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.

Was Prime Video a Loss Leader or Loss Loser? – Most Important Story of the Week – 5 Feb 21

Jeff Bezos ending his run as CEO of Amazon is certainly neé clearly neé absolutely the biggest story in business this week. Is it also the biggest story in media, entertainment and communications broadly? Sure. 

Bezos is a man who built Amazon to be “the everything store”. That includes your video watching habits. As I’ll explain, if there is a way to deliver video, Jeff Bezos’ Amazon has launched a business unit for it. That makes this big announcement an easy winner of the “most important story of the week”.

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Most Important Story of the Week – Was Prime Video a Loss Leader or Loss Loser?

When I opine on Twitter about Amazon, usually critically, someone inevitably opines that Prime Video is a “loss leader”, as if I didn’t know that it was the purpose of Prime Video. But I’ve been around the entertainment-strategy-take game long enough to have read that rationale for Prime Video’s existence. Multiple times. 

The challenge, for me, is that “loss leader” is a vague term. Like it’s cousin “flywheel”–read my thoughts on that phrase here or here–my concern is that loss leader can be used to justify bad decisions. The logic goes: Amazon/Apple/Google/Facebook are big and successful, they invested in Product/Business/Vertical, then even if it doesn’t make money it must be worth it.

When I’m questioning Big Tech’s strategy in video, the words I’m focused on aren’t “loss leader”, but the words “investment” and “worth it”. That’s where we need to start to understand how all of Amazon’s entertainment/media enterprises will fare under Andrew Jassy.

Loss Leaders vs Loss Losers: Is the Investment Worth It?

A “loss leader” is a simple concept: a business sells a given product at a loss to sell more of a different product.

Take an example from the legal world that I just heard on All The Presidents’ Lawyers. Sometimes, a defense attorney will take a high profile case and waive the fees. They do this because the case is so notorious they will get lots of free publicity. The gain in additional paying clients offsets the initial lack of payment.

But consider a defense attorney who represented President Donald Trump in his election lawsuits. Normally, representing the President would be worth reduced fees, because the publicity would be huge. But Trump was so toxic that many firms risked losing paying clients because they were associated with frivolous election lawsuits that were destroying democracy. That’s not a “loss leader”, but the opposite.

For lack of a better term, I’d call bad loss leaders “loss losers”. How do we judge if a potential “loss leader” is good or bad? Well, if the extra sales exceed the costs. One could simplify that to:

A loss leader is worth it if the costs (the losses) are exceeded by the benefit (the sales elsewhere).

Take Roku. They sell their hardware at cost, meaning almost exactly what they pay for it. Devices are loss leaders. They make up the revenue by selling subscriptions and advertising. But if “loss leaders” are good, why not go further? Why doesn’t Roku lose money on each device? Don’t stop there. Could Roku pay every American $100 to take a device? Or higher? $1,000? 

Obviously not. Because at some point the losses don’t lead to enough additional sales. So the question isn’t “Is Amazon’s video investment a loss leader?”. Instead the question is, “Has this loss leader strategy worked?”

Beyond the Black Box: The Hazy Economics of Big Tech

So the obvious question becomes, “What has been Amazon’s return on investment in all of entertainment?”

And we have no idea.

I’m tempted to say we can’t know because Prime Video is a “black box”. Honestly, even calling it a “black box” would be wrong. A true black box is when you have known inputs, that go into an equation/algorithm/process, which spits out known outputs. The black box is the process. For Amazon, we don’t know the inputs (costs, mainly), the process (how Amazon accounts for success) or, most importantly, the outputs (performance, revenue, usage, etc). 

This applies to a range of Big Tech investments. Google, until very recently, reported no financials for Youtube in their earnings reports. Apple hasn’t told us any performance details of everything from Apple News to Apple Music to Apple Arcade to Apple TV+. Amazon has a range of smaller investments beyond Prime Video, all of which are bundled under three vague business lines in their earnings report. 

I’d call it an “invisible box”, where we don’t even know what is going in or out of the system. To compound it further, Amazon isn’t one invisible box, but a stack of several, sometimes competing, invisible boxes.

Amazon Prime/Video/Studios/Twitch/Channels/IMDb TV/Music: Amazon’s Voluminous Investment

Even defining “video” for Amazon is probably the most confusing of the Big Tech firms. Google is primarily focused on Youtube (though it also owns Google Play and Youtube TV), Netflix is only Netflix, Facebook has Facebook Watch (though it also owns Instagram videos), and Apple only has Apple TV, TV+…okay it’s confusing for all the tech companies except Netflix.

But Amazon makes an art of how many different investments in video they have: 

– Amazon makes its own content via Amazon Studios.
– It distributes this via Prime Video, while also licensing a huge content library content.
– Folks can upload their own videos to Prime Video using Prime Video Direct.
– Amazon also sells movies from all the studios to rent or buy. (This was actually Amazon’s first digital video business.)
– Further, Amazon also sells other streaming services via its Amazon Channels business.
– On top of it all, it sells devices that can be used to stream, the Fire TV and stick.
– Lastly, Amazon has other investments in video including Twitch, IMDb TV and Amazon Live. 

And honestly, if you told me there were five more businesses I missed I’d believe you. That list also leaves out music, podcasts, Alexa and video games. That’s a lot of stacked up invisible boxes.

If we can’t say if the investment was good or bad, what can we say? That there were good arguments on both sides.

So is All of Amazon’s Video Investment a Loss Leader or Loss Loser?

I don’t know. Without the inputs and outputs, it’s all guess work. But the alternatives–relying on the CEO interviews, stock price, vague assertions of flywheels and loss leaders –just aren’t very informative.

Instead of providing a definitive answer, I’ll provide both sides. Consider this both the prosecution and defense arguments around Amazon Video broadly, though I’ll center it around “Prime Video”, which is still probably the most well known investment. 

The Cases For Amazon’s Video Investment

The Customer Lifetime Value Math is Very Enticing. 

Given that Prime renews yearly, even a small increase in retention year-over-year can have huge impacts on the potential customer lifetime value of Prime. The best upside math for this comes from Scott Galloway. In his accounting, boosting Prime retention from 80% to 91%–based on some survey data–essentially results in $47 billion in market capitalization for Amazon…and that was pre-pandemic!

Galloway Flywheel

(Source: Scott Galloway Talk)

Now, I quibble with some of his math, but this is clearly the upside. If Prime Video–and the Channels ecosystem broadly–can lock folks in for a cost of a few billion per year, that’s worth it.

Prime Video enabled the Amazon Fire TV Ecosystem. 

Like flywheel, “ecosystem” is overused. But this is a true ecosystem! Amazon leveraged Amazon Video (selling movies/TV series) and Prime Video to launch the Fire TV system, which launched Amazon Channels. Now that they’ve built it, there is the question if it makes money on its own, since it is increasingly removed from additional retail sales, but they did build a valuable ecosystem.

Some analysts think the media/entertainment upside is even higher. 

For example, Laura Martin of Needham. Including advertising on Amazon–which I don’t count as entertainment, since it is the price of doing business on their retail platform–she puts it at $500 billion in value. In other words, Amazon likely spent a few billion dollars every year on content, but it built a $500 billion business, about 30% of their current value.

It seems like Amazon has been successful. 

If you care about awards, Amazon Studios has won with Manchester by the Sea, Transparent and The Marvelous Mrs. Maisel. And the trendline is good: The Boys is likely their biggest hit yet and Upload, Hanna and Hunters made the Nielsen top ten last year. Moreover, the Channels business may exceed them all as Amazon is likely the biggest seller of third party subscriptions, including Showtime, CBS-All Access and HBO/HBO-Max.

Moreover, Amazon hasn’t killed off its video investments yet.

Amazon isn’t innovative so much as adaptive. Or put uncharitably, they’re a copycat. Amazon doesn’t innovate, they let others do that, and then “fast follow” with a copycat product. Diapers dot com. Angie’s List dot com. Etsy dot com. Amazon has created clone businesses of them all. (Indeed, Prime Video is a Netflix clone, IMDb TV is a Pluto clone, and even Fire TV is a Roku/Chromecast clone.) Yet Amazon has axed many businesses if they don’t work. Video, though, has lasted. This would be circumstantial evidence that it must be doing well.

All of Big Tech is into video. 

More circumstantial evidence that video surely must be worth it. If it were a bad investment, why are Google, Facebook, Apple and Amazon all investing billions in it?

The upside in success is that Amazon would likely have built the oft searched for “moat” in digital video. 

Or “monopoly” in layman’s terms. With millions of devices and tens of millions of subscriptions sold, Amazon can demand better and better terms for supply of content, be it movies to rent, subscription to sell, or content to buy. In short, they used profits from AWS to acquire a dominant position in digital TV and now will be able to generate big returns (in pro-business terms) or extract rents (in pro-market terms). There is nothing more profitable than oligopoly, and if Prime Video paved the way for that for Amazon, then that justifies all the investment.

(Consider if Fire TV acts as one of say three distributors of streaming TV by the 2030s, presumably with Apple and Roku. Instead of collecting huge rents on a regional basis, as cable did in the 2000s in America, Fire TV could do that globally. That upside is huge!)

