All posts by EntertainmentStrategyGuy

Former strategy and business development guy at a major streaming company. But I like writing more than sending email, so I launched this website to share what I know.

Theme 2: It’s not Value Capture, it’s Value Creation

Last time I wrote about the “themes” of this blog, I waxed poetically about making decisions. I loved this point I made near the end:

“Salary in an organization is determined by the value of the decisions you make. If you’re decision is, ‘Do I empty this trash can?’, you get paid the salary of the janitorial staff. If you’re decision is, ‘Should we enter China or India as our next market?’ you get paid like a CEO. One of those decisions is valued at cents (the trashcan) the other in millions or billions (entering new markets).”

In other words, decisions determine everything. The higher the stakes of the decisions, the higher the pay. But why or why do we make decisions in the first place?

To generate value.

The more value an individual creates for the organization, the more of that value they get to keep for themselves in terms of pay. (Or compensation in terms of people paid with equity. But you get the point.) And workers/employees/owners create that value via decisions, which is the first theme of this website.

“Value” is why businesses, governments and really any organization exists. But this website doesn’t exist to serve the needs of governments or academics or non-profits; today I’m going to clearly define how businesses create value. Then we can use that definition for years to come.

Value Creation: A definition with a chart

Put simply, a business creates value by charging a price less than a customer’s “willingness to pay” for a good or service but higher than the costs to make and deliver the good or service. That’s a bit confusing. Fortunately, I have a chart to simplify things.Value Creation ChartThat chart I learned in the core strategy class at my business school. So yes, this is Strategy 101 and I’m  summarizing that lecture. That said, I’ve never seen this chart used in an actual business context, which is a shame. It’s simple. It’s elegant. And useful.

This chart isn’t quite economics per se, though it summarizes a lot of micro-economics graphs that show where to price a good. The line between strategy and economics is super blurry.

So let’s explain that above chart. Starting on the right. The “willingness to pay” (WTP, one of only two acronyms I’ll use today, I promise) is the hypothetical maximum price a customer would pay for a good. That’s the upper limit. Above that they won’t buy a good, below that they will. The price is what they actually pay for it. And “cost of goods” (COGS) is the term from accounting that means how much it cost you to make something. I’ll mainly call it “costs” today

The key insight of this diagram is the two terms on the left. This is the “value”. The first one is “consumer surplus”. The gap between what you actually have to pay and how much you would pay is the benefit you receive. The customer’s surplus from the transaction. The gap between the price and what it cost to make (and all the costs to run the business) becomes a company’s profit or net profit. (Or “producer surplus”. Or for an individual item the “gross profit”.) This is the value for a company and its owner and shareholders.

An Example of Value Creation: Buying Beer

For my real life example, I’m going to use craft beer, to show I’m a stereotypical male of my generation (Millennial). Maybe I would pay up to $10 for a six pack of craft beer. This is my WTP for craft beer. That’s the top line. (Numbers from here on are approximations to illustrate the point.)

The store I go to happens to sell a six pack of Golden Road for $9. This is the price. We now have our first “math” problem of the chart. (I put math in quotes because a lot b-school students think business math is complicated. Most financial statements are just addition and subtraction problems. That’s easy!) My consumer surplus is therefore $1. Great!

To keep this example simple, let’s assume the store paid $8 for the beer. This is their cost. Now we have our second equation, price minus cost. This gives us the store’s profit. Unlike the consumer surplus, which isn’t actually exchanged or stored, but a psychological value, the company keeps the profits. (Or again accounts for it as “gross profits” then subtracts the fixed costs of running the store. But I’m keeping it simple for now.)

Here’s that math in chart form:Example 1And that’s it! That’s the whole three part equation in real life. But now we get to play with it and generate some cool insights, that will directly tie to the themes of this blog.

The Good Side of the Chart: Creating Value

In business, the key to gaining a competitive advantage (a term for a later post) is to change the lines on this chart. Literally, if someone tells you strategy is complicated just say, “No, I only need to move one of three lines.” So how do you do that?

First, you can keep your costs and price flat flat, but increase the WTP of the customer. This means, you make a more attractive product for the customer. Get the customer to want to pay more or to raise their WTP. So let’s say every so often my store carries the craft beer Stone IPA. I’d pay $12 for a Stone IPA. But my store sells it also for $9, like Golden Road. In this scenario, my consumer surplus has gone from $1 to $3. That is creating value. (Presumably, the store will sell more Stone beer overall to make up for the higher price they could charge.)Example 2There are lots of different ways to increase the willingness to pay. You can make the product higher quality, better functioning, longer lasting or with better features. In services, you can offer faster services, better services or different types of services. Again, you increase WTP by making things better, in general. Or creating a new product people didn’t know they needed (the rarest type).

(Here are some good examples of boosting WTP. The iPhone took how much people were willing to pay for a cell phone and blew it through the roof because it was such a technological masterpiece. Google offered the best search engine, so it took over search. In-and-Out costs about the same as McDonald’s but crushes it on quality.)

There is another way to increase value for customers: you lower the price, while keeping WTP flat. This increases the consumer surplus. This is also creating value. In the beer example, assume I walk into liquor store, intent on buying beer, and I see a sale for $7 per six pack. I’m used to paying $9, and would pay up to $10, so my consumer surplus went from $1 to $3. Yay me! Same surplus; different method.Example 3So how do you lower prices? Well, you either cut into your own margin or you figure out how to lower costs. Many companies enter a market because they figured out a way to make a core product cheaper than it is currently being sold. In the beer example, domestic light beers are the best example. By scaling up production, they can produce beer cheaper than craft beer makers. I could get a whole twelve or even eighteen pack for price of one craft beer six pack. If a beer company can identify a way to make beer cheaper, it can lower prices and increase consumer WTP (and market share).

(Here are some good examples here: McDonalds, Taco Bell, and Wal-Mart. Or generic drugs. Lowering prices isn’t as sexy as increasing WTP, often relying on supply chain improvements or offshoring/outsourcing, but can definitely create value for customers.)

So figure out how to offer more value and increase willingness to pay, or figure out how to lower costs and therefore lower prices. That’s how you create value. I’d summarize 90% of value creation like this:

Increase Quality —> Increases WTP
Increase Variety —> Increases WTP
Increase Speed —> Increases WTP
Decrease Costs —> Decreases Price

The Bad Side of the Chart: Capturing Value

If you’re sharp, you noticed that I showed how to move two lines on the chart, while keeping the others still. What if, as a company, instead of lowering prices, you raised them? While keeping your COGS and WTP steady? Well your profit would jump.

The term for this is “value capture”.

So let’s say—and this could never happen in America with its strong anti-trust regulations—a single company or say handful of companies captured a dominant market position and began to work together. (Again impossible, but conveniently most cell phone plans cost about the same and offer the same services. Again, coincidence.) Let’s use the beer example. Since customers are willing to pay $10 for the beer above, what if all the stores worked together to all charge exactly $10 for all craft beer? Well, now my consumer surplus is $0. But the company, whose costs haven’t changed is now making a profit of $2.Example 4Or, let’s say there were only two makers of alcoholic beverages in the entire world. And they conspired together to increase the prices they charge retailers. So they still sell the beer for $9.90 to stores, and stores have to sell it at $10. Well, now the beer producers have captured nearly 95% of the value and customers don’t have any.

