Category: Analysis

Is Disney Is Throwing Away Its Money Generating Machine? Thinking Critically About Deficit-Financed Business Units

(Welcome to my series on an “Intelligence Preparation of the “Streaming Wars” Battlefield”. Combining my experience as a former Army intelligence officer and streaming video strategy planner, I’m applying a military planning framework to the “streaming wars” to explain where entertainment is right now, and where I think it is going. Read the rest of the series through these links:

An Introduction
Part I – Define the Battlefield
Defining the Area of Operations, Interest and Influence in the Streaming Wars
Unrolling the Map – The Video Value Web…Explained
Aggreggedon: The Key Terrain of the Streaming Wars is Bundlin
The Flywheel Is a Lie! Distinguishing Between Ecosystems, Business Models, & Network Effects and How They All Impact the Streaming Wars

If Disney+ has done nothing else, it has given the Disneyphiles tons of extra documentaries to consume. Making of Disneyland here. Insights into props here. More behind the scenes here.

My wife and I have watched some of “The Imagineering Story” documentary and there was a tidbit in the first episode about Disneyland’s launch which has stuck with me:

Disneyland was profitable by the end of the first year.

To compare Disney to the company that led the introduction to last week’s article, if Amazon opens a “BezosLand” in Seattle, do you think it would make money in its first year? 

Heck no!

It would probably never make money. It would be created as a unique bonus for Prime subscribers who could attend for free. We would never find out how much money they make and if there were rumors BezosLand was losing billions every year, they’d leak to a few favorite journalists that the “data” makes it all up for them in selling more socks.

It feels quaint what Walt Disney did in the 1960s: He saw a way to create value—have amusement parks that were clean and cutting edge that emphasized decades old beloved characters—and when he launched it, he was quickly proven right. This is capitalism at its finest: for his bet he earned lots and lots of money. Shareholders still are benefitting from his foresight.

Far from being quaint, Walt Disney was actually on to something. For most companies making money is key. This is true even in the streaming wars. But we’ve lost sight of that fact because so many companies entering the streaming wars with plans to lose oodles of money doing so. 

This is part II of my three part exploration of “flywheels” in the streaming wars. Last time I defined my terms. Next time, I’ll use the principles of this article to look at a few other new streamers. Today, the lesson is all about why making money still matters, even in streaming. And Disney’s future is the case study.

Summary

– The best way to evaluate any business is still Net Present Value.
– Even in flywheels and deficit-financed business units, the goal is still the same: to invest money in net present value positive endeavors.
– The risk of a “flywheel” with a deficit-financed component is that you simply lose money, not start the flywheel spinning.
– Disney provides the case study in this: if streaming can’t/won’t make money, their flywheel of toys, parks and resorts won’t make up for it.
– Thesis: The best business model makes money at every point, not “flywheels” that lose money in one area to make money in others. This is actually the forgotten lesson of Walt Disney.

A Reminder about Net Present Value

Fortunately, the key to evaluating flywheels is the same as the key to evaluating all businesses: 

Net Present Value

Or NPV. The short hand for calculating “net present value of the discounted future cash flows”. That’s a finance-y way of saying that a company should invest in businesses that promise to make money. Again, we’re talking Finance 101 here. But it’s worth repeating because I’ve seen many businesses or ventures praised in the streaming world who likely won’t make money, even on a net present value basis. (They use narratives, not numbers. And strategy is numbers.)

Read my explainer for this concept here. (And no website can do it justice, you really should read your finance textbook to understand the details.) But for a reminder, since I use it a lot, 90% of NPV decisions look like this:

– You invest a lot of money at the start. (Capital expenditure)
– You slowly start to make some money. (Revenue)
– You still have some ongoing costs. (Cost of goods sold.)
– You subtract the two, and keep the remaining. (Profit)
– You take those future sums and account for the time value of money. (Discounting)

Since we’re talking Disney, here’s a look at my big series on how much they made from Star Wars toys:

IMAGE 2 - Discounted Star WarsThe problem I keep running into with streaming video is folks seem very willing to ignore these two core principles when evaluating the streaming wars. Most money losing/unknown streaming or digital video ventures are excused because frankly we don’t know. Since we don’t have the numbers—and it’s hard to calculate them—we use narratives instead.

If you take nothing away from this article, remember that even a flywheel can be evaluated on NPV terms. It’s components can, nee MUST!, be evaluated on NPV positive terms as well. Otherwise, companies run a huge risk.

“A License to Lose Money”: Explaining Deficit-Financed Business Units

Consider:

– Prime Video (money made unknown) isn’t around to make money, but to sell more socks, thus spoke Jeff Bezos.
– Apple TV+ (will spend $6 billion on content) isn’t around to make money, but to sell Apple devices and Apple Channels.
– AT&T (will spend at least $3 billion on HBO Max) isn’t around to make money, but to sell more cellular subscriptions.

In these cases, the explanation is that video is a means to an end. At extremes, defenders of the “lose money in media to make money elsewhere” even call it a “marketing expense”. 

It’s worth dwelling on the concept of “marketing expense” more. Because in the previous world—the old fashioned/traditional business world—it wasn’t like you could just label something as marketing and spend as much as you wanted on it. Indeed, marketing was always taken out of your operating profit. So the more you could trim marketing while keeping sales the same, the more you trimmed! That’s what advertising is the first thing to go in an economic downturn.

Despite the branding as marketing expenses, there is real money being spent on video. These are real products from real business units. Not simply “marketing”. We need a new name, which is why I’ve come up with:

Deficit-Financed Business Units.

DFBUs. Yes, I was in the Army so I acronymize everything. It’s worth unpacking the phrases to see why these definition makes so much sense. 

First, a venture is “deficit-financed” if the plan is to never make money on it. Or to make money, but so far in the future that current financing is still net present value negative. Thinking about this abstractly explains why. Say I offered you a billion dollars a year starting in 2050. The key is you have to pay me $20 billion now. Should you do it? Heck no! You could just invest that $20 billion and probably double it multiple times before 2050, making more than enough to pay yourself $1 billion per year.

That same scenario is a microcosm of “net present value”. Should Apple invest $20 billion right now to make $1 billion a year in 2050? Heck no! Just keep it in cash or cash equivalents. No matter if it is marketing.

Second, I like business unit because it really distinguishes between streaming video companies  and a marketing expense. Plopping down several million dollars for a Super Bowl ad could be a net present value negative decision. (And should be evaluated in those terms.) But we should distinguish from genuine efforts at marketing versus creating brand news businesses, that in most other contexts would need to make money. 

The Riskiness of DFBUs: You Don’t Make Actually Make Money on the Flywheel 

My worry for companies and investors is that they don’t insist on looking at these business ventures with an NPV lens. As a result, DFBUs become a license to lose money for big tech companies. They may even grab market share—that’s certainly the case with all of them—but that doesn’t mean they actually make money.

That license usually has a justifciation, though. If we lose money on this part of a flywheel, can it make more money elsewhere? In other words, the key question is:

Can Deficit-Financed Business Units Turn a Flywheel?

This is really the supposition that has fueled the rise of streaming video. If you have a true flywheel or ecosystem, getting more customers in will help cause it to spin. That’s expressly Jeff Bezos’ logic. Apple’s too. AT&T even.

The answer? Maybe. It depends on the flywheel.

My thesis is that they can, but they are risky and hence rare. Losing money is easy for a business to do. Allowing someone to lose money means they will. It makes their thinking sloppy. Moreover, it’s easy to get the tradeoffs slightly wrong, and you deficit-financed business unit just becomes a money losing hole.

And I think I can illustrate this with Disney. If you’ve been following me on social, you’ll know that my household has been into Disney’s Inside Out recently. Which is appropriate to call back to, for this scene:

That’s how I’d describe DFBUs, they’re shortcuts that should be labeled danger. The current danger-disguised-shortcut facing Disney is losing money on streaming (Disney+, ESPN+ and Hulu.) to make it on extra toy sales. The rationales I’ve seen justifying Disney’s move into streaming reinforce this money losing narrative. I’ve seen the same arguments used by the tech conglomerates trotted out for the House of Mouse. For example, I’ve seen Disney’s streaming efforts explained as…

– They’ll lose money on streaming to get folks into the “ecosystem” of theme parks and toys.
– Disney has a flywheel and streaming video will bring more subscribers into the flywheel.
– Disney should disrupt the theatrical business model to own the customer relationship in streaming. 

So all the buzz words. Of course, since strategy is numbers, the question isn’t what narrative you employ to justify losing money, but whether or not the investment will make it up in the long run. So let’s quantify—for what I think is the first time on the internet—the actual numbers behind those narratives.

The Messy Financials of Disney

One of the first explanations for Disney’s push into streaming was so it could “sell more toys”, just like Jeff Bezos sells more socks. But take a gander at this Hollywood Reporter image I love trotting out:

IMAGE 3 - THR Disney 2018

Toys—from here on “consumer products”—is a small, small part of Disney’s overall operating margin, isn’t it?

Let’s dig deeper. I approach a company’s financials like a hostile witness on the stand. What are they trying to hide? What don’t they want me to know?

For Disney, I looked at their financials going back to 2009. And a huge red flag jumps out, which should be a clue for the quality of the toy business:

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Read My Latest at The Ankler (Paywall): Are Superhero Movies Doomed?

If you don’t follow me on social or subscribe to my newsletter, you may have missed my latest guest article at The Ankler (behind a paywall). It’s a short one, but a goody. 

In it I compared Netflix’s recent Hard R action films, and their “datecdotes”, to Netflix’s other big swings, like Bird Box and The Irishman. It’s behind The Ankler’s paywall, but worth it to find out about my provocative title. Not to step on the toes, but I don’t see how $15 a month streaming will ever make $200 million production budget feature films profitable. And this has ramifications for superhero, sci-fi and even animated films. Even if you don’t buy that thesis, it has a good comparison of all their films recent performance.

Check it out!

The Flywheel Is a Lie! Distinguishing Between Ecosystems, Business Models, & Network Effects and How They All Impact the Streaming Wars

(Welcome to my series on an “Intelligence Preparation of the “Streaming Wars” Battlefield”. Combining my experience as a former Army intelligence officer and streaming video strategy planner, I’m applying a military planning framework to the “streaming wars” to explain where entertainment is right now, and where I think it is going. Read the rest of the series through these links:

An Introduction
Part I – Define the Battlefield
Defining the Area of Operations, Interest and Influence in the Streaming Wars
Unrolling the Map – The Video Value Web…Explained
Aggreggedon: The Key Terrain of the Streaming Wars is Bundling

This is probably the most popular image for business school students about Amazon. Heck, anyone describing Amazon has probably used this image. 

