Does anyone else watch Penn and Teller’s Fool Us? Probably, though it’s not cool to admit it with all the great peak TV shows to watch. In my defense, if you have a four year old, it makes for good family co-viewing. (Narcos does not.) Anyways, I love the magic analogy for how business leaders should use the entertainment biz news.
Your eyes will be drawn to the shiny object, where the magician wants you to look, but the real action is happening elsewhere.
Take this week. You may have your eyes gazing at the AMC mask controversy. It’s buzzy and everyone’s talking about it. (I’ll mention this story with the bigger news, which was the Tenet date move.) Same for new email service Hey and their fight with Apple. (Which in fairness was inches from being the biggest story this week.)
If you’re looking for the story that really is important, shift your gaze to lowly cable channels TNT/TBS…
Most Important Story of the Week – Turner Sports nearing (another) record MLB deal
Before I started writing this week’s column, I was thinking there was a chance that I’d finally update my series on “How Coronavirus will Impact…” on sports. Alas, there is too much to cover to fit in this column.
However, I can tell you that this little nugget of news will make that column. This Sports Biz Journal headline says it all…
Now first the caveat. The headline is that the average value of the baseball deal increased 40% for the average price per year. This is “true”, but also a bit misleading. And I’m here for nothing else but to take headlines and put them into a more precise context. So the raw numbers are that the previous deal cost $325 million per year and the new deal is $470 per year. A 40% increase.
However, the previous deal was 8 years long. The new deal is 7 years long. What this means is that in practice, year over year, the growth rate for sports media rights is about 5%. Here’s how this looks in a chart if you assume a 5% increase in sports rights year over year:
Is 5% a good growth rate? Absolutely. Many businesses would kill for their revenue to increase that much year over year. Is it much less than 40%? Yes. Be careful out their when reading big numbers.
Besides quibbling over context, what else does this mean for the business of entertainment?
First, we keep waiting for the big tech giant to make a splash…
Another major deal without a M-FAANG plunking down for sports rights. The biggest barrier to me seems to be reach. The worry is if you go exclusively with Amazon or Apple, for example, you’re artificially cutting off a big chunk of your potential customers. Sure, lots of folks have Prime, but many less know how to watch Prime Video. So the wait continues.
..And linear channels are NOT abandoning sports rights.
Most likely, because we live in times of huge uncertainty, the sports leagues continue to go back to their current partners. And they are continuing to spend the same amount even as always. Which is notable because there are definite signs of reckoning for both advertising spends and affiliate fees as customers cut the cord. If you revenues go down while your costs go up–which seems to be the case for TNT/TBS–that’s bad. (The likely thing to give is scripted programming at both.)
Second, for now, the market sees the impact of coronavirus limited to this year.
This is the first deal of the coronavirus era and it looks shockingly like the old deals. (See my next point.) If Covid-19 cancels the next MLB season, then this deal wouldn’t make any sense. Clearly the buyers of sports rights are assuming it won’t. Even then, it seems to me that most sports leagues are assuming business as usual when it comes to live sports. (More on this in a future article.)
Fourth, prices keep going up at a steady rate.
At the end of last year the PGA extended its deal with CBS/NBC in a deal very similar to the MLB deal. (An announced 60% increase, but spread out over 9 years.) This point is worth repeating since the common sense seems to be that rights are increasing, when I’d say they are holding steady. Meanwhile, I have wondered before if we’ll see the sports media rights bubble pop. Instead, sports rights are fairly resilient. As such, I’d expect 4-5% combined average growth rates to continue.
(If you want to read my deep dive on sports rights, I’d send you to Athletic Director’s U where I went fairly deep on the subject. You can also download my data here.)
Runner-Up for Story of the Week – Apple vs Hey (and the streaming wars)
This week I happened to be rereading Deep Work by Cal Newport and he mentioned David Heinemeier Hansson, one of the partners of Basecamp and the inventor of Ruby on Rails programming language. I happen to follow the Basecamp folks on Twitter and I hadn’t made this explicit connection yet. (And yes, rereading Deep Work is a reminder that I need to “quit social media” and spend less time on Twitter.)
If you follow the Basecamp folks, though, you know that this week they launched their solution to email called Hey. They let users pay on their website, and of course the application is downloadable to iPhones–since likely most of their new users have iPhones and iPads. This is where the problem comes in. Apple objected to Basecamp, telling them that unless they authorize payments through their app store they’ll blacklist their application.
As others have laid out better, the core of this fight is over the fact that Apple controls the gateway, and Basecamp isn’t big enough to hurt Apple’s business on paper. (For example, Apple does not enforce this rule with Netflix.) But since they are a gateway, they can charge a 30% fee to essentially offer very little ongoing value. (Setting up the app store added value; maintaining it much less so.) What do we call a 30% fee for little value? Rents. Or taxes.
