I love Netflix earnings report day. It’s the one day of the year where Netflix has to go “off-background”–read this Columbia Journalism Review article by Brian Merchant on the insidiousness of that practice–and has to give real numbers. That doesn’t, though, make it the most important story of the week. That honor instead belongs to a different battlefield in the streaming wars…
Most Important Story of the Week – Carriage Wars Heat Up!
The “long read” of this belongs to Alex Sherman who last week wrote late in the week about Disney’s renegotiation with Charter and the implications for streaming. Multiple people asked for my thoughts on it, so it was already lodged in my brain as a potential topic when I saw the news that CBS is renegotiating with AT&T for DirecTV carriage. It’s getting ugly. Combine that with…
– Viacom and AT&T had already gone toe-to-toe earlier this year.
– Meredith stations going dark for Dish customers.
– Univision was blacked out on Dish until earlier this year.
– Dish dropped HBO and still hasn’t brought it back, even when Game of Thrones aired.
It feels like retransmission battles are increasing. But are they? What does this mean? And what are the future “retransmission” battlefields?
Are Retransmission Battles Increasing?
Skeptically, you could look at my list above and genuinely ask if this is just a Dish problem, given that 3 of my 5 examples involve Dish. And another 2 involve DirecTV. Are satellites the problem then?
I looked it up and it does seem like the retrans battles are increasing in frequency. The best data I could find comes from SNL Kagan via Bloomberg/Tara Lachappelle.
Source: S&P Global and American Television Alliance via Bloomberg.
Their data only goes back to 2010, but seems to tell the tale that carriage wars are indeed increasing. Without pulling my own data, I think it is safe to say that indeed these carriage fights are increasing and as the bundle gets pressured, will likely continue. They won’t be linear, but are trending upwards. It’s always good when the common narrative is backed up by actual data.
Is the Charter & Disney Negotiation Different?
Yes, and no.
Sherman got it right in his initial coverage that the key sticking point now is less about retransmission fees and more about the ability for Disney to put it’s content on streaming too. Of course, the idea of re-airing content on digital platforms has been around since Hulu launched and the “rolling five” compromise was adopted. The tradeoff between retransmission fees going up versus exclusivity to “linear” has been a point of contention since 2008.
But, yes, this is different because Disney has already launched ESPN+ and plans to launch Disney+. Being able to flex content between all its platforms would lower it’s content costs dramatically, while directly improving those streaming platforms’ offering. Since this is the last renegotiation before Disney+ launches, it will help set the terms for all future carriage deals.
What should Disney give away? What should they keep?
According to Sherman, Disney wants to keep current seasons of shows on Disney Channel or Junior, with the first window going to Disney+. For ESPN, Disney wants some of their tremendously valuable sports programming to move over to ESPN+. Meanwhile, the MVPDs (cable and satellite companies) want lower fees. Or at least lower increases in fees.
My gut recommendation–without running the numbers–is to relent on lower fees for the cable channels if it gets you the content on the streaming. I’m reading Good Strategy, Bad Strategy by Richard Rumelt right now, and the part that keeps sticking with me is his emphasis on focus. Good strategy is focused strategy. Disney’s focused strategy–which is a sound one–is built around Hulu, ESPN+ and Disney+. Relenting a bit on carriage fees is the smarter long term strategy to get those streaming platforms established.
But if were Charter? Well, keep fighting for the content. And if you have to, fine, let the kids content go. Sports, though, is what is holding your bundle together. Fight tooth and nail to keep that.
Also, don’t forget length. In these deals, I’m coming to suspect this is the under-considered element. For Charter, longer is better. Lock in the rights. For Disney, shorter. Frees you to renegotiate sooner. This is the first number I’ll look for when the deal is finished.
What does this mean for the future of entertainment?
