The biggest story of the last two week’s is “Apple v Fortnite”. Yet, for the second week it hasn’t made this list. Like the AT&T-Warner Bros. merger or the Disney-Fox merger, this is a seismic event we can tell will change things in the moment. However, that “moment” will last months, not years. It is potentially the story of the year, and we’ll get to it. Just not today.
(As often happens, I wrote a couple thousand words on it. So I decided to save it for my “Intelligence Preparation of the Streaming Wars” series.)
In the meantime, let’s return to a favorite theme: bundles!
Most Important Story of the Week – The Viacom/CBS Bundle Launches on Apple
Apple is offering a new bundle of SuperCBS channels. (SuperCBS is my name for ViacomCBS.) Instead of paying $10 for CBS All-Access and $11 for Showtime, Apple is offering them together–if you subscribe to Apple TV+–for only $10. So get CBS All-Access and the tech giant will throw in Showtime for free.
(Apple is also exploring a “super-sized” bundle of TV, music, news, gaming and more, but will likely provide details in a few weeks.)
For those of us predicting a return to bundling (read me here, here or here), this move isn’t that surprising. The previous high point of bundling was Disney’s decision to bundle Disney+, Hulu and ESPN+ last fall in the United States. And then in their earnings call Disney announced plans to include Star/Hotstar as another bundle globally.
Let’s unpack the ramifications of the bundle. Why it exists. How this bundle happened. Why this bundle in particular. And why this bundle is NOT the future.
Why Bundle? Because The bundle is a Terrific Deal, for Customers and Companies.
That’s a controversial opinion, surely. (Especially on certain entertainment podcasts I listen to weekly.)
But the math is fairly inescapable. For companies, getting into a maximum number of households is usually worth a slightly worse per subscriber cost. So if AMC–the channel–can be in 85% of households, each paying $1.50–that’s better than being in 10% of households each paying $10. Or take ESPN: right now nearly every cable household pays over $6 to get it. Yet, if everyone cut the cord, ESPN would struggle to get probably 25% of households for the same price, not to mention quadrupling the price. (Moreover, the additional subscriber has zero marginal costs, so maximizing it makes sense.)
Hence, bundles help companies maximize revenue. It’s a classic economics chart weighing prices to buyers and maximizing the value.
The lower prices also help customers. The criticism of the bundle was the simplistic complaint, “Everyone has 500 channels they can subscribe to, but they only watch 20.” The problem is no one watches the same 20 channels/shows/streamers. In cable times, a viewer might watch Friends on NBC, 60 Minutes on CBS, Sports Center on ESPN and NYPD Blues on ABC. But another viewer subs out History Channel for Sports Center. The bundle gives each customer the same low price. (In streaming, if you want to watch Stranger Things, The Handmaid’s Tale, The Mandalorian, The Marvelous Mrs. Maisel and Watchmen, you need a bundle of streamers.)
(What about how high prices are for the cable TV bundle? Well the problem there is the word “cable” not “bundle”. As local monopolies, cable providers for years had insurmountable barriers to entry, so they could raise prices without fear of cord cutting. Streaming is changing that.)
Thus, bundling is coming. But how?
How This Bundle Happened, Part 1: This is still a “Same-studio” bundle
This is fairly key, because it means the costs are fairly easy to allocate. The challenge comes when you try to get two different companies to bundle together. Then each has to ask the other who has the more valuable channels and how they should split costs.
(Imagine a super bundle with Disney, Warner Media, Viacom CBS and NBC Universal in the same package. Now try to imagine the leadership of those companies trying to figure out how to allocate revenue. They’d probably kill each other before they settled. Ergo Hulu.)
That’s why Disney was the first “bundle”, because all the money ends up in the same place. Meaning it is up to Disney to decide how to allocate the value of the bundle and how to allocate investment and content and what not. The same thing is happening here, since CBS can decide how to attribute subscribe value between Showtime and CBS All-Access simply for accounting purposes.
How This Bundle Happened, Part 2: Apple is likely taking a big loss.
