Category: CBS & Viacom

On Content Arms Dealers, Aggregation and the Perfect Bundle: What Is/Should Be ViacomCBS’ Competitive Advantage?

Let’s get right into Part II of my a quest to find SuperCBS’ competitive advantage. (Reminder: SuperCBS is my nickname for ViacomCBS.)

Competitive Advantage: Become a Content Arm’s Dealer

Why?

I’ll be honest, I didn’t come up with this on my own. I first read it on Twitter by Rich Greenfield. Then I heard it from Matt Belloni and Kim Masters on The Business. The logic goes, with 140,000 episodes of television and 3,600 movies, the combined ViacomCBS has the content people already need for their libraries. Moreover, they’ve been making TV and film for decades. So as new entrants like Amazon and Apple struggle to make good shows, CBS already knows how to do that. They boast 750 shows currently in production or ordered. 

Reading their press release announcing the merger makes one even more inclined to consider this position. They clearly think their advantage is content production. Most of the facts from above came from that announcement.

Upside?

Quantifying the upside here is fairly difficult because you need to separate how many shows SuperCBS will sell to its linear channels, its digital outlets and then other folks. Or what happens to their movie output deals. (For instance, Paramount is already making some films for Netflix.) Instead, the main opportunity is feeding the hunger for content from people like Apple, Amazon and Netflix. They’re buying lots of shows to air globally. It’s a sellers market. You should be able to make money off that.

However, as they grow, Netflix has pioneered the trend of controlling more and more of a show’s distribution. In return, the streamers like Netflix pay something like 130% of the production budget of a show to have its rights for 5-10 years. Except that Netflix then takes a 30% distribution fee, and can cancel a show at anytime, while keeping the rights in the near term. This means you essentially are selling your content for exactly what you make it for, which is a zero margin business.

Skepticism?

The reason that there is even a debate between “distribution versus content” (content is king!), is that everyone wants to be a distributor. The way you make money, the conventional wisdom goes, isn’t to be a content producer, but a distributor. As soon as the FCC relaxed rules on the amount of owned content aired on broadcast channels, all the broadcast channels went to majority self-produced content. As a result, many independent TV producers went out of business by the end of the 1990s

TV Value Chain

In the TV or movie value chain, the worst place to be (besides being a customer?) Is to be the producer in the middle. They’re squeezed on both ends. The creatives demand increasingly higher payments to work on the shows or films. (Creatives like JJ Abrams, Shonda Rhimes, Ryan Murphy or Benioff & Weiss are the rare commodities in this market.) Meanwhile, the distributors insist on huge margins for simply putting out your content. (The traditional film distribution “fee”, for example is 25-30%. The streamers have similar fees.)

Sure, the TV producer “owns” the content, but if they can’t sell it anywhere else, where does the extra money come from to pay for overhead, studio lots and, eventually, shareholders?

Worse, the biggest upside TV producers had is potentially disappearing. That was syndication revenue, which was a monster. Shows like Friends, The Simpsons and, now, The Big Bang Theory are worth billion dollar pay days. But it required making hundreds of shows to get those handful of hits that could be sold into syndication. (Netflix doesn’t let a lot of shows get that far anymore.) If the bundle falls apart, syndication goes too. Will streaming be as valuable as syndication? I’m skeptical long term.

Making matters even worse, companies like Netflix are moving to owning more of their shows, so they can keep these margins low. (Netflix can say, “Don’t like our deal? Well, we have Benioff & Weiss, why do we need you?”)

Future M&A Needed?

MGM and/or Lionsgate. 

If you’re selling content, having valuable libraries will only help you deliver on that value proposition. To go with the arms dealer analogy specifically, MGM is like adding a lot of AK-47s while Lionsgate is a few additional heavy tanks. MGM can bring you Gone With the Wind and The Wizard of Oz while Lionsgate has Twilight and The Hunger Games. Those aren’t bad additions to a streaming library!

