A Bad Few Weeks for The Disruption Narratives

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It’s been a minute since I’ve written a pure strategy column. Between adding new databases for my streaming ratings report, writing columns for the Ankler, and preparing some other stuff, I’ve been busy. And my weekly call out of the most important story in entertainment fell by the wayside.

Frankly, I don’t think we missed much last month. The dirty secret of December is that no one in Hollywood does any work. 

But January came out swinging.  First we had news about The CW potentially getting sold, then we got big M&A news, and then last week Netflix had about as bad of a quarter as a company can announce for earnings. At least judged by the stock price.

If one theme ties these stories togethers, it’s that it was a bad couple of weeks for the narratives. Especially the narratives on disruption. Let’s start with the big one at the box office from December.

Most Important Story of the Week  Month – Spider-man “Saves” The Box Office

Why the quotations around saves? Because I don’t really think the box office needed saving. Did 2021 feature the rebound we all hoped and expected in January of 2021, back in the days when we thought vaccines would save us?

Source: Axios

No, not it did not.

But does that mean theaters are dead?

Not at all. 

Of course, like all things, it depends on what “dead” means. For theaters, if dead means “going to zero box office”, then I don’t think we’re on track for that. If “dead” means theatrical box office will be flat or down in upcoming years, then sure, it’s dead.

Ignoring that hyperbole, Spider-Man: No Way Home delivered a very optimistic message to theaters and studios about the potential ceiling of future blockbusters. 

The future potential of the whole box office (potentially) rose on its shoulders. Which sounds like a lot of weight to carry, but I think it’s justified. Before Spider-man, the big guns of the box office were Black Widow, Fast 9, Venom, No Time to Die and Shang-Chi and the Legend of the Ten Rings. And the highest domestic box office was $224 million from Shang-Chi. Good, but not great, and Shang-Chi couldn’t blame bad numbers on a dual release strategy either. (Though it could blame them on Covid…)

If that’s the ceiling of theatrical blockbusters was $225 million, then Hollywood is sunk. Especially blockbusters.

Then, Spider-man comes out and earned $1.6 billion global. Without China. $721 million in the U.S. alone. 

In the midst of a new Omicron wave. 

That’s just a big number. Did a number of factors work in its favor?

– It wasn’t released day-and-date on streaming.
– It has freaking Spider-Man in it.
– Plus it’s a Marvel Cinematic Universe (plus) film.
– Omicron hadn’t yet reach full potential.
– It’s the third in a trilogy.

But like I said, I was worried that, after Shang-Chi—that seemed both popular and well reviewed—the ceiling of these films would stay depressed for a long time. Spider-Man should give executives some encouragement that films can still break through.

That said, Covid-19 will lower the ceiling on blockbusters going forward. A strong contingent of folks in America just won’t return to theaters, no matter how vaccinated, boosted and safe theaters are in terms of transmission. Maybe in non-pandemic times this film does an easy $2.5 billion. We’ll never know.

Looking ahead, by February we’ll start to see what the backlog of films held up by the pandemic will do. February has Moonfall, Death on the Nile, and Uncharted. March has The Batman. April has Morbius and Fantastic Beasts. A few of those will underperform, leading to the same rending of garments and gnashing of teeth we’ve come to expect of box office coverage post Covid-19. But if one to two can become big hits, then the narrative started by Spider-Man will strengthen further.

The Caveats

Reading that, I seem pretty sunny and sanguine about the movies. To prove I’m a realist, not an optimist, I’d point out some other bad news stories. The antidote that even if Spider-Man: No Way Home did well, it doesn’t mean studios still aren’t spooked:

1. Sony delayed Morbius until April. This move isn’t only because of Omicron/Covid-19, tough that didn’t help. As Scott Mendelson pointed out, on the heels of Spider-Man’s success, Morbius may do better in April, and it won’t cannibalize any lingering Spider-Man box office. Still it moved.
2. Box office in January, as such, has been a bit of a dud.
3. Disney doesn’t have any really big titles until May. This one does hurt, as so much box office is fueled by Disney’s tent poles. Turning Red was supposed to release in March, but Disney moved it to streaming-only.
4. Paramount delayed Mission Impossible until 2023 and 2024. Though this too, like Morbius, has other production factors influencing the move.