The Cases Against Amazon’s Video Investment

At this point, going all-in on video seems like the smartest decision made by an executive of all time. Not so fast…

The spending was likely out of control. 

Richard Rushfield called Netflix’s last half decade the “drunken sailor” era of spending. Was Amazon the “Not-drunk-but-can’t-drive-home sailor” era of spending then? Whenever you see estimates of spending, Prime Video is usually right behind Netflix in terms of spending on streaming at about $6-7 billion per year. Including traditional content producers, Amazon still spends more than everyone except Netflix, Comcast and Disney.

Screen Shot 2021-02-05 at 8.55.00 AM

(Source: Variety 2019 Dare to Stream Report)

And Amazon discounts other parts of video too. Fire TVs were often aggressively discounted to move units as well. Same for Amazon Channels, which often offered extremely low or subsidized rates to get users. In other words, Amazon sold Fire TVs at a loss, so they could sell more Prime Video at a loss, all to sell more socks. That’s a double loss leader. 

Usage is still low comparatively. 

Going strictly by Prime Video, has the investment been worth it? Prime Video is either second (using Comscore data), third (using Nielsen data) or fourth (using my estimates) place in the streaming wars. Moreover, the streaming wars are just getting started. Can Prime Video hold off Disney+ and HBO Max forever?

Comscore via Hedgeye by Type

(Source: Hedgeye Comm)

In other words, if Amazon’s content spend was about half of Netflix’s spend, but it got about 1/4th of the usage. That’s not great.



What would a third party pay for all of Amazon’s entertainment products? 

When in doubt, in other words, let the market be our guide. Far from Martin’s valuation, I think you would struggle to find a valuation for all of these businesses even approaching Netflix’s $250 billion valuation. And that’s because while everyone currently subscribed to Netflix is doing it (mostly) deliberately, the vast majority of Prime Video users consider it a luxury. If you sever that link, how many folks keep using Prime Video? I can’t begin to guess.

(Fine, I’ll try. If Roku’s market capitalization is $50 or so billion, say the Fire TV/Channels business gets 100% of that value. Then call it $25 billion (one tenth of Netflix) for video and $6 billion for Amazon Music (10% of Spotify) and say everything else is $2 billion. So is “Amazon Entertainment” worth $82 billion? That would be about 5% of Amazon’s current value.)

Did Amazon have to “build it”? 

Imagine instead of Prime Video and Music, Amazon had offered free Netflix and Spotify to every customer. What would be the better subscription, the current version or those? Most folks would prefer free Netflix and Spotify to free Prime Video and Amazon Music. In other words, Amazon could just do what Verizon does and partner with other streamers to give away better video products than Prime Video.

Presumably, licensing the rights temporarily is much cheaper than building an entire video ecosystem. This is why Verizon doesn’t build it’s own streamer, but simply gives away whatever the buzzy streamer of the moment is, from Netflix to Disney+ to Discovery+. If the return is the same in terms of customer retention, then the better ROI is in partnering, not building a new video subscription.

Most folks overvalue the “hidden business” model. 

In addition to CLV, folks love to repeat the Bezos quote that Amazon invested in Prime Video so customers would “buy more socks”. I call this a hidden business model because most folks stop there and don’t do the simple math to ask, “Well how many more socks?” (The previous king of the hidden business model was MoviePass. It would lose money on tickets to sell “data”. But data isn’t worth that much.)

I’ve done the math, and frankly because retail margins are so low, this is at best about $5.50 per month:

Amazon Retail Margins

(By the way, it’s tricky to nail down exactly what the lift is for new sales and what Amazon’s actual retail margins are. Some folks claim they are still really low (actually under 2-3%!), but then advertising is booming, which is really the price of doing business on Amazon. Play with the numbers to make your own estimate.)

Yes, it’s valuable to sell more socks. But that’s not an unlimited pot of gold. In fact, it’s an increasingly tapped out mine. (The highest net worth customers have already adopted Amazon, so Prime acquisitions will decrease in value.) So for Prime Video to act as a loss leader, its costs need to be under $5.50 per customer per month. And that’s for the folks who use Prime Video. In other words, you could imagine that the content budget definitely doesn’t make up for itself in extra socks sold. 

Big Tech loves video, everyone else can’t make the math work.

Interestingly, whenever conventional companies look into video, they tend not to have the stomach for it. Microsoft abandoned Microsoft Studios very early on. Verizon gave up on Go90. And most notably, Wal-Mart looked at video, even launched its own membership, and bought Vudu. Then they decided that video is not a good business. Clearly they weren’t going to sell more socks! And thus Walmart sold Vudu to Comcast. What does Wal-mart see that Amazon doesn’t? 

Big Tech may be into video because there is nowhere else to go. 

As Matt Stoller has written, as consolidation has risen across industries, firms and investors have few places to park their cash. And since firms can only do so many share buybacks–like Apple–video is the logical extension. Video is one of the more simple/obvious ways to use digital technology, so Big Tech is into video because they have so much cash from their monopolies/oligopolies (cloud/ecommerce, search, social or app store, depending) that they’re blowing it on video. This doesn’t really mean it’s a bad investment, but probably a sign something is wrong with our economy.

It is a loss loser, but Jeff Bezos didn’t care.

I said I’d use this quote quite a bit, and here’s my first chance. The question isn’t if Prime Video is a loss leader, but a loss leader for what?

Screen Shot 2021-02-05 at 9.03.56 AM

Results: Shrug emoji

Look at those lists and draw your own conclusion. Each pro has its similar con. All of Big Tech is into video, but Walmart/Verizon abandoned it. The CLV gains are huge, but the additional sales are likely overrated. Prime Video may be second place in usage, but hardly anyone would pay for it. Again, this is the shoulder shrug emoji of analysis.

So what’s my point? Simply that I’d like more skepticism about Amazon out there in the world.

In conventional wisdom, Prime Video and related investments have been considered tremendous successes. I don’t see the evidence or data to justify that. If you just glance a pinch more skeptically at Amazon next time someone touts their success, then I’ll consider my job done.

Bonus Most Important Thought: What Happens Next?

Probably nothing. Jeff Bezos has said as chairman of the board, he’ll likely have final say on any “one way” decisions. Selling or giving up on devices or video would be fairly final, and given Bezos’ clear backing of those investments, I can’t see him approving that. Moreover, as the con side laid out above, who would buy Prime Video and related businesses if most of their value is tied to the Prime ecosystem? $82 billion is likely the high watermark and I could see, under scrutiny, most potential buyers fleeing to the hills.

However, levels of investment can fluctuate, and that could impact Amazon’s multitude of entertainment investments. Amazon has famously often competed with itself, for example two different business units now produce original audio, Audible and Wondery. Maybe Jassy streamlines video/music and kills underperforming units. Or just drastically cuts back on “investment”, meaning content spend. 

Moreover, there is the antitrust wild card. One article mentioned that Jeff Bezos would likely break up his creation before letting regulators do itEven if Amazon did get ahead of the curve in breaking itself up before regulators can try, it’s hard to see video getting cleaved from retail. Even if Prime Video sells less socks than they claim, it’s value is still clearly as part of a Prime membership. And that serves as the basis for Fire TV devices, so it will likely stay bundled together. AWS could, though, be split off with fairly little disruption. Twitch is part of AWS, from what I understand, and I could see it going with either AWS or staying in the remaining retail/Prime Amazon.

I’d argue that even if Prime Video isn’t performing well enough to actually boost the CLV of Prime, simply the dream in Amazon’s head of selling more sock has/will keep Prime Video alive.

(How well does Amazon retail do without AWS covering any potential losses? The finances are so entangled it is impossible to say and makes the mind reel at the ramifications.)

Oh, Fine GameStop and Other Contenders for Most Important Story of Last Week – 1 Feb 21

For the last two weeks, my weekly column overflowed into two articles. I promise I won’t make this a habit…unless everyone likes it better. Let me know on Twitter. Meanwhile, here were the other stories vying for the top spot last week. But we’ll start with the story that had zero chance of making it.

Lots of News with No News – GameStop Owned the Week in News

How do you know that the Trump administration–and with it all the media upheaval of the last four years–is truly behind us?

Instead of talking politics, everyone is obsessed with GameStop!

It’s not like the Covid-19 crisis has passed. Far from it, January was the worst month yet for the virus. And that’s vying with potentially the best story of the year, which is the vaccine roll out. While stymied by terrible distribution issues initially, vaccine distribution is growing each week and slowing being solved (though with much less media coverage to this good news story). 

You’d think that all the media would be obsessed by virus coverage. 


Instead, the journalists covering the White House asked more questions about GameStop to the new Press Secretary, Jen Psaki, than about Covid-19! Every newsletter or podcast I follow had to mention GameStop, usually with the tremendous caveat of, “I have no idea what I’m talking about” before opining on it. 

Does the rise in GameStop’s stock price due to a sub-Reddit (Wall Street Bets) going publicly long on a stock to hurt short sells change the entertainment business landscape? No. So this is “lots of news with no news”. 

With two caveats.

First Caveat, AMC Theaters Received the Wall Street Bets “Long” Position

When the Wall Streets Bet collective was searching for other stocks that were big “short” positions, one they stumbled on was AMC Theaters. So they collectively “went long” on it, which is the charitable way to describe it. (Uncharitably? They coordinated buying to pump up the stock.) 