Competitive Advantage: Become a Distributor

Why?

If I could choose anyone to be in the streaming wars to come, it would be the folks who are distributing the content. My working theory is these distributors will be the best positioned companies to thrive. These distributors are stepping between the “pipes” to become the new multi-channel provider. The people not just selling their own subscription streamer services, but taking 30% off every subscription they sell.

The best way to make money in entertainment? Not even distributor, but distributor of distributors, taking a percentage without doing the hard work of making TV shows. So Amazon, Apple, and Disney won’t just be people owning streaming platforms like Prime Video, Apple Plus and Hulu, but also selling HBO, CBS All-Access and Starz. And taking 30% from each “channel” they sell you. (But not Netflix. No one gets to resell them.)

Upside

My quick math is that if you can get to 30 million US subscribers, with an $80 monthly bill, and take 30% of that, well that’s a $8.5 billion dollar business. Add an international business with 50 million subscribers at $40 a month, and you’ve added $15 billion to your top line. Not bad.

The non-monetary upside is considerable too. If my theorizing is correct, the new carriage wars are going to be about distribution on the new distributors. (Article on that here.) Say Disney and CBS are having a tough negotiation over CBS All-Access on Hulu. Well, CBS is in an even stronger position if they can also threaten to drop Disney+ from their distribution platform then if they have to argue just on the merits of CBS All-Access (and Showtime). So if you’re a streamer, owning distribution makes it easier to negotiate with other distributors.

Skepticism?

Read More

What Is/Should Be SuperCBS’ Competitive Advantage?

Competitive advantage is tricky. In a nutshell, it’s a business’ unique attributes that give it an edge. If you don’t like that definition, here’s the Wikipedia article. I looked in my strategy textbook to find a simple definition—again, I’m standing on the shoulder of giant’s here—but couldn’t find a simple one sentence definition. Here’s the best quote, though it has some jargon:

IMAGE 1 - Strategy TextBook

Businesses have two challenges with this. First, having a “unique” capability is tough. Hence, most entertainment conglomerates for the last thirty years looked and operated mostly the same. (Start with a movie and TV studio, add a broadcast channel, then some cable channels, with failed forays into internet “stuff”.) Since it is tough, most companies don’t know or can’t express what their competitive advantage is.

In fact, one of my favorite “corporate America” stories is about competitive advantage and lack thereof. Fresh out of business school, I was participating in our business unit’s annual planning process. We were setting our plan for the upcoming year. When you learn using the “case study” method in b-school, well, 8 times out of ten it’s basically “competitive advantage” boot camp. You’re always studying the innovative companies who had a competitive advantage. Unless it’s the cautionary “failed business” case study, which meant they didn’t have a competitive advantage, and the company who did have one ran them out of business. (See Walmart and K-Mart.)

During this planning process, I foolishly asked, “Well, should we explain what our competitive advantage is?” The answer, was, “Uh, no. We don’t need to do that. We don’t need to have a competitive advantage to do our annual strategy.”

Fair enough! My boss was right. She didn’t really need a strategy to make an annual plan. We were going to spend lots of money making TV shows and movies regardless. What does strategy have to do with it? 

Not to mention, making annual plans is easy; doing strategy is really tough. It takes hard work and sometimes it requires admitting your strategy is either 1. bad or 2. non-existent. Moreover, even if you have a competitive advantage, it may not last, meaning you need to start all over again in a few years. Instead, most companies, leaders and groups just don’t talk about it. Maybe your corporate overlords or investors won’t notice you don’t actually have a strategy.

Keeping in mind most businesses don’t have a strategy, or they have a bad strategy, let’s ask:

What could be ViacomCBS’ competitive advantage?

This was the angle into SuperCBS that got me really excited last week. (Since ViacomCBS hurts my eyes to read, I’ve nicknamed them SuperCBS.) After digging deep into what “size” meant for my weekly column, I started musing on SuperCBS’ potential strategy. Mostly, I was dunking on their lack of a strategy. But as I reread the words, it felt a bit hollow.

