Category: Analysis

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.)

The 2019 Star Wars Business Report Part II – TV: Baby Yoda Saves Star Wars

Star Wars did so well in TV this year, that virtually everyone knew which character was the “symbol” for 2020: Baby Yoda!

We know Baby Yoda conquered the social landscape, but how does that translate to Lucasfilm/Disney’s bottom line? Well that’s my topic for today. If you missed it, read Part I for my methodology and the performance of Star Wars films. As I was writing “everything else” I decided that each business unit deserved its own article. It’ll make each article smaller and easier to read, while providing regular content for the site. 

We got a lot to cover, so like the Jawas escaping Sand People, we’ll move fairly quickly.

TV Series

Whether it’s only because of one adorable (non-CGI) character, or the authenticity of this latest series, or just drafting off of the popularity of Boba Fett among Star Wars fans, Disney’s new streaming service launched with one of the top new TV series of the year in The Mandalorian. As always, here’s the Google Trends data:

Screen Shot 2020-02-13 at 8.08.54 AM

Other research firms back up this popularity. Parrot Analytics awarded The Mandalorian its “most in-demand new series”. The service TV Time saw The Mandalorian surge in interest as well. So it’s popular. It’s a hit.

This is a big change to my model. I’d assumed a Star Wars TV series would do well. Sort of like the Marvel TV series for Netflix well: lots of doubles and triples, but no home runs. Instead The Mandalorian is a home run with a chance for a grand slam, if its second season sustains what season one pulled off. (Which is no small feat. Lots of great season ones fade quickly. The Black List. Gotham. Mr. Robot. The Man in the High Castle. The Handmaid’s Tale. Every Netflix Show that didn’t make it to season 4.)

So I have a few changes to my model then. (Here’s my article on TV from last time.) First, I increased the value of what I called “the Jon Favreau series”. I calculated the value of the series as a percent of the production budget because, for Lucasfilm, they are acting as a producer here. And this is what I think the series would be worth, roughly, on the open market. (As for their value to Disney+, I’ll discuss that in my last article in this series.) However, hits are still worth more, so in the event of a blockbuster TV hit, I tripled the imputed fee from 30% to 90%. (Meaning it went from 130% of the production budget to 190%.) Also, I lowered the number of episodes to 8, but kept it at a little more than $15 million per episode. (Which is the consensus cost.)

Screen Shot 2020-02-13 at 10.35.32 AM

As a result, here’s how the value of The Mandalorian changed from being a “hit” versus being just “another TV show”. 

Table 3 - Mandalorian

Are these numbers reasonable? Probably, with just a pinch towards the high end. As you can see, if you take my “high case” as a “revenue per sub”, I basically think it’s worth $11.40 per subscriber. Which on it’s own is huge, but more a function of how few subscribers Disney+ has right now.

The next change was moving the Obi-Wan series back a year. And this brings up the biggest risk for Disney, which is getting these TV series out on time. Frankly, The Mandalorian has done a great job at releasing a season 1 and having season 2 ready to go later this year, only 12 months a part. However, the Obi-Wan series recently switched showrunners and won’t be out until 2021 at the earliest. As a result, I moved back a few of the series.

The last change I tried to make was to move my “imputed license fee” model to an “attributed subscribers” model. But I utterly failed. Why?

Well, I just don’t know enough about Disney’s finances. I took a guess at “customer lifetime value” of Disney+ subscribers, but the pieces we don’t know are too huge to make it reliable. For instance, we have no data on the average number of months we expect a customer to subscribe because it hasn’t happened yet! I also have a guess on marketing expenses per subscriber, but it’s all a guess. (We know revenues were $4 billion in the last quarter, so assuming 20% marketing expense on that, and you have about $800 million. But even that could be low.) About the only thing we know is that the average revenue per subscriber is $5.50. 

Moreover, trying to attribute subscribers is nearly impossible. Because we don’t know how many folks actually watched the Mandalorian, let alone subscribe to it. Also, given that Disney+ is growing so much, it too tough to attribute subs to Mandalorian versus all the other content. Unlike HBO or Netflix, this is far from a mature service to judge.

The final change I did make was to eliminate my “low case” model. Frankly, I think Disney would really have hurt the Star Wars brand to release anything less than five TV series over the next decade or so as they launch Disney+.

As a result, here’s my current base case model:

Base

You can see how I value kids content as well, which is I only count it as a production cost. If the upside for kids TV series is selling merchandise—which is a simplification, but not entirely wrong—than I’ll calculate the upside in the “toys and merchandise” article.

KidsAnd the “high side” case:

High

Money from 2019 (most accurately, operating profit)

So the The Mandalorian is huge. What is that worth? Well, less than you think, especially compared to the films. If the feature films are Executor-class Super Star Destroyers, hit TV series are regular old Star Destroyers. Still huge, but look at the size of Super Star Destroyers!