That’s how monopolies work. Or oligopolies. They don’t create value for anyone per se, but figure out a way to capture value from someone else. In other word, they are “part of the cost of doing business”, which usually means they capture value without adding value.

To be clear, lowering prices as the result of innovation that lowers costs is NOT value capture. Even if the value isn’t passed to consumers, it’s still passed to shareholders. Instead, when prices move simply because a company has figured out how to raise prices without moving their costs or by increasing the customers willingness to pay, they have figured out a way to capture value, and passed the costs on to the rest of the people in the chain.

The Ugly Side of the Chart: Capturing Market Share by Destroying Value

There is an even darker version than just capturing value where a company charges a price below what it costs to make a good. At that point, the company is offering a tremendous consumer surplus to customers. But why would they do this? It seemingly destroys value for themselves. Well it could be used to gain market dominance, at which point the company can raise prices again, devastating consumer surplus. A company cannot survive indefinitely if it loses money overall on acquiring market share.

Here’s an example of that with the craft beer, showing a company pricing below costs. Moreover, overall value is destroyed because the previous surplus of a total $2 is down to $1 (consumer surplus plus producer surplus). Short term there could be reasons for this, but fundamentally it is unsustainable. Example 5In our current climate, a lot of companies have current pricing that causes them to lose money. Some who have lost money for years. There are also companies loading up on debt to fuel M&A that are regional and/or national oligopolies. The question I have for each of them is  this chart. What is your strategy? Are you creating value, capturing value or capturing market share?

In many cases, the end goal of the market share is to achieve market dominance, at which point the companies can charge whatever prices they want. That is indeed ugly, for consumers.

Every business conversation should strive to get back to this chart

I have a working theory that most good things in the economy come from value creation. Companies that create value have better future growth. Value creation grows the economy without inflating it into a bubble. I also believe that companies that learn to create value have better relationships and more success with their customers. Some of these beliefs economists have proven; others the evidence is mixed.

Yet, I have never seen this chart in a business context. I also rarely see it in a entertainment press context either. I hope to remedy that.

I thought about providing some examples of value creation versus capture in today’s article, but it would have been too long and, honestly, that’s the purpose of this website. MoviePass, Disney, Youtube, Amazon Studios/Prime/Video, Hulu, Comcast, AT&T and Apple. I’ll look at all their business models and pass judgement at some point.

In the meantime, ask yourself: is your company creating value, capturing it, or capturing market share?

Most Important Story of the Week and Other Good Reads – 24 August 2018

Reflecting on the links I collected for “the most important story of the week”, what stuck out to me is that, well, it seems like political news can crowd out even entertainment stories. Digging a little deeper, I still think we found a pretty fun story.

The Most Important Story of the Week – AMC, A Small Theater and Paramount Consent Decrees

I first learned about the Paramount case in business school, and honestly I had summarized the lesson as, “movie studios can’t own theaters”. But I had never read the case law, so–as this excellent article by Eriq Gardner clarifies–that isn’t quite true. Instead, it’s an agreement that was agreed to in the 1940s and hasn’t really been challenged in court since.

Until now.

AMC is headed to trial over allegedly running a smaller Houston movie theater chain called Viva out of business by forcing studios to not to license other films to the smaller theater chain. If it does go to trial, it could be appealed and so on up the chain. Given today’s Supreme Court, if somehow this case got to that higheest level, I could see five justices saying, “What? Movie studios and theaters are just entering into contracts? In fact, why shouldn’t studios be able to own theaters? Go ahead, it’s all competition.” This is a summary of Gardner from the previous article that I love:

On the other hand, as times change, once-restricted practices that might have been perceived as an illegal restraint 
of trade in one era may be given a fresh look as pro-
competitive in a different era.

So I’m calling this important on the off-chance it goes all the way up to the Supreme Court and is struck down. Yeah, it was a slow news week.

Good Read of the Week – Kevin Spacey’s Box Office Bomb – A Deeper Look by Deadline

I’m always scouring for new stories that explain the context versus slam you with a buzzy headline. This article by  may be the ideal for what I want. When even my dad has sent me an article–and he sent me one on Spacey’s “box office flop”–you know something is a hot take.

This is the unpopular take: the film was only intended as a “straight to video” release, to use 1990s parlance. But this isn’t a world with video anymore. The straight to video for the 2010s is a release on Video-on-Demand, which encompasses platforms from iTunes to Amazon to cable MVPDs. They all love to bill, in particular that a movie is “in theaters now”. To get that, they need to release in some theaters, which they usually pay for by renting the screens.

So learn about how this works in depth a little more in this article. My other takeaways were that the film made iTunes top 20, which is surprisingly good, but also will likely lose a boatload of money, which makes sense for a film the exhibitor isn’t putting ad spending behind.

Other Contender for Most Important Story – Private Equity Firms Looking to Acquire TV Stations

On the one hand, man this is small potatoes. Who cares about TV stations in the digital age?

Well, “finance people” who I’ve now mentioned disparagingly in two weeks in a row. The larger point this smaller story makes–for me, the “business guy”–is to remember that you can still make a lot of money in a “dying” business. Do you make more than growing businesses? No. But you can still get cash. This lesson would apply to DVDs/cable channels going forward.

Mergers & Acquisitions on Media, Entertainment and Communications Updates!

A new feature to this weekly round-up! When I come across a notable acquisition, I’ll try to put it in here (and update my own table). A few weeks back, Viacom purchased AwesomenessTV, and they recently generated news stories from the announcement of layoffs for Awesomeness TV. The notable thing is the price which is between $25 and $100 million dollars, depending on who you read and whether debt is included in the valuation. Overall, though, the trend is clear that former MCNs–multi-channel networks–have been depreciated significantly in their value. AwesomenessTV at one point was valued at $650 million dollars.

Big Data of the Week – Three Stocks in the Micro-Bubble (Amazon, Netflix, and Spotify)?

Working on another article for my website, I stumbled upon this really interesting look at the stock market. As a strategy guy, I’m going to avoid commenting on how or why the stock market moves because frankly, I don’t know why it moves the way it does.

That said, in this case, my criticisms of some companies line up with their recommendations that these stocks are in bubbles. My philosophy on business is that making money tends to be correlated with success, and businesses that can’t make money will struggle to succeed. Some very buzzy tech companies involved with the entertainment business–Amazon, Netflix and Spotify–seem to buck my philosophy with their high valuations. Again, time will tell.

Be-Twitch-ed: How On The Media Repeated a Bad Statistic and What We Can Learn From It

My favorite Chuck Klosterman rant is in his book Sex, Drugs and Cocoa Puffs about the phrase “apples to oranges”. In short, is anything actually more similar than apples and oranges? How is that a synonym for difference?

He finishes his rant with the line, “in every meaningful way, they’re virtually identical”. He’s right.

It’s a great line because when doing data analysis, this phrase comes up all the time. When you’re comparing two things, you need to keep as many variables the same as possible or it won’t be “apples-to-apples”. Even a small variable being off can make the conclusions drawn worthless. Ever since I first read Klosterman, I’ve tried to use the phrase “apples-to-hammers” since they truly are different.