This math is fairly inescapable, and fascinating given that Apple is currently at loggerheads with Fortnite over the related issue of “platform tax”. Here’s the math for Apple offering Showtime and CBS All-Access separately:
That’s a good deal for Apple, assuming lots of folks sign up for both. Now, here’s the same situation with the platform tax.
Uh oh! Suddenly, this is a really bad deal for CBS All-Access. They lost half their revenue. So what’s the solution? Apple and ViacomCBS met somewhere in the middle. But a middle closer to ViacomCBS making money (since that’s their priority) and using customer acquisition into Apple TV+ to justify the costs.
Notably, this is still a bad deal for Viacom CBS. They lose nearly a third of their value. So let’s run a final scenario, where Apple limits CBS losses to say 20%.
Now you could make a case for both sides. For Apple, they could tell themselves that losing $2 per month is worth it to bring people into the “Apple TV” ecosystem. (In this case, a device ecosystem. Terminology is important!) For Super CBS, they “only” need to add about 20% extra subscribers to make this deal worth it for a bundle. (Implying that the number of bundled subscribers exceeds the amount who subscribed to CBS All-Access and Showtime separately at the previous prices.)
However, there is even a world where Apple is paying the full-freight of $5 to CBS to keep them whole. Meaning they lose a whopping $60 per customer per year on this bundle. I don’t think that’s the case, but I can’t count it out either.
(The caveat that’s worth mentioning is that CBS has discounted CBS All-Access in lots of places. I get it free, for example, through a 24/7 sports subscription. So the $10 price may not be paid by anyone, sort of like how few folks pay full price for Hulu or Disney+.)
Why This Bundle Happened, Part 1: ViacomCBS Still Isn’t Owning the Customer Relationship.
The other big theme of both May and June has been that certain traditional studios have decided that owning the end-to-end customer relationship is very important. Which is absolutely correct! The rise of “direct-to-consumer” implies you’re going direct to the consumer. Which is what Disney, AT&T and Comcast now understand.
SuperCBS hasn’t learned that lesson yet. Clearly.
Instead of insisting that customers pay them directly, they’re letting Apple handle that. Instead of owning the user experience to collect data, they’re letting Apple collect that. Instead of controlling the customer relationship for marketing purposes, Apple gets that. This isn’t too surprising for CBS; they already let Amazon do all of that too! And Roku too!
Why This Bundle Happened, Part 2: CBS Can Offer a Good Bundle
Of the best content streamers, then, CBS was the best that also hasn’t learned the lesson of DTC. Seriously, check out Mike Raab’s lay out of the major players and look how much good stuff CBS owns:
Thus, if Disney, HBO, Netflix and Peacock won’t play ball, then CBS is the best suitor available. Hence, it’s the first bundle on another digital video bundler. (DVB, explained here.)
The Future: More Deals, But Not Like This (vMVPD 2.0)
Do you remember the halcyon days when Youtube TV first launched? It was the most disruptive of disruptors in TV. Instead of paying $80 or $100 dollars for a cable subscription, Youtube only cost $35! That’s how you become a low cost distributor.
That was only 3 years ago. Now the price has almost doubled to $65 per month.
What happened? Well, again, when customers buy a bundle, they want all the channels. (Again, no one watches the same 20 channels.) So Youtube had to keep adding channels to keep adding subscribers. Moreover, Youtube TV wasn’t going to offer old-fashioned “low entry price that later raises”, so they just pretended the price was very low.
Importantly, Youtube had zero cost advantage. Youtube was losing money on every subscriber to grab market share. This is why, when I saw plenty of analysts praise Youtube TV, I thought they were bonkers. If you let me lose $5 per subscriber, I can grab lots of market share. But I haven’t solved any problems. Or created any value.
I think some of that is definitely at play here. Apple hasn’t solved any pricing issues, they’re sacrificing short term revenue for long term subscriber acquisition. Which could be a good strategy–though anticompetitive–but it isn’t sustainable. It won’t be sustainable until Apple can prove that the sheer volume of customers it brings to the table exceeds the profits the streamers are losing.
