with internet access where I had one quest: to estimate how much money HBO made off Game of Thrones.

As I was writing my big series, “The game of thrones for the Next Game of Thrones”, I realized I needed a starting point. And figuring how much money Game of Thrones made was that starting point. It helped me understand exactly how the GoT Prequel could make money, but also tested my model. And I learned a ton figuring it all out. I’m up to 20 pages of research for this series and growing by the day.

(And I’m not close to being finished…this model inspired at least two more spinoff articles and maybe more guest articles.)

It was so good, I pitched Decider on it, and they accepted all 2,000 words of it (with tables).  Go check it out and share it on Twitter, Linked-In, Facebook and everywhere.

Seriously, I don’t ask for a lot of favors from my small, but growing, audience and this is one of those moments. If you’re a journalist, consider picking up the story, and I can answer any questions you have. (Email on the contact page or DM.) If you’re just a fan, still consider or emailing it to your entire office. Any little bit helps. Thanks in advance!

Again the story of how HBO made over $2 billion on Game of Thrones here.

GoT vs LoTR vs Narnia – Appendix: Subscription Video Economics… Explained! Part 1)

(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)

Consider my current relationship with HBO’s Sunday night programming. Right now, I record two plus hours of content to watch during the week: first, Game of Thrones, then Barry and finally Last Week Tonight with John Oliver. Then, for the rest of the week, I don’t record any other HBO shows, but will watch the occasional blockbuster I didn’t see in theaters. (In full disclosure, that included The Meg and Skyscraper. Don’t judge me.) Oh, and on Saturday mornings, we often watch Sesame Street. To access this content, I pay $15 a month to my cable company. 

So the fun question is…

…if I were HBO, how much credit do I give each series?

This is not a trivial question or easily answered. Sure it seems simple—the highest rated shows are the most valuable—but quantifying that value is the tricky part. In fact, this requires teams of finance folks and economists and statisticians running “big data” analysis. Literally measuring millions of customer accounts engaging with billions of pieces of content across potentially hundreds of categorical variables. (Unless, of course, you don’t have streaming data, in which case HBO doesn’t actually know what shows I watch, because I’m DVRing them for later.)

The current HBO lineup is a good illustration of how personal motivations can be obscured over the millions of people watching HBO. I’d definitely subscribe to HBO only for Game of Thrones, but would I subscribe to keep watching John Oliver when GoT goes on hiatus? What about Barry? Is it enough to make me stayed subscribed? Probably not on its own. Of course I will wait for Silicon Valley and Westworld and maybe Watchmen and/or His Dark Materials…so…I mean I don’t have an answer for you.

Multiply my anecdote by millions of individuals—all with different profiles and behaviors, and you see the challenge facing both cable channels and streaming networks. Throw in the fact that I’ve now been a loyal subscriber for 5+ years, and it can be hard nee impossible to determine which, if any, specific show kept me on board versus built up brand loyalty and/or inertia

Yet, this question will be crucial to our three streamers to determine the winner in this future-of-TV-series I’m calling “The battle for the next Game of Thrones”. The goal for these three series is to bring in and retain new customers to help win the streaming wars. Since strategy is numbers, I need to quantify those subscribers.

That’s the goal of today’s article. Streaming video economics. With my usual caveat that this is a subject that we could write books on. (Though, it’s obscure enough that there aren’t actually a lot of books on it.) My plan is to…

…Explain a brief history of content libraries and why this is a contemporary problem.
…Briefly remind everyone that for decades TV and movie studios tried to value libraries poorly on purpose.
…Then, I’ll debunk three bad ways to do this. 

Tomorrow, I’ll show my way, but mainly to describe the incredible amount of assumptions I’ll need to make to pull it off. And guess what? I’ll dig into a valuation of a current TV series. Or better said, a just ended TV series.

The Growing Importance of Valuing Content Libraries

When I built my TV production model, I debated making bespoke models for the four main types of TV, broadcast, cable, premium and streaming video. Ultimately, though, I realized that I didn’t have to because among those four business models, there are really just two types of revenue, advertising and subscription, and each model is just on a spectrum for how much they rely on each: 

Spectrum Ad vs SubscriptionThat’s a fun table and way to look at it because over time, we’re moving more and more to streaming. But as we move there, we also see that the ability to determine which piece of content is the most valuable went from “easy and/or not necessary” to “much harder and/or crucial to growing subscribers”. Let’s describe that in the various phases.

