Category: Explained!

The Bass Diffusion Model…Explained! The Most Important Shape of the Streaming Wars

(Before we start, I launched a newsletter! It’s weekly and it’s short, and I explain my logic here. In today’s social media age, it can be hard to keep up with independent writers like myself so my newsletter will link to all my writings at every outlet and the best stories I read on entertainment strategy each week. Sign up here.)

Here’s three articles. See if you can spot the underlying mistake. An implicit prediction about the future given the facts…

From Variety about CBS All-Access:

IMAGE 1 - CBSAA 50 percent

From Fierce Video about Roku:

IMAGE 2 - Fierce Video Roku

From Decider about Hulu:

IMAGE 3 - Hulu Decider

In each case, a new company is growing wildly. Not just wildly, but 40-50% growth. Which is excellent growth if you can get it.

Implicit, though, is optimism about this growth. This high growth will continue. And the growth is specifically compared to Netflix—entertainment’s boogey man—usually to (again) imply that these companies will overtake or match the streaming giant because of the double digit growth.

This is wrong!

But it isn’t unusual. Frankly, as humans, we tend to believe that patterns continue at their current rate. We like our trend lines to be linear. Stated in layman’s terms, we like straight lines on graphs. Unfortunately, reality is often curved.

Fortunately, though, we know what the curve should look like. One key shape shows not how unique those three companies mentioned above are, but how very, very ordinary that type of growth is. That shape, though, isn’t linear. It’s a double curve and it is one of the most well studied models in marketing and business.

It’s called the Bass Diffusion Model. Today, I’m going to explain what it is, how it works and show a few examples. My goals isn’t to teach you how to use it (we don’t have that type of time), but to recognize it when you see it. Then, over the next week or so, on other outlets and social, I’m going to release some examples. 

To start, though, let’s dig deeper into the problem above.

The Problem – Growth Doesn’t Work This Way

A few years back, I sat in a company-wide “all hands” meeting, and I saw the head of our entertainment group roll out a slide. Our streaming venture was pretty new overall. But we’d had fairly strong growth in the last year, building off growth the year before. Our growth was growing! Here’s a version of the graph he showed, and the numbers have been changed to protect the innocent. 

Image 4 - The Hypothetical

The key numbers are the growth rates between periods 4 & 5, and 5 & 6. Initially, customers are growing slowing. But then the numbers double in year 5. That’s great. And then they increase by 15 units in period six. Again, sixty percent growth, which is even better. The next part stunned me. The executive literally added a dashed line into the future which looked like this.

IMAGE 5 - Exec Projection

That’s pretty incredible, isn’t it? Your growth isn’t just growing, but accelerating as your business matures. To emphasize—because as I type this I shake my head so hard in disbelief I may throw my neck out—this was an executive setting expectations for his entire company/business division, and he expected his subscriber base to double and then triple in the next few years.

As soon as I saw his graph, though, I drew my own chart mentally in my head. I’d seen that sort of growth before in text books and business case studies and in the press, and far from watching growth accelerate further, I thought it would slow down…

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GoT vs LoTR vs Narnia – Appendix: Subscription Video Economics… Explained! Part 2)

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

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

The best analogy for content libraries on streaming services, for me, is theme parks. When I tried to value the new Star Wars land Galaxy’s Edge at Disneyland and Disney World, I wrote about this future scenario:

Next year, I’ll walk into Disneyland in the off-season (probably September-ish). I’ll be wearing a Star Wars shirt. My brother will probably rock a Marvel shirt. That said, I’ll also have a four year old wearing, if current trends hold, either an Elsa (Frozen) or Belle (Beauty and the Beast) dress. Other family members will likely have Mickey shirts on.

So how much of that trip do you allocate to the opening of Galaxy’s Edge? My family already averages one trip to Disneyland every year, and my daughter knows that Mickey lives at Disneyland. So she’d go anyways. But what about me? I’ll definitely go to see the new park at some point. 

Something about theme parks—maybe the permanence of the attractions—helps crystallize in my head the challenge of valuing content libraries. A theme park is a content library of rides, shows, shopping and food. Some of those attractions at Disneyland have been there since the 1960s. Those are the “library content” of Disneyland. Others are only one or two decades old. Those are the “recent library” of rides. Then there are the brand new attractions: Star Wars land, Cars land and a Guardians of the Galaxy ride. Those are the “new TV” of Disneyland rides.

