Category: Covid-19 Impacts

Covid-19 Tracker: What Should Disney and Universal Do with Black Widow and Fast 9?

Week to week, other stories may be the “most important”, but that doesn’t mean that Covid-19 isn’t still the biggest story. As I wrote in a very long article on February 19th, we’re moving away from “lockdowns” as the story to “the reopening of society”. However, that article was limited in that I mostly focused on theaters, not movie studios. The trends that may allow for theaters to reopen are different from the business rationale for studios to release their tentpoles in theaters. They’re related (correlated even), but not causal.

But that still leaves the open questions: will Disney release Black Widow in theaters? what about Universal and Fast 9?

Let’s first review the upcoming theatrical slate, then get to the specifics for those two studios.

The upcoming theatrical calendar could help theaters reopen.

Notably, I didn’t put any specific timelines for when and at what levels theaters could reopen. The variables are too many. States have different criteria and regions have different rates of outbreaks. However, the models do show that a clear majority of folks will have access to vaccinations by the launch of Black Widow on May 7th. Other models back this up. Here’s data scientist Youyang Gu’s look:

Screen Shot 2021-03-02 at 11.20.25 AM

Why wait so long? We’re vaccinating folks so quickly and cases are still generally dropping. Could the reopening take place even faster? Especially with news out last week that New York is reopening theaters at 25% capacity? Could both New York and Los Angeles be open by March? And what would that mean? 

For context, here’s The-Numbers upcoming theatrical calendar:

Screen Shot 2021-03-02 at 11.23.50 AM

Interestingly, these are films that are locked into the calendar. Raya and the Last Dragon will be in theaters and available on Disney’s Premiere Access program. Warner Bros is releasing all their films both on HBO Max and in theaters, including Tom and Jerry last weekend, King Kong vs Godzilla on March 26th and Mortal Kombat in April. In other words, for the big films in March, they aren’t going anywhere, because of the dual release strategy.

Ironically, for as much as theaters hate losing exclusivity in the long run, in the short term this could give them some confidence they will have movies to play if theaters are open at either 25-50% capacity by the end of March. In the fall, there was a chicken and egg problem with theaters: they didn’t want to reopen without big movies to play, but studios didn’t want to give them big movies to play until they were open. The Warners and Universal films being released anyways may solve that problem. Or take this fun quirk: Tenet will premiere in New York this weekend since it never was officially released in theaters in New York. Same will happen in California eventually.

For a few months now, I’ve been focused on Black Widow as the tentpole that was needed to bring theaters back. It’s Disney and, even better, it’s Marvel, so that’s as close to a sure thing a studio could have. But my focus on Black Widow may be too late. If Los Angeles and New York are open for business by March 26th, Godzilla vs King Kong may claim the title as first “blockbuster” of the post-pandemic era.

(And if I were at a studio? I’d be looking to move films up into April. If you get rid of the (largely artificial) constraint of needing a full six to eight week marketing campaign, something like James Bond could slot into April 23rd and have two weeks by itself in theaters. But this is risky/aggressive, which isn’t usually how you’d describe movie studios.)

Despite this, Disney may not open Black Widow on May 7th

As bullish as I am on the “return to normal”, I am not confident Disney will open Black Widow on May 7th, as it is currently slated. There are as many good reasons as bad ones for Disney to keep or move the date. Some of them are qualitative and some are (or could be) quantitative.

Reasons to Move:

– The “expected value” of moving the film may still be positive. Here’s that quick math. The total domestic box office haul of Black Widow (or Fast 9) is in the hundreds of millions. Call it $500 million. (Above the other top individual hero films, but below everything with the Avengers or Black Panther.) Right now, with theaters at 50% capacity or closed altogether, the worry is that Black Widow will only get some percentage of that. Say 75%. If Disney could move the film back just a few weeks to get 100% of that domestic box office, then you’re talking about making an extra $125 million. If you want to quibble with these assumptions, go for it. This is why modeling is tough! But the basic shape of the problem–moving back guarantees higher returns–is in studio executives’ heads, and why they moved all the 2020 films to 2021 in the first place.
– Culturally, especially the progressive/liberal side of the culture, it is seen as irresponsible to be associated with anything that involves leaving the home. Every late night host I saw equated opening theaters to killing folks. The studios can/do worry that they will get lots of negative PR for helping theaters reopen.
– Disney has to make the call soon. Related to the expected value decision, Disney has said they’ll make their decision in the next couple of weeks. Even if the numbers continue in the right direction, there will be plenty of uncertainty about how the situation will look in May. There is lots of speculation about variants and a spring surge. Cases could easily spike in a “spring surge” that shuts down society again. (Though deaths won’t spike with them.) 

Reasons to Keep the Date:

– The entire Disney MCU calendar needs to starting hitting theaters to tie in with the Disney+ TV series. At some point, even Disney can only wait so long. Moreover, the “expected value” of moving the entire calendar back may not be worth it. In other words, say you think Black Widow will still get 90% of the potential domestic box office, that could be worth airing so that Disney can still release Shang-Chi in July and Eternals in November. Getting ninety percent return is much better than getting 0-25%, which was what would have happened if Black Widow premiered last November.
– Disney and Comcast could both try dual release strategies, allowing their films in both theaters and Premium VOD windows simultaneously. That would allow Disney to keep their MCU schedule intact. (This is actually the best argument for keeping the date.)
– The sooner Disney gets MCU films in theaters, the sooner they come to Disney+. Since theatrical films are great at attracting new customers, this would really help Disney+ drive subscriber growth.
– PR-wise, there is also the story to sell that Disney was the film that brought folks back to theaters. That could be a story as positive as it has risks. Especially if the mood of the country shifts and the narratives about getting vaccinated to return to normal are seen as positive.

