I may be cheating a pinch this week. I’m not sure this is the most important story, but it’s the one I think needs the most explaining. In a lot of ways, Amazon paying nearly half a billion dollars (to start) to make the most expensive TV series in history says more about the “streaming wars” than any other recent content decisions.
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Most Important Story of the Week – Amazon Raises the Price on High-End TV
Let’s start off with a hypothetical. Imagine that, with perfect hindsight, Amazon could pick any four 2020 TV shows from any other streamer–but excluding Disney’s legacy IP–and bring it to Prime Video. What series would they pick? My recommendation would probably be in some order:
Bridgerton
The Queen’s Gambit
Ted Lasso
Lovecraft Country
You can see below how much better this would have made Amazon’s second half of 2020:
Instead of four spots on Nielsen’s top 10 lists (Hanna, Borat and The Boys), Amazon would have had up to seven. (I think Ted Lasso would have been a ratings leader if it were on a bigger streamer.) Arguably some of these series wouldn’t have been as big–call that “the Netflix size effect” for now–but they would have still been hits. Like The Boys. Arguably, this lineup would have been the best streaming performance in in 2020, except for maybe Netflix’s March to May.
Moreover, in an alternate universe, this streaming calendar could exist! Shonda Rhimes left her ABC deal, and presumably Amazon could have outbid Netflix for her services. Ted Lasso is owned by Warner Bros, so presumably Amazon execs could have bought that one too. Amazon also has a relationship with Jordan Peele so maybe, again in an alternate reality, Amazon winds up with Lovecraft Country too. The Queen’s Gambit script had apparently been kicking around Hollywood for decades too. I don’t know the legal/development histories of each of these series, but this isn’t crazy.
I bring this up for two reasons, both related to the huge expense of Amazon spending $465 million on start up costs and season one of their Lord of the Rings prequel series. The first reason is to understand that Prime Video has a strategy that can be judged. It seems weird to say that, but a lot of analysts chock up Prime Video as a “loss leader”. Their logic–which defenders think sounds very clever–is that “Hey, if Amazon can afford to lose money, then their strategy can’t be judged, since they’re losing money.”
But take a gander at the above content calendar again. You can envision a world where Prime Video is as successful as Netflix. Even for a loss leader, that’s a lot better than the current state of Prime Video, which is mostly as a service people wouldn’t pay for if it weren’t included in Prime.
The second reason is opportunity costs. If a streamer has a fixed content budget, which likely even Prime Video has, every multi-hundred million dollar production budget means money spent on one TV series that can’t be spent elsewhere. While Amazon was spending $500 million on one TV show, arguably that’s the budget they could have spent on The Queen’s Gambit, Ted Lasso, Lovecraft Country and Bridgerton.
This context is key for evaluating The Lord of the Ring prequel series. Before last week’s leak that the series had already spent $465 million, we knew it would be expensive. And now we (inadvertantly) know exactly how expensive. And it is eye-popping. But will it be worth it?
Already I can hear another group of Amazon defenders. (Amazon defenders aren’t quite as staunch as Netflix bulls, but they are pretty vocal. They basically argue that since Amazon has done so well, and has so much revenue, they basically can’t fail.) The defenders say, “Well, Prime Video is bundled in Prime, and Jeff Bezos wants to sell more socks. Since it is really, really complicated, to calculate additional sock sails, we have no way to judge if they’re making money.”
The good news is that content is simple: more popular content is more valuable than unpopular content.
In other words, you can use all sorts of complicated math to find out how valuable a given show is to a given streamer, but at the end of the day, the more people who watch something the more valuable it is. Again, this seems obvious, but in today’s client of “disruption” sometimes we forget the basics. And in content, more popular stuff is more valuable than less popular stuff.
It also simplifies our task today, which is evaluating what nearly half a billion in content spend means for Amazon’s ability to get a return on their investment. We can just put all the “value creation” into terms of viewers. Shows with tons of viewers are more valuable than shows with very few.
Unfortunately, we don’t have global ratings for non-Netflix series. Especially the best comps for the new LoTR series, The Mandalorian and Game of Thrones. But it doesn’t matter, because the US is actually a good proxy for the rest of the world. If a genre show is phenomenally popular in the US, it’s probably popular everywhere. Here is my rough, rounded math, on the last seasons of each of these comparable series:
This provides all the context in the world for us. And we know that Lord of the Rings will cost twice as much as both of those series. (I’m rounding some estimates here, but assuming that both GoT and The Mandalorian are $15 million per episode.)
