This week felt important for the news. Sure, we didn’t have any official announcements of new streaming services or any giant mergers, but between censorship, antitrust and trade wars, the world of politics is smashing (back) into the garden of media/tech. And the biggest government intervention was far away from Hollywood…
Most Important Story of the Week – The Trade War Moves to Hollywood
If you want a flippant response, “This is how you trade war.” For the catch up, China is surreptitiously telling distributors to avoid booking US films into the Chinese market. China has tight control over their film industry and this is their latest salvo in response to President Trump’s trade war. Here’s the key quote in Variety (but read the whole thing):
Industry insiders stress that there is nothing in writing – no officially published decree – putting a freeze on U.S. content. The Chinese government tends to exercise such controls internally and unofficially, which allows it to publicly deny the existence of any restrictions and to make exceptions when it suits them. Three years ago, when China blocked South Korean films, pop bands and other cultural exports out of anger over Seoul’s decision to deploy U.S.-made missiles, it took six months before Beijing publicly acknowledged the policy.
Frankly, it’s a smart move. Movies really aren’t as high stakes in total dollar value as something like oil or finance, but customers care way more about them. And some powerful people who are friends with the President will be directly impacted (Bob and Rupert). But the ramifications extend from there.
This headline from Scott Mendleson sort of explains it all:
Avengers: Endgame Grossed Less Of Its Money In America Than Any Marvel Movie (Box Office)
And that’s Marvel’s highest grossing film of all time in the US. Yet, overseas is even bigger, including at least $600 million from China. As the studios make more and more franchises and more and more animated films, they rely on this overseas gross, and frankly that support is bolstered by China.
As the article makes clear, the big tentpole franchises like Spider-Man, Secret Life of Pets 2 and others will likely slide through the de facto ban. There is too much money at stake for both sides. However, the challenge–if China does want to hurt the major studios–is to just make it harder to collect money from China, which is already hard. Studios collect a smaller percentage of box office than other countries (25%) and China sometimes make it hard to take capital out of the country. They could add in a few new taxes, and this could hit bottom lines, even if they films do air in China. So even as box office grosses climb, the actual revenue coming back to California stays flat.
Instead, these are the type of films who will feel the pinch. China is growing in importance not just for the huge franchise films, but even smaller pictures. In some cases, they presell China foreign sales rights, so that becomes a key source of funding. If China starts restricting films like this, well that’s just another economic headwind for independent and middle budget films to content with.
Other Movie Industries
China will still need foreign films. China has a cap on “revenue sharing” films at a loose 34 per year. (And there are some ways to make co-productions with Chinese backing or talent or locations that can get around these quotas.) Of course, China is also feuding with Australia, Canada and the UK, so they will not be easy replacements for US films. So my gut is that Bollywood, Japan and South Korea could have an advantage here.
China’s Film Industry
Or you know what? Just make more movies at home. And they need it since apparently they’ve been in a slump since actress BingBing was arrested on tax avoidance charges and the industry. This move by China could just be good ol fashioned protectionism than anything else. I’m still curious when we have our first break out Chinese film in the American market. (The biggest Chinese language film was Crouching Tiger, Hidden Dragon, according to Box Office Mojo.)
Listen, Europe, I don’t want to tell you how to run your trade wars. And you made nice with President Trump after the last trade war talk, and you’re just waiting until he leaves office. This little maneuver with China won’t really impact your box office. I mean, Europeans don’t care if Chinese moviegoers can see the latest Star Wars. But if President Trump spur of the moment changes his mind on his trade war with Europe (the way he just did with Mexico), here’s my unasked for advice: adopt China’s tactics.
But not with movies–again, you’re too small for that to matter–but for streaming video.
Europe secretly bristles that Netflix and Amazon and other streamers are all foreign owned, hence the law requiring European content on the streamers. Well, if Trump puts unilateral tariffs again, announce tariffs on streaming video for Amazon, Netflix and Youtube. Sure, that hurts Silicon Valley, not the heartland, but it will hurt the US stock market more. (You may ask for the logic or rationale for this, but it’s a trade war started by an irrational actor. Logic doesn’t matter.)
Speaking of the streamers…
Here’s the thing about Netflix’s growth: None of it is in China. That’s kinda crazy when you think about it. They’re adding 9 million subscribers every month, but none are in the world’s biggest market. Amazon has been similarly stymied in the Middle Kingdom. (I’m not sure about Youtube and Twitch.) If China is ready to block US movies, you better believe they’ll take the same approach to the streamers. Which isn’t a change from the status quo, but a trade war won’t help their long term prospects.
Mergers and Acquisitions
The biggest casualty of the trade war may be the desire of massive conglomerates to get even bigger. As Tara Lachapelle asked, “Would you do a mega deal in this environment?” Not if the market is ready to tank at the next sign of a slowdown. Moreover, with all the China-America squabbling, that takes one huge potential source of money off the table. A few years back, the cool thing was to grab Chinese money (Legendary, STX, Relativity). This obviously complicates that or makes it impossible.
Long Read of the Week – Esports
When I used to read the LA Times as a paper back in the 1990s, as a child, I felt like “extreme” or “action” sports–everything from skateboarding to BMX bikes to anything else on wheels–was the hot new sport. I can’t prove this strawman with links because the internet doesn’t work so great for articles that long ago.
But my inherent skepticism of people touting the next thing that will kill the NFL (and other leagues) starts with the memory of breathless predictions about the inevitable conquest of extreme sports over the NFL. That was a thing in the 90s. So when I hear that esports will kill the NFL, I think maybe not.