Hence, this current bundle is the “vMVPD 2.0” scenario. It’s a bundle, but we won’t know if it will work until Apple and CBS are pricing at cost. That will happen eventually, just not soon.
Other Contenders for Most Important Story
Fortnite v Apple – The Fight Escalates
This week, in an effort to prove they aren’t using their size to crush smaller competitors, Apple is threatening to destroy Fortnite’s second business of making game engines in addition to destroying its current video game business. (The Unreal video game engine powers many, many video games.) In other words, if you don’t buy our coal, we’ll keep you off our train tracks. It’s a tactic pioneered by Carnegie, Rockefeller, Morgan and Gates. Now Tim Cook is employing it too.
As I said above, the ramifications for this fight will definitely impact the streaming business. But since we’ll have to follow this saga for years, I’ll save longer thoughts for a future article.
Theaters are Finally Reopening (and Some Films Too)
AMC Theaters is reopening this week at reduced capacity (30% I saw reported) and reduced prices on opening day (15 cents per ticket!). I actually think theaters will be able to match demand to supply since they’re at reduced capacity for the near term. The wild card, as always, is how the disease/containment progresses.
The other wild card is content, and we seem to have hit the moment where studios have decided to release movies regardless of theaters. So Unhinged made it to theaters. Bill and Ted is following. And then Tenet. Some will have PVOD/TVOD components.
Frankly, this makes sense and I think for a film like Tenet, folks would be willing to see it in theaters even if it’s weeks after its “release”. My logic is that Covid-19 has temporarily changed what it means to “release” a film. It’s not like consumer demand will decay if customers who want to see Tenet in theaters literally can’t because their home town theaters are closed. (And some will wait and avoid PVOD.) The studios will make less money than before, but more than if they had waited indefinitely. (And probably more than Disney will on Mulan.)
Boom in Video Games?
Video games are definitely having a lock down moment, though as things reopen, this will likely revert to lower levels, though probably not to the same level.
The question I can’t answer is this: How much of this is due to children?
It seems fairly key. Mainly because the “day job” of children has been the most disrupted. Instead of going to school, they spent April to June at home. Hence, a boom in video games and Netflix. (The latest Nielsen Audience report said Netflix had a rise in viewership that I partially attribute to kids.) Even with schools reopening, classes can run only from 1 to 3 hours, if the programs work at all. Which leaves a lot of time for kids to spend on entertainment.
I’ve seen some speculation that this will create a new generation of video game addicts. But will it? It’s not like kids just discovered gaming because they’re playing on their phones. Nintendos, Segas, Playstations and X-Boxes have always sucked down hours and hours of kids time. Usually it competed with school filling 6-8 hours a day. We’ll see.
Data of the Week – Amazon is “Doubling” Everywhere
If you go by the news, Amazon has “doubled’ their video performance. First, Amazon Video streaming doubled according to Amazon CFO Brian Olafsky. Then they leaked that their AVOD audience reach, through IMDb TV, has doubled as well to 40 million users.
Caveats abound.
For Amazon Video, the good news is Olafsky said it was total hours that doubled. The bad news is we don’t know what it doubled to. 100% growth during lockdown is great, but what does that bring us to? Also, the caveat is this is global, not US, so it’s even harder to track where the growth came from.
The AVOD audience is even more suspect. When Amazon Advertising says “reach” is up, that could mean a dedicated video viewer, or an ad running on the background of some Amazon page the user can’t even see. (We call that “Facebooking” given their epic misdirection on the performance of their videos.) Moreover, Amazon was touting “integrations” which means partners are expanding Amazon’s reach, not IMDb TV by itself, which was the story I saw most reported.
So Amazon Video–in all its forms–is doubling. But we should be pretty skeptical for what that means.
Lots of News with No News – Ron Meyer Leaves NBC Universal
The strange part of this sordid saga, as I see it, is that Meyer was still employed by NBC-Universal. The ultimate survivors, he transitioned through countless leadership changes as NBC/Universal was passed from GE to Vivendi to Comcast. Yet, the news of the last few months has barely included Meyer since all the energy is in streaming.