Add it up? And I have no idea (nor inside info) on what Disney plans to do.

Neither keeping the date, nor moving it would surprise me at this point. While there seems like enough evidence that going to the theater has much less risk than indoor dining, the latter will likely restart soon, but theaters remain in reduced limbo. And so will big tent pole films.

Why I Think Theaters Will Return in May: Forecasting When Society Can Reopen

A character in The Sun Also Rises described going into bankruptcy as happening “gradually and then all at once.” This apt description has been applied to everything from debt insolvency to failed democracies. 

The US recovery from Covid-19 will likely feel the same way.

Right now, most of the coverage I read is fairly pessimistic and cynical. On one hand, I get it. The US just had an awful winter. Covid-19 will claim 500,000 deaths in the US alone, and that number is growing. Even positive coverage is framed with caution:

IMAGE 1 - Calm Variant Storm

IMAGE 2 - Experts Still Worried

IMAGE 3 - Reopening v03

On the other hand, doesn’t the US have a lot of good news on the Covid front? Is this pessimism still warranted? Forecasting doom and gloom could be as inaccurate as forecasting sunshine and roses. Where are we really headed as a society? Given the huge implications for the economy, this is a tremendously important question that very, very few people are answering:

When will society reopen after the vaccine rollout?

For my purposes, a lack of forecasting about the future is particularly painful. While lots of entertainment is consumed at home (TV, streaming, video games) lots more is experience live and outdoors (theaters, concerts, sporting events, theme parks). As I usually do when I can’t find an answer to a question I need to know, I tried to answer it myself. 

So here’s a report on what I found. The outline of this (long) article is roughly:

– Bottom Line, Up Front
– The Problem: the legal/regulatory thresholds for society to reopen
– The Assumptions/Inputs: the key assumptions/inputs to build a reopening model
– My Hypothesis: Effective vaccines widely distributed will crush the death toll
– The Model: My results!
– The Key Metrics To Track Going Forward

Let’s get to the results.

Bottom Line Up Front

I’m optimistic that theaters will be open by May 7th across the US, including New York and Los Angeles, the day Black Widow is set to premiere in the US. Black Widow itself may not premiere on that date, though whether or not it moves dates in the next few weeks will be driven by uncertainty, since Disney will have to make the call in about four weeks.

After building a vaccine distribution model (with three scenarios), I’m confident that by early May, between 33%-44% of the population will be fully vaccinated, and up to 61% will have had a first dose. Given the initial data that even one dose provides nearly full efficacy, this level of vaccination will likely decrease deaths and hospitalizations by 76% or more.

It is much more uncertain what the volume of cases will look like by May 7th. The key metrics to focus on, for studios and other entertainment companies, will be the pace of vaccinations, the current case loads, and the rate of death.

(Initially, I had a series of caveats to this controversial article. I can hear the skeptics, “You’re not an epidemiologist so why should we listen to you?” To save space, I’m moving those to their own future article. To address the key caveat, yes, I’m not an epidemiologist. 

Frankly, most companies cannot afford to hire epidemiologists to forecast disease outbreaks. And even if they could, as we’ll see, their models have their own uncertainty. Instead, many companies will likely have their strategy teams doing this analysis themselves and/or rely on models from companies like McKinsey/Goldman Sachs, which are, you guessed it, put together by people like myself. The difference is I make my models/methodology public.)

The Problem: When Will Theaters Open Specifically?

Today, I’m focused on the movie theater problem. (Hopefully, I’ll get to sports and concerts in future updates.) The problem for big studios is distribution: when they release a big tentpole film, they want it widely available. Specifically, this means Los Angeles and New York, and other big cities. They’d ideally want theaters at 100% capacity, but would likely accept 50% capacity constraints.

Thus, the question is whether those specific cities (and America broadly) will be mostly reopen by May 7th, which is when Black Widow premieres. (Or Memorial Day weekend, 28-May-2021 when Fast 9 is set to premiere.) The studios will need to make this call about eight weeks prior, so that they can schedule promotional advertising campaigns. Disney has said they’ll likely make the decision on Black Widow in the middle of March.

To reopen theaters, local counties will need to have Covid outbreaks under control, using whatever guidelines local states have established. In California, for example, this is a series of “tiers”, of which Los Angeles is firmly in the first, most restrictive tier. From the Los Angeles Times:

IMAGE 4 - Reopening v01

And our status under those definitions:

IMAGE 5 - CA Status LA Times

(Though, like all things Covid-19, there is actually a more restrictive tier of “stay-at-home orders”. California’s stay-at-home order was lifted in January.) 

Tying this to theaters, in California, “red/tier 2” counties can have theaters at 25% capacity or under 100 people, whichever is lower. “Orange/tier 3” counties can have 50% capacity or 200 people, whichever is lower. “Yellow/tier 4″ presumably would be fully open.

Covid Act Now, uses a different set of guidelines, and you can see how various metro areas stack up:

IMAGE 6 - Covid Act Now Metro

No matter which numbers you use, the same basic correlation is the same: The lower the number of cases, the more indoor businesses which can be open, which includes theaters.

As cases decline, so do deaths, after about a three week lag. Crucially, as vaccines are widely distributed, deaths may decline even further and faster than cases. If deaths drop and stay low, even if cases come back, some folks could argue that the values of reopening society outweigh the risks of disease spread. (In short, if a pandemic is raging, but no one is dying, is it a pandemic?)