Phase 1: Broadcast starts with all Advertising

At the dawn of TV, life was simple. All broadcasters had to do was look at ratings. The higher the ratings, the more money made from advertisers. The math here is pretty simple for networks: keep the highest rated TV shows. And since Nielsen kept a scorecard for everyone, they didn’t even need to do this math themselves. 

Phase 2: Cable starts collecting retransmission fees

This was really the first time that channels needed to start considering TV series as more than just advertising revenue drivers. As cable expanded, the channels insisted on fees per subscribers. Eventually these fees—the per subscriber fee a cable company paid each channel to air its content—surpassed advertising for cable channels as the largest source of income. 

The best example that comes to my mind was the dual Mad Men/Breaking Bad success of AMC, followed by The Walking Dead. Those three shows allowed AMC to drastically increase their retransmission fees, and it wasn’t all related to viewership/ratings. Mad Men was never a monster in ratings, but its fans were diehards and it was critically acclaimed, so it was of outsized importance to AMC. They used this to negotiate higher retrains fees. Since individual customers don’t pay retransmission fees, you still, as a cable company, didn’t need to value individual shows precisely, though. Just general feelings fit in, and still most cable companies ended up buckling in retrains battles.

Phase 3: Premium cable doesn’t have any advertising, so libraries are a bit more important

Really, HBO was the first subscription TV company. For years, it justified its extra cost by being exactly what its name portends, the “home box office”. The home for theatrical movies before broadcast and cable. With no commercials.

Then, it bolstered this with The Sopranos and Sex and The City. They weren’t the first series on HBO, but the ones that put them on the map. Really, this is the first time a platform had to grapple with how to value their TV series versus the rest of their content. But HBO didn’t really have the data to do this. It didn’t know if someone who watched The Sopranos was the same subscriber as someone who watched their movies.

It also didn’t really matter, because HBO wasn’t selling the subscriptions in the first place. The cable companies were, so it just needed to give off the imprimatur of value and keep people subscribing. Which it did. To guide its behavior, it could also keep using ratings data in general as guides to what is profitable and what isn’t.

Phase 4: Streaming means direct-to-consumer, which means valuing content libraries

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Most Important Story of the Week and Other Good Reads – 17 May 19: The CW Ends Their Netflix Deal (and that Hulu/Disney news)

Distracted by a new birth in my (extended) family, and a big article that will launch next week, I didn’t get to write a lot for this website this week. But I’ll be back in a big way next week. In the meantime, I had lots of stories to choose from for this week’s round up of entertainment business news.

(Seriously, if you’re a TV journalist, be on the lookout around Tuesday for a big number you should definitely retweet or pick up as an article. It involves GoT. So you’ll get clicks. Consider this my first “hey, pick up this story” plea.)

The Most Important Story of the Week – The CW Ends Their Netflix Output Deal

This story made the usual “Upfronts” news cycle, but I think it deserves a bigger look than that. And yeah, I think it is bigger than the Hulu news. Disney was going to get Comcast’s Hulu portion eventually. Meanwhile, I don’t trust AT&T and CBS to pass up cash when they can get it, so kudos for making the right call here. We may look back on this move as when AT&T finally took control of their streaming future. (CBS has already done that.)

That said, the headlines gave a different flavor of the news than the full articles did. Even my headline is slightly misleading, so before the strategy implications, let’s correct some initial misconceptions.

First, “The CW” is less accurate than “Warner Bros TV/CBS TV”

Because The CW is a network. The shows are produced and eventually owned by the parent TV studios of Warner Bros TV and CBS TV. These are licensed shows on The CW, not shows owned by The CW. I explained the difference between owned and licensed here.

The CW has been one of my favorite channels since business school. They are the subject of a pretty widely used Harvard case study–if you take the entertainment biz classes–and I’ve followed them since. The CW is is a fascinating joint venture between CBS and Warner Bros (get where the C and W come from, if you didn’t know?) that only exists so that those TV production studios have another broadcast channel to sell to. So the vast majority of CW series come from Warner Bros/DC, Warner Bros TV, CBS TV or, in a lot of cases, both. So that’s really who we should say ended this output deal, those parent library companies.

Second, this only applies to new shows going forward.