Amazon FlywheelIf we’re supposed to be neutral observers of businesses, you can’t help but notice after a moment of reflection how insanely positive this take is. Man, Jeff Bezos can really sell his positive vision and have it repeated universally.

If you were really cynical—hey, I am—what would the pessimistic version of this flywheel look like? The “Flywheel of Evil” if you will…

Screen Shot 2020-06-24 at 9.21.08 AM

What changed? Well, first, the idea that you “sell more things” is great, but if you lose money on every transaction, that’s “sub-optimal” in business speak. Or bad in human speak. And Amazon does in many cases. 

To fund these losses, you need to start a really successful company that is totally unrelated to your retail business or its membership program, which is where Amazon Web Services comes in. There’s an alternate history where an Amazon without AWS (cloud computing) doesn’t take over retail because it doesn’t have a cash flow engine driving its growth. (In that timeline, Ebay becomes our overlords.)

Even more potent, though, is combining already low prices with Amazon’s decades long refusal to pay local taxes. Could you point to the continued imprisonment of poor Americans to online companies not paying local taxes? Maybe! (As local tax bases erode, some communities turned to police forces to extract rents, like in Ferguson, Missouri. Seem relevant to our current times?) Amazon does pay some local taxes—now—but only after it became an advantage to them in furthering their monopoly power.

Now that it has this “flywheel” rolling, Amazon uses its size to both crush new entrants who want to compete and to punish suppliers, capturing all the value from their product creations.

Which flywheel is “right”, then? Well, both actually. Both describe valuable methods for how Amazon grew to the size it did. Some of those methods were good for customers; some were bad for society. You can’t tell their story without both.

Screen Shot 2020-06-24 at 9.21.39 AMWhat’s the lesson? Flywheels are simple whereas reality is complicated. As tools, flywheels are fairly inexact. They’re not even really tools, but narrative devices we use to help make sense of a complicated world. In other words, a “heuristic”. As behavioral economists like Kahneman and Tversky taught us, heuristics are useful, but can carry pitfalls if we aren’t careful.

What’s the point for the streaming wars? Well video has become a spoke on multiple company’s supposed “flywheels”. Everyone from Disney to Amazon, but most critically Apple last fall. Whether or not these were actual flywheels was less important than merely invoking the term and using it to justify nearly any amount of spending. 

Let’s call this another key piece of “terrain” in the streaming wars. The “Forest of Flywheels” if you will. The problem is the business and entertainment press has been fairly sloppy with our language when it comes these types of endeavors. Due to this sloppiness, we’ve allowed a lot of companies to launch video because they’ll “lose money on video to make money on X”. 

Today, I’ll explain the key terms. In my next article I’ll critique deficit-financing in particular. And then I’ll finish it off with an analysis of some of these business models to show their potential strengths and weaknesses. 

Summary

– Flywheels are the most overused term in business, and it’s important to know what different terms mean.
– Ecosystem is probably the most commonly confused term with flywheel. Ecosystems are also rare.
– A true flywheel is a self-perpetuating cycle of growth that is incredibly rare in practice.
– As such, in pursuit of flywheels, we’ve seen many digital players launch money-losing video efforts. I call these “deficit-financed business units”. And they’re one of the biggest factors in the streaming wars.

Defining Traditional Business Strategy Terms

You’ve read articles bemoaning jargon in the workplace. (This New York Magazine piece is the latest in hundreds on the subject.) Even I just denigrated “sub-optimal” above, a term I really don’t like. Still, I don’t take that extreme of a position on business nomenclature. Often, jargon really does have a role in explaining new concepts.

The problem comes in overuse. That’s what is currently happening with “flywheel”. It’s almost become synonymous with “successful business”. But it’s much more specific than that.

So let’s define our terms, so we can better understand what is and is not a flywheel.

Business Model 

It turns out if you want to stymie business school students, just ask them “what is a business model?” Indeed, they’re taking classes called “Strategy and Business Models”, but answering, “What is a business model?” can stump them. I’ve seen it.

At its most basic, a business model is a plan or process to make a good or service and sell it for more than it costs to make. Make a widget for $1, market it for $1 and sell it for $3. Or replace widget with service. The model is how you make money. On a financial statement, this is usually called the income statement. When I build a “model” for this website, that’s usually what I’m building. 

How do business models relate to flywheels? Well, you can have a successful business model that isn’t a flywheel! It’s just a good business. In the olden days, you would have probably described the dividend producing stocks as just good businesses. They don’t have huge growth prospects, but they still generate a return on investment. Cable companies in the 2000s fit this bill. They had good business models, but were absolutely not flywheels.

Where it gets complicated is usually a given company is actually a collection of many business models. Arguably for every product they sell. Or you have distinct models for different business units in the same conglomerate. Which is actually a good transition to our next definition.

Business Unit

Most companies on the S&P 500 aren’t just one business, but multiple types of businesses lumped together. This is the reality for most conglomerated businesses. When analyzing a compnay, it’s key to differentiate between its overall success and the success of its various pieces.

Amazon is a perfect example here. Retail is one business unit. But then it also has media businesses from live streaming to streaming to music. Then it also sells devices like Amazon Echo. Oh, and it has Whole Foods groceries too.

And then there is the cloud computing (AWS). Which I called out above. And it’s worth noting just how distinct that wildly financially successful enterprise is from the rest of Amazon’s consumer-focused retail efforts. It’s a business-to-business service that is powered by lots of fixed capital expenditure data warehouses. It barely relates. Yet, it’s part of Amazon.

How do business units relate to flywheels? Well, flywheels often fail to take into account entire business units. Take the Amazon flywheel of success…it totally ignores AWS! For years Amazon survived because it had an incredibly high margin business in cloud computing that could provide necessary capital that enabled Amazon to continue building its retail business. This also kept Wall Street happy.

That makes the Bezos flywheel not just wrong, but almost negligently wrong. 

It’s business malpractice to point out that a flywheel helped Amazon to succeed if you don’t include AWS’s role in propping up the balance sheet!

I would add, many of the “flywheel” charts you see out there are often just describing a company with multiple business units. (I’ve seen this with Disney and Epic Games.) Every business can benefit from owning multiple business units, from lowering costs or providing learnings. That used to be called “synergy”. Now we call them “flywheels”.

Ecosystem

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AT&T Really is Going All In, Amazon is the New Standard Oil, and Extra Thoughts on the HBO Max Launch

HBO Max launched last week! A $4 billion endeavor that required a monumental merger to make it happen. Can one measly column capture all my thoughts on HBO Max’s launch? 

Of course not.

So here are my extra thoughts, strategic insights and, in a first, a mail bag of questions/comments from folks on Twitter. (Be sure to follow me here or connect on Linked-In here.)

Strategic Thought – AT&T Really is Going “All In”

If you favor bold, decisive action in strategy—and I do—then AT&T deserves some applause. Two specific readings have helped push me further on this take, both quoted in my recent newsletter.

First, writing in TMT and Chill, anonymous Twitterzen Masa Capital makes the case that AT&T has made a big financial commitment. AT&T is devoting billions just to HBO Max, in addition to whatever they were going to spend at Warner Media, TNT/TBS, and HBO to make original content. That’s a financial spend many analysts said AT&T would never do.

Second came from Kirby Grines in his latest newsletter. AT&T isn’t just serious about spending money, but owning the customer relationship. That’s why AT&T “spent” the legitimate customer dissatisfaction of last week. Long term they know that controlling the data, identity and experience of customers will pay off long term.

In particular, last year Grines called out how bad Amazon Prime’s UX is for third party content. Frankly, Amazon doesn’t treat third party content well. So if you’re spending billions making content for HBO, is it worth it for Amazon to use your content simply to build their platform, while not even making it easy to use? Strategically, that’s a huge no.

(I mean, has Amazon launched customer profiles yet for Prime Video? For years they didn’t have that basic feature.)

It comes down to this: the streaming wars are divided into the major players and the niche players. Niche players will go to bundles like Amazon, Roku, Apple channels and Hulu and others. The major players will insist on their own apps. 

So yes, AT&T really is all in. Because they insist on their own app.

Media Coverage – It Really Was Anemic

Are you really a major player if you launch and no one cares? 

That was partly my take from the coverage. Yes, the usual Twitterati were obsessed by it. We always would be. But did regular America care? Not the way they cared about Disney. To use one example, the Byer’s Market newsletter put HBO Max news “below the fold” on the days up to and after launch. Facebook/Twitter drama beat it out.

Hey, bring some data to this, EntStrategyGuy. What does Google Trends look like?

IMAGE X - Google Trends

Yikes. Maybe no one can catch up to Netflix.

My “Business” Review of HBO Max?

Given that the HBO Max that just launched is essentially the HBO Max we were promised last fall, I could just push you to my column form last November. 

Now that’s it’s launched, do I have any priors to update? Sure, with the caveat that a lot of “reviews” of a new streamer are often excuses to just find examples to reinforce preconceived biases of whatever narrative we came in with. My process is always the “5Ps” of launching a streaming product: Product (Content), Product (UX), Placement (Distribution), Pricing and Promotion, which is how I’ll look at it.

Product (Content)

From everything I see, this content really does rock. That was my take in the fall and using the service I still see that. From Harry Potter—the big surprise—to all the HBO content to lots and lots of movies, this is a strong lineup. (Also, kids content may be a secret source of strength.)

Warner Media also decided to have the content move in and out of the HBO Max catalogue. I’ll be honest, I love that decision. Given that customers can’t identify all the Warner Media content the way they can with Disney’s content, this will provide a lot of reasons for folks to keep their subscriptions. 

Last point, since content is the most important piece, is that the loss of all the Warner Media/HBO content will be felt on Netflix, Amazon and Hulu. It’s such a big library that all the other libraries will get weaker.

Product (UX)

It worked fine for me, though I had my gripes. The UX doesn’t let you turn off autoplay. For me, I can’t stand kids content that autoplays. It invariably causes fights with my daughter, especially if I miss the opportunity to disconnect. It also didn’t have any playback flaws, which is to be expected since HBO Now made up the backbone of the system, and it’s worked for years.