The media compares “apples-to-hammers” all the time. Or they’re just bad with numbers. If you want to hear plenty of examples—or just become a better educated news consumer—then you need to listen to WNYC’s On The Media (OTM). Of all the podcasts/shows on entertainment/media/communications, I’d rank it number one, just ahead of KCRW’s The Business.

To take just one example, OTM reviewed a book many years back called Sex, Drugs and Body Counts that describes how the media often over-inflates, or abuses numbers when it comes to wars, crimes or deaths. I have a copy on my bookshelf. The moral of the segment on Sex, Drugs and Body Counts is to beware of a journalist bringing huge, sometimes unbelievable, numbers to tell a sexy narrative. (I can’t find a link to the original segment it was so long ago.)

So, ahem, I need to call out OTM specifically for doing the very thing they regularly decry. Last week, OTM had a great episode on Twitch, “Twitch and Shout” and the future of live-streaming video. They announced this project in their newsletter a few weeks back:

“We wanna tell you about a little experiment that we’re working on here at OTM. Have you heard of Twitch? It’s like the live streaming version of YouTube — if YouTube were obsessed with videos gamers. (It is.)…Well, over 200 million people watch this stuff. That’s more than HBO, Netflix, ESPN, and Hulu combined.”

They quoted a similar fact same number at around minute 13 of last week’s episode.

“It is a streaming network that has more viewers than HBO, ESPN, Netflix, and Hulu combined.”

I bolded those two sections because they sound unbelievable. Twitch is a bigger business than HBO, Netflix, ESPN and Hulu combined. Can you believe it?

Well, I don’t. Because it isn’t true. And because the analogy isn’t apples-to-apples.

Without meaning to, On The Media provided me a great example of how “data”, or more precisely, “an interesting factoid” can be misinterpreted. Today, I’ll break down how OTM was led astray and how we should interrogate data better. Tomorrow, I’ll tackle some other thoughts from the episode and their business implications.

Where the Bad Fact Came From

Let’s start with the fact that OTM didn’t hire a consultancy to measure the number of viewers across all these different platforms. Instead, they likely started with the internet. In this case, OTM found their statistics from a website called, “DOT Esports”, an e-sports news website. Here’s the key quote:

Which service has more viewers, Netflix or Twitch? Turns out it’s the latter. A new report reveals that more people watch online gaming videos than HBO, Netflix, ESPN, and Hulu all combined together.

The “new report” is key. That comes from a company called SuperData Research, also a company specializing in video games and e-sports. So we have to acknowledge right off the bat that both of the sources of this fact are heavily biased towards showing how large and influential their audience is. (No industry body or news source under-hypes its potential.) This is the exact same motivation that was in Sex, Drugs and Body Counts discussed when non-profits or government agencies use big numbers to bolster their own importance.

It seems that after publishing this report—likely accompanied by a press release—this hard to believe fact was repeated on multiple gaming and entertainment websites. Then, these websites were quoted by at least some TV stations. These quotes were found by OTM and repeated without being challenged.

The Bad Fact Itself Isn’t Even True

Reread the quote above and then check out the DOT Esports headline:

“Report shows Twitch audience bigger than HBO’s and Netflix’s”

Note that DOT Esports says that it isn’t that more people watching Twitch then watch HBO or Netflix, but that the total size of the audience of “online gaming videos” is bigger than HBO or Netflix etc.

Indeed, as the chart on DOT Esports shows, saying Twitch has more viewers than HBO, Netflix, ESPN is just…wrong. Here’s my table version of DOTeSports chart from 2016:

Twitch Table

Even by the most generous measurement to Twitch, the statement is just false. A combined 325 million people subscribed to one of the four platforms mentioned above; in 2016 Twitch only had 185 million unique visitors. (I haven’t found 2017 unique visitors for Twitch or I’d report that. Given how well Twitch is doing, it’s strange they don’t release this information.)

Of course, in the last few paragraphs I’ve used visitors, people, views, uniques and subscribers interchangeably. And that finally gets us back to the introduction. Even if the Twitch did have more people visiting it then HBO, Netflix, etc, it still wouldn’t be true because the comparison isn’t apples-to-apples.

Apples-to-Hammers Comparison 1: Viewers aren’t views aren’t subscribers

You can see this really clearly in the DOTeSports article when they compare the numbers:

By the year’s end, 185 million people watched gaming videos on Twitch during 2016, with 517 million checking out videos on YouTube. In comparison, HBO had an estimated 130 million subscribers in 2016, with Netflix clocking in at 93 million.

Did you catch the sleight of hand in the above paragraph? The paragraph went from “people watched” Twitch to “subscribers”. Is there a difference? Oh heck yeah. By the time it got to OTM, they changed it to “people” from either viewers or subscribers.

I spent a lot of time at my former employer fighting a losing battle to use terms clearly when it came to our customers. The difference between a stream and a viewer and a unique viewer and what not. This wasn’t an exercise in pedantry; it was vital to the business. I worked really hard so that we didn’t compare things apples-to-hammers and make bad decisions as a result.

So let’s provide a too brief set of definitions. Basically, I’d define the key terms in, roughly, descending order of difficulty to achieve. A view is anytime someone starts watching something. A viewer is the person watching. Does this mean a “viewer” can have multiple “views”? Yes, if they watch multiple videos or the same video multiple times. (So yes, someone could watch a Youtube video multiple times and get multiple views.)

A unique viewer is just charting how many visitors tuned in over a given time period, without counting anyone twice. It is basically saying, “over this time period, we’re only counting this person once, making them unique”. It doesn’t matter if they watch something multiple times, it’s just a “unique viewer”. Even if they only tune in for two seconds, they can still be a “unique viewer” on some websites. This allows websites to measure the number of people showing up on a given day, leading to common metrics like “daily active users” or “monthly active users”. (Though even these can be an average so it depends how you measure it.)

The main problem is that while SuperData Research counted Twitch’s visitors over a year, they aren’t counting ESPN, HBO, Netflix and so on the same way. Way more people watch HBO then subscribe to it; that’s basically a fact. Think about it, do you watch Game of Thrones in a group? Then you would count as, say “five viewers” but only “one subscriber”. This is why this isn’t apples-to-apples. Of course, some people may subscribe to HBO or Netflix and never end up watching, even for an entire year. On the other hand, some kids may watch on their parents accounts without subscribing. On the downside for Twitch, who knows how many ofTwitch’s unique visitors  show up for one day and never return? (The latest daily active users for Twitch is 15 million people globally, according to their data.)

Apples-to-Hammers Comparison 2: Subscribers aren’t Unique Visitors, they’re better

That story is also illustrative because being a unique viewer is such a low cost proposition. And again, this is HUGELY important. Twitch and Youtube have “you” as the product, a phrase popularized post-Facebook’s Cambridge Analytica troubles. Twitch sells advertising, so the goal is to get as many total viewers as possible to sell against. (Indeed, they even have a profit motive to inflate all their viewership numbers as much as possible.)