This is key, because these CW series are really valuable to Netflix. In the last two weeks, Netflix has started releasing weekly “top ten most popular” lists in the UK and Ireland as tests. Assuming the data is accurate–and with the caveat we have no idea how this is calculated–here is what Netflix is telling us is popular on their platform in the UK (hat tip to All Your Screen Rick for the data)…

Screen Shot 2019-05-17 at 3.10.09 PM

So in the UK, CW series make up 3 of the top 10 in these last two weeks. That’s really valuable. Is it irreplaceable? Surely not. But you can only lose so much content before it begins to impact engagement, retention, acquisition and general content performance.

The key, though, as I first read in The Verge, is that these shows won’t be leaving. If a show premiered before 2018/19 season, it will eventually wind up on Netlfix. So it’s not like suddenly a lot of Riverdale fans will need to subscribe to another streaming service to catch up.

Third, Netflix will still bid on individual series (and may have cancelled the deal).

Meanwhile, it seems like both sides wanted to end a library output deal and move to individual series acquisitions. I can see the logic. For the TV studios, you can now put the series directly on your aspiring streaming platforms. For Netflix, the entire deal may not be as worth it as individual series–so Riverdale isn’t worth the tax of the underperforming series in the deal–especially if you won’t control the rights in perpetuity. As Netflix moves to a wholly-owned strategy, this makes sense.

(Though, I’ll be honest, most of the tech sites seem to default to “Netflix is right” in their commentary, so part of me thinks this may be Netflix positive spin, and Netflix may have wanted to keep the deal going.)

The Strategy Impacts for the Future

With those misconceptions cleared up, it’s time for the lessons for us for the streaming strategy going forward. Well, as I started saying, AT&T and CBS are getting serious about streaming. Couple this with the AT&T news that they plan make Friends and ER exclusive to their new streaming platform, and you start to see a serious strategy. (I’m focusing on AT&T, because CBS has at least already launched its streaming service.)

If you’ve been following me, you know how valuable I think some of these library TV series are. Both at engaging customers–especially as no Netflix shows make it to fourth seasons–but even for acquiring customers. When you scan the homepage of a streaming site, it helps to see a bunch of shows you recognize. Warner Bros TV has a killer library catalogue, in this respect, and finally getting it all on their own streaming platform could be a huge head start.

Meanwhile, I love the approach used by The CW. If you believe internet Twitter, literally no one watches broadcast TV. Not a soul. That’s what some Netflix bulls will tell you. And yet, these shows often get 500K live viewers and multiple in later viewings. Those are real customers, in just one windwo. Here’s a Salil Dalvi tweet that explains the CW business model:

I’m a Mark Pedowitz fan in general, and he sees his job to launch TV series into future windows. This strategy for the CW makes sense given both the state of his network and his dual corporate ownership. He provides a channel to build awareness, and meanwhile he lets his corporate studios sell into lucrative second windows.

He also got on the comic book trend early–while finding a hit maker in Greg Berlanti–and meanwhile he doesn’t cancel all his shows every year, meaning he can let shows build audiences. He also saw how much more valuable scripted series were than reality series for the streamers, so almost all of his programming is scripted dramas.

As to the comic books, and since whenever we mention AT&T, invariably we find some messed up part of their strategy their screwing up, what the hell is going to happen to DC Universe, their streaming platform? I mean, if you’re taking back the rights to Batgirl, and it could be a hit, why wouldn’t you put it on your DC streaming site instead of the WarnerMedia site? I don’t in general believe in the niche approach to OTT sites, and I can’t tell if AT&T does either. Sometimes they support niche sites and then other times they don’t.

Other Contender for Most Important Story – Disney Acquires the Rest of Hulu Stake (Eventually)

Early this week, we had our lead contender for “the most important story of the week” and it is big enough news I’m giving it it’s own section.

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Most Important Story of the Week and Other Good Reads – 10 May 19: M&A in Media and Entertainment Stayed Flat in 2018

Let’s get this update out on a Friday like it is intended.

Most Important Story of the Week – Mergers and Acquisitions in 2018 Update (Finally!)

For some reason, PwC never released their 2018 update for Media and Telecommunications merger & acquisitions update. Or if they did, I never saw it. But PwC did release a first quarter 2019 update and it happens to include the quarterly data for the last two years, so we can update our table from last July! First, the data update, then some insights. (Also, hat tip to Axios’ Sara Fischer who pointed wrote about mergers in her weekly newsletter.)