As for everyone else, some folks didn’t like it; others found it easy to use. So where does that leave me? Honestly, I’m gonna call it a “we don’t know” since that’s my call for most UX. 

Also, I’m beginning to suspect that customers fall into two categories on UX: Those who want the unending scroll and those who don’t. Netflix and Prime Video will appeal to former; HBO and Disney+ to the latter. More to come.

Placement (Distribution)

If we’re judging on results, not the “why”, which I explained in my last column, this is bad. Getting near 100% distribution is key to reaching the most customers. As I just said, they’re in a majority of connected houses, but not over 80% as Disney was. While they’re on lots of cable providers, video games and Apple devices, the Roku and Amazon devices is a big black hole.

Pricing

It’s expensive, that’s for sure. And we’re in a discounted streaming world right now. So this has to count as a negative as well. Is it a negative for HBO customers? No, but likely anyone who isn’t already “borrowing” HBO from a parent isn’t going to start paying for it at this price point.

Promotion

They were never going to be able to promote as Disney could, but overall they’ve done a strong job. Not to mention, ad rates are so low right now I suspect they’re getting a terrific bang for their buck.

Add it all up?

Well, HBO Max has the content, but it’s expensive and not widely available. So not the worst launch, but definitely far from perfect.

The Lack of Datecdotes Is Deafening

This exchange on The Verge’s podcast is a must read for Julia Alexander’s dogged pursuit of a nugget of data. Anything to indicate it’s working. 

IMAGE X - Julia Alexander Quote

Did she get any data? Nope. Meanwhile, the Sensor Tower data is all over the place. And no one has any leaks yet.

So my judgement? The lack of a datecdote on performance is probably a bad sign. Though it’s just the second quarter and we have a lot of game to play still.

Mailbag!

First up, Andy’s Very Good Tweets asks

Why has HBOMAx not just taken over the whole DC Universe library? DCU can’t be making enough to justify two streamers, especially with so much overlap, so what’s the sense in sharing licensing on many (but all) DC titles and only Doom Patrol from the originals?

Let me start by saying I have no inside information so can’t answer concretely. But this is the most glaring error on the platform. My second or third click on the website was the DC universe button, and the general impression was, “Eh.” Call it the inverse of when I clicked on the Marvel button.

My gut is that HBO Max wants to do the opposite of Disney and rotate content in and out frequently, promoting it when it comes in. Add to that the fact that Netflix still owns the rights to a lot of CW shows that streamed in the last decade, and potentially a lot of the best content just isn’t available. 

Last note on this is that DC Universe is also an amalgam of both video content and digital comic book subscription. Which means Warner Media can’t just kill DC Universe and port it to HBO Max. Which means it’s tricky.

Second up, Masa Capital asks about the biggest immediate strategy change by HBO Max

Takes on the decision to accelerate the release of Love Life. And if that means HBO Max may be considering stepping off the no #BingeAndBurn promise or not.

I bet this is a Jason Kilar special. Most digital media execs preach at the alter of binge model, and I could see Kilar coming in and insisting on this. The other potential explanation is that a lot of content was in production and crushed by Covid-19. Meaning, normally they would have so many originals they could space it out. As is, they need to keep folks on the site until new content arrives.

Are they right? Well, you know I love the weekly release if a show is a hit. But lots of customers don’t. (This could be the second big divide between customers: there are those who love the binge and those who hate it.)

Penultimate Point – The Big Negotiating Hold: Amazon is the New Standard Oil

Last week, I wrote a bit about Spotify’s monopoly play, and I’m returning to that well this week. Not because I want to focus on this issue, but because you can’t understand why Amazon is doing what it is doing without seeing the monopoly implications. It launched Prime Video using profits from AWS. It launched Fire TV the same way, mostly getting expansion by essentially giving away the sticks for free.

Now, Amazon wants its ROI on Fire TV.

That will come as a tax on applications on its service. This tax is passed on to both creators/talent—who will make less money—and customers—who have to pay more because of the tax to be on Amazon’s platform. 

The counter is that Amazon is providing a unified platform. As one Twitterzen pointed out, it’s very convenient to have all your TV shows in one place. This is true.

Of course, if that’s the value Amazon is providing—in other words, the service Amazon offers—Amazon should actually pay streamers to be on its platform. If the value is bundling all the services, then they need to entice the streamers into that user experience. That’s what happened to cable providers. To get channels onto their services, they had to pay the channels a set amount per customer.

So why aren’t they? Because they’re betting on market power, not value creation. If they have market power, they can outlast their competitors. 

Last Point – AT&T Wants to Be a Platform as Well

I speculated this back in the fall, when John Stankey rolled out his thoughts on HBO Max and I’m more convinced hearing the executives talk over the last week or so. 

Part of the reason AT&T won’t just cave into Amazon Channels is that someday they’ll have AT&T channels as well. Heck, AT&T TV is essentially that, just not streaming focused. Yet.

It’s a monopolist’s world, we’re just living in it.

My Unasked for Recommendations for Disney Streaming (2020 Edition)

Do you remember last year before Disney+ launched and I had this series of recommendations for how they could catch up to Netflix? They were…

1. Go dirt cheap on the prices. [Check]
2. Schedule weekly releases for adults [Check]
3. Bundle with other streamers [Check]
4. Get all your key library content on board. [Check]
5. Give it for free to all theme park attendees [No]
6. Release weekly ratings. [Hell no.]

You might have trouble finding that article. Why? Because I never actually finished it and published it. If I had, I could keep pointing back to it for how right I was. 

(Instead, I published an article worrying that Disney+ wouldn’t have the Marvel films or half the princess movies. Oops.)

Given that last week was a bit of big news for Disney+, I think it’s worth providing Disney another round of unasked for recommendations. Rebecca Campbell—the new head of streaming—definitely doesn’t need my advice, but everyone else might find it interesting to know what I would do if I were offering my strategic advice.

I’ll focus on streaming here, with the knowledge tha the entire Disney enterprise has a had a bad few months. It’s almost the perfectly designed disaster to hurt Disney’s business. But given that forecasting the course of a pandemic is pretty uncertain, I’ll wait to opine on Disney’s business model for a pinch.

Recommendation 1: Add a local streamer to your “bundle” overseas.

This was the “a ha” that got me to finally write this article. Two weeks ago, I called my biggest story of the week Disney’s decision to pause international growth plans for Hulu. In these cash strapped times, Disney is worried about the costs of Hulu internationally. Some of this is marketing, some is product, but most of it is likely licensing claw backs. Or foregone licensing revenue. 

As I wrote two weeks ago, I’m not sure a streamer built around the FX stable of content will be a huge winner internationally. American TV shows don’t travel as well as folks think, and really “prestige-y” type shows travel even worse. (This isn’t a uniform pronouncement. Some of the Fox TV studios shows will travel. Like How I Met Your Mother. Just not all.) The Fox movies will have some appeal too, though a lot of the best have been pulled for Disney+ already.

The challenge is that if Disney doesn’t launch Hulu internationally, it will lag Netflix for potentially ever.

What to do? 

Well, keep bundling. The bundle with ESPN+, Hulu and Disney+ has already been successful in America. Likely internationally it will have some appeal. That’s a no brainer.

Even better, though, is to add a local streamer to each bundle. If that’s Hulu’s biggest drawback—lack of local content for adults—don’t opt for the expensive proposition of licensing it all, just partner with a local streamer. Essentially make them the fourth pillar in a country-by-country bundle. Especially if ESPN+ isn’t launched globally for sports. 

Even though we in America don’t realize it, nearly every country has a local streamer trying to fight the streaming giants like Amazon and Netflix. Disney could look like a hero by bundling that content with its other shows. Hulu then gets to come along for the ride. And overall, my gut is this strategy would be cheaper than trying to license local content territory-by-territory. 

Consider this too, an extension of what’s already working. Disney+ was tied closely to Hotstar in India. (Which Disney got in the Fox deal.) They’ve also partnered with local companies for distribution deals like with Canal Plus in France. My pitch is to just take that strategy even further with more bundles in more territories. Even if it means giving local partners most of the benefit in the short term, in the long term this will help with adoption.

Recommendation 2: Seriously, give away Disney+ to anyone going to a theme park.

Let’s re-up my biggest recommendation from last year. It’s super expensive to go to the Disneyland or Disney World. Disney+ is very cheap. So just combine the two and if you buy two tickets to a theme park you get 3 months of Disney+ for free. Those free trials are worth it.

(Yes, parks are closed. They won’t be forever.)

Recommendation 3: Add another “F-BOSSS” Level TV Series. My pitch? Modern Family

Back in January, I coined the acronym “F-BOSS” for the big TV series that were being clawed back from Netflix or secured for multi-hundred million dollar licensing deals. (Friends, The The Big Bang Theory, The Office, Seinfeld, Simpsons, South Park) Now that the biggies are off the table, the smaller series are coming off the board too.

Disney, for its part, has mostly moved 21st Century Fox TV series to Hulu. Like How I Met Your Mother. However, 21st Century Fox has a big one coming up that isn’t as big as those others, but could be. That’s Modern Family. Which just ended its last season.  Back in 2013, Fox licensed it to USA network for a big sum. I looked but can’t see when that deal comes off the board. But when it does, either Hulu or Disney+ is its all but guaranteed landing spot. 

Of the two, I’d say that Modern Family should go to Disney+. This isn’t a no brainer by any means, but that’s because of how hard it is to fit content onto the Disney+ brand. The challenge is Disney+ content needs to be both family-friendly, but also adult-appealing. That’s a hard balance to strike.

I considered some of the older “TGIF” series like Home Improvement (distributed by Disney back in the day, and made by Touchstone, which is owned by Disney). Disney should get that series to Disney+, but it probably isn’t a game changer. It is too old to move the needle. (So they shouldn’t’ buy out whatever rights is keeping it off streaming early.) (The other series on TGIF like Full House or Family Matters aren’t worth it even to license from Warner Bros.) I considered some of the Fox animation series, but they feel too edgy. (It’s still funny The Simpsons made the cut when you think about it.)