The trouble is trying to value each of those pieces and disentangle them. At the end of the day, this both matters—because you need to make the best decisions possible to maximize revenue—and doesn’t—because at the end of the day the goal is to have revenues exceed costs on a total basis. Do the latter and how you get there doesn’t really matter.

My approach to valuing theme parks—calculating the money spent by both existing and new customers—gives us a good idea for how to value content libraries on streaming platforms. So let’s explain that. In today’s article…

– The rules guiding my approach to valuing content
– The “dream method”, which is what we’ll try to emulate
– The steps to the optimal method
– The HBO and Game of Thrones example explained
– Some other variations, caveats and thoughts

The Rules

As I wrote these last two articles, I kept coming back to the “rules” that define good business models. A few stuck in my head for valuing streaming video. Thinking that way…

– First, no double counting. If a customer gets attributed once to a piece of content, they don’t get to count twice. (A good rule of thumb, you can’t attribute more than 100% of your customers!)
– Second, CLV trumps monthly revenue and other calculations. If you attract a new customer, CLV is the best way to capture their true value to your business.
– Third, be humble in attributing success. No single show or movie accounts for 100% of its viewers in a library model.
– Fourth, use real data as much as possible.

The Dream Method – The Probability of Resubscribing

The dream method for HBO would be, basically, to be God Almighty. Looking down omnipotently, reading the mind of every customer subscribed to HBO and knowing why they subscribed, and what percentage of that should be credited to Game of Thrones. Add all the percentages together and you have it. (Maybe our Google/Amazon/Apple AI overlords will be there soon…)

In the meantime, we have data. Especially streaming data if you’re Netflix, Amazon or (partially) CBS or HBO. 

This data means you can track every customer. When their account starts. When it renews. When it lapses. And, crucially, what they watch the entire time. From the people who only watch movies to the people who complete every episode of Game of Thrones. In a big data sense, then you can compare their behavior to the customer who never watched Game of Thrones. 

Say the results looked like this…

…GoT Viewers resubscribe after a year period at a 92% rate.

…non-GoT Viewers resubscribe after a year period at a 80% rate.

That means, of customers who started the year subscribed to HBO, by watching GoT, they were 12% more likely to stay subscribed to HBO. That’s the best number if you can find that, because it basically means that GoT increases the probability of staying subscribed by a huge, statistically significant margin. Now that GoT is cancelled, if those GoT watchers suddenly flee HBO, well we can also reverse engineer that to know that GoT had been keeping them subscribed.

This could also be applied to new customers. If you take all the new subscribers for a given time period, you can look at the ones who watch GoT versus the ones who don’t and model their behavior. You can also tell which are the customers signing up to watch GoT right away, and which ones don’t. Add those up and you can attribute all the best approximation for value we have. (With heaping doses of regression analysis and machine learning.)

Yet, we don’t have the big data to do this. I mean me, as a commentator on the strategy of entertainment. If I were managing content strategy at a streaming company, I would set a team of data scientists working on. But I don’t have that team or that data here. As an outside observer, well, we need to make some assumptions, but we can try to replicate that method.

My Method – Attributing New and Remaining Customers by CLV

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GoT vs LoTR vs Narnia – Appendix: Subscription Video Economics… Explained! Part 1)

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

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

Consider my current relationship with HBO’s Sunday night programming. Right now, I record two plus hours of content to watch during the week: first, Game of Thrones, then Barry and finally Last Week Tonight with John Oliver. Then, for the rest of the week, I don’t record any other HBO shows, but will watch the occasional blockbuster I didn’t see in theaters. (In full disclosure, that included The Meg and Skyscraper. Don’t judge me.) Oh, and on Saturday mornings, we often watch Sesame Street. To access this content, I pay $15 a month to my cable company. 

So the fun question is…

…if I were HBO, how much credit do I give each series?

This is not a trivial question or easily answered. Sure it seems simple—the highest rated shows are the most valuable—but quantifying that value is the tricky part. In fact, this requires teams of finance folks and economists and statisticians running “big data” analysis. Literally measuring millions of customer accounts engaging with billions of pieces of content across potentially hundreds of categorical variables. (Unless, of course, you don’t have streaming data, in which case HBO doesn’t actually know what shows I watch, because I’m DVRing them for later.)