Before I dig into, the basic headline is above: despite the headlines in June, M&A in media, entertainment and communications was basically flat in 2018 compared to 2017. Yeah, it didn’t seem like it, but it was.

The Data Update

I’ve been looking at three measures for mergers and acquisitions (which PwC calls “deal activity, including some investor activity) which is: total number of deals, total deal value and the number of “mega-deals” or deals valued over $5 billion. Fortunately, PwC has been keeping this data for a few years now, so, for the most part, I’ve been able to figure out the data going back to 2009 in a consistent way.

(I’ve been meaning to write a post with all the links, but search PwC and mergers and you can find regular articles in Variety, The Hollywood Reporter and their website going back a few years.)

The basic trend for M&A is that the deal activity was there, but it wasn’t as big as past years. Total deal value fell from $140 billion or so in 2017 to $122 billion in 2018. Which is still one of the five biggest years for deal activity, but also the lowest in the last five years. Here’s my updated table:

MA in 3 Measures.png

Oh, you don’t like tables? Okay, here’s the total number of deals going back to 2009 in visual form:

Chart Number of Deals

Like I said, that looks flat, doesn’t it? That’s why I use three measures and that’s just the first. Here’s the other two,  total value and mega-deals:

Chart Deal Value

I like this chart because you can definitely see that M&A has been picking up in terms of mega-deals and total value, but the last two years we’ve been coming back down. Also, the PwC report didn’t include the number of mega-deals in 2018, so I can’t speak to how that number has changed, though my gut says it stayed about the same.

Looking at all this, I’d say that M&A will continue, just on the same path it has been. What is that? Well, my favorite look at M&A has been the rolling five years, and here’s that updated chart which is a pretty good prediction for me for this year (so another 800 or so deals, with say about $120-$175 in total deal value with 15-20 mega-deals, again).

MA Rolling Ave


To start, I’ll toot my own horn. I called out last July that the “tsunami of deals” soon to swamp entertainment, media and communications may not ever land. And sure enough it hasn’t . That’s what the numbers clearly show.

My working theory is two fold. Part I is about how even though deals were approved, they haven’t been approved easily. AT&T still had to go to court and fears of deals not getting approved scared of Comcast and AT&T from bidding on Disney’s RSNs. Moreover, a Democratic congress looks to be hungering to take on Big Tech, which may discourage them from doing more deals.

Part II is about uncertainty. There have been rumors of a trade war with China since last year and a few stock market scares. So I think that has scared of some mergers and acquisitions, along with the fear that already bloated balance sheets with debt can’t really absorb more mergers. So unless an Apple or Google or Amazon want to buy something, there aren’t a lot of available buyers. Also, as the table above shows, in a recession all deal-making basically freezes and it takes years to recover.

Other M&A News – Netflix buys Story Bots (kids TV Producers)

As if to prove the point above, the recent deals that I’ve seen again fall into the bucket of smaller deals that are far from needle-movers. Like Netflix buying Story Bots. 

Apparently, Netflix has only ever acquired three companies. All I can say is, “respect”. One of my favorite questions in b-school was “build it versus buy it?” My natural leaning is to “build it”, though most people on the finance side tend toward the “buy it”. Netflix appears to really, really insist on the “build it” approach, really only buying a production company for studio space and two other companies for IP. (Though I see the counter that if they had bought a content library, they’d be in a better place content-wise. But with what money?)

Other Contenders for Most Important – Earnings Reports Galore

As I’ve started writing full-time, I’ve found myself paying more attention to earnings reports. The logic is fairly simple: they’re news generating juggernauts. Over the span of a few weeks, we get all sorts of news tidbits dribbled out. While we do get some fun facts, most of the time we don’t learn that much. Most of the coverage regards earnings estimates compared to actual earnings, which is vital for investors, but from a strategic standpoint how does it matter that Wall Street is either good or bad at its job?

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GoT vs LoTR vs Narnia – TV Series Business Models (Scripted)…Explained! Part 2

(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)

Today, we continue our journey explaining how a TV show makes money for its producers. Last week, I started describing the model along with describing costs and the first set of revenue. Today, I continue explaining the revenue piece, touch on why I didn’t build this model for the upcoming Star Wars series, describe some of the fees involved, and provide some final thoughts. Finally, I link to my two main sources.