Thus, in my model, The Mandalorian, in success, is about a $95.5 million dollar profit engine this year. Which pales in comparison to Rise of Skywalker, but that’s because films just have much higher upside in success, due to multiple revenue streams. Next year will be a bit higher, though, because I think Disney will monetize The Mandalorian in more non-toy ways, potentially even via home video. 

(What about potential Baby Yoda toy sales? That will be covered in the “licensing” section. And yeah, Disney didn’t have any available anyways!)

Long term impacts on the financial model and the 2014 deal

As for the future, I’m not ready to change my basic model going forward. Repeating huge TV hits is a tough business, and with the wrong showrunner, the Obi Wan TV series could be as middling as anything. Indeed, that series is cycling through showrunners. As a result, through 2021 we’ll still only have one Star Wars TV series. 

However, the upside case is now higher for TV. If the Lucasfilm folks can generate just a few more hits, than they’ll be able to drive subscribers to Disney+ and a lot of potential value. The key is getting more huge hits. Even though costs would stay about the same in both my base case and high case, the revenue could jump from $5.6 billion to say the $8 billion over 8 years. 

Brand Value

In this case, we can tell that The Mandalorian helped revive any lingering doubts Star Wars fans had about the direction of the franchise. The buzz around Baby Yoda led to countless articles singing his praises. As a result, if you take my critical acclaim chart, you get this:

Screen Shot 2020-02-13 at 12.10.23 PMLook at that! The Mandalorian is the most critically acclaimed of any Star Wars property. (With the caveat that since it isn’t global, the overall number of ratings is fairly low compared to the films.) If you want to know how to make Star Wars, this is it.

Recommendations

I didn’t have recommendations on the film side, but TV really did have one for me. And that recommendation is one person’s name: David Filoni.

He’s been the showrunner on every Star Wars animated projected and he executive produced The Mandalorian. I’m ready to give him a heaping doses of credit for The Mandalorian given that his animated series are fairly well regarded by the fandom too. In other words, if Disney is looking for their Greg Berlanti, this is it for Star Wars.

From an operational perspective, I do think they should ramp up to one Star Wars series per quarter. This seems crazy, but the universe is clearly big enough to support that many stories. Especially if one is a kids series and then you have three adult series and/or limited series filling out the gap.

(And I’ll repeat it until I die to wish it into existence, but if you want a killer limited series, turn the book series Tales from Mos Eisley Cantina into a series. You can thank me later.)

91YK2vwbfZL.jpg

The 2019 Star Wars Business Report – Part I: The Economics of Star Wars Films

If I didn’t have a little Padawan join my family in November, one of my goals was to update my massive “How Much Money did Disney Make on the Lucasfilm Acquisition?” series. That delay actually helped because I wouldn’t have been able to get that article up before Rise of the Skywalker came out. Meaning I would have had to guess on a billion dollar variable!

And since I didn’t have to guess, we know that Rise of Skywalker joined the caravan of Disney billion dollar box office film in 2010s. Still following Lucasfilm/Star Wars in 2019 had a sense of dread. For every good news story there was a bad one. So how do we truly judge—from a business sense—how well Lucasfilm did in 2019?

We use numbers. Strategy is numbers, right?

Since Disney doesn’t release franchise financials—why would they?—I have my own estimates. I last updated these in the beginning of 2019 (with films updated in 2018) so I’ll do a big update to the model to learn what we can about how well Lucasfilm did in 2019. I’ll break it into two parts. Today’s article will cover movies; next week, I’ll review the rest of the business units, TV, licensing and theme parks. Previously, I only focused on the price Disney paid compared to their performance. Today and next week’s article will instead act as a report card on how 2019 impacted Lucasfilm and Disney’s business/future.

What this Analysis is NOT

There are so many cultural takes on Star Wars, especially since The Last Jedi, that I feel it’s important to clarify what I’m NOT doing here. (A UCLA forum I follow, for example, had a 60 page “debate” on the latest two films.) 

To start, this isn’t my “fan” opinion on the franchise. My opinion is just one person’s opinion, so whether or not I “loved” the latest film, or the one before it or “the baby of the same species as Yoda” doesn’t matter. In the aggregate, Disney does and they track this via surveys and focus groups. But lone individuals online? Whether they love or hate recent moves? Not so much.

To follow that, this isn’t a “critical” perspective either. I haven’t been trained in the dark arts of cultural and film criticism, so my opinion again just doesn’t matter. (Does Disney care about the critics? Controversially, I’d argue not really.)

What this Analysis IS

Instead, I’ll focus on three areas per business unit for Star Wars (read Lucasfilm):

Profit from 2019 (most accurately, operating profit)

In my big series on the Lucasfilm acquisition, I was looking at a specific question about the value of Star Wars vis a vis the price Disney paid. But if you’re Disney, that deal is now a sunk cost. What matters for Disney strategists or brand managers is how much money the franchise is making now. That’s the focus.