The current HBO lineup is a good illustration of how personal motivations can be obscured over the millions of people watching HBO. I’d definitely subscribe to HBO only for Game of Thrones, but would I subscribe to keep watching John Oliver when GoT goes on hiatus? What about Barry? Is it enough to make me stayed subscribed? Probably not on its own. Of course I will wait for Silicon Valley and Westworld and maybe Watchmen and/or His Dark Materials…so…I mean I don’t have an answer for you.

Multiply my anecdote by millions of individuals—all with different profiles and behaviors, and you see the challenge facing both cable channels and streaming networks. Throw in the fact that I’ve now been a loyal subscriber for 5+ years, and it can be hard nee impossible to determine which, if any, specific show kept me on board versus built up brand loyalty and/or inertia

Yet, this question will be crucial to our three streamers to determine the winner in this future-of-TV-series I’m calling “The battle for the next Game of Thrones”. The goal for these three series is to bring in and retain new customers to help win the streaming wars. Since strategy is numbers, I need to quantify those subscribers.

That’s the goal of today’s article. Streaming video economics. With my usual caveat that this is a subject that we could write books on. (Though, it’s obscure enough that there aren’t actually a lot of books on it.) My plan is to…

…Explain a brief history of content libraries and why this is a contemporary problem.
…Briefly remind everyone that for decades TV and movie studios tried to value libraries poorly on purpose.
…Then, I’ll debunk three bad ways to do this. 

Tomorrow, I’ll show my way, but mainly to describe the incredible amount of assumptions I’ll need to make to pull it off. And guess what? I’ll dig into a valuation of a current TV series. Or better said, a just ended TV series.

The Growing Importance of Valuing Content Libraries

When I built my TV production model, I debated making bespoke models for the four main types of TV, broadcast, cable, premium and streaming video. Ultimately, though, I realized that I didn’t have to because among those four business models, there are really just two types of revenue, advertising and subscription, and each model is just on a spectrum for how much they rely on each: 

Spectrum Ad vs SubscriptionThat’s a fun table and way to look at it because over time, we’re moving more and more to streaming. But as we move there, we also see that the ability to determine which piece of content is the most valuable went from “easy and/or not necessary” to “much harder and/or crucial to growing subscribers”. Let’s describe that in the various phases.

Phase 1: Broadcast starts with all Advertising

At the dawn of TV, life was simple. All broadcasters had to do was look at ratings. The higher the ratings, the more money made from advertisers. The math here is pretty simple for networks: keep the highest rated TV shows. And since Nielsen kept a scorecard for everyone, they didn’t even need to do this math themselves. 

Phase 2: Cable starts collecting retransmission fees

This was really the first time that channels needed to start considering TV series as more than just advertising revenue drivers. As cable expanded, the channels insisted on fees per subscribers. Eventually these fees—the per subscriber fee a cable company paid each channel to air its content—surpassed advertising for cable channels as the largest source of income. 

The best example that comes to my mind was the dual Mad Men/Breaking Bad success of AMC, followed by The Walking Dead. Those three shows allowed AMC to drastically increase their retransmission fees, and it wasn’t all related to viewership/ratings. Mad Men was never a monster in ratings, but its fans were diehards and it was critically acclaimed, so it was of outsized importance to AMC. They used this to negotiate higher retrains fees. Since individual customers don’t pay retransmission fees, you still, as a cable company, didn’t need to value individual shows precisely, though. Just general feelings fit in, and still most cable companies ended up buckling in retrains battles.

Phase 3: Premium cable doesn’t have any advertising, so libraries are a bit more important

Really, HBO was the first subscription TV company. For years, it justified its extra cost by being exactly what its name portends, the “home box office”. The home for theatrical movies before broadcast and cable. With no commercials.

Then, it bolstered this with The Sopranos and Sex and The City. They weren’t the first series on HBO, but the ones that put them on the map. Really, this is the first time a platform had to grapple with how to value their TV series versus the rest of their content. But HBO didn’t really have the data to do this. It didn’t know if someone who watched The Sopranos was the same subscriber as someone who watched their movies.

