Category: Analysis

Should Disney Have Released Mulan to PVOD?: Part III of “Should Your Film Go Straight-To-Streaming?”

Last week, we figured out that Mulan was likely watched by 1.2 million Americans on its opening weekend. (Plus or minus 1-1.5 million.) We estimated this means it likely ends up with a global PVOD of $150 million.

But what I didn’t do was explain what all that data means.

Which is today’s article. As I was writing up my implications, I realized I was really writing another entry in my series on the changing film distribution landscape, “Should you release your film straight-to-streaming (Netflix)?” So here’s the latest version of that. As before (See Part I here or Part II here), I’ll be asking myself the questions.

Was the Mulan PVOD “experiment” worth it?

I’m probably too much of a stickler on language–I called out a much more influential strategic technology analyst on Twitter for mixing up aggregation and bundling this week–but I do believe terms of art have a role in setting strategy. Words have meaning and mixing them up can make for sloppy understanding.

The word “experiment” should be reserved for true experiments. Meaning scientifically rigorous processes to draw statistically significant conclusions. In business, this is incredibly hard to do. Most often, we have a sample size of “1”. Given that a company can’t split the universe into multiple alternate realities to see what happens, if they change their strategy they have only one data point to draw conclusions from. They only have the one strategy to adjust. It’s an “n of 1” as I wrote last Wednesday. Meaning we can’t draw conclusions from it.

I prefer “test” instead.

Fine, was the Mulan “test” worth it?

Probably not. Because most “tests” really don’t help refine strategy. Strategically, it’s usually a mistake to run “tests” that muddy your strategy and/or consumer value/brand proposition. In this case, Mulan was huge news. With tens of millions of dollars on the line, you shouldn’t run “tests”, but make strategic decisions that align with your long term strategy.

As it is, Disney got the data that PVOD sales didn’t match their expectations. Consider a question I’ll ask later: What if Disney had released Hamilton on PVOD? Then arguably the test would have worked! But the true difference is one film was the most popular musical of the last decade, and the other was a live-action adaptation. The track record on live-action remakes is more mixed: they’ve had a much more up and down reception. (The Lion King and Beauty and the Beast did really well; Cinderella less so.) In other words, we could have guessed that Mulan could not launch well but Hamilton would have.

But that’s why Disney needs to decide if PVOD is a part of their strategy or not going forward.

Okay, my last try: “Was the Mulan PVOD release strategy the best one to maximize revenue?”

That is the best way to ask the question! Thanks, me.

I think it wasn’t. With the caveat that I’m second guessing the executives, let’s review the options Disney had in front of them. They could release in theaters now, or next year. They could try the PVOD test. They could release in TVOD. Or go straight to SVOD on Disney+.

Trying to run the numbers wouldn’t really help since it would require tons of estimates and just guess work. But if we’re ranking the options, my gut is Disney ended up choosing the 3rd or 4th worst option. I’d do it this way:

1. Release on TVOD in September in Disney+ territories, theaters elsewhere.
2. Release in September in theaters globally, with a shortened window.
3. Release sometime next year in theaters globally.
4. Release on PVOD in September as above.
5. Release straight to SVOD in Disney+ territories, theaters elsewhere.

Here’s my logic for number one: Mulan had higher brand equity than Trolls: World Tour, so it would have generated more interest. Indeed, the biggest release tactic that held Mulan back wasn’t the price, it was the distribution strategy. However, you could convince me that options 2 and 3 could have beat option 1.

As I wrote a few weeks back about “exclusive distribution channels” when it came to Spotify, Podcasts and Joe Rogan, when you go “exclusive” you artificially limit your upside. Disney essentially opted for the same path here. The problem was their exclusive channel doesn’t look to be worth it. Essentially, TVOD would have expanded the footprint by so much that it would likely have generated more sales. So that’s my number 1 option to maximize revenue. (And a lower price I think would have further convinced folks to buy it.)

What about the new subscribers Mulan brought in?

Uh, look at the Antenna data of new sign-ups in context of past releases:

antenna-longer-time-period-1

In other words, Mulan didn’t drive new subscribers. Because it was PVOD, fundamentally, it didn’t help with retention either. The number of new subscribers is barely statistically significant.

What about releasing in theaters?

Unlike Universal, Disney hasn’t been expressly antagonistic to theater chains. (Though as soon as AMC and Comcast agreed on a deal, they publicly became best buddies again.) So assuming Disney could have sold the theater chains on it, yes there is a chance they could have released Mulan in theaters followed by a simultaneous or 3 weeks later PVOD release. That would have made more money than PVOD only.

The logic for me is simple: give multiple options for customers to watch a film. The challenge is most theaters in huge markets are still closed. It’s that uncertainty that is hurting theaters more than anything. And the theater chains would have fought fiercely.

Could Disney have held it until next year?

They could, but three things are holding them back. Which I’ve been struggling to explain all summer, and think I just figured out.

First, the financial cost of capital. Which is the idea that if you spend $200 million to make a film, the goal is to eventually make $216 million accounting for inflation since the entertainment industry’s cost of capital is roughly 8%. (No matter what else you know about entertainment, that’s the key math.) If you wait a year, you need to make 8% extra to cover the costs of the delay. That’s the damage “cost of capital” does to a cash flow statement.

(Want an explainer on net present value/the time value of money? Go here.)

For big films, this is clearly worth it; smaller films it isn’t. If the next Fast and Furious film does a billion dollars, taking the 8% cost of capital hit is better than a 60% total revenue hit. Using this logic, Disney should have moved it back.

The second cost, though, may be the real driver. That of what I’m calling “organizational” cost of capital. If everyone moves their films back simultaneously, the problem is many of those films can’t release at the same time. And that means you can’t start making new films, since they won’t have anywhere to go.

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Mulan vs Tenet: I (Don’t) Declare a Winner

At first, I was tempted to call “Mulan vs Tenet” the biggest battle of the streaming wars. Each weekend in September, we’ve eagerly awaited answers to the hottest questions in film: Will Tenet save theaters? Will Mulan blow up the model? Who is making more money? Who is WINNING?!?!?

It turns out that the answer to the first two questions is probably no. As for the third and fourth, well, that’s tricky to answer. But since it’s the logical follow-up to my article on Monday, I’ll do my best.

But I wouldn’t call this a battle. If anything it’s a “skirmish” on one end of the larger distribution battle. (The sort of way that Pickett’s Charge was one tactical engagement in the larger Battle of Gettysburg.) Just because it is a skirmish doesn’t mean it isn’t important. Skirmishes are what win or lose battles! (For want of a nail…) 

So after three weeks of data, let’s analyze what we know. Here’s the outline of today’s article:

– First, two lessons on data that set the terms of the debate.
– Second, an analysis of what we know about each film, including US box office, International box office, and PVOD sales to date.
– Third, thoughts on each film’s revenue potential after these initial windows.
– Fourth, a comparison between the two films and declaring a winner.

Kidding! I won’t do that last part because I don’t know the answer. Moreover, I won’t draw giant conclusions about what this means for the future of film. Because frankly two films won’t fundamentally change the landscape. But I’ll explain that point in future articles. For now, the performance of these films to date.

(Also, I found that I was linking to a lot of my articles explaining the business of film. To keep this article clean and not polluted with links, I put a “reading list” at the bottom.)

Bottom Line, Up Front

– Comparing the box office of Tenet to PVOD of Mulan is comparing two different windows to each other. That isn’t apples to apples.
– That said, we can’t know the future value of either film because both “inputs” are “n of 1” meaning so unique that we can’t build a model.
Tenet will likely gross $325-350 in global box office.
Mulan will likely gross $70-100 million in global box office.
Mulan will end up with likely $155 million in global PVOD (with a big range of $105-$270 million.)
– As for lifetime earnings? No one really knows, because there aren’t good comps to make accurate estimates.

Two Data Lessons: Apples to Apples and “n of 1”

My primary job on this site, as I see it, is to explain the entertainment business. You can find lots of places on the internet opining about the entertainment business; I’m trying to teach you why it works the way it does. And in the “Mulan v Tenet” debate, I see two major mistakes being made.

First, Apples-To-Apples

That’s my simple term for comparing like-to-like. In some ways, statistics/data analysis/science is essentially the quest for comparing things like-to-like as much as possible. That way you can isolate the the true drivers of causality. (That’s why random controlled trials are random and controlled.)

Here’s a simple example from last week: folks saw that 7 Park’s data was much larger than peer analytics companies for Mulan’s debut. The key, though, was that they were measuring eight days of data, and not just the opening weekend. They were also measuring the percentage of folks who watched Mulan who were active users, not all subscribers. Once you accounted for this, their math (1.5 million subscribers), was close to other estimates (1 million at the low end for Antenna and 1.1 from Samba TV). Comparing things apples-to-apples solved the problem.

In “Mulan v Tenet”, the key question/claim at the center of the debate misunderstands this notion. Consider these major windows of movie revenue:

IMAGE 1 - Table Second Window Waterfall

The question I’ve seen written and been asked repeated is, “Is Mulan making more than Tenet?” We could reframe it based on the windows in question. Basically, “Is Mulan making more money in PVOD than Tenet in domestic box office?” That would look like this:

IMAGE 2 - MvT Current Debate

But this isn’t the right question. It’s comparing apples-to-hammers. (A Chuck Klosterman phrase.) Look:

Image 3 - MvT Good

This framing really sets the terms of debate better, in my opinion. Even after Tenet leaves theaters, it can go to US domestic TVOD and home entertainment. So even if the answer to the current question is, “Yes, Mulan has likely made more in PVOD than Tenet at the domestic box office,” the question doesn’t make sense.