Long term impacts on the financial model and the 2014 deal

Since I have a gigantic spreadsheet filled numbers that I can update putting this all in terms of the $4 billion (in 2014 dollars) context, I may as well update how the model has changed. Further, some decisions Disney makes now will directly impact how much potential profit they can keep making on Star Wars. So I’ll update that too.

Brand Value

This last part is the hardest part to quantify, but is crucial as well for putting the above two decisions into context. See, a brand manager doesn’t just care about making money this year, they care about making money next year and the year after and so on. And there are ways to make money in the short term that damage a brand in the long. Threading the needle of making money while building brand equity, not just drawing it down, is crucial for a brand manager. 

This is admittedly a tough section to quantify, but it still feels particularly important. (Again, the goal is not to sneak in my opinion, but use data where possible to figure this out. Though narratives will likely figure in.)

With those caveats, let’s hop into the most important business unit, the straw that stirs the blue milk, films.

Movies

As of publishing, Rise of the Skywalker grossed $1.05 billion, with a 48% US/Canada to 52% international split. In my model—which I’ll repeat is a lifetime model, meaning all future revenue streams—I’d expect Rise of the Skywalker to net Lucasfilm $798 million, nearly identical to Rogue One. (As I clarified before, my model is a bit high compared to Deadlines’ model. There are a few reasons, but mainly I calculate lifetime value.) So that’s the first building block for how Star Wars did in 2019. In my framework of films, I’d have called this a “hit”. Here’s a table with Disney’s 5 Star Wars films in the 2010s:

Table 1 - First Five Windowing ModelBut what does this mean?

Star Wars Feature Film Trend Lines

That’s where things get tricky. The key question for me is context. If we were using “value over replacement” theory, and you looked at the last Star Wars in “value over replacement film”, well it does terrific. Very few films get over a billion dollars at the box office!

However, I’d argue that’s the wrong context. This is a Star Wars film. So how did Episode IX do in “value over replacement Star Wars films” context? Not very good. To show this, I updated my giant “franchise” tracker through 2019. 

Let’s start by just charting Star Wars film performance. First by category, separating “A Star Wars Story” into their own category. Second, by release order by decade.

Chart 3 - Star Wars v03

Chart 2 - Star Wars v01

The worrying issue for Star Wars brand strategists are the trend lines. This isn’t a series trending upwards or even maintaining consistent film launches. If Disney wanted to reassure themselves, they could say it isn’t their fault, lots of franchises lose their mojo over time, like Lord of The Rings, Transformers or Pirates of the Caribbean. Here is the chart I made in 2018 for franchise performance, updated through 2019 launches. They show the US adjusted box office and how series have trended over time:

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Should You Release Your Movie Straight to Netflix? Part I: The basic maths

Since 2019 started, there has been a debate among the entertainment biz literati (you know who they are):

Should you keep releasing your films in theaters, or go straight to streaming?

I first saw this in January when some folks on Twitter argued Disney should release Star Wars films straight-to-streaming now that Disney+ was coming. (My rebuttal here.) Then, when Booksmart flopped, I saw this debate take over Twitter. In short, why bother looking bad releasing in theaters, when you can go to Netflix and get 40 million views?

The Booksmart-esque examples kept coming. Late Night’s flop brought Amazon to the debate. Then Brittany Runs a Marathon. It got so bad, Amazon got out of the theatrical release business altogether. (So the big-for-Amazon Aeronauts abandoned traditional theatrical in exchange for a “four wall” strategy like Netflix.)

Meanwhile, this question is on every company’s mind. Netflix doesn’t do theatrical runs; Amazon just left the business; Apple is figuring out what it wants to do; Disney, Warner Bros and Universal are leaning into theatrical, except when they aren’t as Disney did with Lady and the Tramp. Paramount is an arms dealer at its finest. Let’s not sugar coat how important this question is. It’s literally a billion dollar question, per company! 

Getting this question right is business strategy at it’s finest: so who’s making the right call?

Judging by the online narrative, the Netflix supporters say Netflix. Most “arguments” for going straight-to-streaming seem to rely on personal experience, first, and Netflix’s stock price, second. Hardly ever do I see the piece of information I love most: numbers. (Strategy is numbers!)

Before I finished my series on The Great Irishman Challenge, I would have had trouble relying on anything more than qualitative/narrative explanations too. Without a model, testing assumptions or quantifying the financial impact of these strategic implications would have been little more than guesswork. But since I have it, I think I can try to quantify some aspects of this debate better than I’ve seen before. 

This debate has so many components, arguments and counter-arguments, that as I wrote my response, it was fairly jumbled. To organize my thinking, I’m deploying a “question and answer” format. Which I think helps. Still, before I get to that here’s my…

Bottom Line, Up Front

While very small films or historically poor performing theatrical films—think documentaries or foreign language films—may benefit from going straight-to-streaming, the vast majority of “studio films”—larger than $5 million production budgets, will make much more money for their producers by having theatrical distribution. (On average.) The “strategic” benefits of skipping the theatrical window don’t exist in practice as much as theory. So much so I call it the “straight-to-streaming trap”. 