It also didn’t really matter, because HBO wasn’t selling the subscriptions in the first place. The cable companies were, so it just needed to give off the imprimatur of value and keep people subscribing. Which it did. To guide its behavior, it could also keep using ratings data in general as guides to what is profitable and what isn’t.

Phase 4: Streaming means direct-to-consumer, which means valuing content libraries

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GoT vs LoTR vs Narnia – TV Series Business Models (Scripted)…Explained! Part 2

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

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

Today, we continue our journey explaining how a TV show makes money for its producers. Last week, I started describing the model along with describing costs and the first set of revenue. Today, I continue explaining the revenue piece, touch on why I didn’t build this model for the upcoming Star Wars series, describe some of the fees involved, and provide some final thoughts. Finally, I link to my two main sources.

Revenue (continued)

The bulk of the value of a TV series—especially non-hits or mega-hits—comes in the first window. Especially when you talk about value as “money”. For 90% of TV series, the initial license fee usually represents most of the money a show will ever make. But if a TV series takes off, then the other windows will have much more value. And let’s start with one of the newest of those windows.

Home Entertainment

TV came to home entertainment late, and may be out of it soon. This window couldn’t take off like movies in the 1990s because the number of VHS tapes required was unwieldy. When DVDs made entire seasons the same size as a VHS, right as the quality of top series drastically improved (I’m thinking of The Sopranos here), then the TV home entertainment market took off. With the rise of digital you could buy series without any space at all. (This is a great example of technology enabling a business model.)

Yet, as soon as digital sales started, they ended, didn’t they? So the lifespan of this window was fairly small. I mean, why buy or rent a TV show episode if Netflix will buy the rights and stream them all for you? Still, I’m including it in the model because home entertainment is still something, but more importantly, it was REALLY a thing for Game of Thrones. Franchises that inspire super-fans—which is a short list—can still generate home entertainment sales. At the height, these can be in the millions of units sold per season, at least when GoT started. That can add up and really offset production costs.

So including the first-run licensing revenue, here’s our model so far.

Image 1 The Model So Far

Licensing – Renting Your Show to Other People

I don’t like the word licensing in TV. It sounds too close to selling either naming rights or toy rights. But it is used constantly in television. Instead, I’d call it “TV renting” because that’s really what you’re doing: renting the rights of your TV show out to various players. Still, licensing it is.

For all the sturm und drang about streaming video, in a lot of ways, they were just another window for licensing. Instead of counting the number of runs and paying broadcast residuals, you sold them for unlimited runs to a streaming network, and because it was digital (and not covered by guild agreements), the studios also had to pay less in backend compared to syndication. 

The variations in licensing come down to who you licensed to, when they get that license and where they are. Typically, production companies expend the most energy on the first, domestic window and everything else is a bonus. To summarize:

International Sales – The US TV model built up around selling to American domestic broadcast. Once you did that well, you could sell the rights of a TV show to the international market. That’s the big form of potential revenue. However, the shows that fit international market tended to be broad comedies, crime procedurals or genre series. (Many prestige shows don’t travel at all.) This has also blended in with digital sales as streamers can now buy out global rights instead of just US versus international.

Syndication – Again, another legacy of US TV model, syndication was selling a broadcast show—and sometimes a cable show—to TV broadcast network groups to run in off-primetime hours. This still goes on for shows like Friends to Mom to Law and Order: TBD. Since this was done for whole of series runs, often, this could be worth literally billions for a handful of shows. (Again, the kings are Friends, Seinfeld, Cheers, Simpsons, Everybody Loves Raymond, Two and a Half Men and other broad comedies.) 

Second Window Licensing – I’m using this to refer to cable channels getting in on the game. You could take your broadcast series, and instead of selling them in syndication, sell them to cable channels in deals that looked roughly similar, but had less impact on residuals and participations. And premium channels could get in on the game too (HBO sold Sex and the City, The Sopranos and Entourage). Recently, even streaming series (Bojack Horseman on Comedy Central) have been sold into syndication. Really, what you need to know is that a lot of TV producers made money by selling their shows to a second channel after the first window ended. And then…

Digital Sales – Digital sales can happen in the first, second or library windows. And many times it doesn’t even conflict with the syndication window above (unless the streamer pays for exclusivity on that window too) which is why Friends is on Netflix and TBS right now. (Friends is such a mega-hit in the TV business I use it a lot.) Since so much money is involved in digital, sometimes the streamers buy out global rights simultaneously, which is a change in business driven by the rise of global streamers.

