On Content Arms Dealers, Aggregation and the Perfect Bundle: What Is/Should Be ViacomCBS’ Competitive Advantage?

Let’s get right into Part II of my a quest to find SuperCBS’ competitive advantage. (Reminder: SuperCBS is my nickname for ViacomCBS.)

Competitive Advantage: Become a Content Arm’s Dealer

Why?

I’ll be honest, I didn’t come up with this on my own. I first read it on Twitter by Rich Greenfield. Then I heard it from Matt Belloni and Kim Masters on The Business. The logic goes, with 140,000 episodes of television and 3,600 movies, the combined ViacomCBS has the content people already need for their libraries. Moreover, they’ve been making TV and film for decades. So as new entrants like Amazon and Apple struggle to make good shows, CBS already knows how to do that. They boast 750 shows currently in production or ordered. 

Reading their press release announcing the merger makes one even more inclined to consider this position. They clearly think their advantage is content production. Most of the facts from above came from that announcement.

Upside?

Quantifying the upside here is fairly difficult because you need to separate how many shows SuperCBS will sell to its linear channels, its digital outlets and then other folks. Or what happens to their movie output deals. (For instance, Paramount is already making some films for Netflix.) Instead, the main opportunity is feeding the hunger for content from people like Apple, Amazon and Netflix. They’re buying lots of shows to air globally. It’s a sellers market. You should be able to make money off that.

However, as they grow, Netflix has pioneered the trend of controlling more and more of a show’s distribution. In return, the streamers like Netflix pay something like 130% of the production budget of a show to have its rights for 5-10 years. Except that Netflix then takes a 30% distribution fee, and can cancel a show at anytime, while keeping the rights in the near term. This means you essentially are selling your content for exactly what you make it for, which is a zero margin business.

Skepticism?

The reason that there is even a debate between “distribution versus content” (content is king!), is that everyone wants to be a distributor. The way you make money, the conventional wisdom goes, isn’t to be a content producer, but a distributor. As soon as the FCC relaxed rules on the amount of owned content aired on broadcast channels, all the broadcast channels went to majority self-produced content. As a result, many independent TV producers went out of business by the end of the 1990s

TV Value Chain

In the TV or movie value chain, the worst place to be (besides being a customer?) Is to be the producer in the middle. They’re squeezed on both ends. The creatives demand increasingly higher payments to work on the shows or films. (Creatives like JJ Abrams, Shonda Rhimes, Ryan Murphy or Benioff & Weiss are the rare commodities in this market.) Meanwhile, the distributors insist on huge margins for simply putting out your content. (The traditional film distribution “fee”, for example is 25-30%. The streamers have similar fees.)

Sure, the TV producer “owns” the content, but if they can’t sell it anywhere else, where does the extra money come from to pay for overhead, studio lots and, eventually, shareholders?

Worse, the biggest upside TV producers had is potentially disappearing. That was syndication revenue, which was a monster. Shows like Friends, The Simpsons and, now, The Big Bang Theory are worth billion dollar pay days. But it required making hundreds of shows to get those handful of hits that could be sold into syndication. (Netflix doesn’t let a lot of shows get that far anymore.) If the bundle falls apart, syndication goes too. Will streaming be as valuable as syndication? I’m skeptical long term.

Making matters even worse, companies like Netflix are moving to owning more of their shows, so they can keep these margins low. (Netflix can say, “Don’t like our deal? Well, we have Benioff & Weiss, why do we need you?”)

Future M&A Needed?

MGM and/or Lionsgate. 

If you’re selling content, having valuable libraries will only help you deliver on that value proposition. To go with the arms dealer analogy specifically, MGM is like adding a lot of AK-47s while Lionsgate is a few additional heavy tanks. MGM can bring you Gone With the Wind and The Wizard of Oz while Lionsgate has Twilight and The Hunger Games. Those aren’t bad additions to a streaming library!

Competitive Advantage: Become a Distributor

Why?

If I could choose anyone to be in the streaming wars to come, it would be the folks who are distributing the content. My working theory is these distributors will be the best positioned companies to thrive. These distributors are stepping between the “pipes” to become the new multi-channel provider. The people not just selling their own subscription streamer services, but taking 30% off every subscription they sell.

The best way to make money in entertainment? Not even distributor, but distributor of distributors, taking a percentage without doing the hard work of making TV shows. So Amazon, Apple, and Disney won’t just be people owning streaming platforms like Prime Video, Apple Plus and Hulu, but also selling HBO, CBS All-Access and Starz. And taking 30% from each “channel” they sell you. (But not Netflix. No one gets to resell them.)

Upside

My quick math is that if you can get to 30 million US subscribers, with an $80 monthly bill, and take 30% of that, well that’s a $8.5 billion dollar business. Add an international business with 50 million subscribers at $40 a month, and you’ve added $15 billion to your top line. Not bad.

The non-monetary upside is considerable too. If my theorizing is correct, the new carriage wars are going to be about distribution on the new distributors. (Article on that here.) Say Disney and CBS are having a tough negotiation over CBS All-Access on Hulu. Well, CBS is in an even stronger position if they can also threaten to drop Disney+ from their distribution platform then if they have to argue just on the merits of CBS All-Access (and Showtime). So if you’re a streamer, owning distribution makes it easier to negotiate with other distributors.

Skepticism?