Question: If you only had two words, why should movies avoid the “straight-to-streaming” trap?

Avengers: Endgame.

Q: Okay, explain.

Well, it made $2.7 billion (with a b) dollars in theatrical box office. Of course, Disney doesn’t keep all of that in revenue. Depending if it is US or international, Disney keeps 35-50%, and less in China. Still, I’d estimate Disney kept about $1.1 billion (and even that is low considering how powerful Disney’s bargaining power is with studios).

Assuming a $350 million production budget and a $200 million marketing budget, after just theatrical distribution, Disney has $550 million in gross profit to split with talent. In just one window! That doesn’t factor in toys, DVDs, electronic rentals or future streaming/cable value. Just one window netted over half a billion dollars. 

I honestly can’t fathom a scenario where Disney would have made more money by ignoring theatrical. (Again, that was my thesis back in January about Star Wars, but these are equivalent franchises.) That’s like having a barrel of oil and not refining the entire thing.

Q: Excuse me, oil?

Oil. Every year, one of the best things I read is The Economist’s Christmas Double Issue. Two years ago, they had a graphic about how a barrel of oil is refined into its component parts. Here’s the link for subscribers, but they had the whole thing on Google Images:

Image 1 - Economist Oil 20171223_XMC600_weblarge.png

In short, a barrel of oil is sort of like the not-quite-true aphorism that the Native American’s used every part of the buffalo. (Which was taken to another extreme by American meat packing at the turn of the century, who used every part of the pig/cow. Read Upton Sinclair’s The Jungle for details.)

871878e86165ef98858ea0235551942d

(Source: The Far Side cartoon. How is that not a piece of IP up for sale?)

As oil companies heat a barrel of oil, the raw material separates into different types of chemicals that are then used for everything from gasoline to diesel fuel to sulphur to countless other compounds. This is necessary because different size oil molecules have different uses. The goal for the oil company when refining oil is to extract as much value as possible from the oil they spent real money bringing out of the ground.

I love this analogy for theaters. Each window is a heavier as in greater gross margin type of oil. Netflix is essentially skipping the heaviest molecules (theaters, home entertainment) for the lightest (digital streaming). Long term, that means a lot of lost potential revenue.

Q: And can we quantify that?

Yes, and that’s what I spent a chunk of November doing. Here’s the “financial revenue” waterfall I’ve been using for theatrical films. Actually, here’s how it’s looked historically:

Image 2 - Financial Waterfall Historically

And here are my recent assumptions:

IMAGE 3 - Financial Waterfall Now

In other words, if you skip theaters, there goes 35-40% of your revenue. (While box office isn’t rising, as a percentage of feature film revenue, it is increasing because home entertainment is shrinking. By next year, it may be 40% of a film’s take.) If you skip home entertainment, that’s another big chunk of revenue. And frankly, it makes sense that theaters make so much money because it’s more expensive to go.

Q: The gross margins are higher for theaters than streaming? Do you have numbers for that?

Frankly, these are the numbers that any discussion about Netflix and Amazon have to start with. You can end up where you want, but if you ignore these numbers you’re likely using fuzzy math to justify your preexisting conclusions.

So let’s take each window into rough “per person per film hour” revenue in the United States. Just to make it explicit. Theaters have an average ticket price of call it $10. (It’s slightly lower, but I like to round my numbers.) Since each person pays that to see a film, it’s a $5 per person per film hour for the average two hour film.

Now, compare that Netflix, where the average subscription watches 40 hours of content per month. (According to past leaks/surveys.) Since a US customer pays $12, that’s $0.30 per hour. But since more than one person can watch, we can assume 1.5 customers share that viewership. Which takes it down to $0.20 per film. Which leads to this crucial note on potential revenue:

The streaming window is 8% of the total revenue of the theatrical window per person.

As I said above, theatrical is much, much more lucrative for studios than streaming. (The specific way to calculate the value to Netflix of a film is different than the usage version above—see here for those—but this is to show the potential size difference for different windows.)

Q: So let’s ask the obvious: have you quantified how much Netflix could have made releasing films in theaters this year?

Rightey-oh I have. Let’s talk upside. I took a selection of Netflix’s most noteworthy/expensive films, and asked Twitter for ideas for some quick and dirty “upside” comps for them. (I focused on the most recent films as possible, and matching rating/genre primarily.) Here’s the list I settled on:

IMAGE 4 - Netflix Film Comps

There’s your headline/nut graph/lede at the end of the article: if Netflix released its 10 (arguably) most valuable films from December 2019 to December 2020 (with Bird Box sneaking in), it could have made $750 in additional cash flow to the bottom line in just theatrical box office. If Netflix had to throw in $50 million per film on this list in additional marketing (which feels high), that’s still $250 extra million.

I’d add this list isn’t a ridiculous list of comps. A Quiet Place is definitely the same sized hit that Netflix is portraying Bird Box, so that number is reasonable. Meanwhile, I put in a couple of films well under $100 million in total gross and a lot of other solid doubles. 