(Since PVOD wasn’t a window when I first made this table, I added it above. And I summarized all digital/streaming the “pay windows” to show the timeline better.) 

Really the question is, who will make more domestic revenue? So we should fill in this whole chart, accounting for blacked out windows:

Screen Shot 2020-09-23 at 1.23.54 PM

And we can see that two big chunks of revenue for that are the same: who will make more in Pay 1, Pay 2 and library distribution? (That means all the future revenue implied by streaming (like Netflix), airing on premium channels (like HBO), cable (like TNT) and other places. Now that question is tricky because of our next data point.)

“n” of 1

I was inspired by the “n” of 1 after reading earlier this year an article in the Economist about the rise of “n” of 1 medicine. “n” is statistics jargon for sample size. If you poll 3,000 folks about the Presidency, your “n” is 3,000. If your sample size is all Americans, that’s a sample (population technically) of 300 million. “n” of 1 medicine is referring to treatments designed for one individual with a unique life-threatening condition. It means the “sample size” is so unique it’s a category by itself.

This applies to box office and film revenue analysis. When we make forecasts based on opening weekend performance, we can do that because movies are similar and we can account for the differences to compare things apples-to-apples. Hence, we use Marvel films to forecast how much money films based on superheroes will make, while accounting for the time of year of the release and various other factors. (Scott Mendelson at Forbes is my favorite analyst at this.)

Once we have box office, we can use its results to forecast all the other windows a feature film is sold into. That’s how my film forecasting model works. It’s a fairly accurate system. We can also do it for PVOD, TVOD, streaming, TV and any revenue stream. Once we have an input, we can derive the rest.

The challenge for both Mulan and Tenet is they are unprecedented. They are without comps in the United States because: 1. No other blockbuster film has released during a pandemic that closed 70% of theaters and 2. No other film released to Disney+ exclusively for a one-time $30 payment. 

Because of this, making any forecasts about profitability is perilous. Or should I say, highly uncertain. Meaning, while I know what Mulan did in PVOD—see Monday—I’m much more uncertain about what this means for future windows. Conversely, while I know how well Tenet is doing, I don’t know what that means for future revenue streams, since Tenet is only available in 70% of US markets, that account for about 40% ticket sales.

So let’s start with what we do know.

The Data: International and US Box Office, Mulan PVOD and Forecasts

The easiest data to find is domestic and international box office. Since Tenet has been out a bit longer, it’s getting easier to see what its final total will be. So I’ve included the likely final box office total ranges offered by Scott Mendelson.

IMAGE 5 - Box Office with Rnagers

Are those numbers good or bad? Well, we’re in the middle of a pandemic, so who knows? As Mendelson makes the case, for an original material sci-fi live action film, Tenet is doing really well!

Meanwhile, even the ranges on Tenet are fairly uncertain. I put $350 million as the likely ceiling, but if New York and California reopen theaters, there could be give it a late boost (and stronger “legs”) as folks go to see it. Or not! A recovery that happens quickly is also unlikely so it could stay middling. 

Meanwhile, we know from Monday about how well Mulan is doing on PVOD.

IMAGE 6 Mulan Summary PVOD

The wildcard of the Mulan PVOD numbers is the fact that Mulan wasn’t just PVOD in the United States, but globally where Disney+ is available. My analysis from Monday focused on US analytics firms since there aren’t a lot of estimates for global performance. It turns out Mulan was released in every Disney+ territory but France and India, which includes these territories:

IMAGE 7 - Territories and Price

You’ll note it’s also cheaper in dollar terms in other territories. Time to go to the comps. What I did was find the last five Disney live-action remakes, pull down their box office by territory, and use that as a comp for demand:

IMAGE 8 - Disney Live Action Comps

The way to read this chart is that the “Disney+ territories that have Mulan” tend to account for 43-75% of the box office of the United States box office. Great! That becomes our tool to forecast PVOD revenue in those other territories. My low will be 40% (slightly lower than the Jungle Book comp) and I made a high of 100% based on Scott Mendelson’s back-of-the-envelope estimate. I consider that the far outlier, but with this much uncertainty that’s okay. Here’s the results:

IMAGE 9 Mulan International

Of course, I had high case and low case forecasts from Monday, which we could combine. The worry with our estimates now is that we’re making estimates on estimates, which doubles the uncertainty. Which you’ll see in how big our range is getting:

Screen Shot 2020-09-23 at 1.27.19 PM

What do we know? We have estimates for how Tenet and Mulan both did in their opening “windows”, one of which was PVOD/theatrical, and one which was theatrical only.

What don’t we know? What comes next.

The Comparison: Mulan v Tenet

Here’s a rough look at the current revenue of both Mulan and Tenet. As in how much each film has brought their studios as of this (rough) moment, roughly through their first month of releases:

IMAGE 11 Current Revenue

To answer the question I said you shouldn’t ask up above, yes Mulan globally has made more money than Tenet as of this moment. Crucially, the presumed 90% net take beats the 50% domestic/35% international split of theatrical. (Though I think that Disney’s split with PVOD partners like Apple, and Amazon may actually be lower than 90%, but don’t know for sure.) Here’s the look at the question I said we should ask:

IMAGE 12 Lifetime Estimate

I love this look because it clarifies how much we don’t know. Which is frankly how much Tenet will make on TVOD/DVD, how much Mulan will make in home entertainment, how much more Tenet can make by going to premium cable, and how much both will make in streaming.

Why not try to estimate it? 

Because I don’t believe the Tenet or Mulan numbers are good comps for forecasting. 

If Tenet’s US box office is depressed because of Covid-19, then it’s home entertainment could make as much as Trolls: World Tour or Mulan at home. Meaning it could have as large a window as Mulan had since 60% of theatrical attendees couldn’t see it. It’s rumored that Mulan will go wide on TVOD (including iTunes, Amazon and maybe even Pay-Per-View), but I don’t know if that viewership has already been cannibalized by this PVOD experiment. If it hasn’t, it could add 33% more revenue as Trolls: World Tour did when it went cheaper on TVOD in July.

Meanwhile, Tenet will eventually be on HBO and likely HBO Max. But Mulan will stay on Disney+ exclusively? Could I calculate that exclusivity value? Nope. Because I still don’t know enough about Disney subscribers to conclude that this PVOD experiment drove subscribers or that Mulan will have good replay value on the platform. (Unlike Netflix, who we have multiple years of US-only data to parse.)

This is the “n of 1” problem I discussed above. There are so many conflicting variables that my usual methods of forecasting are out the window. Same for the studios. They’ll basically have to collect the revenue and see what shakes out.

Thus, at $35 million dollars difference between the two, I’m calling this a push. It’s as likely Tenet makes more money for Warner Bros. as it is Mulan makes more money for Disney.

In short, we’ll never really know who “won” this skirmish since our numbers are close enough to call it a draw. I’d add, using one proxy for demand, Google Trends, it looks like Mulan peaked higher, but Tenet may last longer.

IMAGE 13 G Trends Tenet vs Mulan WW

As for how demand shifts from here, we’ll see as they release on additional platforms.

Reading List

Really, this article is a continuation of this series I started in December on “Should You Release Your Film Straight to Netflix? Part I” and “Part II” In that series, I explore the economics of taking a film straight to streaming.

Previously, I built a model on how to forecast “revenue” for straight to streaming titles in this series, “The Great Irishman Project”. It’s fairly tricky to forecast streaming revenue, but definitely possible. (Netflix does it!) See my methods explained here.

I also built and explained a film finance model for feature films released traditionally, which I first explained back when I launched the site in a series evaluating the Disney-Lucasfilm acquisition.

1.2 Million Folks Bought Mulan in the US During It’s Opening Weeknd: The (Not) Definitive Analysis of Disney’s Mulan Experiment

How many folks bought Mulan?

That’s the buzziest question in the streaming wars right now.

Since we don’t know, we’re left to pick at the analytics tea leaves. Fortunately, as each day passes, we’ve got more tea leaves to pick through.

(Partly, the question is relevant because it gets to the buzziest question, “Who’s winning, Tenet or Mulan?”. I’ll answer that on Wednesday.)

Far from throwing my hands up, I’ve started to realize these tea leaves are signal not noise. So if/until Disney tells us otherwise, I’ve done my best to compile all the Mulan on Disney+ data we have. Consider this a “meta-analysis” on Mulan. First, I’ll summarize each data source and what it tells us, next I’ll try to compare this to Trolls: World Tour, then I’ll compare all the data sources, and finally I’ll make my estimates for Mulan’s performance.

(I covered some of these data points in a column and Tweet thread two weeks ago. Today, I’m updating all that data and tossing in my estimates at the end. Also, if you’re new to the EntStrategyGuy, my newsletter goes out every two weeks with links to my writings and the favorite things I read over the last two weeks.)

To start, though…

Bottom Line, Up Front

Don’t want to read the entire thing? Fine, here are the talking points you can deliver confidently without reading the whole article.