Amazingly this allowed AMC Theaters–who is famously over-leveraged/in-debt–to convert some debt to equity, and they were able to raise additional equity. All of which would normally dilute shareholders, but the price was acting bubblish because of Wall Bets’ users enthusiasm. And they were able to to secure additional financing. In short, AMC Theaters has now likely avoided bankruptcy for the year. That’s a crazy, and unpredictable, set of circumstances.

Second Caveat, If Regulators Try to Regulate Media Coverage, That Will Be Tough

The key here is to focus on the word “media”.

Short sellers love to use the media to publicize their short positions. (I’m sure by now everyone has read/listened to ten explanations for how short selling works.) Typically, it works like this. A hedge fund decides to go short on a stock. Usually, they write a report on why they’re going short, and then they publicize that report. This includes but is not limited to: 

– Leaking the report to the Wall Street Journal and NY Times for positive coverage
– Releasing a press release to all journalists.
– Going on CNBC/Bloomberg to explain their short position.

In other words, they try to use “mass” media to publicize their short position. If they enter into their short position before publicizing it, obviously a successful campaign could generate millions of dollars. They’re trying to use a publicity campaign to lower the stock price and make money. The main difference between this behavior and Reddit is that it is 1. Centralized and 2. Mass, not social media. But the impetus is the same: use media to drive stock prices.

On the opposite side of the coin, there are also folks who want to go long who use media to influence stock buying behavior. For example, this guy with a button and lights shrieking “Buy This Stock!”

Is what Jim Cramer doing fundamentally different than a bunch of Redditors collectively deciding they love a stock? I’d say at a core level no, but in the details yes.

My point is that if regulators want to tamp down on what a sub-Reddit is doing to drive stock prices, good luck. Regulating speech is incredibly tricky and often ends up casting a much wider net than intended. Which is why the First Amendment protects so much speech. If the GameStop saga has revealed flaws in the US financial system, those problems likely won’t be solved by the SEC cracking down on anonymous internet message boards.

Other Contenders for Most Important Story

HBO Max’s Franchise Strategy

It doesn’t seem like an accident that in the last few weeks we’ve heard about a Game of Thrones Dunk and Egg spin-off, a Harry Potter TV series, and an animated Game of Thrones series in the works. Clearly, HBO Max is trying to emulate the Disney+ success. As a fan, I’m here for it. As an observer, I’m curious why they didn’t do this earlier. As a biz strategist, I know that quality will still be the differentiator. So far, Warner Bros hasn’t proven they can deliver that in their franchises. Still, better late than never.

Oh, and you probably want to know about…

AT&T Announced 41 Million US HBO Subscribers and 17 million activations

This is probably the strongest candidate to be the story of the week besides NBC Universal/Peacock’s big double story drop. AT&T announced that HBO Max is up to between 17.1 and 41 million subscribers in the US. Why between? Because it depends how you count, as I explained in my most popular series of 2020 “Who Has the Most US Subscribers?” Frankly, if you just count people paying HBO for the privilege of subscribing–a very rational way to do it!–you take the higher number. If you want to focus exclusively on over-the-top delivery–while not my preferred method, this isn’t irrational either!–then you look at “activations” or folks who have used the HBO Max application.

Screen Shot 2021-02-01 at 11.39.08 AM

Either way, Wonder Woman 1984/Roku/Fire TV partnerships/Christmas holidays have worked to grow both numbers in the US. If you take the higher number, then they’re roughly 62% of Netflix’s US user base. If you take the lower, they’re at 26%. If they can sustain these numbers, growing the activation total, they’ll join Disney with a seat at the “viable streaming business” table by the end of the year.

Sling TV is Raising Prices

Another virtual MVPD is raising prices to survive, which is as commonplace as it is unsurprising in today’s day and age. The fact is, especially when thinking about the TV habit which I described on Friday, most folks loved the old cable bundle. Sure, there were hundreds of channels, and no one watched them all. But folks actually browsed and watched more of those channels than they realized. The problem was the prices driven by cable’s local monopolies. To replicate a bundle, frankly, is expensive.

M&A Updates – Twitter is Entering the Newsletter Business

Twitter is expanding their business into newsletters by buying Revue, a rival to Substacks’s newsletter platform. I love this acquisition for Twitter, who has really struggled to monetize as effectively as Google or Facebook via ads. Thus, subscriptions seem the way to go and newsletters offer a middle position between paywalls for access to Twitter accounts and the completely ad-supported version. It will be fascinating to watch this integration. (Hat tip to Andrew Freedman’s write up for informing this take.)

Entertainment Strategy Guy Update

Netflix Isn’t a Part of Chromecast’s Browsing

One of the apparent innovations of Google’s new Chromecast/Google TV was that Netflix shows were, for the first time, included in the homepage browsing. This would have indeed been a big deal, since most streamers are very hesitant to allow the devices/operating systems control the user experience. (Read why here.) Indeed, Netflix has been the most restrictive to date. Which was why I was skeptical they would join this effort, which undercuts their entire competitive advantage.

Sure enough, I saw a headline over the last week that Netflix has been quietly removed from Google TV’s homepage. (Though the author of this headline fails to understand why Netflix would make this move.) Netflix did this because their goal is to be “the TV habit“. That means forcing users out of Google’s operating system and onto their application. Hence this move.

Disneyland is Trying Win Back Annual Passholders

As expected, Disney got a lot of blowback from annual passholder for cancelling the program, so Disney released a new program with some benefits for “legacy passholders”. Former passholders are still upset, as this article describes well, but frankly the article also explains why Disney made this move: demand to go back to Disneyland is higher than the Matterhorn. PR-wise this move would always have hurt Disney, but they made the right decision.

Can Peacock’s “Live TV” Strategy Win the Streaming Wars? Yes – Most Important Story of the Week – 29 Jan 21

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It’s rare–though not as rare as it seems–for a company to compete not just for the top spot in my weekly judgement of the most important story in entertainment, but to have two different stories compete. HBO Max has actually done that a few times, and so has Netflix and Disney+. This week was Peacock’s turn to step into the spotlight and throw down not just one, but two big entertainment stories. Let’s combine them into…

Most Important Story of the Week – Peacock Acquires WWE Network, While Shutting Down NBCSN

When I first read the Peacock-WWE headline, I assumed they had bought the rights to Raw, the Monday night telecast of the WWE. No, they went all in and bought the rights for five years to the WWE Network, WWE’s streaming platform that delivers their pay-per-view events for a monthly fee. (With tons of documentaries, some original reality shows and re-runs of Raw and Smackdown.) Wow! That’s even bigger than I expected. Toss in shutting down the first major sports channel by the end of the year, and Peacock is definitely making moves. 

With these latest moves, Peacock is trying to “become the TV habit” for millions of Americans. Let’s explain that and then decide if this was good or bad.

Netflix’s Best Metric and “Breaking the TV Habit”

A metric I beg for fairly often on this website is “monthly active users”, the percentage of all paying subscribers who watch a streamer in a given month. But you know what would be even better? The metric of how many monthly users who were active for multiple months in a row. In other words, over a six month span, how many customers used a service in a given month. Call it “unique streaming months”.

Let’s not stop there. Even better would be to know how many folks watch a given streamer every week. And once we have this level of granularity, we could cut the data all sorts of ways. Who streamed the most consecutive weeks. Or rank folks by how many days the stream per month. Or per week. And on and on. 

Focusing on “unique viewing days per month” in many ways is a better predictor of retention than total usage. Both numbers are useful, but if you gave me a choice, I’d opt for the former. 

Why is this so predictive? Well, think of a customer’s TV habit. It’s the end of the day, and they sit on the couch. Then they turn on the TV. In my case–a non-cord cutter–it’s to switch to the DVR to see what is on. I only interrupt this habit for certain streaming shows–Disney+ usually–or sports (which is why I don’t cut the cord). 

But I’m not egotistical enough to believe my TV habit is representative of America. (Though, ironically, my habit is actually still the average consumption in America. Remember, according to the best TV analysis, 76% of viewing is linear/cable/broadcast/satellite, and only 25% is streaming.) For many folks, the habit is to sit down, turn on a Roku (or similar device), then go to Netflix, and scroll endlessly. Or continue bingeing whatever bingeable show they watched the night prior.

And yes, Netflix is a deliberate choice. They’re the first in the streaming wars, because they’ve built that habit in a huge number of customers in America and around the globe. For the “Netflix is TV” crowd, Netflix replaces turning on the cable box as “TV”. Even though I can’t prove it, I know that Netflix leads in “distinct streaming days per month” among the streamers.

Yet Netflix has a weakness.

Netflix’s Content Gap

“TV” can mean a few different things. Some TV serves to entertain. This can be either fake (fiction, dramas or comedies) or real (reality and documentaries). But it can also be informative, like news or sports. Notably, these last two categories are unique because they are also better served live than “on-demand”.

Netflix is an “on-demand” platform. When a customer wants it, they can watch it. This was, to be clear, a huge value to consumers, since they no longer had to wait for content until it aired on TV. (In truth, the DVR added a lot of this value previously, but on-demand is up another notch entirely.)