So why hasn’t Netflix looked at this revenue and jumped? I’d argue sloppy financial thinking. And changing their strategy has PR implications. Others, though, would argue it’s about exclusivity for their platform. (Presumably some folks would see it in theaters, but not on Netflix.) 

To keep this article from going too long, I’m going to continue the Q&A in my next article. Essentially, I’ll lay out and debate the pro-straight-to-streaming arguments in their own place.

How The Irishman Lost $280 Million: The Great Irishman Challenge Part IV – The Results

(For the last few weeks, I’ve been debuting a series of articles answering a question posed to me by The Ankler’s Richard Rushfield: Will The Irishman Make Any Money? It’s a great question because it gets as so many of the challenges of the business of streaming video. Read the rest here, here, here and here.)

The biggest uncertainty in The Great Irishman Project was figuring out how well the film did with viewers in the first place. I was all set today to parse Nielsen’s estimates from last week, but doing so meant tons of estimating based on a very limited data set. So I waited.

Specifically, I had a suspicion that Netflix would feel forced to tell us something. They couldn’t let Nielsen drive the narrative for their most high profile picture of the year. Sure enough, we got the results today, as Ted Sarandos spoke at the UBS Media conference:

26.4 million subscribers watched 70% of The Irishman in its first week.
40 million are projected to watch in the first 28 days.

Huzzaw! Now we can be a lot more confident in our estimates.

Here’s today’s plan. First, I’ll given you the “Bottom Line, Up Front”. The results and my model. Second, I’ll discuss a few specific estimates and inputs I still had to make. Third, I’ll answer what I assume will be the most commonly asked questions or criticisms of my model. In Q&A format.

(Also, look for my write-up in The Ankler if you’re subscribed.)

Bottom Line, Up Front: Netflix will lose $280 million The Irishman

As I wrote in Part I, the goal was to make a scorecard, and here it is:

IMAGE 20 - Irishman Profiitability

For the full model, here you go:

Image 21 - Irishman Full Model

In other words, if this were a big budget tentpole from Disney or Warner Bros–whose flops have extremely public numbers–I think Netflix would have to write down the costs for “only” getting 40 million viewers in the first four weeks. This film was extremely expensive, and it’s already decaying fairly rapidly in viewership. Even with a bump from a Best Picture nomination, Netflix will lose money on this investment.

The Model Details

Even having built the model ahead of time, I had to make some assumptions. Here they are.

Determining US versus International Split

One of the big assumptions of my model right now is that international viewership is much less valuable than US viewership. I do this based on their reporter lower international “Average Revenue Per User” and higher churn rate overseas (from what I’ve been told/researched). As a result, the more US customers for a film (for now) the better it is financially for Netflix.

We have two data points to triangulate the split for The Irishman. First, we can look at historical box office trends of mobster films. According to all the films listed as “Mafia” in The-Numbers database, about 61% of box office comes from domestic versus international box office. For example, a film like American Hustle did $150 million in the US/Canada vs $107 million in the rest of the world. Black Mass from 2015 was even more weighted to the US: $62 million vs $36 million rest of world. (The Departed did $132 million US to $157 million rest of world.) This would imply viewership was skewed to the US.

Second, Nielsen provided their estimates that 13.2 million people watched The Irishman during its first five days of release. That’s almost exactly half of the 70% completion Netflix claims. If we assume this would increase with two more days viewership, again we get closer to 55-60% of viewership being in US/domestic.

I decided to use 62.5% US viewership for Netflix. This is pretty beneficial to Netflix, but makes sense. In all, since US viewers pay more on average for longer, this change benefits Netflix.

Changes to Best Picture Bump

My initial model assumed 25% more folks would watch on Netflix if The Irishman is nominated for Best Picture. I decided to bump this up to 25% first window revenue, since that’s a more accurate reflection of the box office bump. (That’s also a benefit to Netflix’s bottom line.)

Adding in Box Office?

I wanted to add in box office revenue, but Netflix hasn’t released any since this film wasn’t released in the traditional theatrical system. (Netflix rented out theaters and then collected the revenue themselves.) Given the limited number of theaters, I think leaving this out won’t drastically impact the bottom line. 

Frequently Asked Questions

I imagine a lot of folks have a lot of questions about this analysis. Let’s try to answer what I imagine are the most common.

What is the best case for Netflix?

Read More

The Great Irishman Challenge – Appendix: How Confident Am I?

(For the last few weeks, I’ve been debuting a series of articles answering a question posed to me by The Ankler’s Richard Rushfield: Will The Irishman Make Any Money? It’s a great question because it gets as so many of the challenges of the business of streaming video. Read the rest here, here, here and here.)

On Twitter, TV journalist and friend of the website Rick Ellis of All Your Screens pointed out that my model is likely not to be accurate:

You know what, he’s right!