Revenue (continued)

The bulk of the value of a TV series—especially non-hits or mega-hits—comes in the first window. Especially when you talk about value as “money”. For 90% of TV series, the initial license fee usually represents most of the money a show will ever make. But if a TV series takes off, then the other windows will have much more value. And let’s start with one of the newest of those windows.

Home Entertainment

TV came to home entertainment late, and may be out of it soon. This window couldn’t take off like movies in the 1990s because the number of VHS tapes required was unwieldy. When DVDs made entire seasons the same size as a VHS, right as the quality of top series drastically improved (I’m thinking of The Sopranos here), then the TV home entertainment market took off. With the rise of digital you could buy series without any space at all. (This is a great example of technology enabling a business model.)

Yet, as soon as digital sales started, they ended, didn’t they? So the lifespan of this window was fairly small. I mean, why buy or rent a TV show episode if Netflix will buy the rights and stream them all for you? Still, I’m including it in the model because home entertainment is still something, but more importantly, it was REALLY a thing for Game of Thrones. Franchises that inspire super-fans—which is a short list—can still generate home entertainment sales. At the height, these can be in the millions of units sold per season, at least when GoT started. That can add up and really offset production costs.

So including the first-run licensing revenue, here’s our model so far.

Image 1 The Model So Far

Licensing – Renting Your Show to Other People

I don’t like the word licensing in TV. It sounds too close to selling either naming rights or toy rights. But it is used constantly in television. Instead, I’d call it “TV renting” because that’s really what you’re doing: renting the rights of your TV show out to various players. Still, licensing it is.

For all the sturm und drang about streaming video, in a lot of ways, they were just another window for licensing. Instead of counting the number of runs and paying broadcast residuals, you sold them for unlimited runs to a streaming network, and because it was digital (and not covered by guild agreements), the studios also had to pay less in backend compared to syndication. 

The variations in licensing come down to who you licensed to, when they get that license and where they are. Typically, production companies expend the most energy on the first, domestic window and everything else is a bonus. To summarize:

International Sales – The US TV model built up around selling to American domestic broadcast. Once you did that well, you could sell the rights of a TV show to the international market. That’s the big form of potential revenue. However, the shows that fit international market tended to be broad comedies, crime procedurals or genre series. (Many prestige shows don’t travel at all.) This has also blended in with digital sales as streamers can now buy out global rights instead of just US versus international.

Syndication – Again, another legacy of US TV model, syndication was selling a broadcast show—and sometimes a cable show—to TV broadcast network groups to run in off-primetime hours. This still goes on for shows like Friends to Mom to Law and Order: TBD. Since this was done for whole of series runs, often, this could be worth literally billions for a handful of shows. (Again, the kings are Friends, Seinfeld, Cheers, Simpsons, Everybody Loves Raymond, Two and a Half Men and other broad comedies.) 

Second Window Licensing – I’m using this to refer to cable channels getting in on the game. You could take your broadcast series, and instead of selling them in syndication, sell them to cable channels in deals that looked roughly similar, but had less impact on residuals and participations. And premium channels could get in on the game too (HBO sold Sex and the City, The Sopranos and Entourage). Recently, even streaming series (Bojack Horseman on Comedy Central) have been sold into syndication. Really, what you need to know is that a lot of TV producers made money by selling their shows to a second channel after the first window ended. And then…

Digital Sales – Digital sales can happen in the first, second or library windows. And many times it doesn’t even conflict with the syndication window above (unless the streamer pays for exclusivity on that window too) which is why Friends is on Netflix and TBS right now. (Friends is such a mega-hit in the TV business I use it a lot.) Since so much money is involved in digital, sometimes the streamers buy out global rights simultaneously, which is a change in business driven by the rise of global streamers.

This gives us four new revenue lines, the three categories above plus “library” which is the placeholder value for time periods after a series is fresh, say five years from the last season and older.