But all on-demand has limitations in the same way that all linear had limitation. Frankly, sports and news don’t work on-demand. They have to be live. This is what is saving the linear bundle right now.

And those two big genres–news and sports–are notable weakpoints in Netflix’s  content library. Netflix has tried to air shows that are close to “live”, like nightly talk shows, but even these have for the most part not worked on that platform. It also makes a lot of documentaries–like Vox’s Explained series–but even these lag real time news by weeks or longer.

That leaves an opening for some clever new entrants in the streaming wars.

A Differentiated Competitive Advantage for Peacock – Live, Live, Live

When Peacock first rolled out, I was fairly bullish on their plan because unlike other new entrants, Peacock really did seem to have an idea for a product that was unique compared to the giant that was Netflix (and the other streamers). I called them the “broadcast streamer”. Consider the dimensions of “on-demand” versus what I’m calling “fake vs real” for content. If we made this chart for all the streamers, you’d get this:

IMAGE 1 - Updated

(This isn’t based on numbers, simply my gut. And yes, many streamers have cheap reality. This is best looked at what a company’s priorities/branding are.)

Let’s interpret this. Essentially, Peacock said, “We know there are some folks out there who watch MSNBC for news, Jimmy Fallon/Seth Myers for late night, and then watch some sports. Our offering should serve them.” Their offering entices folks in with that recurring, live content. Then, hopefully, their entertainment offering keeps them around. 

Consider, on the other hand, HBO Max. The bet for HBO Max is basically, “Hey, we have lots of content too. Instead of using Netflix for your habit, use us.” Which may happen, but more likely some folks will watch some HBO shows, but then go back to Netflix. Netflix is their habit. Indeed, Prime Video has been deploying this strategy for almost as long and with about the same results. Hulu too, and they have an even better offering, recent TV.

So who is really differentiated in the streaming wars? I’d say:

– Disney+: Kids programming. Indeed, the Nielsen top movies essentially shows that for most kids, Disney+ has become the “TV habit” replacing Netflix in the United States. However, when it comes to the rest of TV, Disney+ will struggle to replace Netflix as the TV habit on their own.

Screen Shot 2021-01-29 at 8.27.12 AM

– Peacock: Furthest along streamer in “live” TV programming, including news, sports and actual linear channels to encourage lean back viewing.

– Discovery+: This differentiation grows even further if you focus on quality vs quantity of content. Discovery+ saw Netflix, Prime Video, HBO and Disney shelling out the big bucks for splashy buzzy shows. And it said, “Here’s more 90 Day Fiance”. 

Everyone else is mostly mimicking Netflix, like Prime Video, Paramount+, Showtime, AMC+ and HBO Max.  For the most part–boiling down strategy to one or two sentences lacks nuance–these streamers are trying to beat Netflix as their own game. We’ll see if they can, but I prefer differentiated strategies. Moreover, in Peacock’s case, this strategy also takes advantage of their biggest strength compared to Netflix, their wide ranging experience in live sports, news, and even broadcast television.

Which is where the NBCSN sports (hockey, Olympic sports, Nascar, Premiere League “soccer”, cycling and Indy Car) and the WWE come in.

How WWE and NBC Sports Can Reinforce the Peacock TV Habit

In general, then, the WWE acquisition and move of some sports to Peacock is a signal that Peacock is growing its content in the places where Netflix is weak: live events. Of course, no strategic move is perfect, nor without risk. And let’s explain both of these moves in that light.

The Positives

The big benefit for having WWE Pay-Per-Views and the NBC sports on Peacock is that each can drive repeated unique streaming days per month. Under a Netflix content strategy, you have to hope you can out-develop Netflix for the next big show or film. That’s pretty unlikely with all the content being made.

Instead, Peacock is focusing on delivering a product with known fans. Who tune in on a weekly basis. Say there is a die-hard WWE fan. Now, if they want to watch Wrestlemania or replays of Raw and Smackdown, they’ll have to go to Peacock. The dream is that once they’re done, they’ll check out The Office or Law and Order or Yellowstone or, who knows, The Real Housewives. Boom, a TV habit is born.

Knowing that the WWE had 1.6 million subscribers recently, that’s a lot of potential regular viewers. That’s a ton of upside. (If it can retain all those subscribers? $192 million per year at $10 per month.)

See, there is always a risk for any sport is that the vast majority who watch when access is easy–the followers and casuals–just don’t when it goes behind a paywall. That’s the terror keeping the NFL/NBA/MLB from going digital only. For example, look at the Pac-12 Network when it left AT&T distributors. I was a huge follower of all things UCLA. But would I change my whole cable bundle for college baseball and gymnastics? Nope. 

The upside for Peacock is the WWE Network subscribers had already opted in to digital-only. So there isn’t that worry here. That’s good.

The Negatives

But let’s not pretend these two decisions win the streaming wars. One of the reasons the WWE and some NBC sports are fine to go streaming-only is because, well, they aren’t that big to begin with. WWE does have a loyal fan base, but it’s not like it’s huge. As I just said, only 1.6 million subs, or 0.48% of America. 

The counter I expect is, “They may be small, but they’re dedicated!” I heard/hear this a lot from producers, creators, networks and development executives defending shows/films that not many folks watch. Say a show is buzzy–and usually beloved by critics–but no one is watching it. The defenders then say, “But those who do LOVE it!” They usually have no data to support this.

My counter is that most shows are more the same than different. Same for sports leagues. Let’s say a fan could fall into one of a few buckets: fanatic, diehard, follower, casual. Define those how you want, but you’d roughly get something like…

Screen Shot 2021-01-29 at 8.48.52 AM

If we know that the most popular sports leagues/shows aren’t just a little more popular, but multiples more popular, than we find out that even having devoted fans isn’t enough. Say one show has 100K viewers per week and another has 1 million. Essentially, the bigger show has more fanatics and die-hards than the other show has total viewers. That’s just the math.

This applies to NBCSN’s sports in particular. As great as it will be to get all of NHL hockey’s diehard fans to follow hockey onto Peacock, that number just isn’t very big. The NFL can deliver multiples more die-hard fans than hockey, Olympic sports, soccer (football) and racing everything else on NBCSN…combined. 

Which is probably why the NBCSN announcement hedged that NBCSN sports aren’t just headed to Peacock, but also to the USA Network, about as traditional of a cable net as you can get. As folks speculated, essentially the USA Network will become NBC Universal’s general interest cable net, much like the purpose TNT serves for AT&T. If this were a war, USA Network is one of NBC Universal’s fall back positions as it retreats from traditional linear distribution.

Final Call?

Add it all up, and I like these moves. A lot. Bringing in new regular users who can get locked in to your core customer value proposition is just a win-win. NBC-Universal continues to execute an actual strategy, and that’s unique enough in the streaming wars to be worth praising.

Lastly, on the headline, my take is that a company can “win” the streaming wars simply by 1. Making money and 2. Having a seat at the streaming table in 5-10 years. With it’s current strategy, Peacock is clearly on that trend line and we’ll see if the numbers support that in the next couple of years. (Netflix and Disney+ are the two closest to winning right now.)

Bonus Quick Thoughts

– Is this a good move WWE? Probably. As I just said, the big worry for a sports league–let’s call the WWE that–is that folks don’t follow and essentially you use their “fan lifetime value”, a term I just made up. WWE has a bit less risk with that here in that folks who don’t cut the cord can keep watching on Fox. Yet, WWE can still sell pay-per-views through traditional channels, so I don’t see much risk of less exposure.

– Is this a good move for the USA Network? I think so. This gives another option for live programming on a few more days per week, and maybe during the weekend. That live viewing can then drive to the scripted programming better. In short, it’s fine.

– Bundlers want to replace Netflix too. When I talk about the “TV Habit”, the Roku, Amazon, Apple and Google’s of the world essentially want their devices to be that habit. Instead of going to a specific application, you’ll just browse on their device. So far, none have really succeeded. Mainly because the streamers hate this.

– Price. Variety says sources say about $1 billion for five years. Running the math, WWE makes about $192 million per year (1.6 million times $10 times 12 months), so this isn’t outrageous. Likely Peacock is paying $10 per sub, but they’ll transition WWE folks to either the $5 ad free or $10 tier. For WWE customers, this feels like an even bigger win.

– But note! It’s also only a 5 year deal. Hmmm. If it works, expect a big jump at the end.

Price Discounts Continue in the Streaming Wars and Other Contenders for Most Important Story of the Week – 22 June 21

As The Stranger told The Dude, sometimes you eat the bear and sometimes the bear eats you. 

Such was last week’s weekly column for me. (By the way, check out this great article on the origins of the quote above.) I had a lot of thoughts percolating about the most popular topic in streaming–rightly Netflix–so I went long trying to tamp down expectations just a pinch on what Netflix’s big 2020 means in context. But Netflix wasn’t the only news story of the week. So here’s my quick run through of what else happened in entertainment last week.

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Other Contender for Most Important Story – HBO Max and Apple TV+ Extend Discounts/Free Trials

The news: Apple TV+ is extending their one-year free subscription, which started in November of 2019 to July of 2021. HBO Max, meanwhile, is extending their price discount of 22% ($11.50 per month) until “mid-2021” as well.