Subscribers are paying per month. That’s incredibly more valuable. So saying one service can get 130 million people around the globe to pay them versus 185 million who may tune in once? Those aren’t nearly as comparable as they seem. Twitch or Youtubedon’t require a credit card to sign up. Just an email address and a log-in. Actually, you don’t even need that to watch the videos, only to comment in the chat room. So again, subscribers aren’t anything like unique viewers or visitors.

Apples-to-Hammers Comparison 3: Geography also matters

This could be the biggest flaw in this analysis.

Twitch does not have geo-filtering meaning its content is available globally, including in China.

ESPN is only available in the US. 
Hulu is only available in two countries. HBO is available pretty broadly, while also being heavily pirated, and it also has content partnerships, which keep its subscriber count lower, like a partnership with Tencent. Netflix is excluded from China.

It’s worth repeating that last point. Until a recent crackdown in China on live-streaming video, Twitch was available in that billion person country. Netflix has not launched in China because the government won’t let it. A lot of the success of streaming video games comes from other countries.

This isn’t to say that Twitch’s success in China, Korea and Japan (and other countries where gaming is excessively popular) isn’t noteworthy. It definitely is. But it doesn’t really make sense to compare the different services/platform without keeping this variable equal, right? Now, I would love to do a comparison between Twitch and HBO/Netflix/ESPN/Hulu, and for those four companies I could find U.S. subscriber counts, but here’s the fact about Twitch: they don’t release US viewership data.

In fact, one of the weirdest things about Twitch is how finicky it is at presenting it’s own data. If they were super confident in their data, they’d release a ton of it in table form for us to pour over. Instead, Twitch’s advertising site is a selection of data points pulled at seeming random, put next to images that aren’t related. My favorite is the fact that they have “15 million daily active users” put below a picture of the United States. Note, they didn’t say 15 million DAUs in the US, but they want you to think that, don’t they?

Beware the unbelievable factoid; it’s probably not believable

Is Twitch big? Yes. Is it growing? Yes. Is it new and different? Yes.

But just because those questions are true doesn’t make extreme sentences that Twitch is bigger than HBO, Netflix, ESPN and Hulu necessary.

In general, the more a story defies belief, the more we should disbelieve it. Or at least ask where it comes from. The point of a sentence like the one driving this story is to make someone say, “Wow, I know tons of people who subscribe to HBO or Netflix (like myself!) but I’ve never watched Twitch! That must mean a lot of people are watching who I don’t know. I’m out of the loop.”

But you aren’t out of the loop. The statement, “the fact”, is wrong. But I don’t blame OTM too much. They put together a great product every week and some “facts” are so widely distributed it’s hard to believe they aren’t true

Most Important Story of the Week and Other Good Reads – 17 August 2018

For some reason, last week seemed like it started with a lot of news. But then as the week went on, I saw more popular news stories than impact news stories. And I went so far down an Oscar rabbit hole that this post got delayed until today.

The Most Important Story of the Week – Netflix CEO David Wells Steps Down

Why is this important? Well, CFOs get too little credit. Not “finance people”, mind you. The former get too little credit; the latter way too much (and way too little blame for our current politico-economic situation).

CFOs can do a lot to power a company’s rise, especially when it comes to Wall Street perceptions. And the FAANGs have done a lot to curry Wall Street favor, rightly or wrongly. Time will tell.

That said, Netflix has always struck me as the riskiest of the FAANGs when it comes to money. They lose cash, which makes them unique among those five giants in tech. Again, not profit, which they profess to make every year and quarter. Instead, alone among the FAANGs, Netflix loses tons of cash each year, while it professes to make a profit. Some FAANGs have tons of cash in the bank (Apple and Facebook), some don’t make a profit (Amazon) and some make a lot of profit (Apple and Google). But only Netflix loses lots of cash each year.

Their CFO was very involved in that decision. So him leaving is notable. I’d also say the CFO for Netflix was very influential in deciding how Netflix amortized the costs of its programming. I’d argue their clever, but legal, amortization schedule has convinced the entire world that filmed content is a good business, and the other FAANGs followed their lead. Again, time will tell.

Lots of News with No News – Walmart launching its own subscription service

Sorry, did I say that Netflix convinced the FAANGs to make original video? Well, now they’ve convinced Walmart to do it too!

So what keeps this from being “Lots of news with no news”? Well, it hasn’t officially happened yet, and I tend to wait until it does until I officially react. The previous example that comes to mind for me was when Microsoft launched Microsoft Studios, spent something like a hundred million dollars, and then shuttered with nothing much left to its name.

So let’s react to the Walmart news in the same way, with a healthy dose of skepticism that this ever actually launches. My “blink” analogy would be naturally bearish/negative. Unlike Google or Facebook, people aren’t used to going to Walmart’s website to watch videos, so having a huge website won’t help. (This problem I would argue impacts Amazon Prime/Video/Studios as well.) Unlike Disney or AT&T-Time-Warner-monstrosity or NBC-Universal, Walmart doesn’t have a content library to see the SVOD platform. Unlike Amazon, Google or Apple, Walmart doesn’t have an army of programmers to set lose on this problem. So that’s three strikes off the bat. If this progresses, I’ll try to dig a little deeper.

Long Read of the Week – Time-Warner’s Previous Owner

New owner same as the old owner?

That could be the conclusion of this article from three years ago about AOL’s unsuccessful merger with Time-Warner on the fifteenth anniversary. I found it searching for M&A examples in my database and loved it so much, I decided to make it my long read for the week.

It’s almost impossible not to compare the similarities between the AOL of old with the AT&T of now, both acquiring the same content company (or similar content company) for HUGE sums. Let’s start with the similarities, including some great quotes.

First, what did people at the time think?

“A lot of people thought that the merger was a brilliant move and worried that their own companies would be left behind.”

What about the strategic logic?

“Time Warner, via AOL, would now have a footprint of tens of millions of new subscribers. AOL, in turn, would benefit from access to Time Warner’s cable network as well as to the content, adding its layer of so-called ‘user friendly’ interfaces on top of the pipes. The whole thing was “transformative” (a word that gets really old really fast when reading about this period).”

What about the two cultures combining?

Merging the cultures of the combined companies was problematic from the get go. Certainly the lawyers and professionals involved with the merger did the conventional due diligence on the numbers. What also needed to happen, and evidently didn’t, was due diligence on the culture. The aggressive and, many said, arrogant AOL people “horrified” the more staid and corporate Time Warner side. Cooperation and promised synergies failed to materialize as mutual disrespect came to color their relationships.

So on to the differences to be fair. (And these weren’t really pulled out in the article.) First, the Time-Warner of the past actually had a cable company to their name, and that was spun off after AOL collapsed. Further, the acquirer in this case definitely has a more stable financial position as AT&T has a lot of people paying it huge monthly subscriptions in broadband, wireless or satellite. That alone makes it different. I’d also add the concerns about culture this time seem to be more about the Warner side being concerned about the AT&T people versus the opposite situation in the previous iteration.

That said, the foundational logic just seems so similar, and again, I can’t wait to look back on this deal to see how it all shakes out in 15 or 20 years.

