In times of crisis, it’s important to thread the line between adequately explaining a crisis and avoiding exacerbating the worry about that crisis. Enter the “coronavirus” (or Covid-19), the global pandemic–even if it hasn’t been called that yet–that is impacting economies from China to America, and whose full impact won’t be known for years.
If you want the “panic” side, well look at the market. Is this panic or warranted? Well, as I look at the industry I follow closest, the worry seems warranted. The impacts of Covid-19 will be particularly acute in the entertainment industry. Let’s explain why.
Most Important Story of the Week/Context Update – Coronavirus Impacts on Entertainment and the Economy
Before I explain my worries, let me iterate the caveat that all speculation about the economy should be taken with heaping grains of salt. One of my bibles for making predictions is The Signal and the Noise by Nate Silver, and he devotes a chapter to how bad economists are at forecasting growth or retraction in the economy.
Take last year. Everyone worried about a recession. Sure enough, the fundamentals stayed relatively strong. Employment dropped to lows and median income growth actually started growing. This chart from Derek Thompson on Twitter captures the bullish case for the economy:
"The 21st century economy sucks and wage growth is a dumpster fire" was a statistically sound story for a long time.
But a lot of ppl's strongly negative narratives are frozen in 2014.
The labor market's changed a lot in the last 5 years. pic.twitter.com/ejDNsqxJNf
— Derek Thompson (@DKThomp) December 4, 2019
Thompson is right that the economy finally started turning around in 2015, and incomes have been rising. But the pessimists out there worry that if a deep recession starts right now due to Coronavirus, then middle America will likely be worse off than post 2009 great recession. That’s a terrible result for America, particularly lower income workers who just started to see income growth.
Frankly, I think the Coronavirus could cause a recession on its own, and it would start (partly) in the entertainment industry. We saw the contagion start as conferences were cancelled. But then, for entertainment specifically, this:
Recessions accelerate when consumers change their behavior. Specifically, restrict spending. All signs point to consumers restricting travel and avoiding large gatherings due to the global pandemic. Here’s an example that’s stuck with me since high school, when explaining why recessions/depressions start:
Farmer Fred has a bad crop due to weather. This means he can’t sell as much wheat at the market as he did the year before. As a result, he doesn’t buy a new pitch fork to replace his broken one. Since he doesn’t buy a new pitch fork, Store Owner Sally can’t replace her broken roof. So Roofer Ralph misses out on a job he thought he would have in the fall. Roofer Ralph starts spending less at Grocery Gina’s store. As a result, the next year even as Farmer Fred’s crop comes in, Gina can’t buy it.
The moral? A decrease in spending in one part of the economy can spiral out and cause a recession. Usually, this is really hard to predict. Hence why Nate Silver said economists are bad at it. (Matt Stoller has made this case too.)
But…isn’t it pretty obvious we’re headed for the recession scenario at this point? Here are the entertainment industry specific examples that feel fairly obvious are about to happen:
Theater Terry, Concert Carla: Folks decide not to leave their homes to avoid being out in public.
Conference Carl, Theme Park Tom – Folks don’t want to leave their home, and they don’t want to travel.
Producer Paul: If gatherings of individuals or travel is restricted, studios may have to decrease production.
Expand that list to sporting events, airlines, hotels, tourism, travel, car rentals and more and you get an idea of the potential scope. The best thesis for a recession right now, is that this is a “human capital freeze” the way the Great Recession was a credit freeze. That freeze is hurting revenue, and hence profits. If all those industries see reduced revenues in the range of 10-25% (or even more), then layoffs will obviously happen. As The Indicator pointed out, travel and leisure makes up 13% of the work force.
Those layoffs mean less spending–especially if unemployment insurance isn’t adequately deployed–and that turns this into a recession. Once a recession starts, then companies restrict advertising spending, and that only exacerbates the entertainment industry’s worries.
So all the signs seem there. At this point we face a choice: do we want to wait to know for sure we’re in a recession to respond, or begin deploying countermeasures now?
I’d say now. Notably, the country American politicians most fear–China, our latest boogeyman–fully believes in Keynesian economics. Thus, as soon as they began experiencing supply shocks, China began encouraging banks to avoid defaults and started pumping money to keep their economy moving. America needs to do the same thing, and encourage a global response that includes fiscal as well as monetary stimulus.
The challenge for America is that our economic crisis is as much a supply problem as a consumer spending problem. America fortunately started on the right foot and the emergency spending measure just passed includes $7 billion in spending on small business loans. That’s great, but I’d recommend more. Specifically, measures designed to shore up consumer spending from the 90th income percentile on down.