— The story about Mulan’s performance is remarkably consistent, if you ensure you are comparing “Apples to Apples”.
— Right now, I’m fairly confident at estimating that its opening weekend Mulan was purchased about 1.2 million times. (Other estimates range between 1 to 1.5 million, giving us a fairly tight range.)
— That implies that it made about $36 million on its opening in total revenue.
— Based on its rapid decay, the Trolls: World Tour comp and the fact that it will only be in PVOD for 8 weeks, I estimate Mulan will generate about $90 million in US sales over its lifetime. (Based on the estiamtes, this could be as smalls $75 million and as high as $135 million.)

What We Know: 6 Different Sources Tell a Remarkably Similar Story about Mulan

Disney took a big swing by releasing Mulan straight to Disney+ (and only Disney+) for $30 a pop. That left multiple analytics firms—each vying to get new customers to buy its data, a important point about self-interest to note—to fill in the gap. Reelgood said one thing about the popularity; Samba TV said something else; Antenna said something else and then Yahoo took 7 Park’s data in a completely different direction.

The better analogy than tea leaves is actually the old parable about the elephant and the five blind men. Each grabs a different part of the elephant, so feels something different. That applies to our measurement firms. One is measuring viewership; another purchases; another app downloads. Toss in different time periods and sources, and it seems bewildering.

But if you put the whole picture together, it’s not that confusing. After 7 Park put out a great thread clarifying their data this weekend, I’m fairly convinced each source is telling the roughly same picture.

Source 1: Google Trends

This source is so easy anyone can use it. So be careful. Google tracks search traffic data which has been shown to be a very good proxy for interest. Here’s the time period going back to when Covid-19 started featuring top streaming films:

G Trends - PVOD Comparison

What’s the simple takeaway? Interest in Hamilton far outpaced anything else in the straight-to-streaming space. (See my article in Decider for details.) This, for me, is the context of Mulan.

However, since we’re triangulating on Disney+, it’s also worth looking at a “Disney+ only” look:

G Trends - PVOD Disney Only v02

Mulan was big, but paled in comparison to Hamilton.

Source 2: Antenna

Antenna tracks subscription behavior across a range of services such as iTunes, Amazon Fire TV, Roku, Google Play and others. Last week, they released their analysis of Mulan’s opening weekend in this great chart:

Antenna Longer Time Period

This is the most skeptical look I have of Mulan’s huge driver in interest from Disney. Yes, it helped boost sign-ups for Disney+, but less than any other major theatrical driver of the last few months. Also note how this aligns/correlates with Google Trend data, but not perfectly. Black is King did better than Mulan, according to Antenna, but Google Trends has lower interest. (Google Trends has more interest in Artemis Fowl than Black is King.) 

There is a similar story with Frozen 2 driving more sign-ups than Onward according to Antenna, and Google Trends telling an opposite story. (This explanation is fairly simple: Frozen 2 launched right as lockdowns started, so that’s more the story of lockdowns driving parents to subscriber, not interest in Frozen 2.)

Antenna’s data goes further on Mulan. They also used their data to breakdown Mulan purchases by sign-up time period. 

Antenna Subscriber Percentages

Antenna also  released purchases by sign-up time period. So I took those numbers, and combined them with the above chart to give us this estimate of the average % of subscribers who dropped $30 on Mulan:

Antenna Subscriber Purchas Rate

Save that number, we’ll get back to it. But it’s not the only look Antenna provided. They gave some data to LightShed Partners (and then tweeted it), which compares daily sales of various PVOD releases with “purchases by day”:

Antenna Daily Purchases

This is great because we can use a few numbers to compare Trolls: World Tour sales to Mulan. Hang on to this number too. And pay attention to those steep decay curves.

Source 3: 7 Park

7Park is another data analytics firm, though they don’t clarify where and how their data is collected. However, they have been releasing streaming data for a while now.

7 Park entered the data fray this week with a buzzy article on Yahoo, that slightly oversold the analysis. 7 Park measured, through the first 12 days of September (which covers through Saturday of Mulan’s second weekend), the percentage of users who watched Mulan among all Disney+ users during the time period measured. That italicized portion is key. Which is why Mulan could get 29% of streams during its opening weekend, but then a much smaller number when you look at Q3 to date:

7 Park Long Time Period

How does that 10.3% compare to Antenna and Google Trends? Favorably. As 7 Park pointed out in their thread, the demand ratio from Hamilton to Mulan matches Google Trend very well. As for their data versus Antenna, they measure different things. One compares to subscriber base while the other compares to active users. Assuming active users are between 50-75% of the total subscriber based, then the numbers tell a similar story.

Source 4: Samba TV

Samba TV measures viewership on connected TVs specifically. Samba TV also ran an analysis on Mulan viewership, from the opening weekend, coming up with the number that 1.12 million folks purchased Mulan during the opening weekend. It’s unclear if this is connected TV’s only or if they extrapolated out to all customers. Does this match the other numbers? Yes, as we’ll see.

Source 5: Sensor Tower

Sensor Tower measures application downloads. For the streaming wars, they track how often folks are installing streaming application. (Hedgeye analyst extraordinaire Andrew Freedman uses their data to forecast Netflix and Disney+ subscribers fairly well.) According to Sensor Tower, Mulan drove a week-over-week increase in downloads of 68%, which compares to 79% for Hamilton during its opening weekend. This is a bit lower than the Antenna, 7Park or Google Trends data. Sensor Tower only tracks mobile viewing, which may explain the difference.

Source 5: Reelgood

The biggest outlier is Reelgood’s data. Reelgood is an application that helps folks find and curate their streaming offerings. Reelgood uses their data (they claim 2 million users) to then estimate demand for various titles. Here’s their chart with notably the streams as a percentage of top 20 streams.

Reelgood Top 20 copy

This genuinely surprised me since customers had to purchase Mulan, which should have decreased its viewership. Instead, in a follow up, Reelgood said that Mulan actually surpassed Hamilton, which only had 9.68% of streams. This is the only source that implies that demand for Mulan was higher than Hamilton. So it’s our biggest outlier.

Missing Sources

Just to note, of the major sources I track, Nielsen and Parrot Analytics both haven’t entered the Mulan fray. The reason is that both focus on TV series with their publicly available data. (Though Nielsen does have feature film viewership data.)

Trolls Would Tour Comparison

That’s the data, let’s make the comparisons. First, here is the leaked details or estimates of Trolls: World Tour’s performance.

Screen Shot 2020-09-21 at 12.59.08 PM

Unlike Disney (so far), Comcast was much more willing to leak positive data about their Trolls: World Tour experiment. A few things to note, these estimates aren’t quite as steep as Antenna’s data, but match real world churn/decay better. We’ve seen this with other streaming titles where the opening weekend is about half the viewership of the first month or so of a title. And then with trolls the opening month is about half the viewership of the title lifetime to date.

This point may be interesting, but its definitely possible that about as many folks watched Trolls: World Tour after it dropped to $6 to rent then watched at $20. This chart from The-Numbers shows how popular Trolls: World Tour was even 3 months after PVOD:

DEG At home

WIth these numbers, we can compare purchases between Trolls: World Tour and Mulan using Antenna’s data. I did this by measuring the various peaks in the above Antenna chart with purchases by day.  Which made this chart:

Antenna Demand as Trolls

Since they’re decaying at roughly the same rate, we can use this to estimate Mulan sales. In other words, I estimate that Mulan had about 61% of the sales of Trolls: World Tour on PVOD. The caveat is that Mulan is available in less places than Trolls or Scoob, meaning demand could have been as high, but without additional TVOD channels it reached less customers. But that still results in lower sales/demand.

Comparing all the Sources

Wow. So if you’re still with me, here’s my summary of everything we know. Here are the estimates I derived for purchases for the first weekend, where the data allowed me to make that estimate:

Summary Comparison v01

Let me explain this. Given that Antenna and 7 Park are percentages of subscribers or active users, the 15-35 million are potential ranges of Disney subscribers/users. Then I picked the number that is my current “best guess” for each. In other words, I think Disney+ has about 30 million US subscribers, and about 20 million active users in a given quarter. If you disagree, pick another input. For Samba TV, I just used their estimates. For Trolls: World Tour I multiplied the estimated 2.25 million Trolls opening weekend customers (40 million divided by $20) by 61%, the rough proportion from the chart above.

All these sources say about 1.1-1.4 million folks watched on the opening weekend. Splitting the difference, and picking the number I like best, gives me an estimate of 1.2 million.

From there, we can estimate lifetime sales. I’m using my estimate that opening weekend will generate 50% of the first month’s sales. Both Antenna and Google Trends back this up. For example, it has already seen a second weekend drop in demand of about 75% in Google Trends. Also, given this decay, I think its second month will only see about 20% more sales:

Summary Estimate Lifetime

Using best case scenarios (33% viewing in the second month, 1.5 million opening weekend), I get to $135 million lifetime PVOD. Using worst case, I get to $75 million.

Phew. I’m wiped out. There are tons more issues to unpack, especially how this compares to Tenet. But I’ll do that next time.

How Fortnite vs Apple Could Impact The Streaming Wars: Imagining a “Maximalist” Scenario

The first thing to know about the streaming wars is that it is really multiple wars simultaneously. One war is between the streamers. They compete fiercely against each other, with Netflix in the lead. (This is by far the most covered battleground.) 