This gives us four new revenue lines, the three categories above plus “library” which is the placeholder value for time periods after a series is fresh, say five years from the last season and older.

Image 2 With licensing Revenue

Tax Credits

Tax credits are a great euphemism. We could just call them, “government bribes to movie studios”. What else do you call a straight cash payment to a business to come to your state or country? It’s the utter opposite of the “free market”, and states of all political stripes take advantage of it. (*Cough* Georgia *Cough*)

I didn’t calculate this explicitly for films because at the size I was working—hundreds of millions—it would wash out in the production budget. (Though lots of big budget films, including Marvel films take advantage of these credits.) I’ve also seen these accounted for as “negative COGS” as opposed to revenue, if that makes sense from an accounting perspective. (It isn’t money you make, but money that offsets your costs.)

That said, for TV shows in the low millions of dollars range, a couple million dollars can really hit the bottom line. Some TV producers—I’ve heard—have the goal to breakeven on everything else, and their profit is the tax credit. Starting research for this series, I found this Variety article where Penny Dreadful managed to convince California to pay them $25 million. That’s a hefty bribe, er, paycheck.

Smaller Pieces – Merchandise, Product Placement

For 98% of shows (my assumption) licensed merchandise will never be a thing. People just didn’t buy NYPD Blue shirts or Cheers hats. Yet, that has changed as nerds have taken over the world. I own not one but two Game of Thrones shirts. Breaking Bad—another megahit—had two iconic shirts in both the Heisenberg and Pollos Hermanos t-shirts. So I’ll include this line item because if any of my fantasy series becomes a “megahit”, they’ll make some money off of that.

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Licensed, Co-Productions and Wholly-Owned Television Shows…Explained!

A big topic in the streaming world has been who owns what. All I can say is, “Finally!”

For many years, we—sort of speaking of the business press, especially the casual observers—have treated all streaming TV shows interchangeably. If Netflix branded a show an “original” for all intents, the press referred to it as an original and lumped all the originals together. With the Friends on Netflix issue coming to a head last fall, we’ve finally started to unpack what it means to have licensed content on a given platform.

(Here’s a good article by Beejoli Shah at The Information that makes the distinction between licensed and owned content. I hope we get more of this.)

Here’s my hot take, though: the licensed versus owned conversation STILL doesn’t explain enough. Why? 

In one word…co-productions.

This convoluted third category is like the love child between owned and licensed shows. Moreover, TV series can fall into different categories depending on the territory they are licensed in. Someone needs to step in and explain all this. 

Since I need to clarify this distinction for my series on Game of Thrones versus Lord of the Rings versus Chronicles of Narnia anyways, I may as well write a full article on it.

For the streamers each ownership model has different pros and cons, and understanding those different models can explain why certain shows get renewed, while others don’t, why certain shows are branded certain ways and others aren’t and, mainly, the economics of all of them. 

I’ll start by explaining wholly-owned series, then explain licensed series and co-productions. What they are, how they impact the business models and provide some examples. Along the way I’ll explain the traditional licensing windows and a geographical clarification.  And since this article was directly inspired by my big series on GoT versus LoTR versus Narnia, I’ll pull examples from those three streamers for each of these definitions (as best as I know). 


This is simple: the network distributing a piece of content also owns the content. 100% free and clear. 

More granularly, the studio’s in-house production team owns all the rights to it. To get to this point—where a channel owns 100% of the rights—usually requires that the network developed the show itself. That means they either found the show runner—who wasn’t already under a deal with another T V production house—took her pitch and optioned her TV show; or they hired her under an overall deal, so that anything they produce they have first rights to. That’s step one, own the underlying IP. (Yes, if it is based on a book or movie or what not, you have to own all the rights to that too.)

The second step is to then pay all of the production costs. Most of the time, if you do those two things, you own a show outright.

What does this mean for a network/streamer? Well, they can do whatever they want with the TV series. (I’ll explain a qualification to this in a moment.) They can air the show for as many seasons as they want, as long as they’re okay with the production costs. They can keep it exclusively on their channel or syndicate it. They can raise or shorten the number of episodes. In short, they don’t have to negotiate with an outside producer because they are the producer.