If you want to know why Netflix is the king of streaming, it’s these contrasting pricing decisions. In late 2020, Netflix raised prices. It’s competitors, HBO Max and Apple TV+ , are going the opposite route. They are still in all out growth mode, whereas Netflix has locked in a huge chunk of customers. So it can increase prices  and still see a growth in the US/Canada region of 800K customers.

The fun question is, “Who is this a worse sign for?” and I’d have to opine Apple TV+. HBO Max’s price discount is actually just explained as the easiest way to avoid the Roku/Fire TV/Apple TV 10-30% deal tax on streamers that devices/operating systems charge when you sign up through their application. The industry leader (again) is Netflix who doesn’t let you sign up via your TV, and basically forces you to their website. But they have 67+ million subscribers in the US, so they can get away with that.

HBO Max needs subscribers, but it also doesn’t want valuable, multi-year subscribers forever locked into the Roku or Apple or Amazon payments, so they offer a discount for folks signing up at their site for 6 months or more. That makes sense. 

Apple, on the other hand, just may not be able to get people to pay for their TV offering. Frankly, at $5 per month for only originals, it’s clearly the most expensive service in terms of content for price. At this point, it’s more likely that Apple extends the free price point until the end of 2021 than that they finally start charging customers.

Other Contenders for Most Important Story – The Latest Round of Theatrical Delays

Coming to a theater near you…not new films in Q1.

The news started dropping at the end of last week that the latest round of films due for 2021 are moving. The biggest casualty was probably A Quiet Place 2. Frankly the studios are not optimistic about theaters being open through March. This isn’t unexpected, and the biggest wildcard for theatrical exhibition is when the pandemic finally abates. Personally, the five numbers I’m watching are these, from the Covid-19 Tracking Project and Our World in Data.


IMAGES Covid 2

You could be optimistic or pessimistic on these numbers, depending on your constitution. On the negative side, we have a long way to go before deaths drop to zero. And that will take weeks and weeks.

On the positive side, the drop in cases is the fastest yet of the pandemic in the US. Further, I think we’re going to see the impact of mass vaccinations on the US/EU accelerate faster than the general consensus thinks. (Most public health officials are providing what seems to be very cautionary/conservative estimates of vaccination rates.) The US is now giving out 1 million shots per day, and the rate of growth is doubling about every 10-13 days. For example, the US has already tripled the amount of shots it can give per day in January, and the month isn’t done. If we can see the same growth in February, the US could be vaccinating 3-4 million per day. At which point vaccine production becomes the next bottleneck to smash.

The current date to watch is May 7th for Black Widow. Disney could stand to gain by being the first film to “reopen” theaters and theaters would be hungry for a known commodity, like an MCU film. But we’ll they be open? Remains to be seen.

In other theatrical news, as expected the global cinema industry lost 32 billion dollars due to theatrical closures down from around $45 billion in 2019 for a $13 billion box office year in 2020

IMAGES omdia-cinema-

That’s a good number to keep in mind that if streaming ends all theaters long term, that’s a lot of revenue that streaming may never make up. As Omdia itself point out:

Screen Shot 2021-01-25 at 10.17.57 AM

In other words, theaters declined by 71% and lost 32 billion, but streaming only made up for a fraction of that, increasing by 30% with 8 billion in gained revenue. So that leaves studios/producers down 8-12 billion (minus 35-50% roughly for the split with theaters).

Entertainment Strategy Guy Update – The Pac-12 Fires Larry Scott

It turns out that the presidency wasn’t the only office changing hands last week. The Pac-12 fired it’s long-term commissioner Larry Scott. Normally, conference hirings and firings don’t rate a spot in my column, but this gets an exception for two reasons. First, as a fan of a team in the “Conference of Champions” this could help the Pac-12 return to glory. Second, I wrote about whether the Pac-12 made the right call in not signing a strategic partnership for Athletic Director U last year. This is a super mathy, but fun look at opportunity costs, valuing strategic options and decision making.

Patrick Crakes on Twitter laid this out more succinctly here:

Other Contenders for Most Important Story

And now for the quick hit stories that caught my eye…

Disney Leads in Indonesia

One of my more controversial positions in the streaming wars is that we should analyze the war battlefield by battlefield. While global numbers are easy, they often obscure smaller trends that matter. To change a famous political aphorism, all streaming is local.

Take Disney+. They’ve already taken a lead in India and, according to a new report, Indonesia. How the smaller countries and regions fare going forward is a fascinating, and under covered, element of the streaming wars. 

The CW New Shows Headed to HBO Max

A few years back, The CW signed a big deal that delivered all their current shows in the “Pay 2” window to Netflix. (Pay 2 is after a one year holdback.) This deal was mostly a win-win, with The CW getting a billion dollars per year, and Netflix getting a lot of content that repeatedly made their top ten list in America (and likely around the world) including Supernatural, Riverdale and the Arrow-verse shows. Last year, we noted that the CW was ending this arrangement, because in the steaming wars you can’t arm your competitors, and the question was where does the content go, Paramount+ or HBO Max? The answer is the latter. (Read my story of the week on this here.) 

Assuming the price makes sense, this is another good content decision by HBO Max. Pairing more CW shows, HBO, and Warner Bros content will increasingly make the HBO Max library one to envy. It’s deep. Few customers will switch to HBO Max for these shows on their own, but it could help HBO Max keep folks in the ecosystem. And that’s the name of the game: keep folks on the platform to reduce churn.

Caveat: Batwoman had already gone to HBO Max last year, but this announcement confirms all new CW shows will end up on HBO Max through 2021.

Last caveat: Netflix will continue to air shows that started under their old deal, which could incentivize The CW to end shows sooner than they would have otherwise. That will be a subplot to watch.

Paramount+ Launches on March 4th

The name change officially starts on March 4th, with a new product roll out announced the week before. Expect that to be the story of the week when it happens.

Netflix’s Step One Was to Break Even, The Next Step is to Generate Massive Cash Flow – Most Important Story of the Week – 22 Jan 21

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When a Netflix earnings report comes out, it generates lots of news. Usually, though, they don’t claim the top spot in my most important story of the week, because not much really changes.

This week, though, Netflix did make some news. So let’s make it…

Most Important Story of the Week – Netflix Is Forecasting They Will Break Even in 2021

Sometimes, usually even, the coverage of a Netflix earning’s report focuses around the wrong thing. For most years, that meant subscriber counts, regardless of what else happened in their financial statements. Not this week! 

On Tuesday of this week as Netflix released their 2020 performance, most coverage correctly focused on this announcement from Netflix:


If Netflix can truly achieve a breakeven year for the first time since 2011, that is a big deal. I’ve long looked past subscriber counts to obsessively focus on cash flow. That’s why this is big cash flow news from Netflix.

However, even if most reporters got the most important story right, they missed a lot of the nuance and flavor around how important this story is. For example, look at CNBC’s last bullet point. Does one year of positive cash flow validate Netflix’s strategy?

This is where I need to step in. While turning cash flow positive is clearly a positive sign for the world’s biggest streamer, frankly this one announcement doesn’t validate Netflix’s entire strategy. Instead, what happens in the next 5-10 year period will be crucial.

The Two Strategic Decisions (Investments) Made by Netflix in 2007-2015

Yes, we have to go back to 2007 to explain this history of Netflix. Back then, Netflix shipped DVDs through the mail to customers. And they made a lot of money doing it! Specifically, in 2008, they generated $94 million in cash. (Technically free cash flow. We’ll be using that instead of profit since free cash flow is really the driver of modern finance.) 

Reed Hastings rightly forecast that DVDs were a transitory medium. Someday, they’d be replaced by digital transmission. Instead of letting his company be disrupted as he disrupted Blockbuster, he’d run the company that would digitally transmit those shows and films. In 2007, Netflix launched streaming video in the United States. And the rest, as they say, is history.

Well, not quite. Reed Hastings made the decision to pivot correctly. But he had another decision to make. And the second decision Reed Hastings made wasn’t just to launch a streaming company, but to launch one that was financed through losing money. Lots of money. Billions of dollars. You can see this in the history of streaming. From 2007-2011, Netflix isn’t making tons of money, but they’re also not losing money. Then, from 2012 on…

IMAGE 2 - NFLX FCF to 2020

What I love about this look is that it shows that Netflix really did have a choice to make in 2011. They could have continued as a streamer growing cash flow slowly year after year…or they could spend billions on content. They opted to do the latter.

Losing money in and of itself is not a bad decision. In fact, executives make this decision all the time. When a company builds a new factory, that can cost billions of dollars and years to do. The company, though, makes that investment assuming that long term the additional revenue which flows to the cash flow will pay for that investment. 

(Want to know why pharma companies aren’t making more vaccine doses? Well, it’s because they don’t want to pay to build the factories that may only produce a vaccine for a year or two. That won’t pay for itself! And why the government can/should pay them to build those factories.)

This is called evaluating the “Net Present Value” of investments. This is how all business investments are (or should be) judged. Which is often called “capital budgeting”. This can be about spending dollars on infrastructure, research, new products or what not.

The core of the second decision Hastings (and Sarandos) made (and kept making from say 2015 to 2019) was how much to spend on their streaming disruption. The question was, “How much do we need to  invest in this service to succeed?” And their answer was billions. Because every time they added subscribers their stock went up. 