If those are the established powers, the upstarts are the free, ad-supported streamers are trying to take territory, er attention/mindspace/viewership, from both. Youtube leads here, but is followed by the hot new crowd of Pluto, Xumi, Tubo, Roku/IMDb Channels, and more.

Yet, those land armies’ power is dwarfed by that of the air forces of the world. Who in many cases set the terms of the streaming wars. And in this analogy, that’s the platforms that deliver the streamers, be they devices or operating systems or other bundlers have just as much, if not more, power. In a moment, a platform could blow up an entire business model, like dropping a nuclear bomb on an opponent’s army.

(The Game of Thrones analogy patented by Dylan Byers also explains this well: streamers are the traditional houses of Westeros, ad-supported streamers are Daenerys and the Dothraki, and the platforms are the White Walkers.)

If you want to understand the scope of Epic Games going to war with Apple, this is it. Epic Game’s army is fighting Apple’s air force, with the expected outcome that Apple nukes Epic’s business.

For those who don’t know, Epic Games (maker of the Fortnite game and Unreal video game engine) tried to implement in-app purchasing outside of Apple’s payments system. This resulted in them being kicked off the Apple app store, lawsuits and countersuits.

The Fortnite gambit will directly impact the streaming wars. The ability of platforms to dictate terms to the streamers directly hits streamers’ top, bottom and cash flow lines. If Fortnite wins, it is like taking away Apple’s (and Google, Roku and Amazon’s) ability to drop bombs. (Okay, I’ve taken this analogy about as far as it will go.) That’s what I’m going to explore today:

  •  First, explaining the relationship between aggregators, streamers, bundlers and platforms.
  •  Second, describing the “maximalist” scenario where platforms are heavily regulated.
  • Third, understanding the impact across the three forms of streaming business models: 

–  Transactions (Pay per usage)
– Subscriptions (Pay a recurring fee for access)
– Advertising (Free, but watch/listen to advertisements)

Putting this In Context

As I wrote last November, the key to understanding the streaming wars is to know that a huge amount of power is vested in what I call “Digital Video Bundlers”, the folks bundling multiple streamers into one experience. Here’s where they are on the map, yellow:

Image 1 Video Value Web copy

Fortnite would slot in where I put “aggregators”, though that term is more apt for streamers than gamers like Fortnite. Apple is the bundler, since they allow a user the opportunity to play multiple games on one device. Crucially, Fortnite—like many app makers—wants to be more. They want to sell additional things within its game to make more money. Epic Games also wants to set up an entire app store on its own. (Really, Epic Games has dreams of being a bundler as well.)

The conflict stems from those in-app purchases. Since Apple owns the operating system, it wants a piece of any money being exchanged on its platform. When you buy an application, you pay Apple 30% of that price. On some level this makes sense. Apple set up the platform so they should get paid for letting you on the platform.

This is a “platform tax” that Apple charges to have an application on its App Store. And Amazon and Google have similar taxes. (You could call it a “fee”, “rent”, or other term, but I like tax.) A tax for doing business on their platform. Apple says this is the price needed to run its App Store.

That’s what makes the terms of this court case so large. If Fortnite wins, they won’t just change their own terms, but alter the fundamental case law around platforms. The results could impact Apple, Microsoft, Sony, Google, Amazon, Roku and any other platform.

The Maximalist Scenario

That’s the world I want to imagine today. I’m calling this the “maximalist” scenario. It assumes a judge/judges/legislative bodies/regulatory agencies use the Fortnite case to legislate/regulate/litigate maximum concessions from an Apple, Amazon or Google on their platforms. Call this the “worst case” for platforms or the “best case” for streamers, applications and games. Say…

– A 3% cap on fees (or cap on fees up to a given maximum).
– Guaranteed carriage on non-business issues
– No tying disparate business unit negotiations together.

Essentially, in this scenario digital market places like app stores are governed as utilities. The government would be saying, “Since you have de facto monopoly power over app stores, we have to regulate your business to ensure you don’t abuse your power.” I’m not assuming this happens, but exploring the “what if” scenario where it does. 

Impact on Transactional Business Models

The impacts on the transactional video-on-demand (TVOD) market would probably be the starkest of any of the business models.

Fundamentally, the platform tax makes any external TVOD business unworkable on any mobile device. The math is fairly simple. If you’re Apple, and you own your own TVOD business in iTunes, your gross margins look like this:

Image 2 - Apple TVOD

Now compare that to an independent service trying to run a TVOD business on iTunes:

Read More

Who Will Win the Battle for the next “Game of Thrones”?: How “People” Change the Odds of Success

(This is another entry to a multi-part series answering the question: “Who will win the battle to make the next Game of Thrones?” Previous articles are here:

Part I: The Introduction and POCD Framework
Appendix: Licensed, Co-Productions and Wholly-Owned Television Shows…Explained!
Appendix: TV Series Business Models…Explained! Part 1
Appendix: TV Series Business Models…Explained Part 2
Appendix: Subscription Video Economics…Explained Part 1
Where We’ve Been)

Two weeks ago, we checked back in on the news about the contenders vying to be the “next Game of Thrones”. Let’s keep the momentum going and get right into the “People” portion of our framework. At the end, I’ll unveil my current working model for evaluating TV series.

Why “People” Matter In Every Deal

The “people” in a typical venture capital deal are the leaders of a start-up. This means the founders and the soon-to-be chief officers. Is the CEO a great technology guy, but not great at scaling? Or an operations guy who has a dynamite CTO already in place, but no marketing experience? Conversely, is the product great and so is the opportunity, but you need to replace the leadership to make the company truly succeed? (Uber/WeWork much?)

In a real world example, lots of investors in Quibi invested because of the team of Jeffrey Katzenberg and Meg Whitman. He could handle content; she’d handle everything else. (Only later did we find out they couldn’t work well together.)

As I use the “POCD framework” for evaluating TV series—a concept I dabbled with at my previous job—I’ve found the “People” portion to be extremely important. Who is the showrunner? Who is the creator? Are they the same person? Or do you need to bring in a more established showrunner to replace the creator’s vision? Does the showrunner have the ability to manager a team, or will they do it all themselves? Can the writers work with the directors to bring their vision to bring the show? Are the producers able to corral the showrunner and bring things in on-time and on-budget?

Hopefully, the answer to all those questions are positive. Meaning the creator has a great vision, the showrunner can deliver on their vision, the writers room writes great content, the directors can film it, and the production team will run everything well. The reason this is important is because, if a studio can hire the right people more consistently than competitors, they can achieve outsized returns.

Those outsized returns fall into two rough buckets. The first bucket is the “quality” bucket: Can the show runner make a good nee great show?

Well it depends. Unfortunately, most showrunners and creators are…average.

Average isn’t bad, you see. It just means that while all showrunners are great people—and indeed highly skilled at what they do—their “hit rate” is average. Which means that most of the time the shows and films they make are bombs/duds and a few times they are blockbusters. (About 1 in ten.) That’s just the math. That’s right, logarithmic distribution of returns applies to the people making shows too:

Slide03 copyAt the far right end, some showrunners can buck this trend to reliably churn out hits, but they are few and far between. Think Greg Berlanti, Shonda Rhimes, Mark Burnett or Chuck Lorre. Even then, they have more duds than you initially remember when you scan their IMDb. If either Game of Thrones or Lord of the Rings had a top tier showrunner attached, it would increase the likelihood that a show becomes a “hit” or “the next GoT/superstar” in our model. (Or if they had a top tier development exec with a similar track record. No streamer does yet.)

The converse to good showrunners is a chaotic leadership situation. If a show has lots of creators moving in and out and lots of directorial turnover, that’s a bad thing. (Though not always. The Walking Dead did just fine and it’s on its fourth showrunner.) 

My model also punishes showrunners with extensive mediocre track records. Which unfortunately is quite a few showrunners out there. For all its admiration of experimentation, Hollywood is surprisingly conservative at decision-making. Development executives hire the same writers and directors instead of trying someone new because it’s “safer”. These showrunners produce a show for a few years that is mostly “Meh” (a technical term), and then move on to another pitch/job. In the model, if I saw a fantasy series had that type of showrunner, it would increase the likelihood that a show is another also ran TV show, not the next Game of Thrones.

The second outcome is the “logistics” bucket. Can a show come out on time and on budget?

When it comes to making blockbusters, this is less important. However, if you’re running a business, given that 95% of showrunners are average, this can be the difference between profit and loss. This can be forecast, with the right data, pretty reliably. I, for example, knew that certain showrunners and directors who worked regularly with our streamer would be late or over budget when we hired them, because they were late or over budget previously. Unfortunately, this type of data isn’t public available—studios don’t make a habit of sharing when they go over budget—so I can’t use it in this series.

It is worth noting that this was part of the genius of HBO and Game of Thrones. They managed to keep that show on every single year while being the most expensive show on television. But an incredibly efficient expensive show, if that makes sense. 

(The great production houses out there—Jason Blum, HBO the last two decades, Marvel this decade—really do deliver on time and on budget, while hitting high quality bars. That’s not an accident.)

Meanwhile, most of the streamers struggle to get second seasons out within 18 months of big shows. We don’t know if these shows are “on budget” but with the way Netflix spends money, probably not? While this is important, it won’t make the model because we won’t know about financial/timing trouble until it happens.