Image 2 With licensing Revenue

Tax Credits

Tax credits are a great euphemism. We could just call them, “government bribes to movie studios”. What else do you call a straight cash payment to a business to come to your state or country? It’s the utter opposite of the “free market”, and states of all political stripes take advantage of it. (*Cough* Georgia *Cough*)

I didn’t calculate this explicitly for films because at the size I was working—hundreds of millions—it would wash out in the production budget. (Though lots of big budget films, including Marvel films take advantage of these credits.) I’ve also seen these accounted for as “negative COGS” as opposed to revenue, if that makes sense from an accounting perspective. (It isn’t money you make, but money that offsets your costs.)

That said, for TV shows in the low millions of dollars range, a couple million dollars can really hit the bottom line. Some TV producers—I’ve heard—have the goal to breakeven on everything else, and their profit is the tax credit. Starting research for this series, I found this Variety article where Penny Dreadful managed to convince California to pay them $25 million. That’s a hefty bribe, er, paycheck.

Smaller Pieces – Merchandise, Product Placement

For 98% of shows (my assumption) licensed merchandise will never be a thing. People just didn’t buy NYPD Blue shirts or Cheers hats. Yet, that has changed as nerds have taken over the world. I own not one but two Game of Thrones shirts. Breaking Bad—another megahit—had two iconic shirts in both the Heisenberg and Pollos Hermanos t-shirts. So I’ll include this line item because if any of my fantasy series becomes a “megahit”, they’ll make some money off of that.

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Most Important Story of the Week and Other Good Reads – 3 May 19: Sinclair Buys Disney RSNs

Since I took off two Fridays ago, I had a lot of content to sift through for this week’s update. If you have to know, I took off to see Avengers: Endgame (loved it), then, my wife and I threw a baby shower (she threw it; I cleaned), and then we both got sick (and I’d taken the previous day off to take care of our sick toddler) so basically all my writing plans got delayed. Then I spent almost all of last Friday trying to read through all the news to get this out.

But…I won’t have a “double-sized” weekly column this week because that would drive you crazy. (Or you just won’t finish reading it.) Instead, a lot of stories are going to get cut for space and maybe a few held for next week.

Most Important Story of the Week – Sinclair Buys Disney’s RSNs

Ironically, with all the extra time, I still had trouble finding a “most important story” of the week. One story–The Avengers mauling both Thanos and the box office–clearly sucked up all the oxygen in the room. Did it mean the most, though? Probably not.

When in doubt, I try go to the dollar signs to determine the most important event of the week. If one story is valued in 11 figures (the Sinclair buying Disney RSNs deal) and the other is “just” 10 figures ($3 billion total box office for Avengers), well, Sinclair wins by a hair. (Consider, though, that Avengers is making that revenue on just one window. The entire film will generate much more than that over its lifetime.)

Yet this deal stuck out to me because it has interesting ramifications on all sides.

For Disney

What a revenue week all around. Huge box office and now another $10 billion or so to play with. You can use that to buyout Comcast’s Hulu stake, pay down debt or fund 10 years worth of streaming losses (at a billion lost per year). Or go really crazy and get that NFL Sunday Ticket for ESPN (with ABC Super Bowl rights?). Throw in the previous $3.5 billion they got from the YES Network sale, and their bottom line will look much better. Meanwhile, unlike AT&T, they’re selling assets that aren’t core to their future streaming plans.

Of course, there is always the question of how much more they could have made. We don’t know the cash flow of the RSNs, but right now instead of the expected $20ish billion Disney thought they could get, they ended up with $10.6, off about $3.8 billion in revenue. The pressure to sell (the FCC made them as part of the terms of closing the Fox acquisition) could be partly to blame here, along with general uncertainty for the lifespan of the cable bundle, coupled with the fact that Comcast and AT&T didn’t think they’d get regulatory approval, so didn’t bid. Given that Sinclair saw their stock price jump after the deal was announced and I’d say Disney could have gotten a better price for the RSNs if they had more forces in their favor.

For Sinclair

You have to admire their focus. They want to expand their broadcast/cable footprint and even if the FCC shuts off one lane, they’ll move to another. Meanwhile they have a streaming product, so the RSNs could provide “must have” programming for them. If they can offer all these games as part of their ad-supported streaming platform, that’s interesting. So again, without running the numbers, this gives them good content. If it lasts. (See sports teams below.)

For Comcast

They can now convince Disney to pay top dollar for their Hulu stake. That rumor even dropped early in the week as this deal was closing. Now Disney has the cash to buy out Comcast from Hulu, and that cash can be used by Comcast to pay off its Sky debt. (Though, Comcast would benefit more from keeping their 30% stake in Hulu for strategic reasons. But the debt probably scares them more.) So yeah that Sinclair money could help someone pay down some debt, be it Disney or Comcast.

