Hmm. So it has been a minute since our last “Most Important” story column. Fine, it’s been a month. (That’s like tens of thousands minutes.)
As I mentioned in my Streaming Ratings Report this week, it’s not like there hasn’t been news stories, but nothing blew my socks off. Nothing ground breaking. With a lot of behind the scenes work going on over at EntStrategyGuy headquarters (more soon!), I took a bit of a break off from this report.
Until last week, when the final approval of the MGM-Amazon clearly demanded another strategy-only column.
So let’s catch up on the strategy news. Again, this column is business strategy. More and more, the lead story each week in the trades is barely related to the entertainment business. So let’s provide your dose of entertainment business analysis, with an emphasis on the business.
Most Important Story of the Week – Amazon Merger Goes Through!!!
Well, this is awkward. I’m a notorious skeptic on the value of mergers & acquisitions, yet the last two headline stories of this column are…mergers!
While I think we focus too much on “M&A as a strategy”, when a big merger goes through, that’s rightfully news, isn’t it? Mergers valued at billions of dollars is big news. It literally is the landscape shifting.
I can also hear a lot of folks out there also saying, “Man, EntStrategyGuy got this one wrong.”
I don’t know. Did I?
Sure, I wrote at The Ankler and on my own site that this could be the FTC’s first big test of their new, broader interpretation of antitrust law. Since the deal went through, it was not their first big test.
It’s March Madness in the U.S.—for those who don’t know, a college basketball tournament in America—so it’s a good time to remind people about thinking probabilistically. This means you don’t think about events as strictly either/or, but the relative probability of likelihoods. The tournament—with its 32 games on the opening two days—provides a great data set for thinking probabilistically.
Usually one team is favored to beat another team. But if the favored team always won, we wouldn’t have sports. No one bets on whether the sun rises in the east.
Unfortunately, distilling probabilistic forecasts into bite-sized nuggets for Twitter is, shall we say, suboptimal.
Say a team will win a game 70% of the time. If asked, “Who is the favorite?” Answer the team with the 70% chance to win. Duh. But 30% of the time, it doesn’t happen! That’s just math. And yes, this exactly like Nate Silver’s 2016 Presidential election forecast. He got it “wrong”, but that doesn’t mean his prediction was wrong. (Silver has also been putting out NCAA forecasts since 2011.)
Often, analysts get roasted for getting predictions wrong, when by the math, they’ll get lots of things wrong lots of times.
(If you follow an analyst or, dare I say “influencer”, who claims to get everything right, that’s when you should be really suspicious.)
That’s how I feel about my “prediction” that the FTC could try to stop the MGM-Amazon merger. If pressed, I would have said it had a 20% likelihood of NOT happening. The MGM deal was always more likely to go through than not, simply because U.S. antitrust law is tilted in favor of mergers. The adoption by the courts of the “consumer welfare standard” and its (overly broad) interpretation by economists—notably, that standard isn’t in the original laws drafted by Congress…almost as if judges were legislating from the bench (and we know how both sides of the aisle claim to hate that)—have put up a tremendous barrier to enforcing antitrust harms more broadly.
But—and this is my biggest defense—the odds have shifted.
Say ten years ago, the idea that Amazon buying MGM wouldn’t happen was miniscule. Call it the same odds that Gonzaga (a number one seed) would lose to a 16 seed in the opening round. We’re talking 1% of the time, if not less. (And a one-seed has only lost to a sixteen seed once in NCAA history.) As opposed to a 13 seed upsetting a four seed, which happen nearly every tournament.
Nowadays—a mere ten years later—I think the FTC and DoJ in the U.S. (and the comparable EU counterparts, not to mention the Chinese regulators) are much more likely to stop new Big Tech mergers. Again, call it 20% likelihood now. A shift from 1% likelihood to 20% is a big shift! A nearly 2,000% increase! If the FTC can successfully stop a future merger (or win an antitrust suit) these odds will shift even further.
(The biggest cases to watch then are either the Facebook antitrust suit or some of the cases involving Google and Facebook price fixing in online ad-markets. Or look for the Microsoft-Activision merger.)
The Subtle Reason the FTC Didn’t Try to Stop This Deal
Still, when a prediction goes wrong, it’s worth asking why. To see if there is something you can improve for next time.
In this case, I didn’t weight one key variable high enough. Specifically, that the FTC is currently deadlocked with two Democratic appointees and two Republican appointees. Since the two Republican appointees are very “pro-merger”, frankly even if FTC chairperson Lina Khan wanted to fight the merger, she didn’t have the votes. That’s probably my biggest mistake in forecasting this: until she had the votes, Khan couldn’t try to stop this merger.
That could change shortly. If the Senate approves a fifth FTC member, that could accelerate the number of cases approached by that body. Frankly, a fully-staffed FTC will try to make its mark on the corporate landscape. That could impact lots of future mergers, including in entertainment. So just be aware.
Enough on Mergers, Onto the Strategy
According to reports, this is the new reporting structure of Amazon Prime/Video/Studios under Mike Hopkins:
Before we go onto the future, let’s look to the past. For all the billions Amazon has spent on making video—and though we don’t have exact numbers, we know across all “content” Amazon spent about $13 billion last year—this new org chart should say the most about how well Amazon’s video efforts have performed for, say, the last decade.
When executing a strategy, a company really has two choices, build it or buy it. If you think you can do something yourself for cheaper (or better) you build it. If you can’t, you buy it.