The Results

With that explanation in mind, I’m going to be fairly conservative on evaluating these leadership teams. While picking people is really important, the benefits don’t show up on an individual show, but on a long-term/portfolio level.

Thus, I’m more worried about overvaluing “noise” than true signal in evaluating these leadership teams. (Long term, I hope to do more data analysis to better judge creative hires, but I don’t have those databases yet.) As a result, I’ll default to the “null hypothesis” more than usual.

Let’s go show by show.

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Is Antitrust the New Deregulation?: The Strategic Implications of Ending the Paramount Consent Decrees…and What Comes Next

In his very good book Good Strategy/Bad Strategy, professor and globe trotting strategy consultant Richard Rumelt makes a key point about how evolving industry trends impact strategy. After describing why military strategy is obsessed with “the high ground”, and how companies often focus on the technological high ground, he makes this point:

The other way to grab the high ground…is to exploit a wave of change. Such waves of change are are largely exogenous–they are beyond the control of any one organization. No one person organization creates these changes…Important waves of change are like an earthquake, creating new high ground and leveling what had been high ground. Such changes can upset the existing structures of competitive positions, erasing old advantages and enabling new ones…They can enable wholly new strategies.

The first example he trots out is router technology. AT&T, Apple, Microsoft and other computing companies would have seemed like the obvious contenders to develop routers for the boom in internet traffic in the 1990s. Instead, it was small–now big–Cisco Systems. That’s because Cisco understood that the value they could add was in software, and updating it regularly, whereas AT&T, Apple and Microsoft were hardware companies. They didn’t see how underlying technology trends would upset the industry.

That’s technological high ground in a nut shell. But sometimes changes in government regulation can have even bigger impacts. 

For this, Rumelt takes us to airlines. When airlines were a heavily regulated industry, wild profits could be made on long haul flights, since the Civil Aviation Board set rates at essentially “cost plus”. When deregulation happened, many airlines continued to operate as if pricing would remain at that fixed level. Instead, prices plummeted for long haul flights and profits went with them. Of course, one airline developed a strategy to thrive in deregulation and thrived, Southwest.

My read on the “entertainment business” coverage–roughly the trades, the full-time entertainment business reporters, the analysts at some sell side firms, and in particular the “techno-futurists” touting their wares online–are obsessed with the former (technology disruption) and largely ignore the latter (government regulation).

This is unfortunate and largely to our strategic detriment.

The big story of the month is that a Federal (unelected) judge allowed the “Paramount Consent Decrees” to expire, based on a decision from the Department of Justice last fall. In my weekly column, I tried to explain what could come next. But really, understanding what comes next requires understanding what came before. And that’s today’s long article. I’ll explain why regulation is such a big deal in media and entertainment. Then, I’ll try to figure out what comes next. In particular, setting the potential shape of the future so clever strategists can seize the advantage.

(Yes, this is an “American-focused” issue, and I have more and more international readers.  I don’t hate you Europe, but don’t know your regulatory landscape nearly as well.)

Government Regulation is Hugely Important in Entertainment/Media

Just go back to George Orwell’s 1984 to understand why government regulates media so tightly. He who controls the news, controls the present. And so on. As a result, as soon as mass broadcasting technology was invented, it was regulated. In America by the FCC, FTC and others; in Europe and the rest of the globe, each country regulates their media in some fashion. (The furthest extreme is China.)

Many strategic tools take this into account. The best framework for this look is the McKinsey-originated SCP framework, “Structure Conduct and Performance”. SCP stands in contrast to Porter’s Five Forces, as the conduct and structure focus on a lot of the structure and regulation of an industry can impact profits and strategy.

When you analyze entertainment as an industry, one must take the heightened scrutiny of media/entertainment into account. Take America. It’s still against the rules for foreign ownership of domestic broadcast and cable channels. Hence, Rupert Murdoch had to get American citizenship to launch Fox/Fox News and Sony is the only conglomerate without cable channels.

Two Regulatory Forces of Entertainment Media: Vertical Integration and Concentration

The Paramount Consent Decrees—and their ilk—were born from this heightened scrutiny. Going back to the dawn of film, the concern was always that giant players would box out the little guy if they controlled both the production and distribution of content. And they did! Thus, the government sued the major studios in the 1940s and the “Paramount Consent Decrees” were born. They regulated that movie studios couldn’t own theaters, with the goal that theaters should show films from all the studios/distributors. (Did this contribute to the “golden age” rise of independent films in the 1970s? Maybe.)

This impetus to avoid vertical integration extended to broadcast television and through the 1980s broadcasters had limits on how many of their own shows they could buy.

(Why are so many NBC shows on HBO Max, not Peacock? Because of those regulations.)

These specific regulations were more aimed at preventing vertical integration. And the media/entertainment conglomerates have shown that if they are allowed to vertically integrate, they will. The idea that if a firm can control everything from production to distribution, they can maximize their revenue. Indeed, AT&T was explicit that its goal in acquiring Warner Media was this level of integration.

A related issue is general industry consolidation. Notably, the American government never passed a law or bill rescinding the Sherman Antitrust Act. That bill is still the law of the land. However, since the 1980s, it’s power has dwindled and actual enforcement since the government case against Microsoft has been weak to non-existent.

While we haven’t seen this in movie studios (we’re still at six and have been for some time, maybe more counting the new entrants of the last decade), we’ve seen it in music, movie theaters, cable companies, TV channel conglomerates, general entertainment conglomerates, cellular communications and more. 

This tends to be great for the surviving conglomerates, since they can use pricing and monopsony power to boost profits. (The losers are consumers.)

The question is what comes next. The government’s logic in ending the Paramount Consent Decrees was that it no longer made sense to keep one particular distribution method separate when every other part of the chain is vertically integrated. I can see that logic. But will it continue? And what about general concentration?

Predicting Antitrust Enforcement: It’s Hard!

Let’s start with the obvious: predicting the future is really hard!

Not for some analysts, as I sarcastically write and subtweet regularly. They know who they are and they can predict with fairly precise certainty that some things will happen on vague timelines. (Usually the bigger the platform, the bigger the confidence.)

Of course, this is foolish. As of September 2016, we all knew who was going to be President. Yet, we were wrong. (Don’t worry for the folks who can predict the future knew both that Clinton would win and Trump would win, and can usually point to examples where that support both predictions.) Has the regulatory landscape altered between a President Trump regime and a potential President Clinton campaign? Absolutely. Likely, the Paramount Consent Decrees would still be in place. How different would everything else be?

Probably not as different as it could be. Likely there would be some more antitrust enforcement, but remember the Obama administration approved the Comcast-NBC Universal distribution, which was a much bigger blow to vertical integration than losing the Paramount Consent Decrees. Frankly, I don’t think a Clinton administration would have worked to aggressively break up Big Tech or Big Entertainment. (Would they have tried to stop either the Disney-Fox merger or the AT&T-Warner Media merger? Probably not, actually.)

The lesson? Be very, very, very cautious predicting the future.

If a Democratic Presidency Happens, What comes next for Antitrust?

Yet, we have to make predictions to make strategy. So let’s answer the key question for antitrust and entertainment: 

Are the Democrats in a different place with regards to antitrust enforcement now? 

Maybe. A very tentative maybe.

Between the antitrust subcommittee hearings on Capitol Hill, the broadening discontent with big tech, the rise of the New Brandeisians (and their increasingly visible boosters like Tim Wu and Matt Stoller), and the continued scholarship showing that increasing inequality and stagnant GDP growth are tied to economic concentration, a Democratic administration could maybe just finally start reversing the trends of increasing consolidation across industries in America.

Again, maybe.

If you ranked every Democratic candidate for President by their emphasis on antitrust enforcement–guess what? I did. I’m a single issue voter now on antitrust enforcement–the bottom two would have been Joe Biden and Kamala Harris. Joe Biden is a force for moderation, and he’ll likely hire traditional Democrat power brokers in Washington. In antitrust, this means lawyers trained that mergers are a good thing. Meanwhile Kamala Harris has been supporting Big Tech since she first ran for DA in San Francisco. She’s not advocating to break up those companies. From Dealbook:

Screen Shot 2020-08-13 at 2.42.04 PMScreen Shot 2020-08-13 at 2.46.25 PM

Thus, predicting the future, two key variables will determine if antitrust enforcement (with potential new rules on vertical integration in media/entertainment) changes. First, does a Democratic administration take control in November? If Trump or another Republican is in office, antitrust enforcement will stay lax. (Nate Silver’s model gives Trump the same probability right now as it did on the eve of election night last year.)

Second, when in power, do Democrats fundamentally change enforcement? For this question, look to Biden’s hiring. If Elizabeth Warren takes either Attorney General or Treasury Secretary, it’s an antitrust game-on, Donkey Kong. (Congress could also take a stand, but that’s only if Democrats control both houses.)

Third, does renewed antitrust include regulation on vertical integration? Or just industry consolidation? Or maybe regulations on platforms like iTunes, Amazon and Apple? How regulation happens is just as influential as whether or not it happens.

My Big Idea: Antitrust is the New Deregulation

Taking Professor Rumelt’s advice, I’ve been scanning the landscape more over the last couple of months to look at the future. And the “blue ocean” space in the entertainment strategy landscape for me isn’t technology–again, the futurists have it covered–but how regulation could change business models.

