A Skinny Bundle Murder Mystery (And Knives Out Thoughts) – Most Important Story of the Week – 2-April-2021

Much like Benoit Blanc, the title character of a film series I’m about to write about, every week I find myself hunting for clues. Tidbits. Hints. Insights to answer one, yearning question: What was the most important story this week? This week required a bit more searching than usual. (I don’t interview suspects, I read news stories.) To pound the detective analogy to death, the most likely suspect was not the most important. So what is?

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Most Important Story of the Week – T-Mobile Shuts Down “TVision”

Let’s say you’re driving around Los Angeles. You see a gas station selling gas for $1 per gallon. What do you think?

You think something is going horribly, horribly wrong.

Why? Because gas is a commodity, meaning mostly it sells for the going rate because there is no competitive advantage to any one gas station’s prices. (Is Chevron with Techron a lie? Not really, but it’s also not really different from most gas.) Since Los Angeles has some of the highest gas prices in the US, if someone is selling you $1 gasoline, they’re either scamming you, selling stolen gas, or they’re trying to corner the gasoline market by selling goods under cost.

This hypothetical–with all attendant alarm bells–should be in everyone’s head whenever a new bundler is out there touting some bundle with remarkably low costs for cable TV. Youtube TV and Hulu Live TV both started this trend. AT&T then doubled wayyyyy down on it. Others followed suit. But inevitably, they all had to raise prices over time. In some cases nearly doubling the initial offered price. 

The logic is sort of clear and inescapable: cable channels have set prices negotiated over years by cable and satellite providers (MVPDs) and the cable channel owners. Virtual MVPDs (like Youtube TV and Hulu TV) pay lower prices per channel, but not that much lower. Otherwise MVPDs would demand much lower prices too. There is basically a floor for how much it costs to run an MVPD or vMVPD.

Just how did Youtube, Hulu and AT&T manage to offer lower prices? By losing money on each given sale to gain market share. They sold gas at $1 per gallon, in other words. The old fashioned, if-we-lose-$1-on every-unit-we’ll-make-it-up-in-volume-thinking. But in this case, losing sometimes $20-30 per month. Once customers were hopefully locked in, they would raise prices and keep the customers. 

The problem, especially for DirecTV/AT&T’s offering, was they couldn’t keep the customers. Unlike MVPDs, which tend to have very high switching costs and/or local monopolies, digital is very easy to switch. As soon as costs go up, customers switch providers. 

Which made the T-Mobile announcement last year of a new skinny bundle called “TVision” all the more surprising. The skinny bundle had come and been found wanting. At the time of the announcement, I was skeptical that this time would be any different. Indeed, last week we found out that T-Mobile was ending TVision, and instead partnering with Youtube TV (who is likely still losing money per subscriber, but funding it via an advertising duopoly and search monopoly) and Philo TV. And now customers get a whole $10 off each respective service.

Why is this the most important story? Because it shows that customers do want these services, just nowhere near the prices demanded by the current cable bundle. This story both shows the lingering customer demand, but also the inevitable pricing challenges. My guess is this won’t be the last time we see a skinny bundle, but they’ll face the same challenges. The bundle is dead, but it won’t stay that way.

Covid-19 Tracker – Godzilla Big Weekend

Listen, if this article is supposed to cover the news of the last week, then arguably this “news” didn’t happen last week; it took place over the weekend. To defend myself, we had good indications by Friday that Gozilla vs Kong would have a strong opening weekend, and beat box office expectations. And it delivered, along with a very strong performance in China.

This feels meaningful for at least a few trends. First, the death of cinema and theatrical attendance is far from certain. Every weekend the box office outperforms expectations is a step closer to the new normal for theaters in America, especially as more theaters reopen, increase capacity, and feature bigger films. It could take months to get back to where theaters were pre-pandemic–if they ever even get there–but all the available data says we’ll be much closer to $11 billion per year spent on theater tickets than “$0”, which some analysts forecast last March.

(To channel Debbi Downer, though, the recovery will take months. So lots of pain still to come.)

As for the simultaneous HBO Max release…hoo boy that’s a big topic. And one I won’t answer today. Because we can’t. We only have one piece of data so far–box office–so we’re really missing one side of the equation, the streaming ratings.  I’ll reiterate what I said last week: I think shortened windows are here to stay, but tend to think day-and-date streaming and theatrical is not. But numbers like these help the streamers’ case that day-and-date streaming may not hurt theatrical. But in today’s Covid disrupted world, Im’ not ready to make that case yet.

Other Contender for Most Important Story – Netflix Buys Knives Out Sequels for $450 Million

I subscribe to so many newsletters on entertainment that I can’t keep count. (I probably could count them, but I won’t.) This allows me to see the story that tends to capture “conversation”, especially among the influencers, aspiring influencers, journalists and Celebrity Wall Street Media Futurists (trademark Patrick Crakes). This week, that story was pretty clearly Netflix shelling out $450 million to Rian Johnson and team (that part is important) for the sequels to Knives Out

I was as fascinated as anyone by this story. Though it clearly isn’t the most important of the week, it is the most “thought provoking”. So here are some odds and ends thoughts on it.

– I read all three trade articles on the deal and the biggest unknown is still all the unknowns. This goes from what exactly Netflix purchased (Sequel rights? Franchise rights? Fees to previous distributors? Distribution for the first film?) to how much they are actually paying. I’d break it down into three big areas: the rights for the sequels, the production/marketing costs for the films (with backend), and the rights for the franchise. If I could know anything, I’d love to know what those pieces are expected to cost and how long Netflix will own those rights.