It’s really easy to point at a company, find a bunch of different problems with their plans, and point out the flaws. If the company fails, I look smart, and can point at the column with a smug satisfaction. Even if they don’t fail, but merely fail to become the undisputed market leader than the column looks smart.

It’s much harder to look at that same company and imagine them as a beautiful strategic butterfly ready to emerge from the Porter’s Five Forces cocoon and fly into the world with a new competitive strategy that will help them acquire customers, grow marketshare and become an in class leader in entertainment. 

If I had to bet, I’d argue that 9 out of 10 entertainment companies–from telecoms to media to entertainment to tech–don’t really have a strategy. (The GAFA’s do, but subordinate business units may not.) This is the best bet to make for SuperCBS. But let’s pretend for the day that they really do have a strategy. I’ll start by listing the potential competitive advantages I see. I ended up with five. I’ll discuss the logic behind them, the potential upside and the skeptical viewpoint. As a bonus, I’ll recommend a merger or acquisition that could be needed to complete the strategy.

(Two cautions before we start. First, this is my “gut” analysis. I haven’t actually stacked all the options up with proposed financials, so I haven’t finished my thinking yet. And to that point since “strategy is numbers”, I’m going to throw a few in for every option, but these are pretty high level numbers. If I were doing an actual strategy, I’d demand a lot more rigor.)

Competitive Advantage: TV Advertising Oligopolist

Why? 

A fact in Brian Steinberg’s recent article really stuck with me: A combined CBS and Viacom could control up to 20% of TV advertising. This got me thinking that “advertising”  could be a capability that lays the basis of a new competitive advantage. This would pair well with Viacom’s recent acquisition of PlutoTV, an ad-supported video service. (Call that either an AVOD or FAST.) The logic here is, if you’re already great at selling advertising, lean into that capability and build it out. Become the ad-supported behemoth of the new TV landscape.

Upside? 

Well, if you’ve seen all the news articles where ad executives beg, plead and beseech Netflix to sell ads, you can tell they want to deliver Millennials advertising. Can CBS step into that role instead? Maybe. (Again, it’s a myth that CBS is only old people. It’s really popular with Millennials too. Even on the coasts!) So there is customer demand, and that will translate to advertising. Here are eMarketer’s estimates for digital and traditional TV advertising revenue:

In other words, SuperCBS currently has 20% of a $70 billion pie. (I found other similar estimates to eMarketers too.) But 40% would be even better! (Again, when thinking competitive, the goal isn’t a small slice, but the biggest slice.) And 40% of a $140 billion pie is even better. Of course, you know where this is going…

Skepticism?

Is the future of advertising digital or linear? Pretty clearly digital, and Google and Facebook have a tremendous head start, with Amazon as a third. Even if you just wanted digital video, Youtube is much farther ahead. (I’ve seen estimates ranging from Youtube owned $4 billion of digital video market in 2014 to $15 billion now, which is the highest estimate I saw. Though, I’m pretty skeptical they’re $15 billion of an alleged $17 billion pie…) 

I’d add even the ad-supported sphere will be extremely crowded and competitive. Roku is a well-placed competitor here. Or Hulu and ESPN+, depending on how many ads they keep selling. Plus, Amazon is getting into the game with IMDb TV and there are a bunch of other FASTs following them. 

Not to mention, you don’t start with ads, you start with customers, who you then sell ads against. The advantage of Netflix—and the reason Madison Avenue wants to work with them—is they already have 60 million subscribers in the US watching tons of TV. CBS All-Access hasn’t show it can deliver that yet. (Though PlutoTV is allegedly growing.)

Also, this is is a fairly US-centric approach, which limits the overall upside. Let’s pause on this last point. Does the strategy of entertainment conglomerates have to be global? Clearly Netflix and Amazon see global domination as a competitive advantage, but maybe by focusing on one country/region, smaller distributors can carve their own niches. I don’t know that I’d buy that, but I could see it.