I don’t have leaked Netflix internal accounting and data. This means that I have to make a lot of assumptions to build my models. The more assumptions in an estimate, the more sources for error. While estimates are naturally more accurate than forecasts, they’re still estimates. Meaning they are not an exact science.

Before I publish my results for The Irishman—my next article for those waiting—it’s worth probing what type of analysis this Great Irishman Project” is. As I’ve been thinking about it, I have three analogies to explain what I’m trying to do here, ranging from a weak to strong.

Analogy 1: The Scientific Method

This is the gold standard. Arguably, the very principle that has driven human progress for the last 500 years.

And it doesn’t apply here.

I know, I know. It would be great if it did. But to apply the scientific method means starting with a hypothesis, then gathering data to prove or disprove it. That’s not my approach at all. I’m building models based on my experience and data. Which are “scientific”, but I can’t “test” them on Netflix’s releases.

The streamers specifically have reams and reams of data. They can set theories and test whether they are correct on marketing, user experience and sometimes content. (However, they often overhype their data and stretch the limits of statistical accuracy.) Unfortunately, for yours truly, Netflix and Disney and other companies will never tell me if I am right or even super close with my models, so I can’t ever test my hypotheses.

Since we’re talking scientific method, it’s also worth pointing out that lots of data analysis at technology, consulting and really all companies is “faux scientific method” too. At their best, companies can set out hypotheses, and run tests to see what works best for their customers. At their worst, companies just collect a ton of data and use the data that supports their preexisting beliefs. That’s not the scientific method. (I can’t count the number of times I’ve seen a boss parsing a quad chart for connections that are noise, not signal.)

Analogy 2: Sports

One of my inspirations for this website was the boom in top notch sports writing. Specifically, the top tier analysts. Folks like Zach Lowe or Kevin Arnovitz on basketball, Bill Barnwell in football, Pete Zayas for the Lakers, or Chris Harris on fantasy football. These folks don’t just report the news, but analyze the what and how of sports. They provide deeper insights than just the box score, whether they use scouting, film breakdown or analytics.

I’ve tried to fill the same need in entertainment business. This industry is filled with a phenomenal amount of great reporters, but not the rigorous analysis I needed when I worked in entertainment. (There’s also a lot of great investor-side analysts, but they usually charge an arm and a leg for their work. Their focus is also less on strategy and more on stock price. Which is great for their clients, but not quite what entertainment professionals need.)

There are two huge differences between sports analysis and entertainment strategy analysis, though. First, I don’t have nearly as much data. For sports, even casual observers can now get advanced analytics, from Basketball Reference to NBA.com to Cleaning the Glass. Second, we don’t get the “results” beyond quarterly earnings reports, and even those can be woefully incomplete for streaming. Imagine how much tougher Zach Lowe’s life would be if he didn’t know the scores to games!

This analogy gets a lot closer to what I’m trying to do. Instead of breaking down how a play is run, I’m breaking down how film finances work. Then, I’m applying the data we do have to that model. Then I’m pulling insights for what that can tell us about entertainment strategy. If I had more data, I could pull even more insights.

To find the perfect analogy, we need a field where making predictions is key, but data is sparse. Well…

Analogy 3: Military Intelligence

In war you have to make predictions about what your enemy is thinking, planning and eventually doing. But the amount of information is usually extremely sparse. Even if you have tons of information, you are terrified that it’s all planted by the enemy in misdirection campaigns. Inevitably, an intelligence officer has to make assumption after assumption to project an enemy’s course of action.

As I laid out in my recent series, I used to be an intelligence office in the Army, making these types of predictions. I’m used to uncertainty when forecasting enemy actions.

That’s not a bad analogy either for companies in competitive fields. While every company professes to not care what any other company is doing, they’re lying. (All of Hollywood is obsessed with Netflix, even if they say they aren’t. And yes, Netflix is obsessed with Disney+ right now, even if they deny it.) Understanding whether your competitor is making hits or duds, burning cash or wallowing in it, and how they’re doing it, is a key piece of information for making decisions.

Most companies have blind spots into every other company the same way my models have blindspots into Netflix or Disney’s specific performance.

Just because our models have inaccuracies doesn’t mean we shouldn’t make them. And doesn’t mean they aren’t useful. If you waited in war until you have perfect information, you’d be plagued by indecision. That’s really what I’m doing here: I’m providing my competitive analysis of streaming video, starting with Netflix, at the same level of accuracy I’d try if I were doing this for insurgents in Afghanistan or working in a strategic planning group in a streaming company. Even though I could be wrong, I don’t have a choice because we need these assumptions to improve our estimates.

And yes, as a bonus, these models will eventually inform my larger series on an “Intelligence Preparation of the Battlefield”. Essentially, the models will tell us a lot about how can and can’t make money in streaming video, and how that can impact all of Hollywood. But that’s for a future article.

If The Streaming Wars are a War…Then What War Are They?

In November, a war started. 

Fortunately, in this war, no one will die and the biggest risk is to the stock price of ViacomCBS. If the biggest war our current generation is a streaming war, then the future isn’t all gloom and doom.