Essentially, in 2010 or so, Amazon (meaning Jeff Bezos) decided that video would help Amazon Prime retain members. So they went about licensing video rights and building out video streaming. The “build it” approach. That side of the house is basically still intact, so yeah that was the right decision. (They also quietly acquired a European streamer named LoveFilm to get access to the E.U. market.)
When Amazon chose to get into the originals game, they said, “We can build this ourselves.”
The MGM decision is basically an admission that no, they couldn’t. Roughly, MGM—a near defunct studio that was almost out of business—has three executives reporting to Hopkins and Amazon Studios has one. And frankly, if I were to judge, yeah MGM delivers twice the horsepower on the content side than Amazon Studios. (Hopkins likely has some other product people reporting to him too.) While I have no idea what Amazon spent over the last decade to compete making originals for Prime Video, it can’t be far off what MGM spent, can it?
Meaning that, while a lot of folks want to take a victory lap for Amazon, I just can’t do it. Yes, this big merger went through. And Prime Video has regular users watching its shows. (Look at the success of Reacher and The Wheel of Time.) But has this been a good investment of time and money for Amazon? The decision to build this in-house?
Probably not. Here’s another way to think about it. We all acknowledge that Quibi was a huge bomb. Because they burned through $2 billion in capital. How many “Quibis” has Amazon spent to date? And they still spent 4.5 “Quibis” to buy MGM, not even a major studio.
Even if Amazon will never admit it, I think they took the wrong strategy in originals. But now they can move on to a new, MGM-bolstered world.
Almost Most Important Story of the Week – Netflix Testing Out (Most Robust Yet) Password Sharing Prevention Tool
I’m skeptical about a lot of conventional narratives about Netflix. Especially around their content strategy. I’m not as skeptical about narratives around their product team. They have a top notch product development team. Their product is—with one glaring exception—the best in class.
(The exception? Linear video streams. They let Pluto, Tubi, Xumo and others lap them in this regard.)
For years, Netflix has had a password sharing problem. One person can subscribe—usually someone’s parents—and then share their account with their kids at college. And beyond! To get around this, Netflix started limiting simultaneous streams. This has likely worked somewhat, but obviously password sharing is still a huge problem. And as we covered ad nauseam, growth has slowed in both subscribers and (more quietly) on the revenue side.
In stock valuation terms, password sharing is limiting Netflix’s overall “TAM”, a term I’ve read more since January than in the previous three years combined. Basically, in a world with churn and password sharing, the future “total addressable market”—meaning total number of potential buyers—would never approach, say, the 90 million plus U.S. households of ESPN at their peak.
What to do, what to do? Figure out a way to combat password sharing.
And I like Netflix’s latest approach. Instead of limiting more streams or what not, simply offer people a price to add additional households. This won’t really help grow the subscriber base—unless they change the metrics!—but could have impacts on the average revenue per user metrics. (Or APM, since Netflix has “members” not users, as they say.)
Like video games—another strategy I like, though I think it is much less of a “game changer” than others—the question is execution. Do different subscribers have to establish their “household” address? How do you manage that? Can you add an unlimited number of add-on households? What if one person changes the password? Lots of questions. But solvable questions.
Other Contenders for Most Important Story – March Edition
Comcast-NBC Universal and Hulu End Their Content Sharing Deal
Long rumored, but finally decided, Comcast will start the process of clawing back “day-after-air” broadcast series from Hulu. They need content for Peacock and this is an easy (though not cost free) way to get it. Is this smart? Probably. It makes sense to exchange the small licensing fees for building their overall streamer. Though I probably would have started a few years back. But better late than never.
As for Hulu, this move won’t devastate the streamer, but Hulu has bigger questions facing it…
Disney Will Add an Ad-Supported Tier to Disney+
This is a move that is just best described as “risky”. Sometimes, when we say that, we assume it means bad, and that’s not what risk is. Risk does have danger, but usually because the rewards are higher.
In this case, the rewards are lots more revenue upside. There’s a reason that peak linear TV featured about 95% of channels that didn’t have ads and only a few (HBO, Showtime, Starz) that did not. Arguably, streaming is the outlier for having many fewer ads. (Or a temporary business model offered generously provided to customers by a Wall Street that believes in some overly optimistic financial projections…)
The risk, meaning the downside, is the perception that ads just make the overall product cheaper. When customers see ads, they want to pay much less overall.
The better question is what happens to Hulu now, and I have to imagine we see Hulu become a tab in Disney+ eventually. (And if that doesn’t happen, don’t @ me. I don’t feel too strongly on this.) Now that Hulu and Disney+ will both have ads, the barriers to combining the two services are getting knocked down. The biggest upside to Hulu is the “Hulu Live TV” and the fact that ESPN+ also exists. So I bet these consolidate, but as for when, that’s tough to guess.
Discovery+ and HBO Max will Merge…Eventually.
Not immediately, but someday, HBO Max and Discovery+ will offer one joint product. (And will it get another new name? And will that have a plus in it?) At the end of the day, I think I would have opted to keep the two services separate, but I understand the appeal. Switching streamers is poor customer experience, and this solves for that.
Lots of News with No News – The Ukraine News
The Russian invasion of Ukraine is tragic. I, like I suspect most others, read and followed a lot of this story. And I still am. But I avoided the temptation to try to do the “tie this to my lane” thing since I just don’t think it ties well. The biggest news is that a lot of companies decided to eventually not release their films in Russia (roughly the 13th biggest market globally), but this had likely as much to do with not being able to do business in dollars with Russian companies via traditional banks than altruism.