And this is a hypothesis I’m monitoring: 

Could antitrust enforcement could become the new deregulation?

Deregulation was arguably the biggest driver of disruption in the 1970s and 1980s. Deregulating industries across the globe from airlines to energy to telecommunications repeatedly enabled smart firms to seize new advantages. That airlines example above is a perfect example; Southwest likely doesn’t become Southwest without deregulation.

Generally, everything has been deregulated. So what comes next? My guess is a reversal of antitrust. 

Essentially, since the Borkians seized control of antitrust via the courts, nearly every merger has gone through. It’s how we went from a dozen cell phone companies to three. Notably, private equity noticed this trend in the 2000s, and their buying sprees were often to deliberately create monopolies. And no on stopped them. This trend didn’t occur in a big legal decision, but accreted over time. Its reversal would likely take the same course.

If Democrats embrace the “antitrust enforcement mantle”, it would have “deregulation-sized” implications. For example, if Congress wisely (in my opinion) passed a rule that streamers had to own 10% of their own content, I’d invest in an original production company. Letting the 90/10 rule lapse is what essentially killed independent production in the 1980s. Reviving it would be great for independent producers and talent in America.

(This is why in Europe I’d invest in original production right now. Given the requirements for local content on the streamers, independents could thrive.)

My Recommendation? Monitor Which Way the Antitrust Winds are Blowing

Thus, leaders should carefully monitor the landscape. As long as deals keep getting approved with little to no scrutiny, I’d be in an acquisition mode.

Meanwhile, if more enforcement is coming, be prepared to divest quickly and smartly. If you’re private equity, be prepared to buy either independent production companies or other pieces of talent to take advantage of more competition.

Yes, that’s a lot of hypotheticals. But it’s how I’m thinking about this. When it comes to the future, most folks are obsessed with everything digital and technology. Not boring things like contract law and economic consolidation. That’s a miss. Antitrust could be huge in the 2020s. Potentially the defining economic change in the next decade. Especially in media, entertainment and communications. Or maybe not.

Who Will Win the Battle for the next “Game of Thrones”? : Where We’ve Been

 

(This is another entry to a multi-part series answering the question: “Who will win the battle to make the next Game of Thrones?” Previous articles are here:

Part I: The Introduction and POCD Framework
Appendix: Licensed, Co-Productions and Wholly-Owned Television Shows…Explained!
Appendix: TV Series Business Models…Explained! Part 1
Appendix: TV Series Business Models…Explained Part 2
Appendix: Subscription Video Economics…Explained Part 1
)

A trope of genre fiction is the character with unfinished business. The lone wolf who harbors a grudge against someone or something that harmed his family, destroyed his life or stole his (or her) kingdom. 

July was “unfinished business” month at The Entertainment Strategy Guy headquarters. I’ve started quite a few series and let news or time distract me from finishing them.  Having checked back in on “Should Your Film Go Straight to Netflix?”, “Coronavirus Impact on Entertainment” and “The Star Wars 2019 Business Report”, it’s time to return to a series that’s over a year old, diving into a deliciously provocative topic: which TV series will make the most money for its streamer, the next Game of Thrones or the next Lord of The Rings?

Why didn’t this series get finished? Two reasons. First, I got severely distracted by explaining all the math behind my models as I was building them. This resulted in five articles that were essentially “appendices”. (Seriously, if you want to understand the economics of streaming TV, check them out.) Second, pulling the data on past fantasy TV series and movies took longer than I anticipated.

No more! Today I’ll review:

– A summary of this series so far.
– An update on the news in “fantasy TV” since last summer.

Summary of Where We Were

Cue the narrator voice for a genre series returning after a two year hiatus: “Previously, on GoT vs LoTR vs Narnia”. My challenge is about as difficult: explain a several thousand word series in a few hundred words. 

This series was inspired by the general rise in fantasy programming at all the streamers. It wasn’t just Amazon that wanted the next Game of Thrones, so did Netflix and Disney+ and even HBO itself. I framed the question as:

Which franchise will make the most money for its streamer in the future, Game of Thrones, Lord of the Rings or Chronicles of Narnia?

My initial assessment—what I call a “Blink” look—is that HBO will win. Frankly, they paid way less than Amazon. (Initially described as a $250 million dollar deal for Amazon.) Then I heard that Amazon guaranteed 5 seasons! That’s at least $1.25 billion, and maybe more. That only gives the edge even further to HBO. At first, I didn’t really consider Netflix a viable competitor. (I was wrong.)

Then I moved onto the analysis. Which means building models to see what they tell us. The basic formula is pretty simple:

(The probability of success X The revenue upside in success ) — Costs = Likelihood of money made

The tricky part is calculating all that. To explain it, I’m using the “POCD” framework: 

People
Opportunity
Context
Deal

It’s a framework from the venture capital world, but I’m applying it uniquely to TV series. Essentially, people, opportunity and context describe how much revenue a company can make, and the deal explains the costs. 

I’ll make a bespoke model for every series under consideration using the various POCD inputs to change the probabilities or potential revenue/costs. I explained the TV profit model here and here, and also explained the tricky nature of streaming video economics here. (Those last two articles laid the ground work for my series on “The Great Irishman Project”.)

Then came the distraction. Since I had built this kick-ass TV series business model, I decided to use it on the original Game of Thrones. In a big piece published on Decider, I estimated how much money I thought GoT had brought in for HBO. (A whopping $2 billion plus.) This provides terrific context for the “upside” of all these fantasy series. (I wrote a few “director’s commentaries” for this article too.)

So that’s where my series left off. But the news didn’t end just because the series was delayed.

All The News Since Last Summer

When I started this series, I focused on three fantasy series based on arguably the three most influential fantasy books of all time…

Game of Thrones prequel (HBO)
Lord of the Rings prequel (Amazon)
Chronicles of Narnia (Netflix)

 Since then a few fantasy series have come out…

The Dark Crystal: Age of Resistance (Netflix)
Carnival Row (Amazon)
His Dark Materials (HBO)
The Witcher (Netflix)

And more have been developed or are in production…

The Wheel of Time (Prime Video)
Sandman (Netflix)
– Untitled Beauty and the Beast (Disney+)

If all those qualify for this battle, we’re up to 10 potential contenders for the replacement for Game of Thrones. And that doesn’t include potential series (Disney’s Book of Enchantments and Lionsgate’s The Kingkiller Chronicles) that died in development. And I haven’t even looked at Syfy’s lineup to see what else could qualify. (The incomparable Magicians just ended after their fifth season. Pay attention to that data point for later.) 

The Specific Updates

HBO and Game of Thrones prequel

In one of the more fascinating single day development moves, HBO both cancelled one prequel series (The Long Night/Bloodmoon) and announced another prequel series about the Targaryens (set about 300 years before GoT) called House of Dragons. I could spin this as good or bad for HBO, but either way their series is still happening. Right now, HBO is saying the prequel will arrive in 2022.

Amazon and Lord of the Rings prequel

Amazon meanwhile is furthest ahead, having started production this spring in New Zealand, only to be another Covid-19 casualty. (Though I believe production is set to start production soon or already has.) Amazon was under time pressure to get a TV series in production within two years, and that appears to have motivated the streamer.

Netflix and Chronicles of Narnia

If you search for Chronicles of Narnia and Netflix, you run into a series of articles asking, “Is this thing still happening?” And no one really knows. Netflix insists it is, and Entertainment One has hired a “creative architect”, but there is no release date or known shooting schedule. Which means we’re going to drop this series from our main contenders for another lower down.

The Dark Crystal and Carnival Row 

I’d describe these two series and “came and went” at Netflix and Amazon (respectively). Like the Magicians, these two series demonstrate that not every fantasy series is a guaranteed blockbuster. Though the former was arguably more popular due to the “Netflix Effect”. Still, neither is set to be the next Game of Thrones. 

HBO and His Dark Materials

As one of HBO’s first “Monday premieres”, this series was overwhelmed by Watchmen in terms of buzz. It has a better chance than either of the two previous series at being a future Game of Thrones, but the odds of that are pretty low.

The Witcher on Netflix

And now we have a legitimate contender! Lots of folks pointed out that I should have dropped Narnia for The Witcher when I first started this series. Indeed, The Witcher may have single handedly helped Netflix meet subscriber targets by releasing right at the end of 2019. It is arguably Netflix’s first or second biggest show currently on the air. (With the acknowledgement that “on the air” is an anachronism.) In other words, The Witcher has a great chance to be the next Game of Thrones.

Meanwhile, I’m going to monitor every other fantasy series that pops up in development or production. (For example, Amazon’s Wheel of Time series has promise.)

Now that we know where we’ve been, and what’s happened since, we can move into our four-part framework for predicting which of these series will win the battle. Tomorrow, we’ll continue with the first letter in our framework, P for People.

HBO U.S. Subscribers Over Time – Visual of the Week

Inspired by AT&T’s release of HBO Max “activations” and total HBO subscribers, here’s a timeline of HBO subscribers and HBO+Cinemax subscribers over time:

IMAGE 1 Chart

If you’d like to see that in table form, along with some financial numbers, here you go:

Screen Shot 2020-08-03 at 11.13.55 AM

What about total subscribers? Again, we only have data from 2011-2017, but here you go:

Screen Shot 2020-08-04 at 9.35.20 AM.pngSome quick points and explanations:

– This data was cobbled together from random leaks, Time-Warner’s annual reports and AT&T’s earnings reports. (Links here, here, or here for leaks and here for Statista.) If you know of any I missed, send them my way.