This makes Modern Family the key choice. It’s got lots of episodes (250) for folks to binge—the main requirement—and both customer/critical acclaim. (High viewership for a long period of time and multiple Emmy wins.) It does touch on some politics, but overall isn’t controversial enough to cause too much hot water with family groups. (It’s on syndication nationally and on USA Network right now.) So for me, this is a big content priority.

Side Note: About the “Big 5” Pillars

I’m not sure they have a name, but the “Five Big Pillars” is what I’m calling these:

Screen Shot 2020-05-26 at 5.06.44 PM

These pillars are both a blessing and a curse for Disney+. Blessing because these pillars have shown that they can launch a streamer. Hence, Disney getting to 50 million subscribers and beyond. It’s an incredibly strong brand defined by these five pieces.

The curse is that they limit what Disney can do going forward. Already, The Simpsons is above the pillars in most applications because they don’t fit one of the four categories. Same for some of the Fox films like Ice Age. Is it Disney? No, but it’s somewhere on Disney+. 

But really the limitation crystallized for me in Disney passing on the Studio Ghibli content, that will appear on HBO Max tomorrow. Studio Ghibli movies are great, but where would Disney put them? I’m not sure they know either, and not saying it’s the only reason but they passed on it for licensing.

If Disney does add a big piece of additional content, like a Modern Family, they may need to rethink these five pillars. 

Recommendation 4: Provide a major product improvement

I probably use the Disney+ app more than other streaming app. My daughter isn’t allowed to use the iPad unsupervised, and we watch one short film before the bath. So I’ve scrolled the app a fair bit. Meaning I know it’s limitations and positives better than any other (iPad) application. (I caveat “iPad” because I don’t know if they are problems on other operating systems.)

So it’s time for Disney+ to roll out a new feature that doesn’t upend the entire user experience—folks hate that—but provides more functionality. My pitches?

– Make the Disney animated shorts their own section. And make it easier to scroll and search for new shorts to watch.
– Add a “Sing-a-long” version. And make it easy to find the songs to watch as their own thing.
– Fix the “additional content” to be more like a DVD-bonus features. 

Side Note: Disney Needs to “Proof Read” Its Content

If you’re a heavy user of Disney+, you notice little things. My guess is they are mistakes that are the result of automating the entire process. Which is key for a streamer to get launched, but sometimes a human touch can fix the errors. Meaning someone would need to manipulate the metadata to make sure the service is as accurate as possible. For example…

– The timing for the length of short films includes foreign language credits. Which means a Pixar short appears to be 9 minutes long, but four minutes are credits. That needs to be updated.
– A shocking amount of ratings claim that a given Disney short features tobacco use. (The only authentic one is Steamboat Willy.) I have no idea why this is the case.
– Some content still only has one version. For example, Mickey and the Beanstalk is only included in Fun and Fancy Free, when that version features a nigh unwatchable ventriloquism scene. So on one hand, they have this content. On the other, it isn’t the best version of it.

Recommendation 5: Get NFL Sunday Ticket on ESPN+ somehow.

NFL Sunday Ticket is the killer app that gets ESPN+ mandatory adoption. Will this be pricey? Yes. Will Comcast and AT&T still want pieces of the NFL? Yes. Is the least likely recommendation? Yes.

The NFL is the sports straw that stirs the content drink. As it is, ESPN+ doesn’t have enough reasons for folks to subscribe. Plus, Sunday Ticket keeps from cannibalizing linear views as Disney can pitch to MVPDs that it is just adding Sunday Ticket as DirecTV did before. 

Coronavirus Impact on Entertainment – Film and TV Production

Over the last few articles, I’ve avoided the “C word”. Not that one, the Covid-19/Coronavirus words. If some of you are like me, you both devour coronavirus content, but sometimes find yourself sick of reading any more of it. (Every so often I just delete all my news podcasts that mention Covid-19 or the economic impacts. I need a break.)

I’ve been trying to strike the right balance between ensuring we cover one of the most important events of American history, but also focusing on all the other stories as well. Since my column last week was mostly non-Covid-19, let’s pull out the crystal ball to ask: how will the coronavirus impact the production of filmed entertainment?

Before we get any further, you can read my two previous analyses of the future of entertainment in a post-Covid-19 world.

The Entertainment Recession
Feature Films and Coronavirus
Pay TV

Compared to many analysts, I’m very uncertain about the future. If I could predict the future accurately, I wouldn’t be writing articles. I’d be trading stocks. (Read my first article to understand my methodology and approach.)

Still, we can sketch out some details and try to separate some overreactions from the proper reactions. And since we don’t have clean “demand vs supply” issues the way other parts of the value chain have, forecasting production changes should be a bit easier. (Customers are usually the problem in forecasts.) I’ll break out my analysis into two time frames, long and short term for how Coronavirus could impact production.

(By the way, I use “Hollywood” as a stand in for all global film production in this article.)

Long Term – Somewhere Between Two Extremes

Given my uncertainty, I’ll review all the scenarios using the good old Hegelian method. I’ll explore both extremes and try to guess where the middle of “the impact on production” could land.

Thesis – Coronavirus will make “Youtube-style” the norm.

I’ve seen a narrative that since Covid-19 has enforced universal lockdowns, this somehow represents the triumph of self-produced content. In the future, we won’t need fancy set ups and teams of people to produce content. It turns out that a celebrity sitting in their home can put out a content in HD that looks pretty damn good.

Call this the “triumph of Youtube/Twitch” narrative. (Yes, I loathe narratives.)

In some cases, constraints become the style. With lots of folks watching vlogs and Youtube videos from home, and everyone staring at Zoom cameras, people are used to this style. It permeates the culture.

We’ve already this style invade traditional broadcasting. The broadcasters have mostly embraced the Youtube style for live shows. Disney’s Sing-a-longs in particular had fairly strong production quality, all from at home. Same for Saturday Night Live at Home editions. And Hollywood Game Night’s special worked really well for a remote production.

Expand this view to Instagram/Snap Chat/Tik Tok influences on video, and you could argue there is no future for traditional Hollywood-style production.

I’d emphasize why “filmed from home” productions look so good. While I’ve used the term “Youtube style”, the distribution method has nothing to do with it. Instead, the reason why filming from home looks so good is because cameras have gotten so, so, so much better than even ten years ago. Or more precisely, they’ve gotten much much smaller. 

 

This was fueled by the push to have phones on everyone’s cameras and the push to shrink the technology down. In turn, Go-Pro made fantastic cameras that are also incredibly small. And surprisingly easy to use in production. Like an actual camera. Or to mount in different places. As a result, professional cameras have also gotten cheaper and cheaper to rent or buy.

Combined with increasingly powerful home computers, anyone can shoot, edit and produce their own TV shows or films from their own home. Even do post-production work in many cases.

So that’s that. Everyone can shoot from home and it will look great.  

Antithesis – At home productions still have some key flaws.

How can you tell a production is cheaply made nowadays? Well, the sound is no good. 

For all the advances in video recording, the advances in audio have been much slower. As a result, poorly made student films tend to have bad audio, but can still look fantastic.

Some of the at home productions have solved this, but a few have run into issues. (The musical ones have also likely featured a lot of recording at home separately from the video with high quality equipment. It is fairly easy to do audio recording—ADR—at home with the right investment in equipment.) 

Lighting is another issue. Properly lit films are hard to do well, but make a genuine difference to the final quality. And folks can tell. Make-up is another hurdle. Folks just aren’t great at putting on “TV make up” and that shows up every so often.

Finally, and obviously, the limitations on the number of people in one place has been stark. And no one has loved that experience. It’s still really hard to overcome issues of lag, which are functions as much from computing power as they are functions of raw physics, in some cases. So while everyone is making it work, it just works even better if two people are in a room talking to each other. Or even better a whole group of people.

It also helps to have a team of people behind the camera too. Even with the advances of camera technology, having someone behind the camera to dynamically move it just looks better. That’s why productions in many cases have stubbornly held on to teams and teams of people. Reality shows taught everyone two decades ago that you could make a show with a limited crew of a producer and some cameras. Same for independent productions that have made it by on shoestring budgets for years.

So why do armies of people still exist? Because in most cases they add value. The grips get better lighting and the sound folks record better audio. Add a camera man to free up the director. Then an AD to balance the demands of the lighting and camera. Then add another AD to organize it all. Plus makeup, costumes, sets, props, special effects, actors, craft services. And producers to you know “produce”. Suddenly, you have an army of people. 

So that’s that. Eventually traditional production will return.

Synthesis – The Longest Term Impact is Somewhere in Between

Likely, the future is somewhere in between. Which is the “aggressively moderate” take on it.

When studios can get people back together in the same room, they will. That’s a no-brainer. If studios decided years ago that they preferred smaller teams, they could have made it happen. Guerrilla filmmaking or independent filmmaking isn’t new. Again, reality TV has been making very cheap shows for two decades now for cable in particular.

Contrariwise, Hollywood can see change but not embrace it. Until it is forced to. (Example: streaming.) Will coronavirus cause a complete rethink for how many folks are really needed on set to make a TV show?

In the long term, maybe. Hollywood—and Bollywood, Nollywood, Hong Kong, European and anywhere that makes movies—production isn’t monolithic even now. My gut is this will further expand the divide between huge blockbuster productions—super hero, sci fi and fantasy films and TV series—and everything else. If dramas can be made with less people, they probably will be. Meanwhile, most reality production is probably about as cheap as it can go.

In most cases when production can go back to what it was before, it will. Broadcast multi-cam sitcoms will go back to multi-cam and single-cam will stay single-cam. All the folks making their own shows from home will continue to do so. And when it’s safe to go outside, the low-budget productions of the world will return too. And the blockbusters will be blockbusters. Some folks may try to innovate on the margins, but it’s uncertain if they’ll succeed.

Short Term Impacts on Production – Definitely Smaller Productions in the next 3-9 months

That’s the higher level impact, in the near term there will be some inescapable impacts on productions, whenever they get the green light. You’ve probably read about these impacts, here’s my take on who will benefit.

– Less shooting on location, which is good for production hubs. I don’t think talent will want to travel for fear of airplanes. While I mostly think worries about travel will be overcome quicker than folks expect, in this case, an over-abundance of caution will limit travel. (For instance, traveling on an airplane is actually a low likelihood of transmission.) This will be good for Los Angeles and New York in the short term, assuming demand returns. Potentially Montreal as well, but likely not as much for New Orleans, Georgia or eastern Europe.