– The best framework for looking at this deal is via risk. Yes, online we want to categorize things into “good or bad” deals. That’s easy. (And it fits the social media antagonistic mindset.) But in a probabilistic world–and if you don’t think we live in a probabilistic world, I’m probably not the website for you–no deal is all good or all bad. Instead, the better way to think about investments is how risky they are for the return. Likely, Netflix built a model. In that model, in some cases, they only make $200 million in revenue off this deal. That’s the bad case. But in some, very rare scenarios, they make a billion. That’s great! In some, they just make $400 million. In other words, you run all those scenarios, and the “expected value” of this rights deal could be, say, $470 million. (Again, a made up number.) If Netflix paid $450, then they expect to make about  $20 million on average in this deal. (Again, made up numbers for explanation purposes.)

– The deal is risky precisely because of that $20 million. (My guess, remember.) Whenever the price is sooooooo close to the expected value, the deal is by nature risky. And we know it is close because Apple and Amazon were aggressively bidding on it too. And since Rian Johnson and team likely chose the highest bidder, they probably got the deal closest to the “expected value” of this bundle of rights (remember, it could go from literally just the two sequels up to owning the entire series now). This is called, in economics, the “winner’s curse”. If you have a lot of bidders on something, the odds increase that the winner of the auction likely overpaid. To return it to the “risk” framing, the more bidders, with the more deep pockets, the riskier the deal will be.

– That is assuming the expected value is even positive. If you’ve bought a lottery ticket or gambled in Vegas, those are negative expected value propositions. Could Netflix and other suitors paid have been prepared to pay $450 for $400 million of expected value? Definitely. Because that happens in entertainment all the time. Especially when certain suitors can “afford” to lose money. (Though I hate that phrase.)

– It is also fascinating that it was three big tech companies that were the final three rumored bidders. If I could, I’d love a machine that would allow me to send news stories to analysts/opinion makers stripped of key details. (The dream would be for film criticism. Like you could send a film to a critic and say, “What do you think?” but they’d have no idea who directed it, do you think that would change some opinions?) In this case, I’m convinced that some analysts who praised this deal would have excoriated it, if they first were told it was done by Warner Bros or Disney. In other words, the same deal becomes a genius deal if a Big Tech firm does it, but disastrous if a legacy media firm does it. Obviously, I can’t prove this hypothetical, but in many cases I think it’s true. And bad analysis.

– Lastly, the main upside for Netflix seems to be the hoped for “franchise” play. Meaning that Netflix isn’t just buying two films, but a whole series of films, with potentially TV show spinoffs and international versions. Three quick thoughts on this. First, again after reading the trade coverage like a sleuth, I’m not convinced that’s the case. Given how enormous the paychecks were for keeping rights to the franchise, wouldn’t Rian Johnson and producing partner Ram Bergman have been smarter to keep those rights? I’d say so. That includes controlling international versions and TV rights. Is it really crazy to think that Netflix would pay $225 per film given that they paid that much for The Irishman? I don’t think so.

– Second, I saw some folks using franchise rights as a hand waive to say, “Well, it was worth it because you can’t put a price tag on owning a franchise.” Yes you can! I spent thousands of words explaining how Disney did that for Star Wars. And frankly, franchise rights are lower than most folks would guess. Basically, every film in a series is a chance to fail. And once a franchise fails, well, the sequels after it are much harder to justify. If you don’t believe me, look up The Hangover or Hobbit franchises. Or read my article on franchises here. It’s hard to make one good film. It’s even harder to make three in a row. (But the basic equation is the value of all potential franchise properties multiplied by the success rate of the franchise multiplied by the probability that you can make each one.)

– What about international adaptations? Well, sure, Netflix could make those, and distribute them to their platform. But, wait what? Isn’t the whole power of Netflix that they can make a film in India and make it popular globally? Why would a local audience want to watch a Knives Out remake if Netflix is already offering them the original? If you need to make local adaptations, that would seem to negate that advantage? Maybe the power of global distribution doesn’t actually work out as well as touted. (Indeed, Netflix is making Money Heist for South Korea.)

Other Contenders for Most Important Story

Let’s do some quick hits and wrap this thing up.

NBCU Is Considering Another Streamer?

To use my recent classification, is this “actual” news or potential? Well, the next three stories are all “potential” stories. In this case, there are rumors from a well connected reporter that NBCU is considering launching another streamer, maybe Universal branded, to pair with Peacock. If this happens–and it is a big if–we’ll have lots of strategy thoughts to roll out. But let’s wait until it happens.

Comcast Weights Pulling Universal Films From Rival Streamers

Same for this story. If Comcast, via Universal, keeps selling box office blockbuster juggernauts–like The Minions films or Fast and Furious series–to streamers like Netflix, Hulu or HBO Max, they really need to reconsider their strategy.

NCAA Case at Supreme Court

Lastly, we spend way too much time in political reporting guessing what the Supreme Court will do ahead of time. But it is fair to point out that the NCAA court case on amateurism could have huge ramifications on college athletics in America.

  1. […] the way, this shouldn’t be too surprising! The two most popular franchises in America—after Knives Out of course—are Marvel and Star Wars. And when you look at Google Trends, yep, these are […]

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