– There is a chance that the reason AT&T didn’t release 2018 numbers for HBO, in addition to the merger being ongoing is because their numbers during Game of Thrones season 8 last spring were higher than they are right now. We don’t know because of gaps in the data, but looking at 31.4 million HBO subs alone in 2015, then considering they had 5 million digital only subscribers in 2017, that could easily have been higher than the current 36 million.

– With only 3 million subscribers having “activated” HBO Max, that service has a lot of room to grow. I’d compare that to the early days of Amazon Prime Video; it too had a lot of time to convince people to try it out, but also the free cash flow to wait. Math and explanation of activations over at Variety.

– If you want more on the financials of HBO, and discussion of their subscriber counts over time, read my article at Decider and the Director’s Commentary.

– Comparing multiple subscriber counts with different definitions reminded me of this table I built for Netflix last fall. I’ll update it this fall with yet ANOTHER definition for Netflix.

The 2019 Star Wars Business Report – Theme Parks

This is part III in a multi-part series estimating how much money Disney made off “Star Wars” in 2019. Go here for my larger series on Disney purchasing Lucasfilm in 2012.)

Introduction and Feature Films
Television
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As a tremendous Star Wars fan, I couldn’t shake the feeling that Star Wars had a rough year. “Rough” from a certain point of view. Consider…

– It arguably had the third most popular TV series in America.
– It definitely had the third most popular film in America.
– And it launched a new “land” in two of it’s parks. 

And yet…since this is Star Wars we’re talking about…we’re worried.

IMAGE 3 Bloomberg Headline 3IMAGE 2 - Bloomberg Headline 1IMAGE 1 - WSJ Headline

The theme parks were the biggest disturbance in the force. Based on hyper-charged expectations, observers expected the new park to be utterly jam packed. Instead, Disney saw a decline in total attendance at Disneyland. Stories about Disneyland being “empty”—for July—were blamed on Star Wars. 

On the other hand, Disney raised prices again, finally topping a $200 per day ticket.

It’s all worth unpacking in our continuing series “How Much Money Did Lucasfilm Make in 2019?” (I promise we’ll have this done before the year ends.) This is an extension of the big series I wrote analyzing how much money Star Wars has made for Disney compared to its purchase price. Today it’s all about theme parks, the trickiest business unit to assign value to individual franchises. 

(And also the one most impacted by Coronavirus. Unlike past articles, some of which were written pre-Covid-19, I’ll address that in the final section. As a reminder, this series is about 2019, but it does have some forward looking elements.)

Bottom Line, Up Front

In 2019 Star Wars lost about $60 million in total across the theme parks business. The parks still had big costs in 2019 to finish the lands, which hurt the cash flow.

The story is actually more positive than the headlines suggest, though. Disney was able to drive through incredible ticket price increases (the combined average growth rate is well above 6%, depending on the time period). Given that attendance stayed flat in Disneyland and had the second year over year increase at Hollywood Studios, the new lands are working. (At least, until Covid-19 crushes the top and bottom lines.)

Theme Parks – A Cause for Concern?

The performance of Galaxy’s Edge epitomizes Star Wars’s 2019. The “best of times or worst of times” for Victorian literature, or the “light side and dark side” for Star Wars fans.

As befits everything Disney launches, the buzz was phenomenal back in May when it launched. With headlines like this…

IMAGE 4 - CNN Review

That’s Frank Palotta raving about it in CNN. Other outlets and Twitter matched this hype. These positive reviews—generated from previews given to journalists when the lands were virtually empty—matched the reviews of fans. The folks I know who have visited rave about it. I myself haven’t visited because I was worried the lines were too long. And it’s so damn expensive.

Actually, those two latter points really matter. I wasn’t the only one thinking that way. By July, the word was out that Disneyland wasn’t exactly full. It turns out the price increase was doing its job and keeping folks out of the park. Which led to an article in Bloomberg with this headline:

IMAGE 5 Bloomberg Headline 3

Did Galaxy’s Edge fail then? Not really. If folks were avoiding Disneyland, they weren’t avoiding Galaxy’s Edge, which required reservations to get into for most of the summer and was packed with people. Anecdotally, I think a lot of folks skipped visiting Galaxy’s Edge last year to wait for the crowds to thin out, or for the second ride which debuted in January of this year.

That said, this website is about “business strategy” not a travelogue. From that perspective, two things really matter when evaluating the launch of Galaxy’s Edge. First, Disneyland is thinking very long term with these investments. Like 20 years long time. So if we were evaluating the success of Galaxy’s Edge in July, that’s roughly 1.5% of the time period Disney expect to make it’s money back!

Further, the larger Disney strategy with parks is not to add more people, but to space them out throughout the year while charging them more. That’s summarized by this quote from the Orange County Register.

IMAGE 6 Disneyland Yield Strategy at Parks

The goal isn’t to have a one time bump in revenue, but to establish a brand new reason for families to visit every year. Meanwhile, they are charging those fans more to attend, and selling them more things. When Bob Iger says the Star Wars expansions are exceeding expectations—as he did in the first quarter earnings report in January—normally I’d throw my BS flag. In this case, I think the numbers back him up.

But how do we quantify that?

A Reminder – Theme Parks are Devilishly Tough to Assign Value

The last time I modeled theme park revenue, I complained bitterly about how hard it was. With a film, if you know box office, you can pretty well guess at everything else. 

Theme parks are more like evaluating a streaming video library. How much value do you assign to an individual TV series at retaining customers? If a streamer watches a dozen shows and four movies in a month, that’s a tough question to answer. (And I’ve attempted this before.)

Likewise, how much credit does any single ride get to bringing someone to Disneyland? Don’t many families go every year? Or multiple times? Or on scheduled vacations? It’s not like Star Wars on its own will bring in families.

Yet, if you didn’t add any new rides, the park would get stagnant. Thus, Disneyland needs to constantly add new attractions, and balance those costs against the expected gains. These new attractions then provide fodder for marketing people, new content for fans who go often and generally keep the park up-to-date.

Further, this is a tougher analysis to make for Disneyland than some other theme parks. For example, the Harry Potter lands at Universal Orlando and Hollywood boosted attendance by up to 30% in some cases. That connection is much tighter than Disneyland, which operates at near capacity anyways.

I model those gains in two ways. First, the increase in attendance year-over-year. Second, the increase in ticket prices (which have outpaced the gains in attendance). Once we have those for theme parks at large, the tough part is just assigning value. Which I’ve done, but it’s the biggest “magic number” in this model.

(What’s a magic number? I explained that in this article, but it’s usually the key number that makes a model work but is also the hardest to model.)

The Theme Park Results – An Analysis

To evaluate 2019, then, we just need to look at visitors and price increases. The story with visitors is fine for Disneyland and great for Hollywood Studios. (For those who don’t know, the Star Wars land in Walt Disney World opened in Disney’s Hollywood Studio, the most poorly attended of the Orlando parks.)

IMAGE 7 Theme Park Attendance

For those expecting blockbuster attendance at Disneyland, the results were mostly flat. However, the people were more spread out throughout the year, which helped Disney improve customer opinion. (Indeed, by December Disney had a day where they had to stop selling tickets.)

(By the way, all these numbers come from the Themed Entertainment Association annual report on theme parks. This report just came out on July 20th, so this data is fresh.)

The story is much better for Hollywood Studios. A park that often lacked a purpose, a Toy Story land opened in 2018 and Galaxy’s Edge opened in 2019. Combined, these new lands have boosted attendance from 10.7 million per year in 2017 to 11.5 million in 2019. (And likely would have gone up again in 2020 had Covid-19 not hit.)

As I said above, the real money make isn’t increasing the number of visitors, but increasing the price per ticket. In that lens, 2019 was another great year for Disney. Ticket prices hit new highs. The quick highlights:

– The top ticket price in 2020 at Disneyland was $154, up from $43 in 2000.
– Disneyland was able to introduce a tiered pricing system, allowing Disneyland to spread out customers throughout the year.
– In just the last 10 years, the average growth rate has been 10.3% at Disneyland, and CAGR of 7.5%.

Indeed, the tiered pricing system worked so well, Disney went from three tiers in 2018 to five tiers in February of this year. Meanwhile, the Hollywood Studios prices have started to match the Magic Kingdom prices.

There is one other piece I’ve modeled which is how much guests spend at the parks. Based on reports and some general industry rule of thumbs, I’ve estimated this at $40 per ticket. However, Iger has said that Galaxy’s Edge have driven this up another 10%, so I increased that in my model.

The Theme Parks Model

Let’s take that performance and put it into the model. I updated the 2018 and 2019 numbers with the actual performance for visitors, ticket prices and consumer spending. Here’s the results:

IMAGE 8 - Theme Park Model 2020

My initial estimates for attendance were relatively close. I had guessed that Star Wars could start bumping attendance by 2% at Hollywood Studios, and that’s what happened. (While Disneyland stayed flat, which I did not anticipate.) As a result, my model increased by about $50 million over the course of 2012-2028.

Given the demand for Galaxy’s Edge, I’m still going to allocate value as I had previously, which was starting at 100% of any gains and lowering year over year. These are definitely my magic numbers, and they’re in purple at the top of the model.