In essence, if Netflix does breakeven in 2021 (or for a full-year in 2022), it presents a turning point. This is the year that “investing” is over. They’ve stopped spending cash and now they can start to collect the future cash flows. To continue the factory analogy, the factory is built and ready to churn out widgets. In investment terms, the question is…

Was losing $9.7 Billion from 2011-2020 to launch a global streamer worth it?

Well, it depends on what “worth it” means.

How Much Does Netflix Need to Make Going Forward to Justify This Investment?

Be careful at immediately saying, “Well, 9.7 billion.” 

Because of the time value of money.

(Quick reminder of the time value of money:

I’ve explained the time value of money, and it can be tricky. Basically, the idea is that a dollar today is worth more than a dollar tomorrow. Because of the certainty you have the dollar in hand. Further, you can invest that dollar and generate a return. This is the basic principle of finance.

The next most basic principle of finance is that different investments have different levels of risk. If you take a dollar and put it under your mattress, you don’t get any return on investment, but you’re certain it will be there a year. If you invest it with the government, you’re still fairly certain they’ll pay you back, so you demand less of a return on your investment. That’s usually called the “risk free rate of return”. Investing with a risky start up is much more uncertain, so investors demand high levels of return. The S&P 500 is a good benchmark for the entire stock market, which is fairly reliable but can also have big swings, as we just saw in March of 2020, when it dropped 30%.)

For entertainment, I tend to use 8% because it is a nice round number and close enough for our work. Now that we know we have to take losses into account, you can see what it really cost Netflix when they invested all those billions in content (in millions):


I’m providing you four looks at this. First, I’m giving you both the cost of capital from today’s dollars, to see how much Netflix spent of shareholder dollars the last 8 or so years. But I’m also giving the 2011 dollars to show how Reed Hastings could have been thinking about it in 2011. Also, I accounted for potential cash flow Netflix could have earned at a conservative 200 million per year. By losing money, they lost that potential cash as well.

Netflix actually needs to earn $14 billion to justify the sky high investment of the last eight years. 

The trouble is that discounting continues into the future.  I just said that a dollar next year isn’t worth as much as a dollar this year. That’s even more applicable in 2030, for example. A dollar in 2030 is only worth 21% of a dollar in 2021. Here’s that rough math for those who don’t want to calculate it:

IMAGE 4 - NFLX Future discounted values

Without getting too finance-y with terminal values and what not, let’s say the reasonable goal is to pay back the investment in streaming by 2030. With the discounted cash flow, what would their potential cash flow need to look like by 2030?

IMAGE 5 - NFLX Hypothetical Breakdown

This is why I said breaking even is only the first step. To pay back their investment–and the longer you wait to pay it back, the higher the returns need to be–Netflix needs to add $500 million per year to the free cash flow, getting to $4.5 billion by 2030. 

Is that reasonable? Sure. But it’s also reasonable that Netflix could flirt with breaking even for a few years into 2022, and find that as wealthier markets are mostly tapped, new customers cost more to acquire and churn faster. In other words, streaming could be a low margin business when it comes to cash flow. If streaming is like traditional entertainment, this is reasonable.

Or you could listen to the market, who is projecting that Netflix will achieve $11 billion in FCF in 2026, five years away. In that case, Netflix is a cash flow machine. 

Here are those three scenarios over time:

IMAGE 6 - Scenarios

In other words, using some very reasonable situations, we don’t know if Netflix has validated their strategy. What we can say is that Netflix spent a lot of money for years, and now they need to make a lot in the future to justify that investment. I mean, even our breakeven scenario demands a free cash flow growth rate of 137%! That’s a lot! And assumes they get to $500 million free cash flow in 2022.

But EntStrategyGuy, the Stock Price!

The other big caveat to my entire analysis is, “Well, if you had invested in the stock in 2011, look at the huge boom in price!”

This I cannot argue with. Though, I don’t provide investing advice. While the stock price is correlated with a company’s core fundamentals, they often move in discreet ways. And sometimes the market can have exuberance that doesn’t bear on reality.

Take Netflix’s free cash flow. I just told you the market believes in 2026 Netflix will generate $11 billion in free cash flow. How can I argue against that? Well, let’s see how well the market did in 2015 predicting 2019’s free cash flow…

IMAGE 7 - 2019 FCF Estimate

Or take 2021…

IMAGE 8 - 2021 FCF

That’s right: in 2014, most analysts on Wall Street expected Netflix to earn $4 billion in free cash flow in 2021, a year Netflix is predicting they will break even. Then they kept making that mistake year after year, pushing out cash flow positivity always out another year. Until a pandemic hit. Let that sink in.

Wall Street is terrible at forecasting this company.

The best analysis of this situation–and there are a few good Netflix bull analysts out there–came this week Andrew Freedman at Hedgeye, and his financial table laying out the Netflix options put this in great context:

IMAGE 9 - Hedgeye Cases

(Sign up for his website here! He also helped me pull some of the data above.)

In other words, to justify the current Netflix stock price, their growth will need to achieve nearly 500 million subscribers at ever growing revenue per user. (Freedman uses EBITDA as a proxy for FCF, which gets to the same place.) The point is Netflix needs to hit nearly all their aggressive targets and even then the stock is only slightly higher than its current value.

The Key Question: How long does break even last?

To bring this back to the core point, in a way you could ignore all the spending of Netflix so far. Instead, just look at them as a company with $8 billion in cash, $15 billion in debt, 200 million global users, and zero cash flow in 2021.

Would you invest in that company?

The answer depends on the fundamental questions for every company: How much will they make? And how fast will that grow?

If Netflix continues breaking even through 2022 and finds that profit margins are as tight as they’ve always been in entertainment, then the growth answer is “not much”. If the growth estimates match Wall Street estimates, then the sky’s the limit. The answer is somewhere in between.

So yes, this news is big. But the game is not over. Breaking even was step one. Step two, three and four are to sustain and grow that even more. We’ll see if Netflix can do it. And the debate is very well alive to see if they can.

One Other Big Point: Did 2021 Show That Netflix Was Spending Too Much on Content?

The other fascinating question is “What drove cash flow positivity?” 

The bull case is that Netflix fundamentals drove this reality. They invested in tons of content, and all the subscriber growth justified it. Indeed, that’s a headline I saw repeated in countless articles and many entertainment newsletters.

The bear case is “covid-19”. 

Reality is somewhere in between. But it’s worth figuring out where exactly. Did Netflix achieve positive growth because of the huge Covid-19 acceleration in subscribers? Partially. Did their investment in tons of content drive that? Surely. 

But did Netflix achieve positive growth, almost by accident, because they paused all global productions? Probably! Indeed, in Q4 Netflix said they were back to full-production on their shows, and not surprisingly they were cash flow negative again. The link seems fairly clear: when Netflix spends at their current level on content, they lose money. 

How do we prove it one way or the other? We can’t, but I will point to this fun thought experiment. On the earnings call after the Q4 results were released, Netflix said that they won’t even bother forecasting subscribers in 2021. They said it’s much too difficult, and only forecast adding 6 million subscribers in Q1. 

Yet, they forecast they will break even in 2021.

This begs the question, “Huh?” 

All finance boils down to this: money you make and money you spend. If Netflix has said they can’t reliably forecast how much money they will make, how can they confidently know they will break even in 2021?

Because of what Netflix can control. Costs. Which means content costs. If Netflix is forecasting breakeven in 2021, but they have no idea how many subscribers they’ll grow by, they’re basically saying they’ll ensure they get there by right-sizing content costs to breakeven. Meaning they’ll cut costs if they need to breakeven.

The implications of this are, in fact, the exact opposite of every smart pundit saying Netflix has justified it’s content spend. If anything, 2021 showed Netflix–almost by accident!–that they were much too aggressive on making original content. Sans Coronavirus, likely Netflix loses $2 billion again in 2020, then tries to lower that in 2021 to break even. Covid-19 changed all that.

This ties to the strategic point above. Yes, Hastings and Sarandos built a global powerhouse. Did they need to lose $14 billion to do it? Maybe not.

Read My Latest at Decider “Who Won 2020?” Both Film and TV

Ah for the olden days of evaluating content. In 2019, if you wanted to know, “What was the most popular film?” You just looked at the box office and saw that the answer was (very clearly) Avengers: Endgame. Even TV was relatively simple: Game of Thrones set global records for its entire final season. 

(Though you could argue Stranger Things was close. But hey that complicates my narrative!)

In 2020, no simple measures will suffice. Box office disappeared in a cloud of Covid. And reliable linear TV ratings continue to sink. Meanwhile, streaming uses a bewildering array of metrics so we don’t really know what means what.

Which left it for me to figure it all out. Now that 2020 is over, I collected as many data points as I could, put on my former streaming executive hat, and tried to figure out what was the most popular film and TV show in 2020.

Check out both articles and let me know what you think. Did I get the winners right?

Has Netflix Lost Ground Since the Pandemic? Using Reelgood’s Share of Streaming Data to Find Out – Visual of the Week

Yesterday, I speculated that Netflix had a weak summer for content, and until the end of December, this may have caused it’s usage to slip. This was driven by the Nielsen weekly data, which hit a peak in March, and then in the middle of November. Yet, I can’t show that since I don’t actually have Netflix’s monthly usage data.