– More shooting in soundstage and controlled environments, which is good for studios. If you’re not traveling, and worried about moving around, studio lots provide a controlled environment with centralized testing. While this is generally good for the studios, owning a studio lot isn’t a cash cow business anyways.

– Limited number of people on set, which is bad for support staff. Given the demands for testing everyone on a production, studios will likely limit the number of people to keep headcount down. This should limit costs slightly. (And studio execs/producers won’t be allowed to just hang out on set as much.)

– Fewer shows in front of live studio audience, which is bad for the vibe. Which you know if you watch any late night show. But shooting in front of live audiences will follow the reopening of live events. I’m more bullish on theaters, but could see studios being more risk averse than theaters. 

Bottom Line: So When Are TV Shows Coming Back? 

The question is how long these changes last. I’m more bullish in the upside case then most, but if you expect lockdowns to last for 18 months—which would ensure a depression as deep as the 1930s—then that’s how long they will last. However, like lots of things as people get used to opening up, as long as new outbreaks don’t flare up, they restrictions will gradually decrease. 

Again, this is just my read on the situation, given the huge amount of uncertainty. And studios/productions will keep innovating under restrictions to get as much done as possible.

Will this hurt content output? It’s tough to say for sure. 

Given how many different countries and how many different time frames for when lockdowns could be lifted, it’s tough to know when the slow down will end. (Everything being shut down is definitely delaying shows being made in America.) Meanwhile, other countries are figuring out how to restart production, which will encourage others to start back up.

Netflix is a Broadcast Channel – Implications, Insights, Strategic Impacts and Criticisms

My most popular article of the year is clearly this buzzy headline titled,

“Netflix is a Broadcast Channel”

Why? Since Netflix is the sexy topic in entertainment—a titan of digital subscriptions—my article probably got some clicks because it’s an “aggressively moderate” take on Netflix. (A lane I’ve decided to lean into as heavily as I can.) Most headlines go the opposite direction. 

If your thesis is that Netflix “will become TV”, I basically say, “Uh, not really.” Netflix won’t become TV, they’ve become a broadcast channel. Take a look for yourself.

Image 1 - EstimatesBut that last article was missing, in my mind, the most important part of any in-depth analysis. Which is all the implications from the data. Today’s article will fill that gap. I’ll start with the implications and strategic impacts of this data look. Then, I’ll discuss some potential criticisms of the approach.

Implications

Implication – Netflix is a Broadcast Channel…So They Can Launch Shows

That’s the upside take. A show like Love is Blind or Tiger King doesn’t just become a hit, it becomes buzzy sensational show that seemingly everyone is talking about. When you’re a broadcast channel, your top shows can do this. Fox can launch The Masked Singer or Lego Masters that still gets a lot of coverage. Or NBC can have This Is Us.

This is why being one of the top players provides so much of an advantage to incumbents. When you do put out something good, it is immediately amplified. This is why Netflix can drive so much of the conversation, while Amazon/Hulu seemingly can’t. (No matter how many times Bosch super fans recommend it.)

IMAGE 3 - Total Viewing Q4

Implication – On the other hand, Netflix is *only* A Broadcast Channel

If I took this list of broadcast Primetime ratings, you’d likely shake your head and say, “Hmm, decline of TV is right!”

Image 11 Anonymous 1

Image 12 - Anonymous 2Honestly, did anyone else know that Altered Carbon season 2 came out? Me neither. Talk about a season 1 to season 2 decline. (Read my take here for why this is important here.) Obviously, the difference is growth. Netflix and Amazon are growing, whereas linear TV is decaying.

But we can learn something from these ratings. They explain why even some “buzzy” Netflix shows can stay anonymous in the conversation. Take Outer Banks right now. If you polled a majority of Americans, I bet they have never even heard of it. Which is fine for Netflix. If you polled a majority of Americans, another big chunk wouldn’t know that The History Channel has a successful show in The Curse of Oak Island. 

In other words, even being a successful broadcast channel in today’s day-and-age is just enough to launch some shows. The rest fade quickly, even for streamers. And even “hits” can be unknown by most of the population.

Implication – Amazon Prime Video is a Cable Channel

That’s just what the data says to me. Besides their most recently launched show—Hunters, about Nazi hunters in New York—every other show is pretty old. In other words, based on their ratings they’re a decent cable channel. The question is if providing one decent cable channel is worth the potential billions Amazon is spending. 

(Side insight: Hulu is a cable channel too.)

(Side insight: How many Amazon series are about Nazis? The Man in the High Castle. Hunters. At this point, I’m worried Hitler will show up in The Lord of the Rings.)

Implication – The Broadcasters Aren’t That Far Behind and Netflix May Be Losing Marketshare

Which could be good news for all their streaming services. The folks at Hub Research do some pretty good surveys on a quarterly basis and one slide in particular caught my eye. 

Hard not to see how valued the broadcast channels still are. Which begs this question: Is Netflix worth more than ABC, CBS, Fox and NBC put together? Moreover, can all the new streamers based around those broadcasters compete to take more Netflix market share? I think it’s possible. If not likely.

Meanwhile, as Netflix has told us before, they are 10% of TV viewing in the United States. (From earnings report in 2018 and 2019.) Here’s my Tweet from when I first saw the Bloomberg article:

Yet, this analysis only has them at 5.9%. While the difference is likely chocked up to different measurement systems, it could be a trend. We’ll monitor.

Strategic Recommendation: Understand Segments Better

My favorite strategic frameworks of all strategic frameworks is the 4C-STP-4P marketing framework. Specifically the middle part where business leaders evaluate “Segment-Targeting-Positioning”. My read on the landscape is that a lot of the streamers are targeting the same segment: coastal elites.

Looking at these Nielsen ratings, though, there is a big untapped segment. Overly-stereotyped, I’d call it the “middle America” segment. (A real segmenting would need more data than this cursory look.) They’re still watching broadcast TV. But as the streamers spend more and more money competing for the same segments (Hulu, Netflix, Prime Video, Peacock and HBO Max all arguably are), it gets more and more expensive. Peacock made the most noise about being broad, but even their originals are light on typically broadcast shows. Same for HBO Max.

Implication: The decay is super real in linear TV

To pull off my analysis, I collected 4 years of annual Nielsen ratings. (Collected every year by Michael Schneider of Variety.) Despite adding more and more channels tracked every year, the ratings are declining as you’d expect:

Screen Shot 2020-05-13 at 11.40.42 AM

And that decay looks like it’s accelerating. Of course, this complicates the “Covid-19 will accelerate all changes” thesis, since the rate of decay was already growing. Meanwhile, as I mentioned last time, if you add streaming and linear, you get to 94 million, so the folks watching TV is growing with population. This makes me trust the Nielsen data more. 

Content Implications: Original versus Licensed Battles

The biggest open question—the debate point that riles up the most folks online—is whether or not Netflix’s original content strategy is working. Does this Nielsen data settle the issue? 

Hardly.

First, as Andrew Wallenstein pointed out on Twitter, when it comes to TV series, the Netflix “Originals” win hand down. 

Or do they?

As I wrote in my weekly column, some Nielsen data came out about the top ten licensed series on Netflix in the first quarter. (Here’s a “What’s On Netflix” article on it.) The gist is that licensed shows are still the most consumed TV series when you account for the entire quarter, not the most recent day’s viewing. As Kasey Moore points out, That 70s Shows has never made a Netflix top 10 list, yet it was third in total viewing. Clearly, new shows get lots of viewers initially, but series with lots of episodes drive more total viewership.

Second, when it comes to movies, the picture is out of focus. The top film in early March was Spenser Confidential. The top film in May, so far, is Extraction. So original films can claim the top spot and not let it go. (I’m writing a deeper dive on Hard R action films on Netflix for another outlet.)

That said, unlike the TV series, a bunch of licensed movies make up the rest of the Nielsen list. And have continued to do so. This makes me a little nervous for Netflix’s strategy. Especially considering that they launch something like 20 original movies every month. Their hit rate for those movies looks low, and licensed films are leaving the platform. (Also, kids films do show up on this list, which I’ll discuss later.)

Content Implications: The Decay Is Real

This is something I mentioned last time, when trying to calculate how much additional primetime viewership happened. (I made an estimate for every series not on the Nielsen top ten.) Netflix Originals drop quickly out of the top ten after premiere. Usually within two weeks or so from launch. The oldest show on this list is Locke & Key. This isn’t because folks are consuming all the content, but because they’re switching to something else. (Unless Netflix top ten lists exclude TV series that are older than one month from release, but I don’t know that for sure.)

Justification: Everyone Should Estimate Netflix

I can hear some silent critics out there. “Hey, EntStrategyGuy, you’re just guessing here, right? This is an estimate? Not facts.” The answer is yes, this is an estimate.

Of course, when you hear someone in the media commentariat opining about Netflix, they’re making estimates too. I’m thinking specifically of hyperbolic talk about Netflix on podcasts by so many reviewers or opinion makers. They’re making estimates of Netflix’s size, power and reach, just not explicitly. 

But because they don’t have an actual estimate, they use their gut. And often that gut goes wild. By some of the discussion, you’d think Netflix was 100% of TV viewing in the United States.

Meanwhile, there is a strategic rationale for making this type of estimate. Especially if you work in a strategy or content planning or marketing or any role in the business of studio, production company, streamer or network. If you don’t know how well your competitors are doing, you can’t properly plan. Unfortunately, I’ve seen more firms that don’t make well grounded estimates than firms doing proper competitive analysis.

So I fill in the gap. For free!

Evidence/Arguments Against My Thesis

Here’s is another great public service I provide that separates me from some other media analysts: I’m willing to criticize my own work! How rare is that?

Kids viewing vs Non-Kids Viewing

A huge variable this analysis doesn’t/can’t account for is kids viewership. Kids are such a small portion of the audience that they won’t crack Nielsen’s time specific viewership. This has historically been true on broadcast and cable too.

Yet, as others like Richard Rushfield have speculated before, a huge portion of Netflix viewership is kid driven. Even has high as 60%. Traditional TV, I don’t believe, has ever seen viewership percentages that are that large. Which could throw off the entire comparison I’m making.