Most Important Story of the Week – Netflix’s Last Earnings Call Was Bad

Well, Netflix had a bad week. Here’s the stock price’s brutal trajectory:

I don’t want to be an “I Told Ya So” guy, but I’m known for being bearish on Netflix’s stock price in general, and whenever a stock corrects down 40% from its high, including dropping 22% in one day and continuing that slide, it begs explaining. (And the people who have been worried about Netflix get to take a bow, myself included.)

Unlike Spider-Man’s success—which was important, but didn’t inspire a ton of hot takes—this story is legitimately important and I’m filled-to-bursting with thoughts. I should have some articles going up at other outlets, and when they do I’ll let you know.

The latest earnings call signaled that a few key pieces of the Netflix “narrative” just aren’t coming true. And I can cite articles I’ve written over the years to take that victory lap I’m owed. But first, I want to correct two misconceptions I’ve seen.

Misconception 1. Netflix is dead/will die/is dying.

I wrote this a few years back, but there is a big problem with the term “death” in evaluating companies. 

Here are all the different meanings for “death” of a company:

– It is no longer a market leader.
– The stock price fell significantly.
– The company entered bankruptcy.
– The company ends operations.
– The company is shut down by the government.

Of those, only really the last three are “death”. But often, when I say that either the first or second could happen, folks characterize that as forecasting that “Netflix will die”. Note, I’ve never said that. I don’t think Netflix will die. In fact, I think they will remain a market leader for years and, at worst, be one of the five to ten major streamers. Hardly death!

And yet…

The last week probably feels like death for some shareholders. Not permanent death, but for a stock expected to constantly drive towards $1,000 per share and 1 billion subscribers, slowing growth feels like death. If a stock loses half its value, a lot of folks will lose a lot of money. Which may not be death, but is awfully close.

Misconception 2. Netflix stock went down because of the subscriber miss.

I saw this shorthand in a few places, that sought to attribute the huge stock correction on Netflix missing their subscriber additions in Q4. (Only getting 8.3 million when their forecast was 8.5 million.) Frankly, I think this misses the mark entirely. If I had to pick one number that took down the stock, it was the forecast for net additions in Q1 at 2.5 million. At that rate, Netflix will add fewer subscriber than both 2020 and 2021. In other words, it was a big sign growth was slowing. 

But I’d go further. There were several bad numbers in this report. Free cash flow is still “around breakeven” in 2022. (Folks hoped it would be positive going forward.) Gross margins were flat. Add up all those bad numbers, and yeah it was a grim picture.

And that grim picture hurts a lot of the narrative that fueled Netflix’s truly incredible stock price run in the 2010s. (And even with the dip, if you bought in 2010, you still did great!) So let’s explain what the larger “narrative” got wrong. Specifically, by three myths supporting that narrative.  

Myth 1: Netflix has a flywheel or moat.

Honestly, both of these could have gotten their own narrative, but folks often use these terms interchangeably, so let’s tackle them together. A flywheel, for those who don’t know, was coined by Jim Collins and the du jour example is Amazon. In business, a “flywheel” has self-reinforcing parts, so they pick up momentum as time goes on. In lots of cases, more data provides a competitive advantage, which leads to a cost or pricing advantage, which gets more data and so on. Think Google and search.

The logic is that Netflix, with all its data on consumer preferences—and often an all powerful but largely mythical algorithm—was a flywheel for streaming video whose momentum would only accelerate. But growth isn’t accelerating, it’s slowing. The billions in content spend, in other words, aren’t flying the flywheel.

Related, a lot of folks think Netflix spent billions upon billions on content to build a “moat” around their business. A moat is often business speak for “pricing power via monopolistic behavior”. In this case, the moat was Netflix’s content, meaning they could spend a few years outspending Hollywood and no one could catch up. And yet, if the moat existed, we’d see Netflix’s gross margins growing, not turning flat. A moat this is not.

Myth 2: Streaming is “winner take all” and/or Competition doesn’t matter.

For many years, that was the take among Netflix bulls. In the best case, Netflix is entering a “winner-take-all” market, like search or social media, which means soon it will dominate the whole industry. In the worst case, competition won’t impact Netflix’s performance, meaning other firms can launch other streamers, but it won’t impact Netflix.