To make a comparison, what will Amazon spend on Lord of the Ring prequel? To be clear, Amazon isn’t telling us. But last week, a New Zealand economic minister revealed on radio that Amazon will spend $465 million on the first season. Some articles pointed out that some of these costs would be amortized over all five seasons of the series. So let’s assume that $250 million or so of the $465 million is “series” costs that are amortized over five seasons. That leaves $200 million in season one production costs. We also have to add in the $250 million in costs per season for what Amazon paid the Tolkien estate. Or $300 million total for season one, or about $30 million per episode. (If it is fewer episodes, then the cost per episode goes up.)
So here’s that rounded math in comparison:
There are two ways to look at this. On one hand, if you’re simply evaluating “content efficiency”, then for Amazon to get the same return on investment that Disney did for The Mandalorian, they need about twice as many US viewers for their new Lord of the Ring series. To match Game of Thrones, they need to get 3.3 times as many viewers as the biggest show of the last decade.
To say again, to match the return of Game of Thrones, Amazon needs to have three times as many viewers as the most popular show of the last decade. Literally half of America would need to watch it.
Arguably, though, that’s the most pessimistic way to look at it. Arguably Game of Thrones is the ceiling of popularity for a show. And Amazon could point out that if they could get the same viewership as Game of Thrones through five seasons, they’d make billions in revenue too, as I calculated for Game of Thrones. Billions minus $500 million is still billions.
But that assumes Amazon is guaranteed to make the next Game of Thrones! And based on Amazon’s hit rate over the last half decade, it is no guarantee. And that’s the other way to look at this, which is still a negative for Amazon. If HBO can keep the same costs for their House of the Dragon as they did for Game of Thrones, and Disney can keep their costs to $15 million per episode, then those two streamers can basically take two and a half swings at the plate for every one big swing Amazon takes.
The better strategy is to do what Disney is doing: making TV shows at half the cost per episode with likely the same viewership. Arguably, Disney spent the same amount Amazon did for Lord of the Rings prequel on The Mandalorian season 2, WandaVision and Falcon and Winter Soldier combined. And what are the odds that all three of Falcon and Winter Soldier, WandaVision and The Mandalorian each have higher ratings than the LoTR prequel?
I like these comparisons because they don’t mean this deal was a bad deal. But they do reveal how much riskier such a big expenditure is.
Other Thoughts
– In Amazon’s 2020 earnings report, they revealed that in 2020 Amazon spent $11 billion on “content”, including video and music. So one could speculate that Lord of the Rings prequel is about 5-10% of their total global budget for video, depending on the split between music and video. Spending 5% (at least) of your content budget on 10 episodes is a huge risk.
– The Lord of the Rings prequel probably has a higher “floor” than most TV shows. And honestly that means a top ten premiere in the US. With how much they plan to spend on marketing and the natural buzz, I can’t fathom the series not premiering on top of Nielsen’s charts, which means Amazon will call it a huge success, regardless. However, success won’t be one or two weeks in the top ten, but multiple weeks. (Especially if it is released weekly.)
– Speaking of ratings, the other good news for us as observers is that by 2022, Amazon won’t be able to hide failure on TV ratings. When this prequel series comes out, we’ll have quite a few other TV shows to compare it to. The days of spending tons of money then hiding behind no data are at an end.
– As I’m fond of pointing out, the Hobbit films basically decreased in value every sequel. Which happens in franchises that are failing. (See Fantastic Beasts for the other key example.) So it’s not like this series has a guaranteed success. Especially if the first season is a dud.
– Moreover, the risk is to the multiple seasons. Most TV series, far from gaining viewers each season, lose them. And I mean like 99% of series lose viewers each subsequent season. Which is why expensive genre series tend to have a shorter leash than cheap procedurals. See Chronicles of Shannara or The Magicians or The Expanse.