So really there are two scenarios for reopening. One is the “public health” requirements, which means eradicating cases. The second is the “demand side” requirement, which is that deaths and hospitalizations are low enough that society wants to reopen.

The Key Assumptions/Inputs

The reason I couldn’t build a model before 2021 on Covid-19 was that forecasting the pace of the disease was nearly impossible. With so much uncertainty and unknown variables, most models have failed to effectively forecast what will happen in the next two to three months. 

Vaccines, on the other hand, are an easier modeling challenge. We have fairly reliable data sets on distribution and fairly robust (and growing) knowledge about how effective they are. Let’s explain those inputs/assumptions.

Input 1: The pace of vaccination is increasing in the US, and could accelerate further.

No matter how you slice the data, the rate of vaccinations is growing in the US, and it’s a story that most outlets mention, but with the pessimistic caveat that everyone wishes they were even higher. (Yes, we do.) But they’re getting higher every week. In a few weeks, they will be shockingly high. Here’s Our World in Data’s look:

IMAGE 7 - OWiD Vaccine Rate

Or take Kevin Drum’s take, looking at peaks:

IMAGE 8 - K Drum Update

The US was able to double vaccination capacity in ten days starting in January 4th (350K per day, seven day average) to January 14th (700K). I start with January 4th, since that’s when most healthcare workers returned from Christmas break, and all state and local governments focused full-time on the vaccination program. Then, it took 26 days to double again (from January 14th to February 9th). Depending on when we get to 2 million doses, it may have taken only 30 days to have doubled from 1 million doses to 2 million. (We’re currently at about 1.7 million per day.)

We will likely be delivering two million doses per day, as this week the Biden administration committed to delivering 13.5 million doses to states at a minimum. On top of this, the Biden administration is delivering two million doses directly to pharmacies and one million doses to community health centers. If all those doses are used next week, we’ll exceed 2 million doses administered per day. Further, the CDC expects 200 million total doses distributed to states by the end of March, which implies a daily rate of 3.5 million doses per day in March.

Input 2: One Vaccine Dose Begins Providing Protection

The initial data from the UK and Israel shows that even one vaccine dose provides a high level of protection. This does not mean individuals shouldn’t get a second booster shot. They clearly should. Very likely, though, the first dose provides immediate impacts on infections, hospitalizations, deaths and even transmission. More and more data is coming out which supports this conclusion.

Input 3: The Covid-19 vaccines work. Extremely well.

It seems crazy to have to repeat this, but it should be noted that the vaccines work really, really well. You probably saw this tweet from Brown epidemiologist Dr. Ashish Jha, but it’s worth repeating:

Moreover, studies conducted in the United Kingdom and Israel on vaccine roll outs confirm the efficacy of these vaccines. In addition to preventing symptomatic illness, the vaccines also drastically reduce hospitalization and death. Finally, initial data also suggests that in addition to preventing death, it looks likely that the vaccines prevent transmission to other individuals.

Input 4: Covid-19 is most severe for older individuals, who the US is prioritizing in the vaccine rollout.

While the coronavirus can and does kill all ages, one of the more clear trends is that the virus disproportionately kills older individuals. Here are a few looks at this:

IMAGE 9 - Deaths by Age

IMAGE 10 - Deaths by Age v02

Fortunately, in January, after vaccinating healthcare workers, the CDC changed guidance to focus on high-risk (meaning older) populations. This means the impact of effective vaccines will be even greater than general distribution because it will decrease hospitalizations and deaths of those most likely to be hospitalized and die. 

If we can achieve high levels of vaccinations in those groups (say 80% of a given age population vaccinated) then the results will be dramatic. Vaccinating 80% of individuals over 75 will lower total deaths by 48%, individuals over 65 will lower deaths by 65% and vaccinating individuals over the age of 50 will lower total deaths by 76%. (And if we can achieve 100% vaccination in the most at risk groups? We’d lower total potential deaths 95%!)

Input 5: The current lockdowns are having a dramatic effect.

Meanwhile, as the Covid Tracking Project’s data show, the number of cases are plummeting in America. The declines are dramatic:

IMAGE 11 - Covid Tracking

Whatever the cause—lock downs, seasonality, growing natural immunity, some vaccine prevention—this is very good news for the United States. It means cases are trending down, right when vaccine distribution is ramping up.

Input 6: Case rates by population

To understand the impact on cases, beyond deaths, it is important to know how cases are distributed in the population. Unlike deaths, cases are fairly well aligned with the population. Meaning, folks will test positive for Covid-19 roughly correlated with their percent of the population. 

IMAGE 12 - Case and death and population

This is important because it could mean that as vaccines are rolling out to younger populations, the case rate could flatten or even increase, but deaths will not. There is already evidence that case loads are dropping in certain age groups in the UK, Israel and US, but as you can see that may not impact the overall case load significantly.

My Working Hypothesis

Add these inputs together, and this is my working hypothesis:

If current lockdowns can drive down cases…
Which will drive down hospitalizations/deaths…
And if the United States can vaccinate the highest-risk groups…
And if we can continue to increase the vaccines distributed per day/week…
Since vaccines prevent deaths and hospitalization…

Then once we get the current hospitalization rate down, it will stay down until the next flu season (next November or December). If hospitalizations are down, deaths will stay down as well.

This will allow states to reopen, including theaters.

The Model

So that’s the working theory. Let’s turn this into a model.

Step 1: Vaccine Distribution

To start, I sketched out some vaccine distribution scenarios. To start, I drew a linear model in vaccine distribution to see how it was growing. Then, I made a simpler second model based on potential vaccine supply. This weekly model uses big round numbers, but is more aggressive than the linear model and based on CDC guidance about distributing 200 million doses by the end of March. Lastly, I made a very conservative model based on plateauing vaccine supply at 2 million per week starting in February. 