All of which would imply that my argument that “Netflix is a broadcast channel” is too generous. I assume that Netflix’s percentage of all streaming TV viewership is the same as its percentage of all primetime viewership. If Netflix over-indexes on kids viewership, then it’s percentage of primetime viewership would go down. 

Without more data, though, we can’t know either way.

Or the Reverse: Netflix Has Higher Primetime Viewership

This is another argument I saw. Basically, some folks thought Netflix actually does better with adults so the day-part to primetime analysis doesn’t make sense. I couldn’t find any any data to support that, but the great thing about my estimates is if you want to tweak them, you can.

How Do Sports Impact This Analysis?

It does and doesn’t.

(This great comment from the excellent sports mind Steve Dittmore asking this question:

Yes, a TON of broadcast ratings are due to sports. Here’s the top 15 highest rated shows in broadcast from last year:

Screen Shot 2020-05-13 at 12.11.49 PM

It’s a lot of viewing. 26 of the top 50 shows in primetime were sports. And you can see the orders of magnitude higher viewership for something like the Super Bowl. Unfortunately, I don’t have the specific Nielsen data to answer this question for Steve.

On the other hand, Netflix doesn’t have sports. Which means it will never get these ratings in the first place. That’s a potential advantage fro DAZN or ESPN+ to get mindshare for Netflix. (In other words, it’s hard to become TV without sports or news.)

This Data is Out of Date From a Pre-Coronavirus World

True and sort of irrelevant as far as I can see. If you told me a vaccine was delivered by aliens tomorrow, and you wanted to know how viewership would look post-lockdowns, I’d rather have data from before the lockdowns started than during them. It’s more representative of what a viewership world will look like after the fact.

Also, why certain industries are gaining during lockdowns, it appears as if the market leaders are actually gaining less than their smaller competitors. In shopping, Target, Walmart and Shopify users are up more than Amazon. And it looks like Disney+, Hulu, linear viewing and Prime Video are up more than Netflix in terms of overall growth.

The 2019 Star Wars Business Report – Toys

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

I started this series in January. Do you remember back then? Before the world turned upside down? Reflecting on how much money Star Wars made in 2019 feels almost like a waste of mental energy. Who cares how much Disney did or didn’t make in 2019 when the whole company may go bankrupt by the summer time? 

Perhaps, if we understand the underlying drivers of Disney’s business model, we can better understand how quickly they may go bankrupt or return to normal. And what they can do in the meantime to prevent it. Previously, I’d estimated the performance of the feature film and television business units in dollar terms. Today we move onto “licensed merchandise”, which is my term for toys, apparel, games, and anything sold in stores. 

I’ll discuss the narrative around licensed merchandise, review my top and bottom line estimates, and briefly touch on the impact of coronavirus on toy sales.

(Nomenclature: I’ll use consumer products, licensed merchandise and even “toys” interchangeably in today’s article. Yes, when I say toys I mean everything from shirts to furniture to video games to actual toys. Also, when I use “licensing” I don’t mean content licensing, but licensing for consumer products.)

Licensed Merchandise: The Missed Opportunity of 2019?

If Star Wars fans had a complaint in 2019, it’s that this little guy…

IMAGE 1 - Baby Yoda

…wasn’t available to purchase. I saw quite a few tweets speculating that this spectacular failure was worth potentially BILLIONS to Disney. (Don’t worry, toys are on their way…so long as Covid-19 shutdowns don’t delay them.)

Well, it wasn’t. Which you’d have known if you read my first article on “licensed merchandise” for Star Wars back in 2018. Star Wars on the whole generates between $2-3 billion total retail sales for Disney every year. (With a one time boost in 2015 due to The Force Awakens.) It’s unlikely that one—admittedly excessively “toyetic”—character would have doubled that. 

Even if he had done really well as a toy property, the whole “Baby Yoda” saga reveals some important learnings about toys in general and in the Star Wars universe specifically.

– First, toys in particular aren’t a quick game. It takes Disney (or any toy licensee) months to design, approve, and then manufacture toys. And then put them on a boat and sail them from China (mainly) to the United States. This is why even as Baby Yoda blew up, Disney couldn’t spin out new toys quickly.

– Second, toys (and lots of merchandise) aren’t as lucrative as the headlines usually suggest. Take those retail sales I just mentioned. Those become the “revenue” line for retailers. The toy companies only get the “wholesale” line, which is about half the retail take. Disney, on the other hand, only books 5-10% of the wholesale total. Which is still a lot! But an order of magnitude less than the total retail numbers suggest.

– Third, Star Wars merchandise had already burned retailers in the 2010s. Even if Disney had made Baby Yoda merchandise despite Jon Favreau’s desires, retailers would still have been skeptical. The huge boost in toy sales in 2015 when The Force Awakens came to theaters, burned retailers when Rogue One had anemic sales. I heard from quite a few retailers they were stuck with excess merchandise after Rogue One—when the $5 billion in sales didn’t repeat—so a lot of merchandise sat on store shelves. As a result, retailers dialed back orders for Solo and The Last Jedi.

– Fourth, is Star Wars merchandise for kids or adults? On one hand, kids. Obviously. Look at all the toys and young children wearing Star Wars shirts. On the other hand, look at all the adults wearing the shirts too. Adults are tricky for licensees, as I’ve mentioned before, because they aren’t as lucrative as children. And more finnicky/less reliable. Lots of folks speculated that the reason The Force Awakens generated such a one time boost in merchandise sales was because a lot of adults snapped up merchandise, but didn’t continue into Rogue One.

All of which leads into another “best of times; worst of times” summary of licensed merchandise. Star Wars is huge in the consumer product game, but it’s uneven and possibly trending downward.

Licensed Merchandise – My Estimates on The Top and Bottom Lines

Merchandise sales tend to be one of the harder business lines to estimate for a specific franchise or property. Studios don’t usually release the specific numbers, but the industry trade License Global does release an annual ranking of top content licensees, with some data for companies. Sometimes, specific franchises are called out. This historically happens in May, but last year was delayed until August. (It looks to be delayed again.) In the interim, I’m usually left to guess based on historical data.

The good news is that for toys and merchandise, they don’t have quite the lumpiness that you see in films for evergreen franchises like Star Wars. Other film-driven franchises like say Minions or Trolls see peaks and valleys for when new films come out or don’t. Non-film driven toy properties have similar steady state or peaks and valleys depending on whether they are evergreen or not. However, Star Wars has had a few decades of steady, multi-billion dollar retail sales. Its a safe assumption to assume that continues.

Thus, my toy model is fairly simple. Not a lot of bells and whistles and mostly extrapolating the trend line based on whatever has been publicly reported and then assuming it holds steady. There is still some uncertainty even in the publicly reported numbers because the inter webs have quite a few toy numbers for Star Wars, many of which are contradictory. (Wikipedia for example is wildly inaccurate.)

Let’s start at the top line, total retail revenue:

Screen Shot 2020-05-04 at 12.10.31 PM

First, there were quite a few estimates, as I just mentioned, that The Force Awakens saw a boom in retail sales to $5 billion. However, I lowered that number dramatically after reports that retailers were burned by Rogue One over-ordering. Indeed, even in Disney’s annual reports in 2017 and 2018 they blamed lower sales of consumer products partially on Star Wars.

 

The question is whether or not I think 2019, with The Last Jedi and The Mandalorian, saw a huge boost in sales. Based on the handwringing about Star Wars not resonating with kids, and the fact that another Disney property got most of the attention by stores (Frozen II) I think it did, but nowhere near the 2015 level. And yes, Disney said in their last earnings call that Star Wars and Frozen helped contribute to a big Q4. Hasbro—whose fortunes partially rise and fall on Disney’s fate—said the same thing. So we can’t untangle Frozen from Star Wars, but likely both were up fairly well.

Add it up and here’s my take. 

Screen Shot 2020-05-04 at 3.02.18 PM

The total revenue for retailers was likely around $3 billion dollars. I could see it swinging 20% either way. Of that, Disney likely took home $150-300 million. My estimate is towards the lower end—5% of retail sales—but some folks have said that Disney with its dominant position can demand better royalty rates on wholesale goods. More like around 10% of retail sales. So that’s why the range exists. The good news for Disney is that $300 million is basically a successful blockbuster domestic box office. That’s a great revenue stream to have! (And consumer products have pretty healthy margins as well. The costs are mainly for making the films and TV series in the first place.)

The worry, for Star Wars watchers, is how this fares going forward without another movie until at least 2022 (if not longer with the Covid-19 impact on production).

The Impact of Coronavirus on Licensed Merchandise

I should do a deeper dive like my other two looks at Coronavirus, but I’ll say quickly that I see two hold ups. First, if factories are shut down in China or elsewhere, that will delay toy production accordingly. Many toys have pretty long lead times, especially when bought in bulk, so I could see some delays impacting this process. This is even more true for plush or stuffed animals, that have stringent safety measures. Apparel can churn faster since laser printing has decreased run times considerably, and even on-shored a lot of US production.

Second, if films are delayed, their tied in toy sales need to be delayed too. This makes all the tricky scheduling complications even more difficult.

The question is whether the coronavirus impacts toy sales more broadly, and that I have no clue. I could see arguments on both sides:

More toy sales. With kids stuck at home, parents buy them toys as a distraction element. And they’re still consuming content like they were before, just not feature film content.

Less toy sales. Well, the lack of birthday parties could be killing the toy industry. That’s where lots of toys are purchased. Plus, despite Amazon/Walmart’s dominance, the closure of retail sales isn’t completely offset by digital shopping. Add to that a potential global depression, and toy sales could easily be a victim. (Just losing 5% of sales is enough to really hurt the industry.)

Add them up and I’d be more worried about toy sales than optimistic. But like all my Covid-19 thinking, I am incredibly uncertain.

Consumer Products Impact on Brand Value

As a reminder, as well as calculating the money made in 2019, I’m putting it into context of the Lucasfilm deal from 2012, and the future brand value of Star Wars.

Money from 2019 (most accurately, operating profit)

Well, I just covered that. Another $225-300 or so million added to the ledger for toys, apparel, video games, and such. 

Long term impacts on the financial model and the 2012 deal

I will point out my “discounted time value” though, because it’s the part people forget the most often when saying, “Man, what a great deal for Disney.” It was, but not just because the box office was high. What I’ll point out is that, in terms 2012 dollars, making $225 million in bottom line revenue “only” translates to $142 million in 2012 dollars. In other words, about 3.5% of the total price of the deal ($4.05 billion) was earned back in toys just this year.