In the streaming wars, cable retransmission fees are the mounted cavalry of warfare. In the 10th century, mounted knights ruled the battlefield. Then slowly longbows, crossbows and gunpowder made them obsolete. Yet, cavalry was still involved in battles, but decreasingly so overtime. Instead, they mainly became scouting elements. (See the Civil War.) But to give you an idea of how long a legacy weapon can last, the British and French sent horse-mounted troops to fight World War I.
The analogy works so well because it gives the idea that legacy institutions–in this case, business models–can last for a long time before they fade away. Sure, people will cut the cord and cord shave, but the TV bundle won’t disappear in the next decade. And as long as broadband is still needed for the internet, than cable companies will keep their profit rolling in due to their local monopolies. (At least until 5G replaces it…)
The challenge is less for the cable companies and more for the conglomerates, whose content production will need to be sustained as they navigate the revenue losses from streaming. And this is where I think most observers saying, “Just launch it all on streaming” really undersell how much Disney makes from subscriber fees. Here’s a refresher from THR after Disney’s last earnings call:
Disney still really needs the sub fees as they launch Disney+. Managing that tradeoff is why it took so long for old media to launch their own streaming sites.
What are the future retransmission battlefields?
Just because one type of retrans battle is ending doesn’t mean the battles over “carriage” will end too. Instead, they’re just going to change shape and form. Here are a few potential for the next retransmission battles:
– Device carriage. This is the contemporary battlefield. For a long time, Youtube wasn’t on Amazon’s Fire Devices and Prime Video wasn’t on Google’s Chromecast, as just one example of this type of negotiation. What a lot of us don’t realize is that every time an app appears on a device it does so only at the approval of the device/operating system owner. These carriage disputes primarily revolve around how much money Apple, Amazon and others collect from streamers who allow people to subscribe or buy things in the app, who owns what data and placement (trying to be the first thing someone sees in the device).
– Aggregator carriage. This is the new battlefield to watch. As Apple, Roku and Hulu mimic Amazon’s channel business, most streaming services will need to be distributed through these platforms. But whereas if you sign-up for HBO Now via HBO directly they get 100% of the payment, through an aggregator like Amazon, HBO splits that bill. While HBO can demand high margins to keep–and ESPN+ and Disney+ will likely have the same high customer demand/strong negotiating opinion; CBS All-Access/Showtime/Starz remains to be seen–other smaller services will feel the squeeze just like smaller cable networks of old.
The solution is to, of course, have multiple streaming services which strengthens your negotiating position, just like the carriage wars of old. Even more important than revenue splits may be data. Amazon and Apple will try to be as stingy as possible with sharing it, which should be a deal breaker. Without the data, the aggregators have an immense negotiating advantage.
– Data carriage. This the hypothetical battlefield of a post-net neutrality world. Which we don’t live in yet, but could. Make no mistake, if the pipes can charge for data usage, Youtube and Netflix will have some fierce negotiations ahead.
Data of the Week – Netflix Q2 Earnings Report
Don’t get mad, but I’m not going to dive into the data of the earnings report this week. If you want my initial gut reaction, check out this thread, which I have kept putting thoughts into. The reason you shouldn’t get mad is because I had SO many thoughts on Netflix, trying to double/cross check their data, trying to find insights, that I’m writing an article for it on Monday.
Still, you need some data to tide you over. Here’s my favorite insight from the earnings report so far. (Besides the constant monitoring of free cash flow, which is still pegged to hit $3.5 billion in losses this year.)
The Google Trends Sanity check on Netflix Movie Data
The insight here, for me at least, is that theaters may still the best way to launch films to get awareness. I came to this conclusion because whenever Netflix releases data, I try to compare those datecdotes with other films and TV series via Google Trends. This data isn’t perfect–it is only correlated with success–but it gives us one of the few ways to add context. I’m only showing the US data, but the WW data looked roughly the same in each chart.
Here’s the two big sturm und drang independent film releases–Late Night and Booksmart–compared to Netflix’s The Perfect Date and Always Be My Maybe.