First, here’s the linear model to show the logic:

IMAGE 13 - Scatter Plot

Here’s the table of doses by week:

IMAGE 14 - Table per Day

And a chart of that…

IMAGE 14 - Chart

That’s a lot of number, so here is a summary by month of the “reasonable” model.

IMAGE 15 - Chart

The monthly model confirms that vaccine makers could indeed hit the aggressive targets. I built the conservative model based on misreading the director of the CDC Rochelle Walensky estimating that we’ll have 200 million doses by the end of March. (I thought she had said 200 million by the end of April.) At a rate of 200 million doses by the end of March, the CDC is basically forecasting that we’ll be vaccinating 3.5 million people per day at some point in March. That’s my “reasonable” but aggressive model.

Step 2: The number of vaccinated individuals

So that’s the first step. We can reasonably forecast how many doses we’ll have distributed by future dates. Yet, some folks will insist on distinguishing between shots and those who’ve been fully-vaccinated. I went further and also calculated those who will be two weeks from their first dose, since data shows this too provides quite a bit of protection. Specifically, we need to know these dates by the start of May, our presumed launch of Black Widow, 

Here is my rough counts for those, and to put them into context, the percent of the population over the age of 18 who would be covered:

IMAGE 16 - Numebr Vaccinated

IMAGE 16 - Chart

(Why over 18? Because the vaccine is only approved for those 16 and over, and Covid-19 has very little impact on ages younger than that. Plus, frankly, it is about 250 million individuals which is a nice round number.)

In the worst case scenario, by the time Black Widow premieres, only 30% of the population will be fully-vaccinated. 

However, in the best case scenario, if you include natural immunity, one dose vaccines and count folks who are two weeks from their first shot, then up to 69% of the population will have immunity to Covid-19. So we’ll be on the verge of herd immunity by the end of April!

Let’s be clear on these assumptions:

– Some portion of Americans have already had and recovered from Covid-19 acquiring natural immunity to it. This floor is at least 27 million confirmed cases. (About 10% of the population.) The high end is unknown, but Harvard epidemiologist Michael Mina’s forecast is 40%. Let’s split the difference and call it 20%.

– I used the date five weeks prior since Moderna is three weeks, then two weeks to be fully effective. Yes, Pfizer is four weeks, but again this difference is minimal overall.

Step 3: The number of deaths prevented. 

Again, the impact of Covid-19 is not equal across the population. It is very much tilted towards older individuals. Meaning, when they are vaccinated, the odds of dying from Covid-19 decease by 92% or more.

To figure out how to vaccinate the right folks, I simply took the CDC data and 2019 census information, and assumed an 80% vaccination rate:

IMAGE 17 - Deaths and Cumulative Distribution

In other words, to prevent 76% of deaths, we need to vaccinate 80% of everyone over the age of 50. The key assumption is that we can achieve 80% full vaccination by group. Most surveys put vaccine hesitancy at 70% of the population, but only about 10% is hard core obstinacy to any vaccine. So I took a number in the middle.

So how many people do we actually need to vaccinate to get to that 3/4th decrease in total deaths going forward? Well, here you go:

IMAGE 18 - % Needed to Vaccinate

Of course, not all doses will go to healthcare workers and individuals over the age of 65, especially as counties and states begin vaccinating more essential workers. (Like Los Angeles, who is moving onto food workers, teachers and remaining public safety officials after those older than 65.)

Given the vaccination rates above, we can see that it is very, very likely we’ll have fully vaccinated 40% of the population with either one or two doses, including most healthcare workers and folks over 65. A big portion will also likely be those 50 to 65. If we include people getting only 1 dose of Johnson & Johnson, then we’ll almost certainly have vaccinated all high risk groups.

My model forecasts that by May 7th, we’ll have lowered the ceiling of potential deaths by 76%. If this widespread vaccination results in decreased case loads and transmissions, the actual death rate could be much, much lower. This is essentially the “ceiling” of deaths.

Step 4: The Los Angeles Specific Model

This model, so far, has only addressed vaccinations and deaths. What about cases?

As I set up in the problem, the primary criteria to release Black Widow (and other big studio films) in theaters is whether or not the coastal cities are reopened. To answer this, ideally, I’d build a model forecasting cases in both of those cities. Given that I live in Los Angeles, I pulled the numbers there to see how far LA is from reopening. I’m assuming that Los Angeles and New York are roughly correlated with each other, and their outbreaks are also roughly correlated with national outbreaks.

(This assumption is both fine and could be horribly wrong. The “summer surge” mainly took place in “Sun belt” states, whereas the first surge took place in north Eastern states. However the last surge took place in every state simultaneously.)

I showed Los Angeles’ current performance on state re-openings, but it’s worth noting that most metrics are tied to case loads. If it goes down, ICU capacity, case positivity rate and the equity will trend downward as well. Here’s the current case trend line:

IMAGE 19 - Case Trend Line

Now the question is can we model how vaccine distribution could impact case levels going forward?

And no, I don’t think we can. 

I’ve done a lot of forecasting so far, but every number is from a fairly reliable source. The vaccine distribution plan is fairly well reported, and its growth is easy to forecast. (Again, look at that straight line!) The impact of the vaccinations is also fairly well known. Thus, we can confidently predict a coming drop in deaths that will stay low, if we vaccinate the most at risk groups.

Cases, though, are a different ball game. 