Since I’m writing an “intelligence preparation of the battlefield” for the streaming wars, it sort of begs the question: if the streaming wars are a war, what kind of war are they? To prove I’m not making a straw man here, here’s a host of articles asking about the streaming wars, but no one tying them to the best comparable war.

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I was a history major and in the military. I should be able to figure this out. Let’s do it.

The Plan

1. Will rank wars from “easily discarded” to “Pretty darn close”. Scroll down to the bottom to find out the winner(s).

2. One imaginary war per section. 

3. I’m fairly “American” so all of these wars will inevitably come from that bias viewpoint.

Easily Discarded

The Civil War (and most other civil wars)

The case for the Civil War—and other civil wars—is that the entertainment industry itself is like a country riven by sectarian strife. The Confederates would be the traditional studio conglomerates and cable MVPDs clinging to their profits, while upstart streamers are, I guess, the Union? Trying to impede the new movement? Or maybe switch the two and the streamers are the Confederates splitting off from the Union? See, it doesn’t really work.

The Persian Gulf War or Franco-Prussian War

The problem with these wars is they were too darn quick, each lasting under a year. The streaming wars won’t end any time soon.

Alexander the Great, The Huns or The Khans Conquer the Known World

Every so often, some military leader just up and conquered most of the known world. Four years ago, we probably would have said Netflix was set up to do just this. Yet, unlike the foes who fell under Alexander, Attila and Genghis, the traditional studios may have a fighting chance to defend their territory.

Independence Day War

This is the fictional version of massively powerful invaders taking over everything, just this time with aliens. We only have two sides in this war, where the streaming wars are multi-polar, so we’ll need some better analogies.

Closer, but Key Flaws

Punic Wars

We have our first “traditional” war where two massive powers square off for domination of, literally, Western civilization. If Carthage had defeated Rome, all of human history may have taken a different course. (Instead of Rome, the Western World would have been centered around North Africa.) If the upstart tech streamers defeat the traditional entertainment conglomerates, the results for investors may be similarly momentous.

The challenge is we’re not dealing with two united sides in the streaming wars. Disney+ is fighting for control from HBO Max as much as they are fighting Netflix and Amazon. However, if I did make this analogy, it would mean Ted Sarandos is Hannibal and his elephants are Netflix originals powered by algorithms. Which could mean Bob Iger is Scipio Africanus, but now we’re going too far.

The French Revolution

Revolutions are like Civil Wars, just without sides or uniforms. Which make it tough to compare to our streaming wars. Sure, our combatants don’t wear uniforms—well, NBC Pages do, but you know what I mean—but you have to like the symbolism of revolution. Streamings isn’t a war, but a “digital revolution” in how we receive content! 

That has an ethos of “power to the people” who are rising up and saying, “No more high cable prices, I’m cutting the cord!” Of course, the data doesn’t support that—most Netflix subscribers have cable; most cord cutters pay well below costs for content—but it sounds good.

The Cold War

If I took points from The French Revolution for not wearing uniforms, well no one wore any uniforms in the Cold War either. This war was waged via proxies, spies and nuclear stock piles. All of which I have a tough time comparing to the streaming wars. In its favor, The Cold War was a global enterprise, with battlefields from a divided Germany to Vietnam to Latin America to China to Korea to Afghanistan. The streaming wars will match that scope.

War of the Ring (Lord of the Rings)

Human-Covenant War (Halo)

Lots of science fiction or fantasy works have two sides squaring off for all the marbles just like the Punic Wars:

Lord of The Rings. This is the literary equivalent of the Punic Wars. The humans battled Sauron for literal survival. And somehow a hobbit saved humanity.

Halo. This is the video game equivalent of the Punic Wars. The humans battled the Covenant for literal survival. And somehow a super-soldier saved humanity.

Pretty Darn Close

Peloponnesian and Corinthian Wars

Now we’re getting there. While the wars between Sparta and Athens had two sides, each city state had its own power and made its own decisions. Each city state picked a side and either allied with the Spartans (Peloponnesian league) or Athenians (The Delian League). These city-states also struggled with civil wars and popular up risings, depending if they were winning or losing. That’s a lot like the streamers disrupting traditional movie studios, but each city-state still working for its own end and switching sides as needed.

These wars also were bloody, inspiring later theorists to develop the concept of “total war”, when war isn’t just a show of force, but a fight for survival. Like the streaming wars: instead of shedding blood, though, the plan is to shed cash flow.

One Hundred Years War and/or War of the Roses

These two wars were the inspiration for countless fantasy novels, especially one of our “co-winners” of the streaming wars analogue crown. Like the Peloponnesian Wars, two sides squared off for power (first, in France, then in England), with the nobles switching sides and betraying each other whenever needed to stay in power. Still, as much as these previous wars resemble the streaming wars, neither quite captures the scope of conflict. We need a really big war, when the War of the Roses is really squabbling over England’s crown. Not like our next contender.