Listen of the Week – HBR Ideacast on “Learning from GE Stumbles”

We’ll keep with the mini-theme on mergers & acquisitions. This HBR Ideacast on General Electric should just serve as a caution that M&A that helps reinforce strategic advantages is good M&A, but M&A isn’t a strategy in and of itself. With all the talk about Disney and Fox and AT&T and Time-Warner and Viacom and CBS, it’s a good lesson. GE went from being a cash machine and M&A beast to being removed/replaced/delisted from the Dow Industrial Average.

Could AT&T or Comcast or other aggressive media & entertainment firms suffer the same fate? Time will tell. (I guess another theme of this week.)

Putting Numbers to the Oscar Best Picture and “Popular” Film

If you want to know why I started this website, just take a look at the furor unleashed on the Academy of Motion Pictures Arts and Sciences when it announced (via Twitter!) that it would add a new category called “Achievement in Popular Film”.

First came the questions: “How would this even work? By box office? By user reviews? By top 25 films at the box office?”

Then came the pondering: “Hey, what film would have won in the last ten years? What will happen to Black Panther?!?”

Then came the criticism: “Hey, this won’t work. This won’t solve the problem.” Or summarizing Rob Lowe on Twitter, this will just plain suck.

Throughout all those takes, the data was largely missing from equation. In data’s place lived assumptions. Assumptions from which the rest of the arguments derived. Consider what a flawed world that is: how can we fix something if we don’t know what the problem is? Or worse, when we don’t know what caused the problem?

Well, no more. Let me step into the void with as much data as I can muster to challenge the assumptions permeating the Oscars debate. Let’s separate fact from fiction. Call out our assumptions. Review what we know from what we can only guess. Let’s do this.

But first, my usual warning on data when it comes to media & entertainment.

Warning: We’re in small sample size.

I’m not going to go into as much detail as I did for my series on Mergers & Acquisitions in media and entertainment on my data, but the same admonition that drove that series drives this one: we’re firmly in the realm of small sample size.

Box Office Mojo tracked “Oscar bumps” going back to 1982, so that’s the sample of Best Picture nominees I used. So that’s our starting sample size: 216 films. However, drawing conclusions from 1982 data just seems wrong. Too much has changed since then. From DVDs to going from 200 or so films per year to over 500. As a result, we’ll leverage the last 20 years of data, which is only 136 films, 81 since 2009 and 55 from 1998-2008.

Assumption 1: The Oscars feature fewer and fewer “popular” movies.

Rating: True.

The ostensible reason the Academy needs to make a “popular film” category is because popular films aren’t being included in the nominees for Best Picture. This statement seems obvious which is why so many people said it on podcasts or in articles summarizing the issue. Narratively, this is an easy case to make: In 2017, only two films grossed over $100 million dollars, Dunkirk and Get Out. Worse, the winners in 2016 and 2017 grossed under a $100 million dollars combined, and had a combined box office of $45 million when they were nominated. No films have been nominated since 2014 that we could call a “blockbuster” meaning it did over $250 million at the box office.

(I defined movies as either “popular” with greater than $100 million in domestic box office or “blockbuster” with greater than $250 million. “Popular” and “blockbuster” are my definitions, but they work pretty well.)

The problem with easy narratives is they can often be countered with an equally compelling counter-narrative. If I squint at 2015, it’s hard not to call The Martian a near blockbuster since it did $228 million in domestic box office and more at the international market. I could also point out that La La Land, which was so close to winning it was even announced as the winner, did $400 million in total box office. Or I could just play with the timing: The Oscars don’t have a problem with nominating blockbusters since Star Wars was nominated in 1997, ET in 1982, Beauty and the Beast in 1992, Titanic in 1997 or even Avatar as recently as 2009.

So let’s go to the data. I plotted this a few ways, and they all tell roughly the same story. First, the raw counts:

Slide01Chart 1: Count of “Popular Films” and “Blockbuster Films” in Best Picture Nominees. Data: Box Office Mojo

Even that doesn’t really tell the story right, since the number of films eligible doubled in 2009, as the Academy expanded from 5 films per year to “up to 10”. So here is the percentage of films defined as popular or blockbuster for all films nominated.

Slide02

Chart 2: Percentage of “Popular Films” and “Blockbuster Films” in Best Picture Nominees. Data: Box Office Mojo

But even that doesn’t tell the whole story. That’s about one or two movies passing a certain threshold. Arguably, the more important fact is the average box office performance of the nominees. How has that trended?

Slide03

Chart 3: Average Domestic Box Office per Best Picture Nominee. Data: Box Office Mojo

Does even that metric tell a misleading story? See, a dollar in box office in 1998 isn’t equal to a dollar in box office in 2017. According to Box Office Mojo, a 1998 ticket only cost $4.69 whereas on average in 2018 that price has jumped to $9.27. So we need to make the three tables above, but adjust for the price of a ticket in a given year. Fortunately, Box Office Mojo does this for us.

Slide04

Chart 4: Count of “Popular Films” and “Blockbuster Films” in Best Picture Nominees, in 2018 adjusted dollars. Data: Box Office Mojo

Slide05

Chart 5: Percentage of “Popular Films” and “Blockbuster Films” in Best Picture Nominees, in 2018 adjusted dollars. Data: Box Office Mojo

Slide06

Chart 6: Average Domestic Box Office per Best Picture Nominee in 2018 adjusted dollars. Data: Box Office Mojo

Accounting for ticket price inflation, everything looks even worse for the Academy. The worst measure is the average box office per film. It was on a downward slide that was only arrested for a two year period, then it has gone back downward. The number of blockbusters per year looks equally bad, as the period from 1998 to 2004 regularly featured blockbusters, then again besides the period from 2009-2014, they haven’t featured any.

Taking those six charts together, we see a narrative forming that in our time period, we’ve seen two slides away from popular films and towards smaller films. Starting in the 2000s, the popularity of the films started dropping, bottoming out in 2005, and staying in that low period through 2008. So in 2009, the Academy expanded the field to 10 films to hopefully get more “popular” films. It worked, and the number of popular films, blockbusters and average box office jumped right back up.

But after this initial surge of popular films and blockbusters, the voters returned to form and the number of popular films, blockbusters and average box office per film plummeted again. To show this, I combined the data of films through these three time periods:

Slide07Of course, the key question for the Academy is how a lack of popular films reflects in TV ratings. (I’d personally argue that ignoring blockbuster films means the Best Picture category isn’t truly representative of the quality of films in a given year, but I can’t quantify that.) So let’s test that next.

Assumption 2: Featuring more “popular” movies will drive TV ratings for the Oscar telecast.

Rating: Maybe, leaning towards true

Again, narratively this is a really seductive argument. Basically, if you feature really popular films, people will tune in to see those films rewarded with nominations and wins at the telecast. Of course, the counter-narrative is also persuasive and I heard it on two different, influential podcasts (The Ringer’s Press Box? and KCRW’s The Business with Kim Masters): the types of people who watch the Academy Awards don’t watch/like popular movies anyways.

So here’s the one the chart that implicitly everyone referenced but I never saw: TV ratings plotted against average box office per film. (I also did the percentage of popular films, but it was even noisier than this line chart.)