Just look at US trendiness in the past. If you started in the middle of October, and just extrapolated forward, you’d have missed the December spike. Or if you started in the middle of January, you’d have forecast cases to stay high. This actually happened with the CDC forecast. In the middle of January, their model of models forecast 1.5 million cases by the middle of February, with a floor over a million.

IMAGE 20 - Forecast

Instead? Cases are currently at 600K and falling.

IMAGE 21 - Cases Feb

I don’t blame the CDC. Modeling seasonality, societal behavior and mostly a brand new virus is incredibly tricky, and these epidemiological models have trouble with it. Again, no blame here from a fellow modeler. I’m just acknowledging the limitations of modeling.

Add it up, and I won’t forecast the case rate/total cases in Los Angeles by the beginning of May. There are too many unknown variables. Indeed, I think both the best case (cases stay very low, due to natural immunity and expanding vaccinations) and the worst case (case rates rebound after widespread reopening, potentially driven by more transmissible variants) are both possible by May. The only thing I am fairly confident (as steps one though three show) is that deaths will stay down. 

At best, what we can say is that as vaccinated rates go up, the peaks of the worst metrics will be limited. Think of it like this: the infection rate is the number of people an individual with symptomatic Covid transmits it too. If it is 2.5, that means one individual gives it to 2.5 individuals. If half of all the people someone meets are protected from Covid-19, then the max number would now be half of that, or 1.25. 

The Key Metrics Going Forward

Notably, I haven’t provided any probabilities thus far. If I apply probabilities to events two months out, my error bars would need to be very, very wide. Those probabilities wouldn’t be worth much more than guesses. 

Instead, I’m going to provide a scorecard of key metrics. The higher the scorecard, the more confident we can be that society will returning to normal. You can apply your own probabilities based on the numbers. These metrics will have three parts: vaccinations, deaths and case loads. 

Screen Shot 2021-02-18 at 5.02.44 PM

I plan to think on these metrics a bit before I do an update, hopefully next week. As I said, I won’t provide predictions, except for the vaccine roll out, but will color code which metrics are moving in the right directions.

As I said at the start, if you read all the way down here, as vaccine distribution picks up, the Covid-19 pandemic will end gradually, then all of a sudden.

In the meantime…

Please do whatever you can to prevent the spread of Covid-19, focusing on the best practices at preventing spread. 

1. Wear a mask. In fact two, or the highest quality you can afford.
2. Avoiding indoor gatherings until you are fully-vaccinated.
3. By all means, get vaccinated as soon as you are able to.
4. Help older relatives get their vaccinations by whatever means necessary.
5. Spread positive news about the efficacy and safety of vaccines and that they will enable our society to reopen. Vaccine hesitancy is driven by vaccine skepticism, a large amount of which is coming from the media. This includes skepticism about how vaccines prevent hospitalizations and death. Do your part to spread the good news and not Covid-19 hysteria.

Sources

I linked to most data I used to put this together. However, a few websites provide regular updates. I recommend…

Our Wold in Data
Covid Act Now
The Covid Tracking Project
The Los Angeles Time
Bloomberg Vaccine Tracker
Nate Silver’s Twitter feed, who close followers will recognize a few tweets from.

An Aggressively Moderate Take on Coronavirus and Sports

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

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

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

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

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

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

Supply

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

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

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

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

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

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

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

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

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

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

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

Demand

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

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

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

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

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

Employment

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

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

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

Bonus: The Breaking of the Bundle?

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

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

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

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.

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.

Most Important Story of the Week – 13 Mar 20: Love (Films) in the Time of Coronavirus

The most important thing in this time of crisis is to focus on staying healthy and being good citizens. So don’t hoard food, avoid public gatherings, and try to donate blood.

Still, the economic consequences will quickly become as real as the pandemic ones. This is really what we pay CEOs for; not how you govern in times of booming stock prices, but times of crisis. 

For the next few weeks, since Coronavirus will dominate the news coverage, it will dominate this column too. I plan to run through how all the parts of the traditional and digital video value chain could be impacted. 

Image 7 Video Value WEb

Emphasis on the “could”, because in times of crisis there is a lot more we don’t know then do.

Most Important Story of the Week – Hollywood Pauses Production; Theaters Begin to Close

In my last weekly column, I speculated that the Coronavirus Pandemic had finally reached the “economic consequences” stage. Arguably, I was too late to make this warning very useful. But if any doubters remained, last weekend cinched it. Every big film moved out of the Q2 time period and nearly every major sporting event was cancelled. This week—I’m dating this for the 13th of March, but posting on the 17th—most major theater chains have closed.

Still, I hedged. Especially about predicting what would happen to entertainment companies.

Indeed, I tried to commit to the position that I wasn’t going to forecast the future. Why? Well, it’s impossible.

Which hasn’t stopped folks of course. Within the swarm of actual news came the opinions you’d expect, usually verging on the apocalyptic. “This is the death of theaters” being a typical example.

How do movie studios banking on theatrical releases handle that uncertainty? Well, they have quite a few strategic options. Given that theaters are the most visible part of the video value chain, we’ll start this mini-series there.

Before that, though, a rant…

Probabilistic Scenarios vs Narratives

The biggest “narrative” impacting actual stock prices goes like this…

…the impending quarantine will leave Americans (and the globe) stuck at home.
…Americans (and the globe) like Netflix.
…Therefore, they will binge a lot of Netflix.
…So Netflix wins the coronavirus sweepstakes.

Um, maybe?

Like most things “Netflix” when it comes to the narratives the only thing larger than the impact of the narrative is the stridency of the belief. Once the “Quarantine and chill” narrative started, it quickly went from “hypothesis’ to “thesis” to “inevitable outcome”. 