Listen, esports is clearly a growth industry. However, when valuations start to get frothy, and investors drop tens of millions on negative cash flow businesses, well, then I naturally revert to bear status. I think esports will be a fixture of entertainment going forward, but I can believe that and believe that 1. The NFL won’t die and 2. An Overwatch team isn’t worth $50 million dollars.
So I loved this article from last week by Cecilia D’Anastasio about esports. Read the whole thing, but here are my key takeaways.
Measurements Are Still All Over The Place
I put out a tweet thread on this, but my final admonishment is the one any investor or business exec should heed: beware journalists bearing huge numbers.
Ask the 5Ws about any data point you see: who is included (meaning unique viewer or not, subscribers versus audience), where is it (global vs US; is China included), when (weekly, monthly, yearly), what (the metric specifically, and alternatives) and why is this company telling you this?
As the article shows, many data points about esports rely on gimmicks (compare a US only numebr to a global one; double count viewers) to compare things that aren’t apples to apples.
Section 2: Investment Hype
This is where I learned the most. I had suspected valuations were too high for esports–specifically the folks buying into the Overwatch league–but this article provided some specific details. Indeed, most of the teams in various leagues are losing money, and player salaries are huge driver. Further, most of the teams are operating on investor money instead of actual revenue. Finally, many non-Twitch entities that are trying to get into esports are losing money, and hence going out of business. (We don’t know with Twitch since Amazon doesn’t break out Twitch revenue in its financial statements.) There are other worrying details in the article, like how little fans actually pay themselves (under $5).
There’s a final clarification that I’d make in the world of esports. There is a clear difference between competitive esports–you know setting up a league and running tournaments for cash prizes–and people watching other people play video games on Twitch/Youtube. I’m way more bullish on the latter because it’s monetization approach–while brutal, here’s a good New Yorker article on it–is much more straight forward.
AT&T Changes Prices Multiple Times in One Week
The week started with news that HBO was causing AT&T headaches because they couldn’t cut its price lest they risk the ire of traditional cable bundles. Then by the end of the week, AT&T had leaked to another NY paper that they had plans for just one streaming service that includes HBO. Until the China news, this was the most fun idea I had come across all week–first, the question, “Is HBO overpriced or Netflix underpriced?”, and then, “All of Warner Media’s content is worth only $2 more dollars for an HBO subscriber?”–but I went long this week, so I’ll make that its own article in the future.
If a cancellation happens, and it isn’t on broadcast right before upfronts, does it make a sound? The key factor for many of these cancellations is that they are co-productions, which I wrote about here. If two shows do about the same ratings wise, well the one whose back end returns to the conglomerate will last longer. Meanwhile The Ranch is just another data point that Netflix shows will continue to struggle to get to 5 seasons. (If you’re talent and the big profitability comes in season 5, I’d renegotiate your contract.)
As for Swampman? Well, see the AT&T news just above. AT&T doesn’t quite have a plan for all the smaller Direct-to-Consumer brands they acquired yet.
Listen of the Week – HBR’s After Hours Podcast: Q&A Episode
They’ll have all the benefits of a subscription video company–regular revenue, data on customers–but instead of propping up a money-losing ecosystem (cough Amazon cough), it’ll prop up a wildly profitable one. And yeah, Netflix has a head start, but Disney’s planning to be a bundler/aggregator, while Netflix is steadfastly ignoring the coming flixification, to use Alan Wolk’s term. Oh, and Netflix is ignoring sports entirely. If Disney gets the same “tech/future of TV” valuation bump that Netflix got, watch out.
M&A Update – Antirust, antitrust and antitrust.
It’s a big deal that the FTC and DoJ are both taking a hard look into antitrust concerns for the four big tech behemoths. (Somehow Microsoft always escapes notice. Well, not in the 1990s.)
I’ll have more to say on this, but the “conversation” around antitrust in America is pretty severely broken. When the “free market” can consist of one, two or three companies, well we need to relook at what “free” and/or “market” means. Meanwhile, if the concern of some liberals is the influence of money/big business in politics, assembling an “army” of lawyers/lobbyists to fight your case sort of proves their point, doesn’t it?
Twitter Thread of the Week – Andrew Wallenstein Trying to Explain AT&T from Last Week
Before AT&T derailed the news of the week with multiple leaks about their streaming plans, they were shuffling executives last week. Some of the folks from Otter Media–who were part of AT&T before the merger–are now taking over the streaming side of Warner Media. I liked Variety editor Andrew Wallenstein’s take on Twitter:
This move raises a bunch of questions re: what's up at AT&T. Gotta wonder what happened to Brad Bentley. Does his departure tell us something that all is not right with the WarnerMedia streaming service, and new overseers are being brought in to tighten reins? https://t.co/bn0mWic7kG
— Andrew Wallenstein (@awallenstein) May 31, 2019
Ent Strategy Guy Update – Youtube Deals with More Content Issues
A couple years back, Youtube’s issue was politically polarizing content pushing conspiracy theories. A couple months back, the issue was child predators using Youtube. This week, it is more problems with inappropriate content, this time hate speech. I remain unmoved by the arguments about the size of the problem; yes, the size is huge, but so is Google’s profit.
As a bonus, here’s another long read on how Youtube (and Instagram) creators skirt child labor laws. Is Youtube responsible for this? Honestly, it depends on the legal definitions, but you could make the case they should do more.