The qualification to unlimited control is talent. Even a wholly-owned show has obligations to talent—especially key talent like showrunners or the lead actors—that can influence some of these pieces. If the talent’s contracts are up, and they don’t want to make the show anymore, they don’t have to (until they get a pay raise).

Since the 1980s, roughly, broadcast channels have become more and more likely to own their own shows, or at least air shows under the same corporate parent. (So NBC airs shows produced by Universal Cable Productions or Fox aired shows by 21st Century Fox Television.) This has happened since time immemorial, but became more common when the FCC relaxed primetime air time rules and ended “fin/syn” regulations (which I do not have time to explain today) in the 1990s. When the streamers got into the game, they prioritized “wholly-owned” shows because it enabled them to choose distribution plans they wanted.

(Note on verbiage: I called these “wholly-owned” at my previous job, and I’m sure different places can call them different names. I like wholly-owned much better than “original” because it is about who owns the series financially, not customer-facing branding.)

The downside to wholly-owned is one of costs. If you’re paying all the costs up front, that can quickly get expensive. For a licensed show, you can choose to pay a fraction of the total costs because the production house can make additional revenue later. Same with broadcast shows back in the early 2000s, when networks often paid 50-70% of the costs for co-productions. However, if you’re looking to own all the rights forever, or want exclusivity forever, owning the content completely is actually cheaper.


HBO – Game of Thrones. The Sopranos. The Wire. True Detective. Veep. Silicon Valley. 

(Basically, nearly their entire catalogue. HBO as a premium channel has tried to own 100% of their content. That’s why HBO Go/Now’s offerings have nearly every TV show they’ve ever made.)

Amazon Prime/Video/Studios – Transparent. The Man in the High Castle. Mozart in the Jungle.

(Amazon has a fair bit of wholly-owned content, but some of their biggest swings will fall in later categories.)

Netflix – Stranger ThingsGLOW. All the content coming from the huge overall deals with Shonda Rhimes and Ryan Murphy will fall in this category.

(Netflix is rarely the producer of record, according to Wikipedia. However, as this Digiday article makes clear, Netflix is essentially acting like the wholly-owned studio by owning rights for extremely long time periods. These shows are examples of series that are functionally owned by Netflix, even if another producer originated the project.)


A “licensed” show is a TV show that the streamer doesn’t have any financial stake. They don’t own any downstream revenue. At all. It’s actually about as easy to understand as a “wholly-owned” show. If a wholly-owned show is 100% of the rights of project, a licensed show is zero percent of the rights. Zilch. Nada.

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Porter’s Five Forces…Explained

The trouble with value chains—which I unveiled Monday—is that they don’t stay the same forever. They are constantly changing. Disruption, right?

Take filmed entertainment. In 1980, it was just movies and TV, with movies in theaters and TV on broadcast. But home entertainment, cable, digital and the internet have all disrupted those two models. Plus toys and merchandise are sold for all of it now at unconsidered levels back then.

While the value chain shows how things currently flow, it is pretty silent on how the things relate. Who has the power in the relationship? Who creates the most value? And for people at the same part of the value chain, what is it like? So we need another tool.

And thus enters perhaps the most famous tool in strategy.

Porter’s Five Forces…Explained!

The second tool is similar to the first one, but focused on a single part of the value chain. The competitors at one layer. And to complicate it, after Porter unveiled it, he added a sixth force, so it’s the five forces, plus one. Here’s the shell of that model:


That’s from Wikipedia, so I hope they don’t mind me borrowing. (And yeah pro sports tip: Wikipedia is pretty damn good at explaining a lot of economic, statistical, business and other scientific concepts. It doesn’t replace reading the underlying books, but is great for refreshers.) My change is to tilt the model from the Wikipedia version:

Screen Shot 2019-04-10 at 3.11.17 PMValue chain analysis and five forces analysis serve two different purposes. The value chain is really about analyzing who creates and captures value at each stage, with the specific costs, gross margins and profits at each potential stage. (Twitter follower Simon pointed me to the Exponent podcast from 2017 that digs in to this usage a bit deeper.)