So Late Night and Booksmart don’t look so bad, do they? Considering Netflix has zero incremental revenue from either of their releases–and The Perfect Date doesn’t even show up–maybe theaters aren’t such a bad thing. Of course, we could add even more context by putting the blockbusters into the list. Let’s try Toy Story 4 (which initial coverage sounded like a flop) and Murder Mystery, Netflix’s biggest launch.
In this case, Book Smart still had higher interest than Murder Mystery, and well Disney’s Toy Story 4 was four times larger than those at it’s peak. This sort of makes sense to me. Even a theatrical Adam Sandler/Jennifer Aniston film would have struggled to be as popular as Toy Story 4. (This is an example where the worldwide data shows a big jump up for Murder Mystery, but still no where close to Toy Story 4.)
Of course, the conclusion is obvious that Toy Story 4 won’t end up on Netflix. Last year, it would have. And even if a lot of people saw it, clearly the interest in it was huge. Which translates to views on streaming, which means subscribers. There is no “Netflix killer” but losing very popular content will still hurt in the long run.
Dueling Renewal/Pick-Ups: From Linear to Streaming
In the olden days, a cancelled network show was revived by a streamer. (See Designated Survivor.) Then, we had cancelled network shows going to other networks. (See Brooklyn 99 and Last Man Standing.) Recently, this went from a cancelled streaming show being revived by a network. (See One Day at a Time.)
With this week’s news, we now have streamers reviving their own cancelled shows, with AP Bio coming to NBCU-TBD. It makes sense that if you’re launching a new service, you should go with shows that have some name recognition. And/or a devoted audience, which NBC is guessing applies to AP Bio.
More Streaming Service Cancellations and Shifts
First, NBC-Universal is finally consolidating its TV Everywhere applications, which, yes, still exist. This is very minor streaming news that probably should have happened 6 years ago. It makes sense from a UX perspective (less log-ins/downloads improves user conversion) and content perspective (odds you’ll find more series which drive time on app). Though late, it leads me to be slightly hopeful that Comcast is finally figuring out they need a focused streaming strategy.
Second, speaking of focused streaming strategies, Disney is shuttering FX Plus, which was the FX bundle’s streaming service. Disney seems focused on three current streaming platforms, and my guess is the FX content will help bolster the Hulu part of that trio. This move, like above, makes sense.
Long Read of the Week – How Endeavor’s IPO Became a Focus of the Bitter WGA-Agencies War in Variety
I had a surfeit of good long reads this week. (Check out my Twitter thread with all the other contenders.) The one that stood out at the end of the day was the issue that should remain on top of all content creator’s minds, which is the WGA/Agents war. Cynthia Littleton and Brant Lang dig deep into how all this impacts Ari Emmanuel and Silver Lake’s plan to take Endeavor public. Take a read.
Listen of the Week – Malcolm Gladwell’s Revisionist History on Meritocracy via the LSAT
Since the Fourth of July weekend, we’ve been on a run of great podcasts that apply (somehow) to the business of entertainment.
This week my listening recommendation is Malcolm Gladwell’s second episode in Revisionist History on the LSAT, which is secretly an episode about meritocracy. How does this apply to you? Well, if you do hiring, are you a Chief Justice Scalia or Chief Justice Lewis Powell? If you are a big company that only hires from Ivy League schools (that mainly select children from upper income private schools), well you’re the former. But that might not mean you’re hiring the best people.
Twitter Thread of the Week – David Sims on New York Times and Netflix Films
A few weeks back there was a big New York Times story on the future of movie going and The Atlantic’s David Sims had the best takedown of the misunderstandings about the economics of theaters versus streaming.
the thing about the “people pay money to see a thing in theaters” system is that it also is a proven and profitable one, while “people pay a small monthly fee to see dozens of hours of new content a week in their own home” is powered by venture capital and colossal unprofitable
— David Sims (@davidlsims) June 20, 2019