For MLB and Other Sports Leagues

I wonder if this deal shakes up the status quo just a bit. Sure, you still have your RSNs paying you top dollar for local rights, for now, but everyone knows this auction was avoided by a lot of traditional media companies. Worse, none of the big tech giants jumped in with serious bids. Is now the time to sell your rights to an ESPN+ or DAZN? Or Amazon or Apple? Or do your own thing?

For Amazon (and other rumored big tech buyers)

They still haven’t jumped all in. Sure, Amazon was part of the team buying the Yes Network, but we don’t know at what percentage (that deal has multiple players in it) and they blinked at buying into these RSNs too. As of this moment, no streaming company has decided to go “all in” on sports rights, which honestly could leave it open for ESPN+ or DAZN. (Though if DAZN does well enough, then it’s an acquisition candidate.)

Other Contenders for Most Important Story

Avengers: Endgame Box Office

I didn’t want to put this as the most important story on the heels of praising Game of Thrones for its TV debut. Ratings are one off events. They don’t deserve these spots.

And yeah, if you want to talk “importance”, breaking a box office record is essentially a once a decade phenomenon. By my reckoning, backed up by Wikipedia, since Star Wars started the contemporary box office blockbuster phenomenon in 1978, we’ve averaged about one new champion per decade.

1978 – Star Wars ($410 million)

1983 – ET ($619 million)

1993 – Jurassic Park ($914 million)

1998 – Titanic ($1.8 billion)

2010 – Avatar ($2.7 billion)

2019 – Avengers: Endgame ($2.2 billion and growing)

(And these are unadjusted numbers. Yeah, I know it’s better to always use adjusted box office. Ticket price inflation is the real driver here.)

Avengers: Endgame is just this decade’s box office champion. If anything, I’m surprised the unseating of Avatar didn’t happen sooner. There are a few trends that have made the “winner takes all” economics even stronger. (And yes, technically Avengers: Endgame hasn’t displaced Avatar yet and may not do it. But it will take second which is close enough for this analysis.)

First, as I linked to last week on Twitter, digital is the big change in the game. When you have to cart six physical rolls of film into a theater, you can’t rapidly increase the number of screenings the way you can with digital projection. So Avengers: Endgame got to have round the clock showings as the demand filled up screens everywhere in multiplexes.

Second, China. The incredible growth in the Chinese market has basically created three massive markets: the US, China and the rest of the world. In the 2000s, it was still “the US” and “rest of the world”. It’s rare for a film to do amazing in all three markets simultaneously. The Force Awakens was huge in the US, but not “huge” in China, just really big. Wolf Warrior 2 and the Wandering Earth were huge in China but anonymous in America. Avengers: Endgame did well everywhere.

Third, social media did help make this an event people had to see before it got spoiled. That probably helped push even more people to the theaters for the first weekend. You just knew someone was going to die, but who? So that “conversation” likely had network effects for everyone.

My mild prediction is that this won’t be the last film to break box office records. It will happen again, before you know it. I won’t even try to predict who it will be, but it will happen, sometime in the next ten years.

More Original Content – Twitter and Walmart

This was the news out of the New Fronts last week that both Walmart and Twitter planned to expand their “original” content offerings on their platforms. I’m more skeptical of Twitter because I just don’t think people use Twitter for video. They use it to be a part of conversations. Instead, the logic, from Twitter’s perspective, seems to be, “We get paid more for video ads, so we want more video.” Notice, that doesn’t actually talk about the customer. Though customers do get news and sports updates from Twitter, and that seems to be the push for their new content. So it’s the right content, I’m just not convinced video is the right product.

Walmart is planning on originals for its Vudu service too. They want Vudu to succeed so they can try to move their DVD sales business online. So fine. You can lose a lot of money trying to compete in originals and failing, and I don’t’ think Walmart has the same Wall Street blank check that Amazon enjoys. But we’ll see. (And I may research further.)

Lots of News with No News

We also had a surfeit of stories that got headlines, but I feel will amount to very little. So I’ll run through them, with quick “Why this isn’t really news” explainer.

Santa Clarita Diet cancelled

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