Moving forward, the fact that Star Wars won’t have another film until 2022 (at the earliest), could cause an even steeper drop off in licensing revenue going forward.

Brand Value

The last question is whether the merchandise business as a whole built brand equity or detracted from it. This is almost all value judgement, and I have to say I don’t think the brand was hurt by not having Baby Yoda merchandise. Did Disney miss an opportunity to build some brand equity? Yes, but that’s not the same as hurting the brand equity. 

A Final Caveat

When I put these numbers out there, I should put a caveat on how to use these numbers. These aren’t actual sales or profit and loss statements from Disney. If I had those, I’d say so. (And if you have them, please share!)

Instead, these are my estimates. Which some can and have dismissed as “just my estimates”. I can also imagine the strategy teams inside Disney saying, “Oh man, he’s so off on this or that number in the analysis.” Sure! Of course I am. Any estimates are more wrong than they are right.

My defense is that this is my strategic estimate. When I was doing military intelligence, it’s not like Al Qaeda in Iraq or Jaysh Al-Mahdi or the Taliban gave us their number of fighters and locations. Right? That’s for them to know and us to estimate, and plan accordingly.

This estimate is the type of estimate I’d hope—but doubt they are—big studios like Universal or Warner Bros are making about their competitor Disney. In the battle of franchises, it’s worth knowing who’s doing well and who isn’t. That’s the type of analysis I’m trying to put out here.

Final point: I also provide my estimates in real numbers, unlike some other prominent strategy voices. You win and lose on the bottom line, and that’s the estimates I’ll give you. Strategy is numbers after all.

Netflix is a Broadcast Channel: Comparing Streamers to TV Channels in an Age of Nielsen Data

One of my big frustrations with the “debate” over Netflix is how little we know. That’s a gripe I share with a lot of folks. 

One of my big frustrations with coverage of Netflix is how seldom folks try to step into the gap and estimate data points for Netflix. In this gripe I’m mostly by myself. I understand that some journalistic outfits can’t do this. They can only report facts or estimates from other established firms.

But I won’t settle. If Netflix won’t tell us how many folks watch their programming, then I’ll take things into my own hands. (See Ted Sarandos’ latest on Reliable Sources. All he said was “Viewership is ‘up”.) I just need enough data to make my estimates reasonable.

And guess what? Over the last three months I think I’ve collected enough. 

Normally, at this point I’d launch into a bit of a strategy lesson. I mean, it’s right there in the name of this website. Instead I’m getting right to my results. I’ll put my “Bottom Line, Up Front”, what this is, why it’s a good look and then how I calculated it. Then in my next article, I’ll analyze some implications from all this data, and finally my strategic lesson for folks out there.

Bottom Line, Up Front  – My Estimates for Primetime Viewing

The breakthrough for this project came from three summaries of viewing. All came from Nielsen, which means the measurement system is “apples-to-apples”. Even if you’re measuring subtly different things, at least having the same person measuring is better than multiple different measurement systems. 

Here’s my prediction of the top 20 “channels/platforms”—across both linear and streaming—in Primetime (8-11pm) in the United States, as measured by “Average Minute Audience”. 

Image 1 - Estimates

To be clear, this is the “average minute audience” during primetime in 2019. The best way to explain “average minute audience” is that it is the average number of people tuned in or watching during primetime. It can be different people who tuned in for only part of a show in traditional linear TV. Notably, it does include delayed viewing of shows, so it’s better described as “shows that debuted during primetime.”

Why use “average minute audience”? 

First, because it isn’t subscribers, which is the numbers we most often see reported. (And duly covered by me, for example here or here or here.) 

AMA is pretty damn useful because it captures actual usage, not just folks who are subscribed to a service, but don’t use it. While AMA can have wild swings—for example live sports skew ratings heavily—over 365 days it absolutely evens out. In other words, it’s a pretty good sample of the average amount of usage.

I’d add, the business rationale for tracking both usage and subscribers is because they are a chicken and egg problem. If you have lots of subscribers, but they don’t use the service, they’ll quit being subscribers. And if you have lots of usage, that ends up getting more subscribers. (Meanwhile, coronavirus is going to screw all this up as the old models of usage to sub growth will be pretty inaccurate during this time of crisis.)

Here’s a fun example. Who has more subscribers, CBS or Netflix? Well, CBS obviously. Through all the linear cable channels. (If you count those as subscribers, and they do pay a monthly fee, even if they don’t know it.) But since usage is declining, so is linear channel subscriptions.

How the relationship between usage and subscribers evolves overtime will have a big impact on how the streaming wars progress. We have subscriber numbers for the most part; AMA balances it out nicely in the interim. (Though if I had a preference, I’d just prefer total hours consumed by streamer and linear channel.)

The other main reason I used it? Well, it’s the data I have. So you use what you have.

Methodology

How did I pull off this feat of estimation? Let’s go step by step through it.

First, gather your sources. 

One. Every year Michael Schneider releases a roll up of every channel by average primetime minute audience. This means for the 3 hours of prime-time (8pm to 11pm) he averages how many folks watch by every single channel. That gave me this chart of the last four years, since he linked to his past columns at IndieWire: 

IMAGE 2 - Top 25 Channels

Two. In February, Nielsen released their “Total Viewing Report” for 2019 Q4. They then released some juicy nuggets about streaming and Netflix’s share of viewership. Covered in every outlet possible, here’s the pie chart from Bloomberg converted to a table:

IMAGE 3 - Total Viewing Q4

Three. In another scoop, Michael Schneider in Variety got the weekly Nielsen streaming data on a show-by-show, top ten basis, which we hardly ever get:

IMAGE 4 - Nielsen Originals March

Second, make an estimate between the first two sources.

This actually just becomes a math problem. To start, I calculated the total viewing of primetime shows each year. You can see on the top line of the 2016-2019 chart that I calculated total viewership year over year, and it’s decline. With Nielsen’s estimate that streaming is 19% of viewership, we can combine these two estimates:

IMAGE 5 - Total Viewership

Once we have that, we can just multiply the percentage of streaming by percentage of viewing. Assuming that the percentage of prime-time viewing on Netflix is on average the same as broadcast and cable channels—which seems reasonable—we get this updated table:

IMAGE 6 - Updated Implied Total Viewership

That gave me the table above, which I’ll post again because I love it so much…

Image 1 - Estimates

Third, make some margin of error.

See, Netflix has in the past estimated they are 10% of TV viewing. So I wanted to give them their due and put the number out in case that’s closer to reality. So that number made it in as the “high case”. In this case, Netflix would surge past CBS and NBC to 9.4 million AMA on average. 

Of course, I’ve also heard that Netflix has something like 60% of their viewing is kids or family content. While this doesn’t show up often in their season data, you see this in their film viewing. So if I were estimating total Netflix usage, I’d consider lowering the primetime ratio down a bit, say to 4%. This would mean that Netflix severely under indexes on primetime viewership because it is essentially a kids TV platform. This would make Netflix’s primetime AMA around 3.7 million.

I’d call those two numbers our high and low case for Netflix in 2019. So 3.7 million to 9.4, with a like 5.5 million average AMA.

Fourth, sanity check your estimate.

This is where Michael Schneider’s latest Nielsen scoop in Variety comes in. In his latest scoop, he got the top ten ratings by “average minute audience”  from the first week of March for both Amazon and Netflix across a range of originals and films. 

We can use these weekly snapshots to evaluate our previous estimates. Because if the top ten had multiple shows in the high 8 digits of viewership, then obviously way more people are tuning in nightly than *just* 5.5 million per night. And since I unveiled this article, well you know the math doesn’t add up. First, here are Nielsen/Variety’s charts, converted to Excel so I can “math” it.

IMAGE 7 - Raw Tables

If we add up each of the 30 Netflix data points, we get 34.8 million AMA. Which is way higher than my 5.5 million per night. But…this viewing was spread out over 7 days. Someone could have watched multiple series each night. On a streamer, there isn’t a constraint on viewing. Since this is 7 days of data, at a 5.5 million AMA we’d have expected about 38.8 million. That’s pretty close to the 34.8 we actually had. This is why overall I think my methodology is pretty accurate.

But I have some huge caveats.

First, this is seven days of around the clock Netflix viewing. Which is way more than what Michael Schneider was tracking in his “top channels” run down which is strictly a primetime measurement. (8pm to 11pm) So if we’re trying to balance the books, we’d need to draw down the Netflix numbers to account for non-primetime viewing. Try as I might, I couldn’t find a good data source showing Netflix viewing by time of day.

Second, you could also point out that these 30 shows weren’t the only things available on Netflix. What about all their hundreds of other shows?

Good point. So here’s a table of the Netflix shows whose data we do know.

Image 8 - without additionsWhat should jump out at you right away? The logarithmic distribution of returns. In other words, in the content game, the winners aren’t just a pinch better than the others, but they are orders of magnitude bigger. We see that starkly here. Of just these 30 pieces of content, a plurality had less than 500K AMA and a majority had less than 1 million.

But we know that’s far from all the content Netflix has. They’re a machine churning out, according to Variety’s estimates 371 new TV series in 2019. That’s in addition to a hundred plus original films. 

Why does this matter? Well, I made my own estimate of the rest of Netflix’s viewership based on these trend lines. Here’s how that looks:

IMAGE 9 - with additions

In other words, even though Netflix has hundreds of other shows, they don’t really impact the ratings after the launch. Likely the majority of series launched on Netflix last year average a ratings-wise insignificant number of views. (Say 10-25K per week. Or less.) If you have 300 shows earning 10,000 views a week, that’s only a 3 million AMA. Which would bring the estimates above right in line.

In other words, after my sanity check, I think my nightly AMA number for Netflix looks pretty good. Arguably the primetime only numbers would bring it down—meaning I was too high—but the other not included shows would bring it back up. And likely still a majority of adults watch Netflix at primetime, regardless of anecdote about binge watching at all hours of the night.

So that’s my data estimate of the day. But what does it mean for Netflix? 

Next Time and My Data

Let me be honest: if you unleash me on a data set like this, I generate way more insights than just this one article. In my next article, I’ll run through some implications and provide a piece of strategic advice. 