Slide08

Chart 8: Average Domestic Box Office per Best Picture Nominee in 2018 adjusted dollars versus TV Ratings, in Millions. Data: Box Office Mojo, Nielsen data from Wikipedia.

So what can we draw from this? Honestly, not much. Technically, I should plot this as a regression model using a time series analysis, but I can tell you ahead of time it won’t be statistically significant so I’m not going to introduce that bad data to the world. Instead, the strongest conclusion we can draw is the Oscar telecast peaked in 1998 at 55 million people and have been sliding down ever since.

As for whether popular movies have slowed this decline, you can cherry pick data either way. First, let’s make the “popular movies matter” case. In 2008, ratings hit their nadir at 32 million, just above 2017’s 32.9 million. Each of those years represented near low points in average box office per film. Then in 2009 and 2010 saw increases in the TV ratings, and those two years were the highest average box office since 1998.

I can also make the case that “popular movies don’t matter” pretty easily. 2014 had the highest ratings since 2004—remember this for a minute, I’ll get back to it—and it only featured 1 movie with a box office over $100 million dollars. 2015 saw an increase in the number of popular films and average box office, but ratings still fell from 2014. 2003 had a huge average box office per film, but TV ratings ticked down that year. Moreover, even blockbusters like Titanic weren’t enough to bump up TV ratings, if you look back that far.

How do we draw a conclusion from this? Well, first we admit that one variable like “popularity of films nominated for Best Picture” is just one variable among hundreds. Other variables like the host(s), the date of the telecast, the length of the telecast, the quality of the broadcast, major a-list celebrities nominated and more could all impact TV ratings. Focusing on one variable to explain all our conclusions is a fraught enterprise.

Assumption 3: The Oscars haven’t featured diverse films in the recent past.

Rating: False.

Okay, so I didn’t actually read anyone who wrote this specifically. Or relating it to the move to make “Achievement in Popular Film” a category. But you can’t talk about the Oscars since 2015 without addressing the #OscarsSoWhite controversy.

Arguably, no groups has benefited more from the move from 5 films per year than diverse films and filmmakers. (Except maybe science fiction films, which I’ll get to.) Take a look at the number of films featuring African-American characters or themes measured before and after the expansion in number of films:Slide 9The difference is stark.

In the 9 years since expanding the field, a film featuring African-American characters or themes has been nominated every year except 2015 and 2010, and 2009 featured two, if you count The Blind Side. I debated it since arguably Sandra Bullock is the main character and it is her story, but if we exclude The Blind Side, I’d rule out three of the films from the 2000s for the same reason, which would only make my case stronger. Of the four films in the 11 years before the change that I counted, three are ensembles that don’t really focus on African-American themes. I could easily say that only Ray really qualifies. Before the Academy expanded the field it really ignored African-American characters.

(And obviously I’m only dealing with Best Picture here, not the acting categories, which in a lot of ways was the key driver of the #OscarsSoWhite movement.)

Of course, I could define “diversity” in a variety of ways. Take “global diversity”. Has the expansion of eligible Best Picture nominees helped foreign language films? Not really. From 1998 to 2008, four foreign language films were nominated for Best Picture (Life is Beautiful, Crouching Tiger, Hidden Dragon, Letters from Iwo Jima and Babel) and since then only one film has been nominated (Amour), which is even worse when you consider how many more films are nominated since the expansion.

(I’d also say you could look into Latino-American-themed films, but you’d basically find zero examples of any films in any time period. The Oscars may be so white, but they’re even less Latino-representative than African-American representative. Asian-Americans fair similarly poorly.)

Assumption 4: The Academy wasn’t nominating enough different types of films.

Rating: False, but trending towards true.

One of the biggest topics around this year’s nominees was the bugaboo about Get Out. Specifically, I heard people claiming it was unique because it was a horror movie, and those types of films never get nominated.

Well…

To test this, I wanted to see how many “genre” films were nominated before and after this change. I defined “genre” films as any film in the following genres: science fiction, fantasy, war, musical, comedy or animation. And if a film in Box Office Mojo was more a drama than a fantasy (say, The Curious Case of Benjamin Button) or more a drama then a comedy (Juno was a tough edge case here), then I excluded it. Again, we’re looking for films known as genre films, not films that happen to have genre elements.

Slide10

In this case, nothing much has changed. From 1998-2008, roughly 69% of the films were “drama” films. From 2009 to present, 62% were “drama” films. So it’s gone up by 7%, but that’s within the margin of error. Even the last two years which “felt” like not a lot of genre films were featured still had one-third genre movies.

Of course, for certain categories, the change has really helped. As I mentioned above, since the change 9 clear “science fiction” movies have been nominated: Avatar, District 9, Her, Inception, Gravity, Her, Mad Max, The Martian, Arrival and, last year’s winner, The Shape of Water. Some of those films were also blockbusters or popular. Though the three biggest science fiction films since Avatar (Star Wars) haven’t been nominated. War films have also done very well, but have been generally less popular than the science fiction films, including American Sniper, Hacksaw Ridge and Dunkirk. The other categories all had smaller changes which are more likely noise than genuine signal.

The last category I’d call out is animation. During the first two years when the Academy expanded it’s number of films, two Pixar films achieved Best Picture nominations, Up and Toy Story 3. Arguably, Pixar’s quality the last few years has been at its highest with Inside Out and Coco being frankly, masterpieces (Both were “universal acclaim” on Metacritic.) but it hasn’t seen the respect from the Academy. I would argue that if the Academy really wanted to train a new generation to love movies, putting films like Coco and Inside Out (and even Frozen) would help a lot.

Assumption 6: Politics hurts the Oscars.

Rating: True, but not for the reason you think.

Well, maybe for the reason you think.

The one narrative that was hinted at throughout the #OscarsSoWhite campaign was that featuring non-diverse filmmakers would keep a diversifying America from watching the campaign. As we saw above, though, diverse films have regularly been featured as Best Picture nominees. Instead, the arguably bigger lack of diversity comes from the lack of political diversity in the films.

To explain this, I go back to the biggest discrepancy in the data comparing TV ratings to average box office: why were 2014’s ratings SO high? Again, this year only featured one movie grossing over $100 million dollars, which happened to be its lone blockbuster. So it was an unpopular set of movies that also lacked any major A-list talent. What happened?

American Sniper was the one film.

American Sniper was a major topic on Fox News and other right wing new sites. That’s right, if the Academy is looking honestly at its whole slate of Best Picture nominees, this is pretty much the only film that could be labeled “right leaning” that has been nominated since 2010. (Maybe Zero Dark Thirty too.) The conclusion here is that far from “popular” films, the Academy needs popular films that also appeal to the political-cultural right. (I’m not necessarily recommending that, just acknowledging that this data says.)

Conclusion: A Summary

So here’s my short line summary of the history of the Academy Awards as it relates to popular films and TV ratings.