First, look at the size of those giants. While I tend to look skeptically at how we cover Netflix’s size (mostly using market cap, subscribers and content spend; ignoring revenue, free cash flow and profit), I can’t make the same case with the Apple, Google and Amazons of the world. Amazon is one America’s largest companies by most metrics. Disney has a stranglehold on the box office, which generates 3 times as much revenue as Netflix. And Apple makes more cash than Disney makes in revenue each year. 

Plus, CBS does not have the hardware to get into people’s homes nor the software to distribute multiple services. Notably Disney has the latter, but not the former. Amazon and Apple have both the hardware and software. This strategy more than any other demands…

Future M&A Needed?

Roku.

First, Roku is cheap, with a market capitalization of “only” $16 billion. So at least it’s feasible that SuperCBS could pull off an acquisition. Roku is already the leader in smart TV technology with an interface folks seem to like. They have their own ad-sales team, so you could pair Roku’s technology with one of these other strategies.

Recommended Competitive Advantage: The perfect bundle

Why?

To piggy back on my general view of the future—which I promise to flesh out in future articles—if we have aggregators bundling all our channels, it will again be valuable for certain streamers to offer bundles of their content. Which can then be bundled into larger bundles. If that future sounds a lot like what the current cable landscape is, um yeah. Did you really think that basically free content was here to stay?

Disney is kicking this trend off with the trio of Hulu, Disney+ and ESPN+. And I think CBS could be the next one into the streaming bundle swimming pool.

I love where ViacomCBS in the “bundled” landscape. Here’s my take from a Linked-In article:

Screen Shot 2019-08-22 at 1.50.30 PM

To grab customers, PlutoTV is the free entry point. That’s a great start to a funnel and a potential great source of “sticky” content. After you have their attention, CBS is the “broad” platform with CBS All-Access. Having the most popular broadcast channel is an advantage. Once they’re ready for more, Viacom could be a third subscription service, selling itself as a general entertainment channel with a lot of clear brands a la Disney+. Not as valuable as that service, but still something. For your premium customers,Showtime is the “prestige” add-on that’s already sold by a lot of channels. If cord cutters really are proliferating, that’s a lot of content they’ll want in their subscription bundle.

Upside?

The upside is the number of customers multiplied by the price per month. (Or the customer lifetime value, but those are two sides of the same coin.) This math is basically the upside of Netflix in the US (60 million subscribers paying up to say $20 for the bundle per month). And if SuperCBS is clever, they’ll go global next.

Skepticism?

The first argument is that the price is too high for this specific bundle. And that Netflix/Amazon already have such a head start that the old brands have already lost too much value. Netflix already has 60 million subscribers and all the eyeballs, why do people need CBS or Showtime? They already could buy them and aren’t.

My biggest worry though is a company having the focus to go all-out to launch the streaming platforms, while not confusing customers. The problem with the aggregators right now is that you go to Amazon Channels and there are dozen of smaller subscriptions you’ve never heard of and don’t want. If Viacom tries to launch MTV Now and Comedy Central Now and so on, they risk the same confusion. Even explaining the PlutoTV to CBS All-Access move could be confusing for customers.

Future M&A Needed?

Entertainment One. 

The challenge with my plan is that the SuperCBS bundle isn’t truly perfect yet. With Nickelodeon, they should have a strong kids brand, but it too has decayed in value recently. Reassuringly, their recent acquisitions—like Garfield—say they want to bolster this further. Entertainment One has some of the most popular characters going in kids content right now with Peppa Pig and PJ Masks, so this would refresh Nickelodeon’s content slate. (As for whether kids content stays bundled with CBS All-Access, I’m not as certain. If SuperCBS does keep that plan, they need a kids-only app or profile system.)

[As I publish update: Well, Hasbro just purchased Entertainment One. Which will make my list of stories tomorrow.]

But I’m not done. After kids comes sports. So…

NFL or NBA or other sports rights.

Call this the “fast follow” of Disney. Sports will still have tons of value in future bundles, hence ESPN+. Traditional CBS has some killer sports—selected NFL and SEC football games, March Madness—but CBS Sports is much less of a brand name. CBS needs the digital rights to sports to become an irreplaceable part of the bundle.

The Most Likely Future? Combining Multiple Strategies

A good bet for ViacomCBS’ future—besides changing the name—is that their actual strategy will look a lot like all of the above. They’ll keep selling shows, they’ll maybe acquire another studio and/or more channels and sell lots of advertising. Along the way they’ll keep their bundle alive. 

That’s the worst case. The best case may be to take one of the strategies above and combine it with another. Say they lean into the advertising advantage, while buying Roku to help create the perfect bundle. That would make sense, but it would also mean NOT becoming a content arms dealer. You need all the content you can to make the best bundle.

Or they could just try to maximize their revenue and cash flow, at which point they could be a content arms dealer who buys Discovery, so also milks all the revenue possible out of the end of the cable bundle. With cash saved up, they can decide their next strategic pivot.

Whatever strategy (and consequent M&A) they pursue, they can’t do it all or they’ll have a lot of debt and not a lot of plan. (Like say a cellular company that’s been in the news a lot.)

Last Note: Selling yourself isn’t a strategy.

As I was writing this, it struck me that of course, ViacomCBS could sell itself to a larger tech company. Everyone seems to want them to do this. Of course, selling yourself isn’t a strategy. Instead, strategy your plan to thrive as a business. I’d assume that whatever strategy ViacomCBS pursues, if they gain market share it makes them even more attractive as an acquisition target.

  1. […] Miramax has a fairly prestigious library, so why isn’t Apple buying it? Let’s wait to see what happens, but adding a bucket of movies like this makes sense for several of SuperCBS’s potential strategies. […]

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