Future M&A Needed?

Read More

The Myths of CBS…Debunked!

A few years back, I was at a party—more like a family get together—and the subject turned to TV. Everyone at the party started raving about the latest The Big Bang Theory. Then raving about other CBS shows. As an effete, Millennial, west coast liberal, with New York values, I joked about it with my brother. We don’t watch any CBS shows!

Well, that’s not quite true. I currently watch Life in Pieces. I used to watch The Good Wife. My brother watches The Amazing Race.

Hmm.

I was stereotyping. I took some data points and anecdotes about CBS from my experience—both personal and professional—and drew broad, generalized conclusions. Like most people in my social circle, I don’t watch The Big Bang Theory. So I stereotype the people who do, along with the people who watch NCIS (formerly CSI). In fact, very few coastal liberals brag about watching CBS. TV has become a cultural identifier, especially peak TV. We judge other people by the TV shows they watch.

Critics do this too. Well, especially critics.

If it ended there, in judgy cultural wars, fine. But I work in entertainment and media in a business capacity. These stereotypes inevitably infect my thinking. They infect all of our thinking. I’m saying “our” in the “we work in the entertainment industry” sense.

In business, you make decisions. You do that based on data, both good and bad. Stereotypes are bad data, and they’re a lot more common than uncommon. If you use stereotypes to make decisions, you’re likely making bad—sorry, “sub-optimal”—decisions.

On Monday, recapping the end of the Moonves era, I laid out a series of stereotypes about CBS. Broadly, Moonves made shows for “middle America”—meaning rural, white and not coastal—that were popular, but not “good” in a critical sense. That’s the general consensus. Today, I’m going to look at the data today because I wanted an excuse to reexamine these stereotypes I’ve carried for so many years.

Caution 1: I’m going to primarily use Nielsen data for today’s post. I used Nielsen data in past research projects at my former company, but I don’t currently have a Nielsen subscription. This means I’m relying on websites that do, that also publish their results. This makes it tougher to interrogate the data. Further, I wasn’t a Nielsen ratings expert by any means. (I was focused on streaming data, you know?)

Caution 2: This is also going to be a lot of selective data pulling. I’m not setting out provide a definitive answer. Instead, I want to pull just enough data to make you question your own assumptions and stereotypes.

Myth 1: CBS was popular with middle America, meaning not the coasts or not the cities.

If you think middle America, you think the middle of the country, not New York and Los Angeles. Fortunately, New York and Los Angeles are large enough markets that Nielsen could tell us how well shows performed in those specific geographies. Unfortunately, as I mentioned above, I don’t have a Nielsen account.

Here’s what I did find. Joe Adalian of Vulture used Comcast Xfinity data to pull the most popular shows by city. Here are three cities as an example (but seriously read the whole article):

Chart 1 City View 3

Source: Xfinity viewing data via Indiewire

The first lesson is that different cities do have different tastes, and likely these differ even further from rural tastes. America isn’t some uniform blob. Obviously. That’s what makes this a great country.

But…and here’s the huge but…notice that The Big Bang Theory is just popular. It made every city list except one (out of 16). Blue Bloods made a bunch more. (The data is from 2016.) My guess is CBS would do pretty well in the top 25 and top 50 lists.

The lesson is that sure CBS “over-indexes” in the middle of the country. But CBS still has a lot of fans in cities. And in all the states. That’s what blockbusters do. Besides Game of Thrones, The Walking Dead, and, I presume, Stranger Things, CBS is the closest thing to blockbusters in TV.

Myth 2: Middle America means old people.

CBS is an aging dinosaur and no one who is under 50 watches the channel.