The big worry comes from looking at how much Disney still needs to make on the two Star Wars lands. My model only goes to 2028, and even then I don’t think Disney will make its money back on these two parks. Here’s a comparison:

IMAGE 9 Comparison

Of course, we’re not on track for that type of year in 2020, are we?

Coronavirus and Theme Parks

This year is devastating for theme parks. With Disney owning the most valuable theme parks in the world, this is particularly devastating for them.

This doesn’t, though, invalidate the building of Galaxy’s Edge lands. A global pandemic is like a recession: we all knew it was coming, but had no idea when it would happen. When Disney bought Lucasfilm in 2012, it made the right strategic decision to build these two new lands. And again they will pay off for the next two to three decades. 

What’s that? You still want to see a coronavirus-impacted model? Fine.

Screen Shot 2020-07-22 at 10.03.36 AM

Here’s the comparison to the other two models (my model from 2018, from this year without coronavirus, and with coronavirus).

Screen Shot 2020-07-22 at 10.03.44 AM

In other words, a world with coronavirus could cost Disney nearly a $750 million dollars in value. And that’s just the Star Wars allocation. The actual costs are much much higher.

Theme Parks and Resorts: A summary

Money from 2019 (most accurately, operating profit)

It’s a pinch misleading, but likely Star Wars still didn’t make any theme park money this year as it spent big to launch both new parks. It almost broke even, as I allocated most of the price increases in 2019 to Star Wars Galaxy’s Edge. As such, I have Disney losing about $60 million dollars on Star Wars theme parks in 2019.

Long term impacts on the financial model and the 2014 deal

That said, the overall year was positive for the model since the price increases and attendance increases will likely help drive even better profitability in the future. In particular, the spending increase per customer really helps the model long term. 

At least, until coronavirus ruined everything.

I think Covid-19 in the average case will still cost Disney about $750 million dollars when it comes to Star Wars. Mainly this comes from the time it will take to get attendance back to pre-coronavirus levels. Though my margin for error is huge with this forecast.

Brand Value

Longer term, I don’t think Galaxy’s Edge will hurt Star Wars brand at all. If anything it will reinforce the brand position. Despite the lack of crowds, the reviews have been phenomenal for Galaxy’s Edge. That’s the piece I can’t look past. Even as the films disappoint (some) folks, the fans still want to relive and experience Star Wars in the real world. By all accounts the park delivers on that.

An Aggressively Moderate Take on Coronavirus and Sports

On Wednesday sports in America made their triumphant return! “The MLS Is Back” tournament declared that, well, the MLS is back.

This follows the June return for most of European soccer, starting with the Bundesliga and continuing to the English Premier League, the most popular global sports league.

Yet not all is sunshine and roses. The leagues are back…but the fans aren’t. And won’t be for the rest of the summer, if not longer.

So how should we think about Coronavirus and Sports? Well let’s bust out the EntStrategyGuy’s patented Covid-19 impact system to analyze it. We look at impacts on Supply, Demand and Employment (if relevant). We also try to separate what we know from what we don’t (and is usually guessed at).

(Curious for my “moderate” take on how Covid-19 will impact the rest of the entertainment industry? Here are my takes on…

The Entertainment Recession
Theaters
Pay/Linear TV
TV and Film Production

Supply

If you’d asked me in 2012 how sports teams made their money, I’d have told you extremely confidently that they made their money by signing huge TV sports rights deals. That’s what I kept reading in the news, after all. Then one day a famous NBA GM spoke at my school and disabused me of that notion in a way that’s stuck ever since. And understanding that explains the trouble for sports leagues over the next year or so.

Yes, the headline buzzy numbers about multi-year deals for TV rights are indeed true. Sports rights for TV have grown by about 4-5% per year for the last two decades. (Math here.) That’s tremendous growth! And hence why everything related to sports has also grown in value. (The price of teams, the salary of players, the size of sponsorship deals.)

But it isn’t the entire story. The second or first biggest chunk of revenue for nearly every sports team in America (and I believe globally) is ticket sales. That’s fans attending live games. It depends on market size, but not the way you think. Larger market teams like the Lakers, Dodgers, Golden State Warriors, Dallas Cowboys and Knicks have even more of their revenue as a percentage from local ticket sales than smaller market teams. This is because seats to sporting events are a constrained inventory for a popular product often in very economically wealthy areas. That’s a recipe for high prices.

This explains why the sports leagues, initially, were more willing to postpone the season than play games in front of empty arenas. Empty arenas meant permanently lost revenue and the NBA, NHL and MLB desperately wanted to avoid that happening. (This article says all live revenue is about 40% of the NBA’s total revenue.) They waited as long as they could, but now it’s clear sports in front of fans aren’t happening this year. 

And since it’s better to get some revenue than no revenue, the sports leagues–sans the NFL–have figured out how to bring competitions back without fans. (Good for them!) This means sports in America will be back on live TV soon enough. (Technically the PGA is already back in the US and as I said above the EPL and other European leagues are already back.) 

Still, this leaves the situation with ticket sales unresolved. The owners and commissioners desperately want that other huge chunk of revenue back.

Forecasting when fans can return to arenas or stadiums is fairly difficult. It’s worth comparing them to theaters because the different situations imply different economics. With theaters, I remain convinced that there are measures that can reduce transmission dramatically: have everyone wear masks, keep a checkerboard pattern in design, have a reduced congestion plan when leaving. (This is definitely a minority take not shared by public health officials, so take it for what it’s worth.) Moreover, with a new film, a theater can flex it onto many, many screens simultaneously, meaning you can support a checkerboard pattern while potentially achieving mostly the same volume of tickets sold.

This is not the case with sports. If you’re an NFL team, you only get 8 home games. NBA team gets 42. MLB gets 424 (it feels like). And so on. You can’t surge it into more stadiums or games. (The very thing that drives up prices in the absence of coronavirus hurts the sports leagues here.) Moreover, unlike theaters, stadiums are filled with choke points where people will crowd. (You’d have to have folks arrive 2 hours early or more to avoid crowding at ticket entrances.) Not to mention, a checkerboard seating pattern won’t make sense because you’d have to rearrange nearly every season ticket holder. Yikes.

This means that to have sports return with live fans, you are much closer to needing a full therapeutic cure or vaccine before sports can safely resume.

When will that happen? Well I don’t know. And it’s the biggest variable–and potential hit to the bottom line–for sports teams. However, if you assume we will one day cure or eradicate coronavirus, the supply problem will eliminate too. In the meantime, I expect players, owners, stadiums and all adjacent dependents to take a hit to their salaries and values.

As for the “Bubble” situation, I’m reasonably confident the leagues will find ways to play the games in largely safe ways for the players. It will evolve and folks will get sick, but the revenue draw is too high to avoid.

Demand

Here’s the good news: all signs point to sports fans clamoring for the return of their favorite sports. The Michael Jordan documentary did blockbuster ratings for ESPN. Same for the NFL draft. Even golf is breaking ratings records!

Everyone is trying new things during this quarantine. Some habits may change. But abandoning sports doesn’t look to be one of those things.

Of course, the flip-side to the above supply scenario is that maybe fans will abandon live sports for fear of the coronavirus. This is a risk, but feels low probability. First, sports will likely be constrained by having a therapeutic or vaccine before they return. Unlike theaters, which will test audience demand for their product, I don’t see live sports in arenas this year. 

Second, I don’t think coronavirus has turned us into a world of shut-ins. If anything, folks want to flee their homes more than ever. Admittedly, this is my opinion. It’s an unknown and I could be wrong. A pessimists could say it’s as likely fans flock back to stadiums as they abandon them in perpetuity. Where specifically it lands on that spectrum is up in the air.

As fro demand for live-sports on TV, again I expect it to be high. If folks are in perpetual shut downs with concerts, live-sports and many outdoor gatherings prohibited, live sports rights should be widely consumed. Not to mention, the slow down in TV and film production has meant fall will be light on new content. Sports can instantly step into that void.

Employment

I do see lingering pain the labor market related to stadiums staying closed. Entire ecosystems are built around attending live sporting events. Everyone associated with working that from ushers to security to restaurant staff will be hurting until sports return.

Even the players, as I mentioned above, will likely see a lot of pain. As long as salaries are a percentage of basketball related income, then the players will see cuts if fans can’t comeback in 2021. 

Overall, I’m less worried about the impact on the economy from sports compared to either TV/film production or movie theaters, both of which employ a lot more people.

Bonus: The Breaking of the Bundle?

The one variable that is neither “supply” nor “demand” is whether the absence of live sports will cause a further deterioration of the cable bundle (and maybe satellite bundle in Europe) that props up the current exorbitant sports rights fees. I’ve seen this thesis floated out there fairly commonly over the last few months. (If not directly, then via the rhetorical question headline.)

If prices to be paid are any indication, the answer is no. The prices for live sports rights haven’t decreased even during coronavirus–they’ve continued to go up actually–meaning sports will definitely be the anchor propping up cable and satellite providers in the near term. I’d recommend considering this mostly wild speculation. Folks have been predicting the end of TV since the beginning of this decade. And it’s still kicking.

However, the true test will be the upcoming earnings season. After all, the bundle won’t die because companies let it, but because customers finally opt out. That will be the true final test.