But other firm’s data can act as a proxy. Like Reelgood, a company that helps users find their favorite shows and films. (In full disclosure, Reelgood provides me their data on a regular basis and I am friendly with this firm.) Two of their charts in particular stuck out to me, both in their “quarterly streaming” reports. What I did was combine them into one. And voila, my visual of the week:

IMAGE 2 - Usage by Streamer

And here it is in table form:

IMAGE 3 - Table

Some quick thoughts/insights:

– Reelgood claims 2 million users, but doesn’t clarify the demographic break down of those users. (It’s a question on my to do list to ask.) So that could skew these results. Though by no mean does it skew them enough that I won’t use their data.

– Also, given how their platform operates, I wouldn’t be surprised if it skews “adults” since kids more often just turn on a given streamer and watch the same shows. So this probably doesn’t capture all usage.

– That said, their usage for Netflix is within the margin of error for Nielsen’s Q2 results, which had it at 34%. Comscore has shown similar numbers too.

– As such, that decline feels bad! Or to use biz jargon “sub-optimal”. I don’t think Netflix is really achieving the same usage as Prime Video, but clearly they didn’t gain in Q3 and Q4 usage.

– Disney being flat with The Mandalorian is also a sign that they need a stream of hits to drive usage up across the board. 

– This is also another data point that the Wonder Woman 1984 experiment worked to drive usage up. 

Did Netflix Have a Strong Q4 For Content? And Other Thoughts Before Netflix’s Earnings Report

This year marks a pretty significant upgrade in the amount of data we have available about streamers. At the start of the year, we had to rely on Netflix to tell us during the quarterly earnings (or selectively on Twitter) how well their content is doing. Since then we’ve added regular Nielsen reports, Netflix’s daily top ten lists, and multiple different analytics companies selectively releasing data points for us to chew over. 

With all that data, we can begin to analyze how well each streaming company is doing in any given quarter. If you believe, like I do, that…

Popular content —> Higher Usage —> Higher retention —> Higher subscriber totals

…then this seems like pretty valuable information. And this is the first earnings report (Netflix publishes their Q4 2020 report tomorrow) where we can really unpack all that data.

Initially, I had hoped to make some quantitative predictions about Q4 2020 compared to past years and quarters. But frankly I don’t have enough information to do that confidently. (We’re firmly in small sample size territory.) What I can do is provide a quick look at Netflix’s Q4 content. Then we can try to do what analysis we can, and make some inferences. 

What Does Nielsen Say?

Nielsen’s data has been the most useful new data source we have this year. Specifically, because it shows the volume of consumption for a given show, week by week. 

The limitations are time frame and the total minutes viewed. Nielsen has only been providing a public top ten list since August. They provided me with data back to April—and I found three data points in March—but that still only provides us three quarters of data. Thus, we can’t compare to Q4 of last year. 

Further, since the top ten list only has ten spots, we don’t get a full picture of Netflix’s original films and series. In particular, since Nielsen measures at the series level, some licensed titles are overrepresented. For example, four shows have made up a huge portion of Netflix’s viewing and three of them make the top ten list every week. Meaning, at most this is a top seven list for new Netflix shows/films, at best. Usually less.

With that in mind, how does the picture look for Q4, given that we are missing two potentially big weeks of data (the last of the year)?

IMAGE 1 By Week

I tried to play around with this data in a lot of different ways to show the average by month and quarter, but given that Nielsen starts at different times of the month, it made March—the crucial month—look funky. Here’s the average per week by quarter:

IMAGE 2 - By Quarter

So if we use Nielsen data, that means that Netflix is having a better quarter than Q3, but still dragging way behind the end of Q1/start of Q2 peak. I can’t stress how good Netflix’s March in the US was with Spenser Confidential to start, Tiger King on 20-March and Ozark on 27-March. Remember, Ozark would be the most watched original in Netflix for the whole of 2020. Compared to that, though, November was good for Netflix. Both The Crown and Queen’s Gambit simultaneously did well.

Is viewership of the top ten correlated with viewership of the platform as a whole? In my experience, absolutely. Though I can’t quantitatively prove it here.

What Does Netflix’ Datecdotes Say?

As a reminder, these are…

The total number of subscribers who watched 2 minutes in the first 28 days, globally.

Fortunately, since changing from “who watched 70%” in Q4 of 2019, Netflix has stayed consistent on using this metric. Thus, by my measure, Netflix has released 66 datecdotes from Q4 2019 to Q3 2020. Notably the number of datecdotes are increasing every quarter:

IMAGE 4 - Netflxi Datecdotes

Using this metric, how did Netflix do? Let’s start with film. The challenge is that there are so many different ways to cut the data. So here’s Netflix’s films that netted over 38 million subscribers globally over time:

IMAGE 5 - Netflix Films

You can see a few of the problems with this data. To start, we can’t use it to predict Q4’s performance since Netflix has only released one movie data point for Q4 so far. Further, it’s noisy and it’s not clear it’s correlated with adding subscribers. For example, Q3 had a number of 70 million plus viewed films, but it didn’t help Netflix grow subs in Q3.

This is also a “tale of two data measurements” problem. If films are measured simply in total numbers, Netflix is growing each quarter. Measured by the percentage of folks tuning in, it’s shrinking. 

Let’s switch over to TV. In this case, Netflix has released three datecdotes so far, and the picture looks slightly better:

IMAGE 6 - Netflix TV Datecdotes

In both cases, though, the big performance of The Queen’s Gambit and Bridgerton will likely pull up the content performance of this quarter. The Crown did very well in Nielsen’s rankings so it could pull up the average as well.

How Do the Q4’s Compare Over the Years?

Interestingly, Netflix has tended towards a similar release strategy the last few years: release a big Christmas film in the middle of November, release the awards bait at the same time, release a big movie to close out the year and a big TV show as well. Here’s the last 3 Q4 release plans:

IMAGE 7 - Last 3 Q4

So can we learn anything here? I’d say not really, until we learn the rest of the Netflix datecdotes to round out 2020.

What Datecdotes Could We Learn Tomorrow? 

As you can see, we don’t have the data points for this quarter. (Which I just mentioned above!) We only have four, and they’re lagging their analogues from previous quarters.

Looking at the films that made the Nielsen Top Ten, we can see the trend with the films Netflix has provided a datecdote. 

IMAGE 8 - Table of FIlm Nielsen

Looking at this, we can say fairly reasonably that Hubie Halloween and Christmas Chronicles 2 will likely get the “datecdote” treatment this quarter. Hillbilly Elegy would be a good bet too. A California Christmas is on the border line.

However, with Nielsen’s data, this doesn’t have to limit us as much as the past. Specifically, we can also have a range for what we think Netflix’s datecdotes will be. Let’s be clear, this isn’t the most complex data analysis in the world. I’m basically making a scatter plot and having Excel draw the line through it for me. Still, the correlation is fairly tight (.85):IMAGE 9 - Correlation tableIn other words, I’m guessing that we’ll hear data points about Hubie Halloween at around 74 million viewers, with The Christmas Chronicles 2 potentially well above that (92 million). Hillbilly Elegy would be around 50 million viewers. Here’s the ranges:

IMAGE 10 - Forecast

With this, we could update the Q4 comparison above to see the potential growth in total viewers:

IMAGE 11 - Comparing Q4

As for the TV side, forecasting there is a mess, because of different seasons. The most likely datecdotes for Q4 are The Haunting of Bly Manor, Virgin River, and The Crown. The Office could be a wildcard flex by Netflix as it leaves. Emily In Paris and Selena are less likely but possible.

Add It All Up: What Do We Have?

Since Netflix dropped Bird Box’s rating on us in Q4 of 2018–what I’m calling the “Netflix Measurement Era”–here’s my quick take on how well Netflix has added subscribers, along with some of the biggest content per quarter:

IMAGE 12 - Table with Subs

Looking at that table and focusing on 2020, I’d spin this story:

Netflix started off the year 2020 strong with The Witcher being one of the most popular series around the globe. (It was released in the last week of 2019.) Then, when people entered lock-down for Covid-19, Netflix also happened to have some of it’s most popular content of the year at the same time, Money Heist (3-Apr), Ozark (27-Mar) and Tiger King (20-March). This led to big subscriber growth after the first quarter and into the second. However, Q3 didn’t have any breakout hits to drive significant new subscriber growth.

Indeed, this weak slate in Q3 led to the smallest US growth since Q2 of 2019, the smallest global subscriber growth 1.1% of the last two years, and missing the estimate.

So looking at the data from today, does Q4 return to Q1 levels, or merely hold steady? 

I’d guess hold steady. 

Subscriber growth isn’t solely driven by content. The Covid-19 lock down definitely drove growth and price increases (like this last quarter’s in the US) can also slow it down. That could be as much the story of Q1 and Q2 as anything else. (Q2 in particular felt light for content after March.)

Looking at the Nielsen data, the datecdotes so far, I’d say Netflix is definitely having a better quarter than Q2 and Q3, simply because Q4 was trending upwards and Bridgerton/The Midnight Sky will likely finish very strong for Netflix. 