Entertainment Strategy Guy Update – Disney Buys Sony’s Additional Windows for Films
When news broke a few weeks back that Netflix had entered into a big deal for Sony’s feature films after theaters, it generated lots of headlines, mostly for the high price of the deal. At the time, we heard rumors that another deal was pending. And that deal is here: Disney purchased the additional windows for Sony’s films.
Let’s explain what that means, because sometimes it can be confusing in the coverage. When a film leaves theaters, it first goes to home entertainment, which means being purchased for pay-per-view or on digital platforms to own or rent. Historically, it would then go to premium cable (pay 1 and pay 2) windows, onto cable and broadcast channels (free as in “free-to-air” window). It was a neat system of descending value. But then streaming stepped in to compete for both the Pay 1 and free windows. Which meant films could go from premium TV to cable and then back to streaming.
As windows collapse, though, the distinction between whether something is “pay” or “free” is almost gone. The better question is when a streamer will be airing a piece of content. For Sony, it will roughly look like this: Netflix is buying the first window after home entertainment, or “pay 1”. Then the films will leave Netflix to go to Disney, Hulu and Disney’s linear channels.
After that window, it gets complicated. Lots of Netflix Pay 1 deals including future library windows as well, which is why some Marvel films could return to Netflix in the middle of the 2020s.
So was this a good deal? Maybe. Disney will have a supply of library titles from its own studio and now Sony for all their properties. This deal is rumored to be much less than the Netflix deal, but that also makes sense because earlier windows are more valuable than later ones.
Really, the winner isn’t either streamer, but Sony. They’ve basically locked up two big chunks of revenue to make their films. Now, they still need those films to be box office successes–since the deals are likely predicated on box office earnings–but if they can? They can make lots of money.
Other Contenders for Most Important Story
HBO Max Gets to 44.2 Million US Subscribers
In December, Warner Bros announced it was upending the theatrical apple cart and releasing all its films day-and-date on HBO Max and in theaters. Between The Snyder Cut of the Justice League and Godzilla vs Kong, the strategy seemed to be working. From one perspective, then adding 2.5 million subscribers, five percent growth in one quarter, is a resounding success.
On the other hand, squinting at that number, doesn’t it still feel low? Not that the growth isn’t good–they’re almost definitely larger than Disney is the US–but to upend an entire revenue stream wouldn’t you have hoped for slightly higher growth? I’ve been one of the biggest proponents of the thesis that the streaming wars will get much more competitive over time, and this number doesn’t impress me. I’m looking for confirmation bias, and 2.5 million isn’t it.
Their counter would be, of course, that the films are making money in streaming and in theaters. Godzilla v Kong won its weekend at the box office. So did Mortal Kombat, both beating their Covid-19 reduced expectations. If you’re Warner Bros, and you can win box office weekends while adding 2.5 million subscribers each quarter? Yeah, that could be a win.
Paramount Reshuffles Its Film Slate
A few weeks back, Paramount rearranged their 2021 calendar, moving Top Gun to November, moving the next Mission Impossible to 2022 and then selling another film to Prime Video. I had forgotten to call this out in a weekly column, so wanted to make sure it got a spot. That said, things are slowly moving out from the doom and gloom category, because we’re now seeing headlines like this from Variety:
The worry now is that the September schedule will be too crowded with blockbusters. Which would be a good problem for theaters to have, even if studios suffer.
DAZN Buys Serie A Streaming Rights
A few folks asked for some thoughts on this. To appease my football/soccer loving European fans, here goes. DAZN has emerged from the pandemic recapitalized and they’re making sports deals. As such, they’re buying global rights, including a deal for Italy’s Serie A soccer league in Europe, after adding Bundesliga rights. I have to admit this deal does impress me more than some other football deals. The key to sports is grabbing the most popular rights in a given country. Serie A rights in the US? Not worth much. Serie A in Italy? That is valuable. The challenge for DAZN will be that of all sports owners, which is that you’ll never own the underlying assets, so rights fees could always go up.
Speaking of soccer….
Lots of News with No News – The Failed European Super League
If this had happened, I would have made it the story of the week. But somehow the so-called “Super League” of the top clubs in Europe failed to survive even a week of coverage.
The question for football fans in Europe should really be if this is the end. The only thing as big as the outrage this league generated is the upside in revenue. The top clubs in each league know that a Super League has even higher potential than Champions League, because they’d own it.