Step 1 – Provide $500 to every tax payer in America. Via check in the mail. This would cost $70-100 billion dollars. And is inspired by this talk by Matt Yglesias and Claudia Sahms. The “Sahm rule” says to employ this as soon as the rolling three month job losses are over 0.5% of the last twelve months. Frankly, this is a lot better than waiting six months for two quarters of retraction. If anything, I wouldn’t wait for to trigger the rule since all the news says this is coming.
Step 2 – Do Trump’s payroll tax cut. This would cost another $50-100 billion. While Step 1 is more effective, this will help lots of employers.
Step 3 – Do Richard Neal’s infrastructure plan, but not the way he’s thinking. For some reason, the leading Democrat wants to do an infrastructure project in response to the financial crisis. Unfortunately, infrastructure is slow and would likely not happen until after the crisis has started. My proposal is to use the low interest rates in the treasury to build solar panels. This would help add money into folks pockets long after the recovery has started and fight climate change. Win, win, win.
Step 4 – Provide banks/high income earners a bail out. (The Fed already did that by cutting interest rates.)
My four steps provide a range of stimulus, but importantly, everyone gets to partake in the gains. Consumers win; employers win; infrastructure fans get their win. And banks have already got what they want. I will add the biggest hurdle is the lack of trust between both parties and the desire not to work together. The best way to ensure cooperation is to guarantee that any stimulus will be continued under a Democratic administration.
What Do You Do if You’re a Studio
Well, don’t panic. That’s first.
Second, ask for government bail outs. As long as we’re providing stimulus, the government should provide targeted bail outs to all those industries most impacted by the pandemic.
After that, while I’d love to have detailed recommendations for each part of the entertainment value chain, I just can’t provide that. Recessions are tough to predict. Generally, I’m skeptical when folks say they can forecast who will win a recession. It can be easy to say who will lose–because we see that directly–but the winners are usually the folks who develop smart, recession proof strategies quickly. Sometimes that’s who you think it is; other times you don’t know.
So if you do run a company, that’s how I’d think about it. Your customers are about to worry about a financial crisis: how do you create value for them? How do you make and deliver content to folks under huge emotional and financial stress? It’s not an easy question to answer, but it is the most important.
Other Contenders for Most Important Story – Judge Judy is a Free Agent
Judge Judy is one of the most watched television shows. Period. Not just in syndication or in daytime, but every day period. (And yes this includes streaming shows.) So when that iconic show ends, it matters.
And Judy Sheindlin will launch another show called Judy Justice. That was fast. As for where it will go, we don’t quite know. Hence, the free agency.
Last point. Judge Judy has always been an excellent case study in how in certain situations talent can extract almost all the value for their creations. Syndication is a fairly well understood marketplace. Since Sheindlin is Judge Judy, she’s almost the entire value of the show. For a good explanation on this, see the latest PARQOR newsletter.
M&A Updates – FASTs on the Block
Here’s a fun question: are FASTs the new MCNs?
In the early 2010s, MCNs were growing rapidly and got snatched up by traditional studios just as quickly. With Maker Studios to Disney, Machinima to Warner. Awesomeness TV to Dreamworks. Fullscreen to Otter Media and then AT&T. And so on. They’ve since almost all been dissolved or written down.
FASTs–the free, ad-supports streaming TV services–have seen a similar boom. ViacomCBS started the trend by buying PlutoTV. Amazon launched IMDb TV, Roku has Roku TV and Walmart bought Vudu (and added a FAST element). Just last week Comcast bought Xumo and NuFox (the channel business) is rumored to be in talks with Tubi.
The big difference is that FASTs have a bit more control over their business model than MCNs, that relied 100% or more on Youtube. However, the FASTs do have a big dependency on the DVBs (digital video bundlers). If you can’t get on a Roku device and get prominent placement, it’s a lot harder to survive. Meanwhile, if every service is fiercely competing for ad-supported eyeballs, that makes every part of the business harder.
Related: IMDb TV Paying $500K Per Episode
Lot of sites/newsletters I follow called out that IMDb TV is reportedly paying $500K per episode for IMDb TV original series. My only response? That’s peanuts in today’s landscape. Few buzzy dramas come under the $5 million per episode tag nowadays, especially if there aren’t additional revenue opportunities. That’s cheap reality content on cable budgets, not scripted cable budgets.
Entertainment Strategy Guy Update – More Apple Worries
Two stories that cause me to worry about Apple TV+. First, an executive left Apple to go to 20th Century Fox TV. We’re so used to traditional execs leaping to streamers, not the other way around. Second, another Apple TV+show–Shantaram–is indefinitely delayed.
Third, Steven Spielberg helmed Amazing Stories dropped on Friday and had zero buzz, and negative reviews. That’s bad.