But consider this: if all the studios have to freeze productions, and Netflix is a studio, then they will have to freeze productions. While that could definitely help Netflix’s near term cash flow, it also would kill the new content used to bring in new customers. Speaking of cash flow, if credit markets freeze up, then getting new high yield debt could be tricky. 

Or consider this. With the impending budget cuts, cable MVPDs may aggressively cut prices to keep customers around in a pandemic-cause recession. They know folks are stuck at home; don’t let the recession kill your business.

Or this. Free, ad-supported streaming TV service (FASTs) may actually take up viewing. They have the same volume as Netflix for a better price: free. Or Twitch. Or Youtube. Both free too.

Which one of those scenarios will happen? I don’t know. Maybe all of them. Or none of them. We’ll need to set up good metrics to measure the signal of what’s actually happening with customers, not the noise of social media.

Which is my point. While narratives feel good, they don’t tend to make good strategy, since they tend to reinforce stereotypes and biases instead of generate insights and understanding. We need a more systematic approach. Which is what I’ll try to provide. (And I’ll get to Netflix in the streaming article.)

My Tools for Understanding Coronavirus Impacts

To try to think about Coronavirus strategically, I ended up pulling out three tools that I’ll use together.

– Supply, demand, and employment: The impacts of the coranavirus are unique in that they impact both supply and demand, making this a unique crisis.

– What we know; what we don’t: In times of crisis, it’s often good to separate what you know from what you don’t and what you believe from what you assume. Otherwise, you’re likely just building a narrative that reinforces existing and preconceived biases.

– What could change permanently versus what is temporary. This ties back to my “question of the year” I speculated before we started. The question was, “With streaming, what is the same and what is different?” This same question applies to the Coronavirus: what is a temporary change in circumstances, and what could lead to a permanent change in how we consume content and entertain ourselves?

Along the way, I’ll try to call out the biggest narratives I see emerging and I’ll conclude with my tentative strategic recommendations. These are the strategies I’d pitch to CEOs if I worked at a theater or a film studio.

Theatrical Film Going – The Narratives

Theaters hold a special place in the entertainment industry’s heart. For as much as it is being displaced by streaming it still has that “je ne sais quoi” embodied by the Oscars every year. That experience of going to a theater to see a film with a bunch of strangers on opening weekend. And for my money, big budget epics just look better on the big screen.

But how will the industry fare in the Covid-19 times?

I’ve seen a few narratives. Most prominently, is the “This is the death of theaters” theory. Theaters had merged for several years, then spent significantly to upgrade the experience (better seats; alcohol). Meanwhile, theaters have always been a low margin business even in the best of times. While those are true facts financially, the narrative piece seems to be the prediction that somehow customers will turn against theaters as an experience. 

Will being stuck inside for 8 weeks really prove to Americans how little they enjoyed going to theaters in the first place?

Let’s dig in. 

Supply

What we know: Supply gets hit in two ways. First, theaters themselves are now closed in Los Angeles and New York. This will likely spread to other states and cities. Obviously, if folks can’t go to theaters, they can’t see films in those theaters. As of this writing, most major chains have gone dark and most films scheduled for Q2 have been postponed or moved to VOD.

As for release calendars, we know that studios are now getting creative. Some films have moved back to later in the year, some to 2020, some up to VOD and some indefinitely. As a result, we can say that the end of 2020 and start of 2021 will likely be fairly crowded release calendars.

What we don’t know: How long theaters will have to stay closed. As of two weeks ago, it looked like April was gone. Then last week, most would have predicted though the end of May. Now June and July and beyond are on the table. But this crisis is moving quickly, so if by the end of April cases start declining, who knows? Maybe June is available.

The bigger unknown is what happens to the release window now. While Universal has “broken” the theatrical window with Trolls and The Hunt, they have a pretty damn good explanation: theaters are literally shuttered. It’s not breaking a window that doesn’t exist. Some studio chiefs likely would like to experiment with smaller theatrical windows like NBC, while others, especially Disney, like things the way they are. I personally wouldn’t be confident predicting the future of the window in either direction.

As for release calendars, even these are pretty unknown. A few weeks back Richard Rushfield wondered aloud if any big budget films would venture to streaming. There are big financial differences between VOD—which has great unit ecnomics—and straight-to-streaming, which doesn’t. But more than anything none of these moves sets a precedence. 

Meanwhile, studios will be desperate to get films in theaters. Especially blockbusters. Studios make roughly $5 billion from domestic releases alone. You can’t remove $5 billion and expect the same level of production. Globally tosses in another $15-20 billion. And remember, the economics are much better in theaters than even VOD.

Demand

What we know: Honestly? That folks like going to big budget movies. But we also know that America is afraid and as a result no one is going to the theaters. 

What we don’t: How folks will feel about movies in the future. This is a classic narrative you can build to support both sides. Maybe the Coronavirus creates a new normal where Americans decide to permanently live sheltered in their homes. Streaming satisfies all their filmgoing needs.

Or maybe after a two month quarantine, stir crazy Americans flood back into theaters to escape their home. Maybe the theater experience really does have something to it. (Most theater attendees have Netflix right now!) That feels more likely to me. But when and how and if this can happen we don’t know. And how theater attendance fares in a potential extended slump is another unknown.

Meanwhile, if theaters do go bankrupt in the quarantine, the impact on demand could be felt in the death of super hero films. Frankly, without home entertainment and theatrical releases powering billion dollar grosses, major studios will have to cut special effects driven films. What type of content will replace those films, if anything? Will folks miss super hero content when the next round of streaming series don’t have quite the same budgets?