We’ll see where this goes as for the anti-monopolist energy rising across America. In the meantime, I see two insights for entertainment:
Insight 1: Apple’s Service Revenue May Be Rising for Non-Entertainment Related Reasons
I’ve been fairly skeptical of Apple TV+’s performance since before it launched. (See here or here.) Yet, last quarter, when they had record services revenue, many analysts and observers credited this to their new multimedia efforts. Yet, take a gander at this quote from Stratechery’s Ben Thompson:
The challenge for us as analysts trying to determine how Apple TV+ is doing is that it’s the blackest of black boxes in streaming right now. Well, Prime Video is pretty unknown too. But with Apple TV+, we don’t know how much revenue, subscriber or viewership they have. And given that Apple bundles everything from insurance to payments to music in “services”, untangling that knot will be impossible.
This Thompson quote speaks to the idea that it is much more likely that other service revenue (think Apple Care or App Store) is driving the business instead of the multimedia stuff (think Arcade, News, TV+ and Music). That’s going to be my position until I see good data otherwise.
Insight 2: Any Decrease in In-app Purchases Would be Great for Streamers
In other words, this fight between Hey and Apple is just an extension of the AT&T and Roku/Amazon fights. Indeed, the terms are fairly similar. Roku, Amazon and Apple are hardware/operating system owners that allow third party apps. And they charge a 30% tax to work on their system.
If the antitrust authorities get involved, it could be a game changer for the streamers. Imagine a ruling in the EU that Apple is capped at 5% rents on in-app purchases. At 5%, the streamers would likely all allow in-app purchases. That’s much more reasonable fee. That would mean they could also potentially lower prices and still make the same revenue.
Is this likely? Not in the United States, but maybe in the EU. So it’s worth monitoring to see how these fees evolve.
Data of the Week – Xfinity VOD From Vulture’s Buffering Newsletter
Josef Adalian of Vulture got a peek at Comcast’s Flex and X1 viewing data and he drops some insights in one of his recent Buffering newsletter. (He’s used Comcast VOD data before to draw similar judgements.) My takeaway? Blockbuster movies are still important (Spider-Man and Fast and Furious), Game of Thrones may never die and don’t count out non-buzzy/non-critically acclaimed fare. (Yellowstone and 90 Day Fiance)
Other Contenders for Most Important Story
Movie Theater Openings Updates: Tenet Delayed to July 31st
The theaters and studios are locked in a chicken-and-egg problem with launches. Since theaters have built their entire models around launching tent pole blockbusters, they don’t want to open too early and have to endure weeks without a tentpole. The studios, meanwhile, don’t want to be the first movie back after reopening with all the (totally predictable) problems with reopening. Thus, even though the National Association of Theaters Owners said most global theaters would be back by July 15th, Warner Bros still pulled back the date for Tenet.
The compromise to me should be from the studios end. Disney and Warner Bros. and Universal should be offering up Marvel, Disney animation, Harry Potter, Jurassic Park and Fast/Furious films to theaters for as close to free as possible. (Just enough to cover residuals and back end participation.) This way theaters can test run the experience on library films while studios get free publicity for recently launched streaming services.
Instead, the theaters and studios are sticking to business as usual. As it is, right now, all eyes are on Mulan and its July 24th opening day, about 9 days after AMC theaters July 15th reopening.
(Well, that and on AMC’s mask policy. The vast majority of evidence I read says that masks really do decrease transmission in crowded areas and would likely prevent the majority of spread. That said, with adequate distancing–like when folks are in their seats–they should be optional. AMC Theaters, though, wanted to avoid the political flashpoint of making a call, and then got the blowback anyways. The lesson is that everything will become a political flashpoint no matter what happens.)
Disneyland Has a Reopening Date Too
Disneyland of Anaheim joins its sister parks in getting a July release date. I remain bullish on Disney through the end of the year, though this may reflect my Disney fandom then actual data. That said, I have a feeling they’ll be at capacity every day through the end of the year. Though that’s the artificially reduced capacity meaning they’ll be leaving lots of revenue on the table.
Twitter Had a Good Week
From Sara Fischer’s excellent newsletter, Twitter set a high in downloads during the recent protests. While Twitter is overrated in terms of its relation to series popularity–it’s correlated, but other measures are more correlated–it is seeing additional use as a newsource.
Fortnite Had A Good Week Too
Of course, if I’m talking about good weeks, Fortnite had one too. This week they held an “event” that reached capacity and previously they had another “record setting” in-game concert. To top it off, they’re raising another round of funding at a 17 billion dollar valuation.
(This last one is a bit odd to me, since if they’re making money hand over fist with high margins, why do they need to dilute their equity? Presumably to take advantage of their current popularity during lockdown.)
I would add few companies besides Zoom likely benefited as much as Epic Games from the lockdown. Essentially, many American school children replaced sitting in a classroom with Fortnite. Is that good for future American productivity? Hardly, but it’s great for Epic Games. (It’s also probably an indictment of online learning, but I haven’t seen that case as much.)
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