That’s the stereotype. While it is true a lot of cord cutters are young people, a lot of cord cutters are also older people. Another stereotype for another article. But just because CBS over-indexes on older viewers, which it does, doesn’t mean that no young people watch the network. That’s a fallacy. For this data point, I used Michael Schneider’s summary of TV network performance from 2017. Here’s the broadcast channels:table-2.jpg

Source: Nielsen via Indiewire

It isn’t that CBS under-indexes on younger viewers—it has roughly the same as ABC and Fox—but that it has such an over-index on older viewers. More young people watch CBS than watch any cable channel on average.

Again the lesson isn’t that CBS doesn’t favor older viewers or favor rural areas versus cities. But it’s much too simplistic to say CBS is only older viewers, which is the stereotype. We need to be careful moving from a “trend” to to “no one” or “never”. That’s when evaluating data turns into stereotypes. (And bad decisions.) A lot of young people still watch CBS, not zero.

Myth 3: Middle America means white people.

Don’t get me wrong: I’m not setting out to prove that CBS is the most popular TV network for viewers of diverse backgrounds such as African-Americans or Latinos. I don’t think I could prove that because it isn’t true. But is the converse true, that no African-Americans watch CBS, which is the stereotype?

No. Here’s from Nielsen directly, their top 10s of a given week, broken down by demographic:Table 3

Source: Nielsen

Do you see differences in viewing habits? Yep. Only four shows overlap between the two lists. That said, a CBS show makes the cut for African-Americans, and I bet if we saw the top 25 or top 50 we’d see some other CBS shows make the list. Yes, CBS skews older and whiter, but it isn’t a monolithic blob. It’s heterogeneous, like America.

Myth 4: CBS has underperformed financially.

Okay, this isn’t a widely repeated myth, but it is the analysis I read in two critiques of Moonves, one by Richard Rushfield in Vanity Fair (which I said you should read on Monday) and one by Joe Nocera in Bloomberg. Both articles cited CBS stock price lack of stock growth as evidence of Moonves’ failure as a CEO. Nocera used a pretty blunt headline for this, “Moonves was not a good CEO”. Here’s their evidence in two charts:

Pic 4

Source: Bloomberg.

I have two responses to this. First, yes, the stock price has been flat. That said, if you have faith that the stock market is a good predictor of future performance in particular (meaning for individual stocks) then you have a lot more faith in the market than I do. (Also, if you pick and choose dates on the stock market, you can rig the outcome.)

Moreover, when judging firms, I hate just using one metric. This comes from my unwavering belief in “the balanced scorecard” approach to most problems. If you just focus on stock price, you’ll get executives focused on inflating that. If I had to pick one metric above all else, though, I’d pick cash instead of stock price. Specifically free cash flow. So here’s a comparison of the CBS Corporation and, oh say, Netflix in the terms of free cash flow:table-4.jpg

Source: MarketWatch.com and Annual Reports

I’d love to include other broadcast channels such as Fox, NBC and ABC, but they’re so encumbered by their large conglomerates it would be too tough to untangle. (And I didn’t do this analysis, I relied on others, either the company’s own annual reports or MarketWatch.) Either way, to call CBS a financial disaster is disingenuous at best and flat wrong at worst. It generated at least $3 billion for shareholders in the last three years, whereas the main tech giant in tech lost at least $4 billion, and plans to potentially double that number this year.

But this myth isn’t really about the numbers, but the narrative. Let’s get to that.

Myth 5: CBS is old broadcast, not new tech.

This accusation was leveled by Rushfield, Nocera, and I’d add most importantly, by Rich Greenfield, the most quoted analyst in entertainment. Here’s the money paragraph from the Nocera article, citing Greenfield:

There were no larger ideas — no sense that Moonves had a plan for competing in a future where Netflix has size CBS can’t match (130 million subscribers), HBO has content it can’t match (“Game of Thrones”), and AT&T-Time Warner has revenue it can’t match ($158 billion vs. $14 billion). Nor was there any inkling that he might invest for the future if it meant taking a short-term hit to earnings, something Netflix does as a matter of course. Rich Greenfield, the BTIG analyst who has been a rare Wall Street voice critical of the CBS chief executive, says that Moonves has long preferred to “focus on short-term cheerleading actions versus real long-term strategy.” Greenfield is right.