– By the end of the 1990s, the Oscars featured generally popular films such as Forrest Gump, Titanic, Gladiator and The Sixth Sense, while also featuring critically acclaimed but unpopular films such as Chocolat or The Cider House Rules. 
- Then, from 2000 to 2008, the Oscars featured increasingly fewer popular films, as shown by multiple metrics. The nadir was 2005 to 2008.
– In 2009, the Academy expanded the number of films from 5 to 10 and changed the voting system. As a result, from 2009-2012-ish, the were more popular than the previous five year period.
– Since 2014, the Oscar films have trended downward in popularity, especially among “blockbusters”—films grossing over $250 million—which the Academy hasn’t nominated since 2014.
– The TV ratings have been on a general downward trajectory, though limited evidence (2009, 2010, 2012 and 2014) indicate that popular films can help increase TV ratings.
– The expansion in number of Best Picture nominees helped African-American films/film-makers more than any other category.
– While the films have decreased in popularity, “genre” films have been represented at roughly the same rate. In other words, “dramas”, which tend not to be “popular” have earned about 62-67% of nominations.
– Finally, the biggest discrepancy in the “TV ratings to film popularity” came in 2014, when American Sniper arguably drove the biggest TV ratings in the decade, a film that was the personal favorite of Fox News and its viewers.

I still have a ton of questions to answer on this (some fun, some business) but I think that’s enough for this post.

Debunking the M&A Tidal Wave: Part V – Other Thoughts That Didn’t Make It In

Was I too strong in calling this series, “Debunking the M&A Tidal Wave in Media and Entertainment?

I don’t think so.

I want emphasize the “think” in that previous sentences. I’ve thought about this a lot. I mean, asked myself many, many, many times, “Wait, are you sure there won’t be a tidal wave surge in M&A now that the Justice Department lost in its AT&T battle? Even if M&A has been high the last few years, couldn’t it get higher? Are you implying you think M&A could go down in the future?”

Upon reflection—all that thinking, hat tip to iFanboy—and yes, I think I am appropriate in calling this a debunking. Certain narratives catch hold—coincidentally, like a tidal wave—and most everyone tends to repeat that narrative. The internet started this phenomena, but social media like Facebook and Twitter and Reddit amplify it.

To sum up all I’ve learned, here’s the brief history of M&A in media and entertainment:

– Media and entertainment (and communications/internet) has been consolidating since the 1980s, like all industry.
– After the recovery from the Great Recession, media and entertainment companies began consolidating again.
– By my numbers, the growth in M&A was somewhere between 8%-25% per year in total deal value (depending on the years you pick) and mega-deals (deals over $1 billion in value) increased from 8 in 2011 to 18 in 2017.
– These deals included both horizontal mergers (within the same industry), conglomerations expanding (conglomerates continuing to acquire new businesses) and vertical mergers (within different industries, including distributors such as cable or internet firms acquiring media and entertainment companies).
– Consolidation likely would have continued even if the Justice Department had won their lawsuit preventing the giant and horizontal AT&T-Time Warner Merger.

Phew. Sorry, I had to get that out.

Knowing what we know above, we can use that as our baseline. For any new information on M&A, we can update our priors, to use Nate Silver speak. Basically, if a new deal is announced or a current deal opposed by the government, we have a solid context to understand its impact on the larger M&A in media and entertainment (and communication/distributors/tech/social media) landscape.

For today, any time I dive super deep into a topic, I end up with a bunch of stray thoughts that don’t quite fit in any of my other articles. Today is the catch all round up of those pieces.

Other Thought 1: The Chaos of the Trump Administration

Ignoring the politics of the current administration—and how can you?—what does President Trump and Gary Cohn/Ajit Pai/Wilbur Ross mean for how entertainment companies conduct business? Really, the daily tweets and outrages for liberals or the perceived economic boom times for conservatives matter much less for how he had changed the regulatory environment for business.

But some of those Trump tweets matter. Like how he tweeted opposing the AT&T merger, praising the Disney-21st Century Fox merger and supporting Sinclair/Tribune. In each case, either base political calculations or personal relationships determined his support, not larger idealistic concerns (either free market or pro-consumer). In AT&T’s case, he hates CNN. In Disney’s case, he loves Rupert Murdoch, whose Fox News also supports him. In Sinclair, I think he knows he has a friendly voice supporting his policies.

Uncertainty is the key, along with the certainty that the key is winning Trump by pledging allegiance to him. That’s how companies can win in the short term, while America’s economy moves towards a rent-seeking/crony capitalist future that curtails economic growth. In the mean time, M&A will proceed apace as the key to execution means wooing Trumps favor. Before you decide to do a deal, think, how do we spin this to make Trump look good, while crossing our fingers Democrats don’t punish us for that?

Speaking of decisions…

Other Thought 2: What decisions can we make off this information?

Imagine you’re a major executive at a major studio, communications provider (cable, satellite or telco) or production company. Maybe you’re the boss or the head of his/her corporate strategy or business development team. The key question following a judge’s approval of the AT&T-Time Warner merger is: how should this influence our decision-making going forward?

Now, if you build it, they will come. In business, this means if you build a team with a mission, that team will recommend decisions in its interest. If you have a team devoted to assessing and executing mergers & acquisitions, they’ll probably recommend that you make a lot of mergers & acquisitions. That team—and its likely influential leader—would therefore recommend most CEOs be aggressive in their deal making. Hence, they probably read a lot into the AT&T merger decision as the green light for future mergers.

Ignore that team/leader.

If a merger with a competitor or supplier or other company makes sense economically, it probably made sense no matter which way this decision went. Now, it likely would change the probability on one line of the economic model—the line one the costs if the merger fails—but I would argue that would only apply to deals that almost exactly mimic Comcast-NBCU/AT&T-Time Warner style deals, meaning it would mainly apply to Comcast. And I don’t think Comcast CEO Brian Roberts has any desire to slow down his deal-making.

What about the information I’ve provided showing the huge surge in deal-making going on? Should this influence executives? Maybe.

The case would be strategic. If everyone around you is getting larger, then to continue to be able to negotiate with suppliers or be able to gain a presence in the marketplace, you may need size to compete. If you’re Discovery and Scripps, facing a world with shrinking cable subscribers, doubling the number of channels under negotiations may help keep your affiliate fees higher. Same with movie studios: Disney will be able to negotiate great revenue shares with theaters if they own 50% of the box office, so maybe you need size to compete with that.

But for that strategic case, I could trot out an early version of my “Theme 3: Strategy is Numbers!” At the end of the day, you don’t win in entertainment by simply being the largest player in the world. This isn’t a board game like Risk or Settlers of Cataan where simply being the biggest or lasting the longest means you win. You win by generating cash for your shareholders.

If the deals to get bigger end up costing you more in interest payments than they return in cash, then shareholders will lose money, even with the size. This is usually exacerbated by vertical deals, but all deals risk costing shareholders money. If anything, the frothier the M&A environment, the higher the prices paid, which increase the likelihood that deals don’t make economic sense.
In all, M&A in the larger sphere is interesting, but not determinative on the decisions you need to make as a decision-maker.

Other Thought 3: I’m even more skeptical of conclusions from the M&A data than I was before.

I can’t get over how noisy M&A data is. So noisy.

When you read sweeping conclusions in breathless reports about M&A, remember this. The biggest deals have a huge impact, but are really small in number, while the timing can fluctuate a lot over a given year, which can drastically change the conclusions. a lot, impacting any quarterly or yearly analysis.

