Last week got away from me. Fine, I got away from it by diving down a data hole. Specifically, a Covid-19 data problem. For all the forecasting being done, few people are answering the query, “Hey, when will all this end?” I’ve seen answers ranging from “Never” to “2022” to “maybe a few weeks”. Hence I dove deep into the data to make my own guess, especially as it relates to theaters. Check it out here.
It was a good week to be distracted, since the week felt light on big news. (Unlike this week, which is already trending upwards in big stories.) The most consequential story was actually spread out between a few different streamers, who all announced new forays into producing kids programming.
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Most Important Story of the Week – Why Every Streamer is Investing in Kids Programming
Take a gander at these headlines:
“Apple/Skydance Animation Set Multi-Year Feature & TV Deal”
“Warner Media Kids Debut Cartoonito Preschool Programming Block”
“YouTube Announces 2021 Slate of More than 30 Kids Originals”
“Netflix Plans Six Animated Feature Films Per Year”
That’s a lot of kids content. And with it, a lot of hyperbolic headlines and coverage. Kids content is a key part of the streaming wars, but it deserves more nuance than most coverage provides.
Consider an actual war. Many battles are important, but they aren’t all equally important. In the Civil War–since I use too many World War II analogies–the main event was the Army of the Potomac fighting the Confederate Army of Northern Virginia. That’s the adult content battlefield. The main event. The showdown that truly decided the war. But the campaigns to retake the Mississippi River, Sherman’s March through Georgia and the naval blockade of the South were all crucial to winning the war as well. All were important, but none were the main event.
Why Kids Content is a Pinch Overrated
Often, explanations for why a company gets into kids programming is treated as obvious. As if it’s a no-brainer decision that every streamer is right to pursue it. I don’t buy that for a few reasons that don’t get nearly as much press:
– First, there are way less kids than adults. This seems obvious, and yet it’s worth pointing out to make it explicit. Given that I just pulled a bunch of demographic data, it’s worth reminding everyone that these are the number of kids in America. In other words, if the “total addressable market” for adult TV in the United States is 130 million households, by definition, the market for kids is a fraction of that. If you target preschoolers–5 and under–then your market is, by definition, 6% as large as the entire U.S. viewing market.
– Second, licensed consumer products (toys, shirts, whatnot) aren’t as lucrative as some casual observations make it seem. In the past, I’ve said that on average they make up 5-10% of a film’s total revenue. Further, it’s not like licensed products are a growth industry. If anything, it’s the opposite. There are a few factors driving this, from Disney’s dominance on one end to consolidation in sellers (Amazon, Walmart and Target) on the other to disruption by digital in the middle. In all, yes, if you have a SpongeBob, Mickey Mouse or Peppa Pig, you can generate billions in retail sales, of which you keep 5%. But if you aren’t in that top tier, you make much, much less. Toy sales alone cannot justify kids programming.
– Third, competition is fierce, as the headlines suggest. There are a lot of folks competing for a limited number of kids eyeballs.
– Fourth, replacements for TV are legion, from video games to social media, which makes it even harder to compete.
Add those four variables up, and it doesn’t scream out that kids content is a business you want to be in. It seems as competitive as adult competition, with only marginally better upside. Using Porter’s Five Forces analysis, arguably every variable is against you. It’s easy for competitors to enter, the competition is fierce within the field, sellers of toys offer poor margins, and there are lots of replacements to kids TV competing with you as well!
As a result, we probably have too many firms competing for kids’ attention right now. There’s an old saw that there are always six major film studios. They may change names, but there are always six. (I’ve been meaning to write an article on this since I launched.) Well, given the smaller market size, then I’d say there are only 3-4 major kids content producers. In the 1980s, this was Disney with the three broadcast channels. By the 1990s to 2000s, this shifted to Disney/DreamWorks in movies and Disney Channel, Nickelodeon and Cartoon Network in TV. (PBS also has had a place for preschoolers. Again, it’s complicated.) As streaming took kids attention, this has shifted to Disney, Universal (DreamWorks/Illumination), Netflix and YouTube.
Can HBO Max, ViacomCBS, Prime Video and Apple all break/rebreak into that and succeed? Probably not.
Why Kids Content is Valuable
Still, I’ve presented a bit of a conundrum. Clearly kids content is a tough biz to be in, yet everyone wants in! What do they see that I don’t?
Going back to the Five Forces, it’s not an insurmountably tough business to be in. In technical terms, the barriers to entry are low, especially once you’ve set up a streamer. The marginal costs of adding kids programming to general entertainment is fairly low, once you’ve set up a streamer in the first place. Animation tends to be much cheaper than producing full-episodes of live-action television. Moreover, kids, especially preschoolers, don’t know what legacy brands are. Except for Mickey Mouse, new preschool brands can and do break it. Just look at Peppa Pig.
And if it works, it’s sticky. Sure, kids are a small population, but they’re influential to their parent’s decision-making process. If kids want the content, and the content passes the parental approval test, it can be very sticky. The kids who watched Frozen every week weren’t going to just stop watching it when it left Netflix.
However, if I’m being cynical–and if you’ve read me for any length of time, you know I am–then partly it’s an easy strategy. Which isn’t “good strategy”. Easy strategy is when there is an opportunity in front of a company, and they take it simply because they can. It can sometimes allow business leaders to “empire build” as well. Going into kids programming lets you hire a brand new direct report and team of people. That’s easy strategy, like mergers & acquisitions or getting into original content.
Who Will Win The Kids Space?