Also, I built a fun Excel for this. It’s not super complicated and you could go get all the data yourself if you wanted. But like I’ve done a few times before, I’m going to give it away. The price? You have to subscribe to my newsletter at Substack. It goes out weekly if I don’t have a consulting assignment; once or twice a month if I do.

Email me from the email you subscribe to the newsletter with, and I’ll reply with the Excel. (Email is on the contact page.)

Most Important Story of the Week – 20 March 20: Coronavirus and Pay/Linear TV…Boom or Bust?

You can tell we’ve hit peak coronavirus coverage when you see the headline “Did Disney predict the virus?” Because the film Tangled features a “quarantined” character in a town called “Corona”. Yep.

In more serious coverage, the predictions that coronavirus is “no big deal” have shifted to “we’ll be in lock down for 9 months” and folks are as confident as ever. Meanwhile, everyone is quite confident in all their predictions. 

I’m not. So my public service is to try to separate what we know from what we don’t in the entertainment business in the age of Covid-19.

Most Important Story of the Week – Linear/Pay TV…Boom or Bust?

In case you missed it last week, I picked a few tools to use to try to figure out how the coronavirus is impacting various parts of the video value chain. Including:

– Ignoring Narratives vs building out scenarios
– Demand, Supply and Employment
– What we know vs what we don’t
– And “what will change” and “what will stay the same”.

If you want a good example of how narratives can take us in the age of Coronavirus, consider Pay TV. This could simultaneously be the end of Pay TV as we know it or a boom time for live TV.

Narratives

Let’s start with the most extreme narrative: This is the death of Pay TV. Lest you assume this is the type of hyperbole only left for social media, here’s a Bloomberg headline with itScreen Shot 2020-03-22 at 3.12.58 PM.png

Note the question mark, but this still captures the feeling. The narrative goes: as consumers cut spending due to the impending recession, it will hasten cord cutting. In short, less folks will subscribe to traditional linear TV bundles than before. 

Of course, this trend was going on before the Coronavirus pandemic came to American shores. So will a widespread “quarantine” and consequent recession accelerate, decelerate or not impact the rate of various cord trimmings? What do we know and not? What are we guessing and what are we confidently estimating?

Demand

TV content falls into five rough categories: Scripted. Reality. Sports. Kids. News. I’m not breaking new ground, but that’s how I’ve always thought about it. So how does coronavirus impact demand for those five areas? 

Well, it may cause demand to go up for the first three categories, scripted, kids and reality TV. There is some evidence to support the idea that folks stuck inside turn to more TV consumption to pass the time. This includes films and peak TV series and cheesy reality shows. It will all benefit. So the first few categories should benefit from quarantine.

Given that this is a natural response to be stuck indoors, this is where the “death of pay TV” thesis starts to look shaky for me. Or at least contradictory to the other big narrative “quarantine and chill”. Especially when many folks predict both narratives simulaneously. For both theories to be true requires folks to “watch more streaming” but simultaneously “watch less linear TV”. From a strictly demand perspective, it’s unclear how linear TV doesn’t benefit from increased consumption as much as streaming. In fact, the initial data says both streaming and linear TV are both up.

Notably, it’s not up as much as you’d expect. A healthy chunk of people are still working, just from home. Another chunk have likely added other distractions or hobbies to the mix. But overall TV viewing is up, along with streaming viewing. Demand-wise, they’ve both benefited in the short term. 

Will it last? I doubt it. This doesn’t feel like a permanent viewing behavior shift to me; simply a function of not being allowed to go outside one’s home. Same with kids content: if you force a bunch of kids to skip school, parents will have them watch more TV, especially if the park is closed. When folks go back to work and kids go back to school, it feels more likely that demand returns to normal, not some permanent shift.

Arguably, if supply constraints weren’t present, we’d see a ton of demand of the fourth category too. If sports were available (see supply), that’d be a huge amount of viewing right now. A “not cancelled” March Madness would have shattered records if they could have held it with all 300 million Americans stuck at home. In other words, demand for sports hasn’t abated, just been shifted to other topics. (And meanwhile, most streaming doesn’t have sports programming.) As it is, sports channels have seen ratings plummet:

(My big curiosity? Does some of the sports/demand for competition get shifted to pseudo-competition series as in reality game shows? Top Chef is coming back to the air. Survivor is in mid-season. Even MTV’s The Challenge is coming back in April. Maybe they grab some of that demand for competitive sports.)

As for news? Well, this is the big area that streamers just can’t compete. (For now.) If you want to hear the latest Los Angeles or New York City public announcement on Covid-19, you have to turn to a local station. Frankly, a cable subscription is the easiest way to do that. And the initial data suggests that folks are indeed watching more news content than before. (And I’d expect this too to revert back to “normal” after Coronavirus worries subside.)

Add it up? Well, on the demand side there seems to be plenty in favor of linear TV in “raw demand” terms. Obviously, though, actual sales are a function of price compared to demand. Does a pending recession obliviate pay TV?

Maybe. A recession crunches wallets, which in turn forces high priced luxuries to go by the way side. “High priced luxury” is a pretty good description of cable TV at this point compared to other digital options. So will folks continue to pay outrageously high cable and satellite bills as they get laid off? Maybe. Especially with the proliferation of other options. We know cord cutting is coming. The statistics back that up.

But to make this prediction implies a pretty substantial prediction about the impending recession. And how deep it will be. And whether the cable companies offer cheaper bundles in lieu of losing subscribers or stick to the current business model. In other words, a host of variables (that few folks can predict). 

(Not to mention cord cutting is a misnomer as many more folks “cord shift” or “cord shave”. Turns out cord trimming is complicated.)

I’d flag all this as a big “we don’t know.”  If the recession continues through the end of the year, absolutely that could accelerate cord cutting, though it may be taken up by cord shifting. If the recession is short? Well, the desire to keep things the same may not have the same impact.

Supply

Again, with coronavirus, the pandemic is unique in that it can wallop both demand and supply. 

Coronavirus started by hammering the TV production industry. If groups of more than 10 people can’t get together, well you can’t make a TV show. Period. Right now, nearly every television production is on hold.

The question is how this plays out over the next few months. An extended shut down means that TV will mostly go to reruns or shows—like many reality shows—that were mostly already recorded. However, by June, if production hasn’t resumed on some basis—I imagine at least reduced staffing for the foreseeable future—than linear channels may run out of content.

How long does this last? Well, I’ve seen predictions from 6 weeks to 9 months of shut down. That’s a huge range.

Moreover, it violates the most common mistake in economic forecasting, which is that actors adapt to their surroundings. Productions are shut down because they can’t film in groups of more than 10. But at a certain point, you’d have to imagine that studios and production companies will get creative with how they shoot TV shows or ask for exemptions. Or figure out ways to screen employees. Yes, it may be a while before things are back to “normal”, but shows could return faster than you think. 

I’d apply this to the other big supply constraint, the lack of live sports. Honestly, sports could have the quickest rebound of all TV content. Yes, while it’s unlikely that 10,000 people will get together to watch a game in the next couple of months, to film a basketball game all you need is 12 players on each side, two coaches and the referees. And camera crews. Yes, that’s a lot of people, but way less than 10,000. Could the NBA ask for exemptions with strong testing to get games in front of folks? I imagine so.

Will they? Will TV productions get creative? Maybe. Maybe not.

There is one other huge supply constraint that is honestly the biggest threat to linear TV, and it’s usually the area that soothsayers predicting the demise of Pay TV ignore: advertising. If a recession comes in and comes hard, one of the first areas every business cuts is the promotion and advertising budgets. This could hurt everyone from social media to Google to linear TV.

Yet, linear TV also has all those eyeballs and an election on the way. Still, its the biggest “supply” constraint to watch for TV. How do linear advertising payments shift? I don’t know which way it will go, but it will likely have the biggest impact on the future of this industry.

Employment

In some ways, linear TV will have less employment impacts than theaters. Theaters have a mass of low wage employees out there every day. Networks have a lots of people, but not like that. 

Still, the economic impact on the below-the-line workers will likely have the biggest impact. They are the economically most vulnerable and will stay so in a recession.

I’d add: I can see remote productions have even more trouble in the future, which could help Hollywood. If actors don’t feel like boarding airplanes for film/TV shoots, the natural location is old-fashioned Hollywood.

Strategic Recommendations

1. Begin quarantines for sports and talk show staffs, if possible. If folks are quarantined together, they can’t share the disease, but they can generate content. “Getting creative” is always my go to advice for companies. And there are ways to get SNL, the Late Shows and other comedies back on the air in an age of “reduced quarantine”. It requires thinking how to do it and figuring out creative ways to house employees early.

2. If I’m cable, get more aggressive with skinny bundles. Cut the fat, and blame it on coronavirus. Folks will still want news and sports. Fortunately for the cable/satellite bundles, the streamers don’t have any real sports or news capability. So skinny linear bundles can fill that need.

3. I see an edge for vMPVDs too. Really, those are just the nu-cable bundles. (vMVPDs like Hulu Live TV or Youtube TV). They can also offer the sheer tonnage of scripted/reality shows that folks want along with sports and news. So price discounts for those will make a lot of sense. 

4. Lean in to reality when the quarantine ends. That’s the quickest way to get lots of content back on the air, while getting scripted series back on the air.

Other Contenders for Most Important Story

Quibi!!!

It’s no secret I’m hugely skeptical of Quibi. At the core, it’s because they are avoiding an entire method of distribution, which is living room TV. For all the growth in mobile, I just don’t think you can be viable without TV sets in your arsenal. The latest news is that Quibi is offering a 90 day free trial, which will the longest in the industry. We’ll see if it works. I’m still more bullish on HBO Max and Peacock with their huge libraries. Especially in an age of quarantine.

Crowded VOD

Last week, Universal was moving some films to VOD early. This week it became a flood with Onward joining Rise of Skywalker joining Emma (and then Lovebird went straight to Netflix via Paramount). On the one hand this shouldn’t be too surprising, since these films weren’t going anywhere in theaters. (Variety has a good list of how everything has moved.)

But part of me thinks this is still pretty shortsighted. If we are in for a long lock-down, come May a studio could really benefit by having these VOD launch weekends all to themselves. Crowded weekends aren’t good for film, TV or VOD. In the long run, will this be a huge impact? No, but I think some of the studios are rushing.