Five forces analysis is about the power of each of the inputs or outputs of an industry on the potential to make a profit. But usually limited to one stage. It helps explain why profit margins are high or low given the biggest inputs on those margins. Here’s the picture from my text book. It combines how my model (listing the players) and the Wikipedia model (showing the forces). (Again, I love my Strategic Management text book, and they have it oriented my way):


As I clarified, I could build a “Porter’s Five Forces” model/run a five forces analysis on potato chip manufacturers or stores or distributors or even potato farmers. Since we’ve been doing manufacturers this whole time, let’s keep with that:

Screen Shot 2019-04-10 at 3.11.38 PM

The key insight of a five forces analysis is explaining how strong or weak each of the interactions is. This is usually described as as high or low power. The power of each part is relative to your strength/situation. If someone has a lot of power, that means they can demand lower prices to buy, or higher prices to sell. The power of this model is it visualizes the strength of the various relationships. 

Still, let’s walk through the steps, to explain the value in the various components. And that pesky “plus one” that doesn’t fit neatly into the chart.

You start with suppliers to the west. Say your main supply is a commodity, like oil or corn or even energy. Well, the suppliers don’t have a lot of power to charge you higher prices since commodities tend to be priced at what the market can bear. If, on the other hand, you have a monopoly on the supplies—say a patent on a new drug—you can charge exceptionally high prices. 

For potato chips, you’ll notice there are many more supplies required to make the final product than just potatoes. However, for the most part those other supplies are still commodities, so my gut is the suppliers have low pricing power for the potato chip manufacturers.

On the east side of the model, you have buyers. Buyers are not “customers” necessarily and absolutely not necessarily “consumers”. If buyers have lots of power, they can demand lower prices. Take gas stations: I can always drive to the next one. If their power is low, it means they have to price low to get your business. Another currently relevant versions is tax returns. Only a few company offer the services, and they’re really hard to do, so consumers have less bargaining power. (The fewer options, the less bargaining power, in general.)

Let’s head to the middle of the model. The value chain is usually silent on this part: what is it like for you at your part of the value chain? If there are lots of players, then competition can be very fierce. Again, think commodities and all the potato farmers showing up to the farmer’s market at the same time. Or the ice cream truck wars of Portland. On the other hand, in heavily consolidated industries like cell phones or cable companies, isn’t it funny how they all sort of charge the same price, for usually bad products? That’s a lack of rivalry among firms. 

For potato chips, the main thing is that while it seems like there are a ton of potato chip options, uh, there aren’t. Frito-Lay owns them all. Doritos, Cheetos, Tostitos, Ruffles. All Frito-Lay. While there are smaller brands that have entered and expanded business in the last twenty years—Kettle Chips mainly—I’d say that rivalry is low among firms, because Frito-Lay buys most competitors, or uses its power to keep its shelf space with buyers. 

In general, the CPG companies have about 5-6 huge companies that own all the brands. I’m not sure if I’d call this rivalry fierce or not. I could argue either way. On the pro side, there is a lot of battles over price and the companies run small margins (see Kraft and Buffett right now). On the con side, with only 10 major players, there is a lot of unspoken agreements on behavior and sharing shelf space.


The other thing that can really drive down margins is the ability for new firms to enter. (And this will probably be the key to discussing entertainment next week.) Look to the north of the model for this. If it is really easy to enter a market, then the barriers to entry are low. This can also force firms to keep prices low to ward off entrants. If the barriers to entry are high, then you can keep charging high prices or capturing value. Think cable companies for forty years in this way. Since it costs a fortune to lay fiber optic cable, the barriers to entry are very high. (Notably, Google’s adventures in fiber optic cable have been bad, but every tech company wants to launch a video service.)

The barriers to entry are high in consumer packaged goods, even though they shouldn’t be. This come from the massive consolidation at the center of the industry, which means the current players can try to box out upstarts. This is complicated to explain—and I don’t have enough numbers to prove my point right now—but it is easy to start a hot sauce, barbecue, or even chip company. It can be impossible to get national distribution. (And I don’t credit some sort of clever business strategy for this, but industry consolidation.)

The only new entrant I can think of is Kettle Chips, at least nationally, in America. Twenty-five years ago, they weren’t a thing and now they are. (Why? To summarize, a family company sold their company to a British PE firm, who later sold it to one company, who was bought by another and that company was bought by…Campbell’s Soup. Who didn’t even make the above chart.)

(Oh, all of these business examples are from America, for my foreign readers. That’s the market I know best.)