Not everyone can win in kids programming. There are only so many preschoolers and elementary schoolers to bring into your ecosystem to justify the costs. Some folks will quietly dial back their investment. Indeed, some streamers seem to have realized there is already so much kids programming out there–and again, kids don’t need new content to be satisfied–that you can rent all the programming you need, instead of making originals.
Still, if you do want to win, I have two (fairly obvious) recommendations. First, building a defined brand really is a differentiator. Disney has this. Netflix does too. Quietly, PBS also has one of the stronger brands (and fairly high viewership on mobile devices). Even those brands need constant renewal to stay fresh. Nickelodeon lost brand equity rapidly in the last decade. But a brand is valuable.
The second way is to make hits. It seems obvious, but sometimes the best strategy is obvious. Disney is “Disney” because of three immensely lucrative time periods, driven by three innovative development executives: Walt Disney in the 1930s and 1960s, Frank G. Wells in the 1980s and John Lasseter from the 2000s. John Lasseter, the creative force behind Pixar before he was fired and then hired by Skydance, just signed the big deal with Apple. Indeed, of all the headlines above, the Apple/Skydance partnership interests me the most.
If I had one overwhelming recommendation for everyone except Disney, really, it would be to not just produce kids content or have kids content, but to have a kids strategy. This battlefield will be fierce coming up, and simply dabbling in it won’t be enough.
Entertainment Strategy Guy Update/Lots of News with No News – Roku’s Push Into Originals?
Based on one job opening, the speculation mill was unleashed last week that Roku may be starting a big push into “Originals”. Like I said, originals are an “easy strategy”.
When they announced earnings, Roku splashed cold water on this idea. Likely they are evaluating originals as a space to be in. There is a great reason to make original content, but just as good of a reason to skip it altogether. Let’s explain each:
The Best Reason for Roku to Make Originals: To Sell Targeted Advertising
One of the profit drivers over at Roku has been The Roku Channel, which is their version of an advertising streamer. (Either AVOD or FAST, whichever acronym you prefer.) Unlike other FASTs, the genius of Roku’s platform is that they can sell advertising targeted to any streaming service’s customers. Think of it like this: you’re an advertiser. You want to sell ads to folks who watch The Queen’s Gambit. With Roku, you can do that, since Roku knows everything a customer watches.
This is why Roku is so insistent that they get advertising share for any ad-supported service on their platform. Because they can charge higher CPMs (cost per thousand) to advertisers with this unique targeting. (This demand notably held up Peacock and HBO Max launches. Amazon demands something similar.)
Of course, this genius system only works if customers aren’t watching Netflix. Which is where the free Roku Channel comes in. It’s basically a vehicle for Roku to sell extra, highly targeted ads. But it only works if folks are watching it. Hence, the need for programming. Mostly, this has been library programming.
This is where original programming could (big tentative could) come in. If the higher CPMs provide a true edge, Roku can outbid for AVOD programming since it will have higher margins. Hypothetically, this could even include original content. Except…
The Best Reason for Roku NOT to Make Originals: They are limited by distribution.
Every so often, some cable, satellite, cellular or device maker contemplates getting into the originals game. The logic goes: if originals work at driving customer acquisition, and since our customers are really valuable, maybe we should make originals. Think AT&T Originals, Spectrum Originals, Verizon’s Go 90 and Microsoft Studios. In the end, they all get shut down.
Why? Because unlike a streamer, who is available in at least 90% of connected households, devices and MVPDs are not as widely available. A simple thought exercise shows why. If someone wants to watch The Mandalorian, they can find a way to download Disney+ to their iPad, iPhone or connected TV. Then they can watch. Literally, almost anyone in America with broadband. On the contrary: if you didn’t live in an area with Spectrum cable, you couldn’t watch the Mad About You reboot. (Yes, they rebooted that.)
In other words, a device-based original has an upside directly tied to the market share of its device. As big as Roku is in connected devices, it’s far from a monopoly. Roku is only 30% of connected device sales in the U.S. If you factor in the folks not watching streaming at all, those on mobile devices, and those with connected TV sets not using Roku’s operating system, then the vast majority of TV viewing is not on Roku. That’s always going to limit Roku’s upside in producing originals, since their distribution footprint is that much smaller.
That will be the key element in whether or not Roku does get into originals: The trade off between reduced distribution (which will constrain costs) and higher CPMs with targeted ads (which could boost revenue). We’ll see which side wins out.
Other Contenders for Most Important Story
Theaters: China’s Big Theater Weekend
An Avengers: Endgame milestone–albeit a slightly obscure one–was taken down last weekend. Detective Chinatown 3 launched in China and surpassed Endgame as the biggest single country opening weekend of all time. In other words, theaters are back! (In China…)
By the way, if you missed it, Soul also did really well in China too.
Streaming: Disney+ Launching First European Originals
Given that all the major streamers are U.S.-owned (mainly), there was a concern in Europe that local productions would begin to be overtaken by foreign content, so the EU passed a law mandating that streamers would need to have a minimum amount of locally produced content available. Thus Disney+ is staying in line with this law by releasing European-produced originals.
I do love the one potential ramification of this law, which is that if every country around the world passed a similar law, it would basically end global originals. If 30% of your content has to be European in Europe, and 30% has to be Brazilian in Brazil, and 30% has to be Indonesian in Indonesia (the last two are hypothetical), then Netflix would only have 10% of their content left to make for global originals! Obviously, they wouldn’t do that, but by definition, a market quota will inhibit truly global footprints.