World War II

Most Americans when they think of wars, they think of World War II.

World War II is America’s favorite war, and Hollywood’s too. Just look at their regular output of Greatest Generation films. The problem for this analogy is that, well, I can’t make either side the Axis. Otherwise they’ll be horrifically offended. 

Not to mention, if this analogy were really true, it would be as if the British turned their guns on the Americans midway through the fighting. Because Disney is squaring off as much against fellow conglomerates AT&T (HBO Max) and Comcast (NBCU/Peacock) as it is Netflix and Amazon. (And those two started the price war in the first place for content.)

Finally, at the end, the Allies won partly because they developed one tremendously destructive weapon. There are no nuclear weapons in the streaming wars. Speaking of which…

Star Wars

This galactic battle was allegedly a “civil war” between two sides—Rebels versus the Empire—that each squared off in decisive battles like a traditional war. Like World War II, though, there isn’t some giant super weapon of streaming which one side or the other can destroy to win the war. I tried to imagine this as “data”, but every streamer has that. 

The best case for Star Wars is that The Force is a mysterious force that rules our lives that no one individual can master, sort of like “creative excellence” is the force that rules Hollywood that no one individual can master.

Runners Up – The Iraq War or Vietnam War

I could make a better case for these insurgencies than the civil wars of old. Where civil wars pit uniformed soldiers against each other, in Iraq, militias faced off against the traditional military against insurgent groups versus terrorists all mixed in with organized crime and genuine political parties. It’s as confusing a web of relationships as my “value web” for entertainment.

What I particularly like, too, is the role of persuasion in this type of war. Insurgencies aren’t just about defeating the enemy in the field, but persuading the population at large to support your side via propaganda, ideology, bribery or threats. Which is how AT&T plans to woe it’s customer base too. I really wanted to make one of these multi-sided insurgencies the winner but…

Again no uniforms! Or even enough cohesion to form coherent battle plans. So we need two other wars to take our crown.

The Winners – The 30 Years War and Game of Thrones

The 30 Years War

Whoa! Went off the “American only” board. Most of my readers don’t know what this war was really about, so let’s just slam off a summary from my AP Euro textbook, A History of the Modern World by R.R. Palmer:

The Thirty Years War…was therefore exceedingly complex. It was a German civil war fought over the Catholic Protestant issue. It was a German civil war fought over constitutional issues, between the [Holy Roman] Emperor striving to build up the central power of the Empire and the member states struggling to maintain independence…It was also an international war, between France and the Habsburgs, between Spain and the Dutch, with the Kings of Denmark and Sweden and the prince of Transylvania becoming involved, and with all these outsiders finding allies within Germany, on whose soil most of the battles were fought. The wars were further complicated by the fact that many of the generals were soldiers of fortune, who aspired to create principalities of their own or refused to to fight to suit their own convenience.

Here’s that paragraph on the streaming wars:

The Streaming Wars were therefore exceedingly complex. It was an entertainment civil war fought over new content distribution models, from streaming to theatrical to cable. It was also an entertainment civil war fought over technology, between new sticks, devices and UX. It was also an industry wide war, between giant tech companies striving to enter entertainment and traditional studios struggling to keep them out. It was also an international war stretching from Sweden to Japan, to Australia to Brazil. It was further complicated by the fact that many of the new entrants were deficit financing their streaming efforts to support other businesses, while all the while clinging to “data” as the raison d’être.

I’ve always had a soft spot for this war in my heart because when it finished, Europe was never the same. Arguably, the Peace of Westphalia established the modern conception of the nation-state. When the streaming wars finish, we’ll have new entertainment nation states ruling our lives. That connection was enough to make this our winner, but there are even better reasons.

This war had it all,. Like a traditional war, there were two sides, the Catholics versus the Protestants, which connects to our “entertainment” versus “tech” narrative. Like the Peloponnesian or Hundred Years war, there were also tons of city-states in the German heartland, like our various streamers, FASTs, vMVPDS and more. Plus there were giant empires funding the fighting on each side, the way Apple, Google and Amazon are funding their streamers. Plus, each side was trying to convince local populations to support their side, so you have influence campaigns like the Iraq or Vietnam insurgencies. The Thirty Years War lasted so long and covered so much territory, it fits almost any analogy.

Finally, if you factor in the size of the population at the time, this may have been the most destructive war in European history in terms of casualties. (Over 8 million by some estimates.) Bet you didn’t know that. 

If we could take a lesson, the bloodshed only ended via diplomacy. In entertainment, this means a tacit agreement to collude on price setting, as has happened in entertainment since the golden age of studios, the golden age of broadcasting, the golden age of cable and someday the golden age of streaming. Just wait.

Game of Thrones

This analogy was written perfectly by Dylan Byers in his must read piece here. Game of Thrones captures the nuances and destructiveness of the Thirty Years War in fictional form. (Even though George RR Martins says he based his epic series on the War of the Roses, the Thirty Years War fits better.)