Employment

What we know: Well, theaters employ lots and lots of people. From staff taking tickets to contractors cleaning the theaters. If there are no show times, there are no jobs to be had. And unlike sports teams which could choose to keep salaries going for the foreseeable future, theaters run much tighter margins.  

What we don’t know: What happens to these workers in an extended slowdown. 

My strategic recommendations

Since I started writing this column last Friday, things have already changed. The headline of headlines being that Universal broke the theatrical window.

1. Get creative. The Troll World Tour move to VOD makes a lot of sense. (I’m honestly surprised the price isn’t higher.) I’d recommend this for lots of films that are in this window; triage for what can go to theaters later, what can go to streaming now, and then theaters later and what will go to VOD never to emerge.

2. Be prepared for a “summer snap back”. If the virus is under control, I think August could shatter records as folks desperate for distraction seek entertainment out doors. This requires a lot of things going right, but seems on the table.

3. Assume a government intervention. Or reach out directly. Part of the reason I don’t think the window is irrevocably broken is that thousands of theaters going out of business would put tens of thousands of folks out of work, which would exacerbate the impending recession. If you can get a bail out for lost blockbuster revenue, VOD seems more attractive. 

Other Stories

Well that was the big story, but some other new stories were there too.

Netflix Biz Model Keeps Evolving

First, Netflix ended 30 day free trials in Australia. If I had to speculate? Well, churn is the name of the game. Second, Netflix is expanding their very cheap $3 plan to new territories. If I had to speculate? Subscribers are the name of the game.

Pixar’s Onward Stumble

If I’d gotten this column out on time last week, I would have noted the soft weekend opening of Onward. The most obvious explanation? It was Covid-19 worries. But the film felt like it had soft buzz even before it came out. Why is this big news? Well, I’m monitoring Disney Animation/Pixar for the first sign of stumble post-Lasseter exit and that was Onward. One is a data point, so we’ll look to Soul for a trend.

Fox Sports Brings Back Written Content

The “pivot to video” may be the worst strategic decision universally adopted by media since the dawn of the internet. And no surprise Fox has slowly reversed itself. Now if only ESPN would make their website more functional to read their great writers.

 

Most Important Story of the Week – 6 March 20: Coronavirus and the Entertainment Recession?

In times of crisis, it’s important to thread the line between adequately explaining a crisis and avoiding exacerbating the worry about that crisis. Enter the “coronavirus” (or Covid-19), the global pandemic–even if it hasn’t been called that yet–that is impacting economies from China to America, and whose full impact won’t be known for years.

If you want the “panic” side, well look at the market. Is this panic or warranted? Well, as I look at the industry I follow closest, the worry seems warranted. The impacts of Covid-19 will be particularly acute in the entertainment industry. Let’s explain why.

Most Important Story of the Week/Context Update – Coronavirus Impacts on Entertainment and the Economy

Before I explain my worries, let me iterate the caveat that all speculation about the economy should be taken with heaping grains of salt. One of my bibles for making predictions is The Signal and the Noise by Nate Silver, and he devotes a chapter to how bad economists are at forecasting growth or retraction in the economy. 

Take last year. Everyone worried about a recession. Sure enough, the fundamentals stayed relatively strong. Employment dropped to lows and median income growth actually started growing. This chart from Derek Thompson on Twitter captures the bullish case for the economy:

Thompson is right that the economy finally started turning around in 2015, and incomes have been rising. But the pessimists out there worry that if a deep recession starts right now due to Coronavirus, then middle America will likely be worse off than post 2009 great recession. That’s a terrible result for America, particularly lower income workers who just started to see income growth.

Frankly, I think the Coronavirus could cause a recession on its own, and it would start (partly) in the entertainment industry. We saw the contagion start as conferences were cancelled. But then, for entertainment specifically, this:

Most Important 14Mar

Recessions accelerate when consumers change their behavior. Specifically, restrict spending. All signs point to consumers restricting travel and avoiding large gatherings due to the global pandemic. Here’s an example that’s stuck with me since high school, when explaining why recessions/depressions start:

Farmer Fred has a bad crop due to weather. This means he can’t sell as much wheat at the market as he did the year before. As a result, he doesn’t buy a new pitch fork to replace his broken one. Since he doesn’t buy a new pitch fork, Store Owner Sally can’t replace her broken roof. So Roofer Ralph misses out on a job he thought he would have in the fall. Roofer Ralph starts spending less at Grocery Gina’s store. As a result, the next year even as Farmer Fred’s crop comes in, Gina can’t buy it.

The moral? A decrease in spending in one part of the economy can spiral out and cause a recession. Usually, this is really hard to predict. Hence why Nate Silver said economists are bad at it. (Matt Stoller has made this case too.)

But…isn’t it pretty obvious we’re headed for the recession scenario at this point? Here are the entertainment industry specific examples that feel fairly obvious are about to happen:

Theater Terry, Concert Carla: Folks decide not to leave their homes to avoid being out in public.

Conference Carl, Theme Park Tom – Folks don’t want to leave their home, and they don’t want to travel. 

Producer Paul: If gatherings of individuals or travel is restricted, studios may have to decrease production.

Expand that list to sporting events, airlines, hotels, tourism, travel, car rentals and more and you get an idea of the potential scope. The best thesis for a recession right now, is that this is a “human capital freeze” the way the Great Recession was a credit freeze. That freeze is hurting revenue, and hence profits. If all those industries see reduced revenues in the range of 10-25% (or even more), then layoffs will obviously happen. As The Indicator pointed out, travel and leisure makes up 13% of the work force. 