That said, this doesn’t look like Q1’s big subscriber growth, does it? The March slate for Netflix happened to come right when folks were binging like crazy. A perfect storm of good content for the right time. 

What the Democratic Wins in the Senate Mean for Hollywood – Most Important Story of the Week – 15 Jan 21

Well, living through the last two weeks of news has shown that the pace of news in 2021 isn’t slowing down. The most notable story for entertainment–though it was pushed off the front page within 24 hours–has to be the Democratic Senate wins in Georgia last Tuesday. This week we’re seeing the ramifications of it in policy. So let’s make it the…

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Most Important Story of the Week – What the Georgia Election Could Mean for Hollywood

(A caveat before I start: this section is not trying to explain what should or shouldn’t happen in a Biden administration from a political standpoint. Meaning, I’m not advocating for or against any given policy, but merely trying to sketch out what could happen. So you can be prepared for what may come next. Whether you agree with those policies is up to you.)

To start, President-Elect Biden winning in November was itself a defining moment in the course of American history. I don’t subscribe to the school of thought that both parties are identical. They clearly have different perspectives on everything from regulation to taxes to unions. Switching out one party for another has a big impact on the conduct of business. When Biden won the presidency, that meant things would change.

However, if you’ve followed US politics for the last twelve or so years, it is clear that if a President’s party doesn’t have control over both chambers of Congress, then they can’t get much done. Given that control of the US Senate ended up in a stalemate in November, the question of how much Joe Biden could change was left open.

Then the Democrats took control of the Senate last Tuesday. And, frankly, now the potential impacts are even bigger. Lots of things that could be contested no longer are, including cabinet, judicial and regulatory appointments. Essentially, all the jobs required to run the executive and judiciary. And some things that weren’t possible now are. Like passing bills through budget reconciliation, which only requires a bare majority in the Senate. Democrats control the agenda in both legislative chambers. That itself is meaningful.

We’re already seeing the unleashing of Biden this week. For example:

– Biden appointed Gary Gensler as SEC chairman. Gensler is fairly progressive and was a tough regulator in the Obama administration. In a Republican controlled Senate, he may not have gotten approved. Now he will sail through.

– Biden announced a huge new stimulus bill. Specifically, $1.9 billion in additional stimulus. This will be targeted for both Covid-19 and just economic recovery. In a Republican controlled Senate, this bill would be dead on arrival.

So what happens to Hollywood in this environment? Is it good? Bad? Or somewhere in between?

Probably somewhere in between. And that starts with the idea that “Hollywood” is now fairly amorphous. In Los Angeles specifically, actors, celebrities and Hollywood power brokers love to host fundraising parties for big politicians. As a result, they have Democrat’s ears on a lot of issues. 

Do their corporate leaders? Maybe. A few years back Hollywood tried to pass a suite of content protection legislation and Silicon Valley basically shot it down. So Hollywood influence isn’t without limits. And while Silicon Valley–which is now entwined with Hollywood–used to curry the same favor, they’re now enemy number one. 

In all, we’ll have to see. A lot of positions remain unfilled in Biden’s team, and some of those decisions could definitely impact Hollywood for good or ill. But here are some ways that a unified Congress/Presidency could help or hurt Hollywood:

Economic Recovery. 

This is the biggest area. If Senator Mitch McConnell controlled the Senate, likely there would be no additional stimulus to the U.S. economy. Or it would have to be heavily negotiated and come nowhere near the price tags Biden wants. Given the general economic consensus that we need to drive to full-employment, and that means stimulus, this is good news for Hollywood. (In general, good economies are better than bad, though entertainment is somewhat recession proof.)

Covid-19 Recovery. 

Responding to the virus is as important as repairing the economy. Winning control of the Senate likely won’t have as big an impact on this as simply taking over the Presidency. That said, if the Biden administration really does approve an extra $400 billion to fight the virus, that will supercharge efforts at vaccine distribution. (I’d toss in that even if America gets to 100% vaccination, the rest of the world will lag, and a true recovery will need to be global.)

Targeted Aid to Theaters. 

The last stimulus contained some aid for independent theaters and concerts, but notably only smaller venues. Under intense lobbying, I could see bigger theater chains convincing lawmakers they need help as well. Again, good news for Hollywood in general.

Antitrust (Big Tech)

I’ve written about this a few times. So read those articles to get a flavor for how I think renewed antitrust could impact Hollywood. As for how the Senate changes this, it means that if Biden considers corporate consolidation a problem, he can appoint folks to the DoJ, FTC and FCC who take it much more seriously. If you are traditional Hollywood, part of you would love to see the big Tech Titans taken down a peg!

Antitrust (Old Hollywood)

But what if they come for the rest of the industries? There are hardly any two industries more reviled by customers than cable or cellular phones. Or more consolidated. The biggest risk for very consolidated industries is that antitrust fever spreads from the Big Tech Titans to cable, cellular and entertainment companies broadly. We still need to hear about the specific appointments before we make a judgement call. Depending on which company you are (the big or the small) this could be good or bad.

FCC regulation

This is another wildcard area. There aren’t a lot of hot button policy issues that Democrats want to pursue, though net neutrality is one. The FCC also can regulate the size and consolidation of media companies, which relates to antitrust above. Make this a wildcard for now.


Labor power has ebbed over the last few decades in America. Entertainment is one of the few industries remaining with strong unions for its members. Biden has said he’s going to be the most “pro-union” president America has seen. If he’s successful, and his pick Marty Walsh can follow through as Secretary of Labor, this could be good for below-the-line and above-the-line talent in Hollywood. It would be bad for companies, since profit margins could be squeezed. A Democratic controlled Congress could also help by passing labor-friendly laws. That said, of all the areas I’ve discussed, this the one I’m most skeptical of. I’ll believe unions are making a comeback when they start to make a comeback.

Other Contenders for Most Important Story

Two weeks into 2021 and we’ve seen a new streamer launched, a new one announced and an old one shutting down. That’s right, a lot of other stories to get to.

AT&T is Shutting Down AT&T Now

In AT&T’s quest to confuse customers, it rebranded DirecTV Now a few years back as AT&T Now, while then launching a product called AT&T TV. DirecTV Now was one of the first vMVPD (digital cable bundle) to run the “start at a cheap price that rises dramatically” playbook. And it was punished the most harshly for this bait and switch. (Youtube TV and Hulu Live TV seemed to avoid quite as severe cord cutting.) Now, AT&T is shutting down AT&T Now.

Overall, the vMVPD market is fascinating. Customers desperately want cheap cable bundles. So they sign up for them in droves. When they go up in price, they drop them in droves. So bundles are good; expensive bundles are not.

Univision Launches a Streamer

It’s about time!

While there are Spanish language streamers out there, there doesn’t seem to be one that dominates the market. (This is an area I’d love to research more.) Netflix obviously has lots of Spanish language content. And Peacock incorporates Telemundo into its offering. And there are smaller services that most English speakers haven’t heard of. But no one has dominated this market yet.

Which makes Univision’s new streamer a fascinating entrant and potential disruptor. One of my theories is that local content can rival Netflix if it is targeted to the local situation. Univision is about to test that thesis. Can they offer a more authentic experience to a targeted demographic than a service trying to be everything to everyone? We’ll see.

Netflix Announces a Big 2021 Film Slate

The widely repeated headline is that Netflix is planning to release a new film every weekend for 2021. Not to be that guy, but didn’t they already do this?

By my count, they’ve released more than a hundred films in 2019 and 2020. And nearly 100 in 2018. That’s why I made charts like these…

Screen Shot 2021-01-15 at 1.48.03 PM

Of course, many of those films were documentaries or in other languages. So sure, maybe this is a change. 

The challenge for Netflix’s film group, which I’ll write about more next week, is that for all the quantity Netflix has not delivered the quality. So looking at this slate, I can’t tell you if this new 2021 slate will dramatically improve Netflix’s fortunes or not. We’ll have to see.

Disneyland Cancels Annual Passes

Lastly, Disney announced that they are cancelling annual passports for Disneyland, and this news shocked me. These have been an institution for decades in southern California. So is this a good sign or a bad sign for their finances? Probably a good one.

A few things likely influenced Disney. First, the price tags are getting so high that the value proposition for an annual pass is no longer there. If you aren’t making customers happy, then it probably shouldn’t continue. (Not to mention actively antagonizing them with big price increases.) Second, with variable pricing, Disney thinks they can keep the parks at full capacity, and maximize the profits of a given day. If Southern California residents want to go for cheap, they can go in off-peak times of year.

Lastly, this may be some indication Disney sees upside in attendance this year, whenever parks reopen. Because there might be lots and lots of pent up demand. In other words, Disney may not need annual passports to keep parks at capacity.

Data of the Week – Nielsen in Growth of OTT Usage

Here’s a fascinating tidbit in Nielsen’s 2020 annual report on streaming:

Nielsen Usage - Growth by 3% in raw

Wouldn’t you have thought it was higher? I mean, the narrative in March was that everyone was streaming all the time now. But while viewership of TV went way up, streaming “only” took 3% of the usage. 

By the way, if you want my take on Nielsen’s annual list, see this thread: