This week started off slow, but man what a finish. Kevin Mayer left TikTok? That’s buzzy. The NBA players boycotted their games? Wow, that’s a big deal. But neither are the most important story of the week. That honor belongs to the theaters slowly returning to business. This is a $42.5 billion dollar industry globally and its survival is the story we’ve been monitoring all spring and summer.
Most Important Story of the Week – Are Theaters Back?
Of all entertainment industry topics, this one deserves the most nuance. The doom-and-gloomers are being too pessimistic. The sunshine pumpers are too optimistic. The truth is somewhere in the middle. Where precisely? Well, I’ll present both cases and let you make up your mind.
The Optimistic Case
First, China has reopened it’s theaters. That’s huge and more importantly, they’re doing well. Harry Potter set some records earlier in the month, then the epic film The 800 had a huge opening weekend. With Tenet due soon, and then Mulan, the Hollywood studios could see some real box office grosses soon.
Second, Canada opened just fine earlier this month. So did South Korea. Turns out customers are fine to return to theaters. As this random study from Odeon Theaters says, customers are hungry for the theatrical experience. (32% of those surveyed tried to recreate the theatrical experience.) As a result, studios are slowly ramping up their TV advertising spend.
The current underlying all this is that so far the theatrical experience doesn’t seem to be a huge driver of sources of transmission. This point is key and may go against initial forecasts, estimates and guidance. It turns out that wearing masks and not talking/shouting can limit exposure, especially if theaters are only partially filled. And if a country has its cases under control. (We should know by now if theaters are causing superspreading events in China, but we haven’t seen it.) This tweet from Derek Thompson shows that theaters, depending on capacity, are either low to moderate risk.
https://twitter.com/DKThomp/status/1298421178642632705
Moreover, the theaters have a unified plan that should protect them somewhat from political blowback. In all, theaters can see a road back to profitability.
The Pessimistic Case
The pessimistic case is that it will be a long road back.
The first weekend of new releases in the US was “decent” at best and maybe even disappointing. Even though Unhinged opened in 70% of theaters–though not major markets like New York and Los Angeles–it only earned $4 million at $2,200 per theater. As IndieWire pointed out, that means there is basically a 75% “Covid-19” tax on new film’s box office. More ominously, Warner Bros trotted out a re-release of Inception, but didn’t tell anyone the grosses. Lack of numbers is always suspicious.
Meanwhile the most important market–the United States–still has lots of closed theaters. New York and Los Angeles remain shutterted and, as a result, the theaters never actually tried out a “rerelease library titles” strategy to get customers used to going to theaters again before the blockbusters could return. (Though drive-ins have done well with library titles.)
Thus, the studios are still fleeing 2020. The latest casualty is The Kings Man in the US which just decamped to February. As Scott Mendelson points out, essentially only a handful of films are going to try to rescue the fall and winter in the US: Tenet, James Bond, Candyman, Soul, Black Widow, New Mutants and Wonder Woman. And any of them could still move if Tenet underperforms. In my optimistic cases, I thought quite a few films would try to prop up the calendar and that isn’t the case.
As this analysis from Bruce Nash shows, theaters will see a slow return, then speed up and then slow down again. That prediction seems to be describing the Canadian and US return to theaters. As a result, it could be until February until things are back to normal.
In Summary
The optimistic crowd can point to a hunger to go back to theaters by customers. The pessimistic crowd can rightfully retort that sure some customers will go back, but it will take at least 6 months or more to get back to full capacity. That’s billions of lost revenue in the meantime.
Overall, I lean towards the optimists. Because I think theaters will survive this crisis. (Plenty have predicted otherwise.) As the evidence rolls in, it seems clear to me that movie theaters and streaming aren’t direct substitutes. They can be–you are choosing how to use your time–but really the theatrical experience is an experience. This is frankly why PVOD can’t replace theatrical either. That is much more like a substitute.
Does this mean theaters can relax? Nope. I hear from plenty of folks who don’t like or even hate theaters. Theater chains have work to do to focus on the experience. (Breaking them up into smaller companies would help here.) But there is room for optimism.
Other Contender for Most Important Story: Joe Budden and the Downside of Exclusivity in Mass Markets
Joe Budden–a hip hop artist with one of the best pump up tracks of all time–has a wildly influential hip hop podcast. Thus, when Spotify decided to dive aggressively into podcasts, he was one of their first calls and got a major deal. (Though I still haven’t seen numbers. Note this.) This week Budden announced that he was (likely) not renewing his deal with Spotify.
What happened?
My guess is that Joe Budden is realizing the tradeoff of going all in on a single distribution platform. The subtle difference between mass distribution, selective distribution and exclusivity. Let’s talk about Budden’s situation in particular, then how his complaints can be extrapolated out to the rest of entertainment.
When it comes to Budden specifically, he appears to have two primary complaints. Here’s the key quote from Variety:
Issue one, if you will, is that he wasn’t paid as well as other folks. He was one of the first Spotify deals, so likely didn’t have other deals to compare. Since then, Gimlet Media, Joe Rogan and Bill Simmons (via The Ringer) have all been acquired at huge pay days. (Joe Rogan, for example, knew what Simmons got paid.) Since Budden can directly compare his previous salary to the new deals, he knows if Spotify was paying him market rates. And clearly feels they weren’t. (And he was a top performer.)
The second issue is the more fascinating one, for me, as it involves thinking about how limiting distribution impacts an artist’s ability to grow an audience. This is arguably one of the most important tasks for talent in the digital age.
(Also, some of the development execs who hired Budden have departed. Often Hollywood isn’t complicated; it’s just the relationships.)
As Budden describes, the Spotify gameplan in podcasting is fairly clear: they want to build a walled garden around podcasts. (Luminary had the same plan, albeit without Spotify’s size.) This means, though, that Spotify’s goals aren’t aligned with Budden’s. Budden wants to build his audience; Spotify wants to build a podcast audience. Consequently, once Spotify had Budden’s fans in their platform, their goal was to convert fans of his show into fans of Spotify. In other words, they weren’t buying Joe Budden, but renting his audience to convert them to Spotify fans.
Budden’s example shows just how much risk any podcast takes by going exclusive to Spotify. If Spotify executes their game plan, after a certain time period, then they no longer need your services since they’ve captured/converted a show’s fans. Thus, they can offer lower prices (potentially) for future deals.
Moreover, there is the audience that is “left on the table” if you will. The downside of exclusivity is your reach, and hence audience growth, suffer.
My speculation–this isn’t in the Budden article–is that Budden realized that there was likely LOTS of audience he left on the table by going to Spotify exclusively. Now, he may have made more revenue long term–Spotify is overpaying for all of these deals–but exclusivity always comes with limits on your audience potential. This is just simple math. If Spotify is 10% of the podcast market by unique users, then going exclusive on Spotify limits your upper audience potential by, you guessed it, 90%.
To explain this, think of the three types of distribution channel strategies someone can pursue. (And yes, Wikipedia actually describes this fairly well.) You can either be mass market (intensive), selective or exclusive. I’ve long felt that one of the biggest problems a business can make is to try to be exclusive when the industry is mass market, and vice versa.
Take streaming. Netflix is mass market right now when it comes to device distribution. Why? Because they have to be to reach as many customers as possible. So if you name a device, Netflix is on that device. Now think about Microsoft Studios, the brief venture that planned to make exclusive content for X-Box. Why did that fail? Because you can’t monetize original content if you’re limited to only 5% of the marketplace. The same thing happened to Quibi. They went selective and cut off two-thirds their market potential. Thus, when it comes to devices, exclusivity doesn’t play.
Or TV shows. In this case, every TV show is exclusive in the Pay-1 (first year). Thus, exclusivity is fine there. In that case, being “mass market” would actually hurt your business. Meanwhile, most channels were mass market so being exclusive still reached everyone. (I would add the audience factor matters here. Being a new show on a new streamer essentially means being less than exclusive.)
Podcasting is notably a mass market business. Right now, every podcast is “intensively” distributed, meaning they try to go on every application that features podcasts (above a certain size). So every podcast tends to go on Apple’s Podcasts, Stitcher, Spotify, Google, and so on. There are little costs to adding new platforms, so most podcasts are distributed on all of them.
This is why I’m skeptical of Spotify’s long term podcast goals. Apple has about 60% of the marketplace. Meaning if you’re selective even off Apple, you lose 60% of the market. Meanwhile, Spotify only has about 10% of the marketplace. For ad-supported podcasts in particular then, going exclusive is a killer. Which is why Spotify has to pay such high prices to get exclusive deals. Can Spotify convert everyone to Spotify only fans? I don’t think so. Podcasting is too mass market for it. But we’ll see. And Joe Budden may be the test case.
Data of the Week – Youtube TV Price Hike Hurt Customers
The folks at MyBundle.TV sent me their latest blog post looking at what happened when Youtube TV massively hiked prices. As you’d expect, customers didn’t like it and now their recommendation algorithm is pushing Hulu for vMVPD services. Check out their whole write up for details.
Other Contenders for Most Important Story
Kevin Mayer Quits TikTok!!!
This is more surprising than it will be impactful. Few executives actually move the needle. But leaving a company after three months is usually a bad sign. The options from here could be:
– TikTok wanted him out since he couldn’t avert the Trump forced sale.
– The new buyer (Microsoft, Walmart or Oracle) wanted him out for some reason.
– He lined up a better job that we’ll find out about shortly.
– He discovered something inside TikTok that made him willing to jump quickly.
The fourth option is the most salacious, but the second feels like the most likely. As for what happens next? Who knows.
The NBA Boycott
Let me be clear, I separate the importance of an event politically from the importance of an event on the business of entertainment. (Reminder: I only cover politics when it relates to the entertainment business directly.)
That said, this was close to being a huge deal. If the players had voted to cancel the season, without the NBA Finals revenue, the owners would have to cut the salary cap by anywhere from 25-50%. The Player’s Association would fight this, and the result is likely a lockout. The players weren’t just boycotting this season, but likely one and a half seasons, meaning two NBA years without a championship. As the MLB in the 1990s example shows, losing fans can take a long time to recover. (Especially since the other leagues like MLB, NHL, PGA and NFL–in that order–are much less likely to cancel seasons.)
(Again, this doesn’t mean the boycott and protests are not worth it for the players. I’m not opining on the politics, merely noting the business and financial stakes.)
Entertainment Strategy Guy Update – The “Mega-Agencies” Are At Risk
As I wrote a few weeks back, an agency without agents isn’t an agency. And since agents can up and leave their current employer, it’s hard for them to maintain a consistent competitive advantage unless it’s simply size. (Hence why new agencies are born every decade. Endeavor born from agents leaving ICM. CAA was born by agents leaving William Morris.) Notably, California law doesn’t allow employers to force employees into non-compete clauses, which is why California has so many start ups.