Actually, there is a worse case than that: streaming competitors do hurt Netflix’s growth. (And each others.) This little quote immediately jumped out to me when I read the earnings report, and lots of other analysts/writers saw it too. It is a big deal, and its one of the only times Netflix has acknowledged that competition does matter:

Think about how many shows are being made for how many networks and streamers and think about how easy it is to cancel a streamer. That’s how easy it is for competition to impact Netflix. And this is a point I’ve hammered on in my writing and in other outlets. Seriously, read this article back in early January that basically makes that case at The Ankler:

The streaming wars is not winner-take-all.

Myth 3 – US Subscribers will reach 80-100 million; Global subscribers will reach 1 billion.

This is a good example of a narrative which—like the death narrative above—needs a timeline more than anything. I mean, on a long enough timeline the life expectancy for everyone and every business drops to zero, as Tyler Durden tells us. So on a long enough timeline, sure Netflix could grow to 1 billion subscribers. 

But many stock analysts still have models forecasting 80-100 million U.S. (or sometimes U.S. & Canada) subscribers this decade. My model—and others I trust—have never quite believed this, and I wrote two years ago I think the better number was 70 million U.S. subscribers. Given Netflix’s slow pace of growth the last two years in the U.S., and even after one of their best content quarters, they only added 1.2 million subscribers.

In other words, yeah subscribers numbers north of 80 million don’t feel likely in the U.S. And whether or not Netflix can get to 500 million subscribers globally this decade feels unlikely.

Appendix: Oh, and What About The Price Increase?

I haven’t mentioned the price increase in any of the three articles I wrote, so I probably should here. The upside is fairly straight forward: if you increase prices 11%, but only lose 5% of customers, that’s a net win. Right? Basic micro-economics.

(So yeah the number to look for is how many Netflix subscribers (currently at 75.2) Netflix loses in 2022. Anything over 8.2 million is technically a win.)

However, the worry is that this is awfully close to the last increase. The closest gap between two prices increases to date was 17 months. This is only 14 months, with the last increase announced in November of 2020. Meaning another price increase could come next year, and that could finally start to impact customer churn and retention.

M&A Updates – Microsoft is Buying Activision-Blizzard

Well, that’s a big merger & acquisition story! A $69 billion big story. That’s the price Microsoft is offering for Activision-Blizzard, the video game producer of Call of Duty, Warcraft and Candy Crush, among other titles. Just when we thought that mega-merger activity was slowing based on government interest, wham!, this deal comes in to shake things up.

It’s a big deal and the biggest loser would likely be Sony if it went through. I still don’t think this means Disney or others need to buy other gaming studios, because frankly that just doesn’t work strategy-wise. (And I get asked about this all the time.) 

It also doesn’t have much to do with “metaverse” aspirations either. Instead, this is about old fashioned consolidation in pursuit of walled gardens (or an actual moat). For the consolidation, Activision had already bought Blizzard and King (maker of Candy Crush). Sony itself buys other gaming studios too. In other words, these are just more and more defensive mergers. The prize Sony and Microsoft are searching for, as well, is to create subscription products that lock customers into their devices/“ecosystems”. Owning game studios makes that much easier.

The one question is whether this actually happens, and I do think the FTC or DoJ will go pretty hard to stop this deal. If they’re successful, or can successfully discourage Amazon’s MGM merger—which they’re trying to do too—that could finally chill merger talk in entertainment. This story is far from over.

Other Contenders for Most Important Story 

Youtube Gives Up on Originals

Back when Youtube gave up on Cobra Kai, the writing was probably on the wall that making originals wasn’t a priority for the world’s biggest ad-supported video provider. If all your users will do the hard work for you—spending their money to make content—why spend any of your own cash on it?

The news from last week was that Suzanne Daniels—head of the originals business—was leaving Youtube. It will be interesting to see where she ends up, as I have to assume her name and background are appealing to the new streamers.

ViacomCBS and Warner Media Are Looking to Sell The CW

The CW is the little broadcast network that almost could. I’ve long admired its strategy, since as a network it knows who it is and who its customers are. But obviously in an increasingly streaming world, and as the smallest broadcasters, it’s likely to lose out to other corporate priorities. The news is that its co-owners will look to sell the CW. We’ll see who ends up buying it and what they plan to do with it. 

(Part of me also wonders if one side will buy out the other—mainly Warner Media, though I don’t know with what cash—simply to simplify ownership.)

The Entertainment Strategy Guy

The Entertainment Strategy Guy

Former strategy and business development guy at a major streaming company. But I like writing more than sending email, so I launched this website to share what I know.


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