Those layoffs mean less spending–especially if unemployment insurance isn’t adequately deployed–and that turns this into a recession. Once a recession starts, then companies restrict advertising spending, and that only exacerbates the entertainment industry’s worries. 

So all the signs seem there. At this point we face a choice: do we want to wait to know for sure we’re in a recession to respond, or begin deploying countermeasures now?

I’d say now. Notably, the country American politicians most fear–China, our latest boogeyman–fully believes in Keynesian economics. Thus, as soon as they began experiencing supply shocks, China began encouraging banks to avoid defaults and started pumping money to keep their economy moving. America needs to do the same thing, and encourage a global response that includes fiscal as well as monetary stimulus.

The challenge for America is that our economic crisis is as much a supply problem as a consumer spending problem. America fortunately started on the right foot and the emergency spending measure just passed includes $7 billion in spending on small business loans. That’s great, but I’d recommend more. Specifically, measures designed to shore up consumer spending from the 90th income percentile on down.

Step 1 – Provide $500 to every tax payer in America. Via check in the mail. This would cost $70-100 billion dollars. And is inspired by this talk by Matt Yglesias and Claudia Sahms. The “Sahm rule” says to employ this as soon as the rolling three month job losses are over 0.5% of the last twelve months. Frankly, this is a lot better than waiting six months for two quarters of retraction. If anything, I wouldn’t wait for to trigger the rule since all the news says this is coming.

Step 2 – Do Trump’s payroll tax cut. This would cost another $50-100 billion. While Step 1 is more effective, this will help lots of employers.

Step 3 – Do Richard Neal’s infrastructure plan, but not the way he’s thinking. For some reason, the leading Democrat wants to do an infrastructure project in response to the financial crisis. Unfortunately, infrastructure is slow and would likely not happen until after the crisis has started. My proposal is to use the low interest rates in the treasury to build solar panels. This would help add money into folks pockets long after the recovery has started and fight climate change. Win, win, win.

Step 4 – Provide banks/high income earners a bail out. (The Fed already did that by cutting interest rates.)

My four steps provide a range of stimulus, but importantly, everyone gets to partake in the gains. Consumers win; employers win; infrastructure fans get their win. And banks have already got what they want. I will add the biggest hurdle is the lack of trust between both parties and the desire not to work together. The best way to ensure cooperation is to guarantee that any stimulus will be continued under a Democratic administration.

What Do You Do if You’re a Studio

Well, don’t panic. That’s first. 

Second, ask for government bail outs. As long as we’re providing stimulus, the government should provide targeted bail outs to all those industries most impacted by the pandemic.

After that, while I’d love to have detailed recommendations for each part of the entertainment value chain, I just can’t provide that. Recessions are tough to predict. Generally, I’m skeptical when folks say they can forecast who will win a recession. It can be easy to say who will lose–because we see that directly–but the winners are usually the folks who develop smart, recession proof strategies quickly. Sometimes that’s who you think it is; other times you don’t know.

So if you do run a company, that’s how I’d think about it. Your customers are about to worry about a financial crisis: how do you create value for them? How do you make and deliver content to folks under huge emotional and financial stress? It’s not an easy question to answer, but it is the most important.

Other Contenders for Most Important Story – Judge Judy is a Free Agent

Judge Judy is one of the most watched television shows. Period. Not just in syndication or in daytime, but every day period. (And yes this includes streaming shows.) So when that iconic show ends, it matters.

And Judy Sheindlin will launch another show called Judy Justice. That was fast. As for where it will go, we don’t quite know. Hence, the free agency.

Last point. Judge Judy has always been an excellent case study in how in certain situations talent can extract almost all the value for their creations. Syndication is a fairly well understood marketplace. Since Sheindlin is Judge Judy, she’s almost the entire value of the show. For a good explanation on this, see the latest PARQOR newsletter.

M&A Updates – FASTs on the Block

Here’s a fun question: are FASTs the new MCNs?

In the early 2010s, MCNs were growing rapidly and got snatched up by traditional studios just as quickly. With Maker Studios to Disney, Machinima to Warner. Awesomeness TV to Dreamworks. Fullscreen to Otter Media and then AT&T. And so on. They’ve since almost all been dissolved or written down.

FASTs–the free, ad-supports streaming TV services–have seen a similar boom. ViacomCBS started the trend by buying PlutoTV. Amazon launched IMDb TV, Roku has Roku TV and Walmart bought Vudu (and added a FAST element). Just last week Comcast bought Xumo and NuFox (the channel business) is rumored to be in talks with Tubi.

The big difference is that FASTs have a bit more control over their business model than MCNs, that relied 100% or more on Youtube. However, the FASTs do have a big dependency on the DVBs (digital video bundlers). If you can’t get on a Roku device and get prominent placement, it’s a lot harder to survive. Meanwhile, if every service is fiercely competing for ad-supported eyeballs, that makes every part of the business harder.

Related: IMDb TV Paying $500K Per Episode

Lot of sites/newsletters I follow called out that IMDb TV is reportedly paying $500K per episode for IMDb TV original series. My only response? That’s peanuts in today’s landscape. Few buzzy dramas come under the $5 million per episode tag nowadays, especially if there aren’t additional revenue opportunities. That’s cheap reality content on cable budgets, not scripted cable budgets.

Entertainment Strategy Guy Update – More Apple Worries

Two stories that cause me to worry about Apple TV+. First, an executive left Apple to go to 20th Century Fox TV. We’re so used to traditional execs leaping to streamers, not the other way around. Second, another Apple TV+show–Shantaram–is indefinitely delayed.

Third, Steven Spielberg helmed Amazing Stories dropped on Friday and had zero buzz, and negative reviews. That’s bad.