First, saying CBS didn’t have a strategy is my pet peeve. Clearly they had a strategy to generate about a billion in cash each year. You may not like it; you may not be able to define it, but they had a strategy. If you want to criticize someone’s strategy, define it first, then criticize it. Otherwise you’re building a straw-man.

Second, wait, it doesn’t have the content? That’s Nocera’s second point, but honestly, CBS makes more popular series than HBO, so that’s just not factually accurate. Both NCIS and The Big Bang Theory have viewership comparable to Game of Thrones. It also took a huge swing with Star Trek: Discovery.

Third, size isn’t a strategy. Ask GE. Conglomeration goes in waves, as I predict this wave of consolidation will do. (Also, I hate industry consolidation. Bad for consumers, good for stock prices. More in future articles.)

Fourth, it’s all moot because of the broadcast channels, CBS was the most forward looking. Alone among the broadcast channels, CBS had an independent streaming platform.

Disney still doesn’t have a plan for ABC with streaming, NBC has been trying to figure out a digital strategy since Comcast acquired them—and they have so many stakeholders they still haven’t figured it out, though they are hinting in recent interviews they have—and who knows what Fox’ plan is now that Disney is buying almost all of 21st Century Fox except for the broadcast.

So it can’t be about the tech. What really bugs Nocera/Greenfield about CBS?

That CBS won’t burn cash to grab market share.

Really, that’s what separates CBS from Netflix. They could have taken the $1 billion in free cash flow and made say 40 additional shows and put them on their streaming service, and poof cash gone. (Or ten shows at Netflix/Amazon Prime/Video/Studios prices.) Amortize over long enough it may not even hit the net profit line.

But Wall Street would have crushed them with that approach. Only Netflix gets away with that in today’s stock market. If you’re criticizing CBS for having a flat stock price, what would you have done if the stock price had tanked?

To sum up, was CBS the best streaming platform? No. Was it the most dinosaur-ish of the broadcast channels? No. It was somewhere in the middle, in that it was actually small enough to be able to launch CBS All-Access, even if it was late to the streaming party compared to Netflix, Hulu and Amazon.

Myth 6: CBS makes bad TV shows

Listen, I’d love to find an absolute ton of links with critics saying this, but I think this sentiment is, if anything, more popular in quiet discussions at entertainment shindigs than it is something said out loud. In the entertainment press you don’t want to burn too many bridges or future places of employment. The best summations were Todd Van der Werff’s three articles on the subject from 20152017, recapping each year’s upfront.

The problem is “bad” is just so darn subjective. So we need to find a way to prove this. I have two definitions that get semi-objective: awards and critical acclaim (which is usually the forerunner to awards). For the last time, and fifteenth time this article, I’m not setting out to prove that CBS is the best at making award winning shows—it clearly is not—but that it hasn’t completely struck out. (This is probably the most “accurate” myth.)

Awards

Reviewing the Emmy nominees for drama and comedy (the Golden Globes aren’t a real award show) since Moonves took over in 1995, CBS popped up regularly. Not the most, but not the least. In comedies, Everybody Loves Raymond won twice, Two and a Half Men was nominated, along with How I met Your Mother and The Big Bang Theory. The Good Wife was one of the few broadcast dramas nominated for several years.

In smaller categories, David Letterman won for talk show until Jon Stewart took a stranglehold. (Colbert and James Corben have both been nominated recently.) The Amazing Race, though, had a similar stranglehold on the reality-competition award for years.

Critical Acclaim

Okay, I’m not going to fight this battle. Most critics hated everything on CBS. This stereotype is accurate that critics just hate on CBS.