The first impact of this uncertainty is to really hinder drawing trends underneath the data. Like say, “Oh look, the majority of deals are about developing innovation” or “achieving economics of scale” or that deals tend to be horizontal or vertical in nature. I’m also hesitant to point to explanations for why M&A is happening, besides that M&A is the natural state of industry in America.

Take the explanation that executives are fearful of the rise of Netflix, Youtube, and Amazon and disruptive business models. That’s a great narrative. But consider that Comcast tried to buy Disney in 2004, did buy NBC-Universal in 2010 and Disney has been buying big new businesses such as Pixar, Marvel, Lucasfilm and Maker Studios. If we tried to quantify this trend, we just couldn’t do it.

The second impact is I tend to look skeptically at any explanation that M&A is increasing year over year based on the most recent data. Again, it just won’t hold up to analytic scrutiny if you can move one or two deals and change the whole picture.

Other Thought 4: Explaining the M&A total number of deals in 2007/2008

In Part IV of this series, I pointed out that in 2007, the number of M&A deals exceeded 1,000. That’s huge, compared to the 800 or so deals we’ve averaged in most of the 2010s. Even though I dismissed this number when making my prediction, it doesn’t mean it doesn’t beg for an explanation.

I have two theories.

Theory 1: 2007 to 2008 was the peak of consolidation of bigger players of smaller mom and pop shops. Basically, this theory says in the 2000s small groups of cable providers, radio stations and independent broadcasters were swallowed up by larger groups. While we focus on the giants of cable, we forget that in the 2000s there were hundreds of cable companies, maybe even thousands. Yet a lot have been swallowed up by the larger players. Now, these deals were sometimes for cable providers as small as a few hundred thousand people, so they just didn’t rate a huge value. Now that they are gone, the number of deals has gone down, but the total value has gone up.

Theory 2: In the 2007 financial crisis, some businesses were divesting not merging. This makes more sense, and I believe one article mentioned this was happening, but honestly I don’t have the data to prove it. If I had Thomson-Reuters data, this is what I would definitely explore.
So I can’t prove either theory above, but they would make for interesting future study.

Other Thought 5: Horizontal versus vertical merger discussions were overblown.

One of the legal hot takes was that the Justice Department had typically ignored vertical mergers and this is what made the move against AT&T so bold. I have two counters.

First, the Justice Department didn’t do a great job of stopping horizontal mergers either.

In my data set, I see a ton of horizontal mergers that went through without scrutiny. In just 2016 and 2017, we saw announced horizontal mergers in broadcast (Sinclair and Tribune), theaters (Cineworld and Regal; Dalian Wanda with two theater chains), radio (Entercom and CBS Radio), conglomerate (Disney and 21st Century Fox), networks (Discovery and Scripps), and other cable/cellular companies, most of which passed scrutiny. So the Justice Department hasn’t done a great job stopping horizontal mergers, which makes the focus on vertical mergers…strange.

Second, the Justice Department has looked skeptical at vertical mergers. Namely, the Comcast-NBCUniversal deal, that it ultimately blessed with many conditions.

Overall, this is one of those data problems where we shouldn’t rely on the sparse data too much. There just aren’t a ton of examples and other factors may explain the conclusions better. Like say size. Many vertical deals just involve really small companies being acquired.

Honestly, just because this vertical deal was successful at trial doesn’t mean future deals will be as well. If cable and satellite companies keep increasing prices after deals clear approval—as both Comcast and AT&T have done—well a future government many decide that these deals aren’t great for consumers.

And wouldn’t that be something.

Most Important Story of the Week and Other Good Reads – 10 August 2018

I love it when the “most important story” ties directly into the topic I’ve been writing about a lot since July: “mergers & acquisitions in media and entertainment”. Call this the “Updating Your Priors” edition of my most important story.

Most Important Story of the Week: An M&A Tidal Wave…Stalled

The great thing about the analogy of the tidal wave is the unstoppable nature of it. If you want a real life version of the “immovable object versus unstoppable force” it’s a tsunami heading towards land. Unstoppable force hits immovable object.

So how could the AT&T decision have unleashed a tsunami if it’s already been stopped? Hardly an unstoppable force, I’d say.

First, the FCC came out opposing the Sinclair/Tribune merger. Or more specifically, it sent the deal to an administrative hearing, which ended up killing the deal. By Thursday of this week, Tribune withdrew from the deal. Then the Justice Department decided to appeal the AT&T-Time Warner merger decision, even after the judge strongly discouraged the DoJ from filing an appeal. (Though, consider the logic of that, shouldn’t every judge insist you don’t appeal their decision?)

Imagine a world where the DC Circuit appeals court overturns Judge Leon’s ruling. Imagine if Sinclair abandons it’s Tribune merger. Does the narrative suddenly shift that M&A is doomed in America?

Nope.

Back to my admonition above to “update your priors”. No single news story should swing the narrative from “M&A will be a flood” to “M&A will ground to a halt”. Instead, all these moves and counter-moves are just a part of the regular ebb and flow of M&A. The largest force in M&A is the general trend towards consolidation in general. The current tax and regulatory environment are just the current drivers.

Moreover, the overriding “tsunami” changing all regulatory agencies in America is still Donald Trump. He and his administration are enforcing the law haphazardly and primarily due to whoever courts his or his party’s favor.

Added Thought: This is Sinclair’s Fault

This quick summary of the legal issues by Eric Gardner was the best summary/history/legal read I saw on the Tribune-Sinclair issue. The issue for me seems like one of over-reach by Sinclair. They, in my opinion, over-estimated the value of the Trump nomination and how easy it would make to flount or skirt the laws related to media ownership. And it backfired.

Lots of News with No News: The Oscars Is Adding a Category Called “Popular Film”

Listen, I loved this story. As a fan of the Oscars. But is this an “important” story in that it will impact how entertainment studios do business? Barely. There might be more of a push by the big studios to get popular films some Oscar buzz, but the size of that buzz is already baked into these films. In most cases, blockbuster films have been out on DVD since Christmas by the time the Oscars get nominated. Also, arguably only the Best Picture category really generates buzz. Add on top none of this may happen, and you have a story with a lot of fun news, but not a lot of news.

(I will still try to dig into the economics of it next week.)

Data of the Week: “Open” Offices aren’t effective

One of my favorite types of news stories to debunk is the one that leaves out the most obvious example. Take the fun story of the last few weeks about the study showing that open offices may not actually help foster collaboration. Most of the takes on this study tried to explain why “open” office floor plans have proliferated, offering these explanations:

– They foster collaboration.

– They look better than cubicle farms.

– They’re less dehumanizing than cubicle farms.

I have a simpler take: They take up less square footage than cubicles, which were already cheaper than offices. This is why most people moved to open offices, and the above reasons were just the window dressing.

Still, I have one giant caution. So Harvard Business School–or professors associated with it–conducted a study showing open offices don’t work. Could another group of professors do a study showing the opposite? Sure, and they probably will. This doesn’t mean the new study isn’t useful and research we need, but it doesn’t end the discussion, which is how the article sounded.