But while it can be hard to break in, that doesn’t mean there aren’t alternatives for customers. This brings us to the “south” and a perfect example of how a Five Forces analysis can provide insights the value chain can’t on its own. Substitutes are things that can fill in for the core product. You can either think of these super broadly or narrowly. An Oscar worthy example of this was when Reed Hastings said Fortnite is a bigger competitor than traditional TV for Netflix, he really meant it is a substitute for leisure time.

Potato chips have many substitutes. Say consumers want something healthier, they could eat pop chips or Hippeas. Those are healthy items that fill the same need of something to snack on. Or nuts for protein. Or pretzels. Or Cheetos. Even tortilla chips substitute for potato chips. If you go natural, apple slices! Those are examples of other substitutes for snacking and you could even go into candy. (Though we risk starting up the “snack vs treat” debate.) Moreover, you could decide to just NOT eat chips, which is healthier anyways. So here’s our chart with my “back of the envelope” perception of power:

Screen Shot 2019-04-10 at 3.11.46 PM

So my take on potato chips that the biggest piece keeping prices down is that you can always choose not to eat them. You don’t need chips to survive, and actually will live longer if you eat less of them. But that’s my gut take without pulling specific pricing numbers. (And if someone knows CPG better than me, which is a lot of people, shoot me a note if I got something wrong.)

Oh, did you notice that new piece, in the upper right? After rolling out these forces, Porter later added the “plus one”, complements. These are things that add value to the core product. For potato chips, think ranch or onion dip. Dips take a plain potato chip and kick it up a notch. Or salsa on tortilla chips. They aren’t in your value chain (presumably), but they definitely impact your bottom line.

Connecting the Value Chain to Five Forces

You may have noticed my sellers, incumbents and buyers had the same shapes I used in my value chain. I used the same shapes, because frankly, you can see that the value chain is really just the middle line of the Five Forces model. A connection that literally no one (that I know of) made in business school. They were basically two pictures of smaller parts of a much larger image, which is roughly the interlocking pieces of any industry. So I combined them, and since I felt like I was creating something new, I gave it my own name:

The Value Web

I call this my “insight” because again I really haven’t seen it in other places. And most of the maps of entertainment ignore the value chain component, instead using company names. the value pieces, as opposed to just company names. The name is simple: Value, because I love it above all else, and web, because it explains not just one layer but all the interlocking pieces. 

(I haven’t seen this term in other places, but Clay Christensen uses the term “value network” in The Innovator’s Dilemma, so it may not be that clever of an idea. And Deloitte uses it here, but focused on the supply chain.)

So let’s look at a value web for potato chips. 

Screen Shot 2019-04-10 at 3.12.03 PM

Some insights. Well, the traditional buyers are under threat from web sales. Not everyone (liquor stores are fine), but eventually, lots of things will be sold online, so every brand needs a web presence. Notably, some data shows that this means smaller CPG companies can expand their presence to new markets, so maybe the incumbents have less power. So that’s why understanding substitutes and multiple parts of the chain can be useful.

This is why I like the larger view. A value web will help a company at one level understand the substitutes and new entrants across the range of the value chain. And how that may impact their business. So Popchips are a substitute for potato chips, but online shopping is a substitute for grocery stores. A potato chip company probably needs to understand both those potential substitutes. 

Digital video has new digital entrants across a range of the value chain from producers (shooting video on cell phones) to streamers and eventually even bundlers. Youtube is taking eyeballs in a different way than Netflix, which is both at the end of the value chain. Online shopping is changing toy sales. Going back in time, even reality television—with its cheaper production costs—was a substitute for scripted television at the production level. 

The challenge with building a strategy web is one of simplicity and scale. Honestly, I’ve just about maxed out what I can build on Powerpoint (a tool which works for 95% of my image creation on this website) and what 95% of business folks use. I’ll need to look up other drawing tools to build a true strategy web. And even then, it will probably get update too frequently to last long. 

But we do have the two tools needed to analyze this industry in slightly deeper depth. Which I’ll start to do with my next big series and next week as I try to define digital video.

Value Chains…Explained!

2019 is off to a great start for “maps of the entertainment universe”. When I was writing on media consolidation, I wanted to make one of these to help explain this crazy industry in better detail. But I doubt it would have looked as good visualization as this Wall Street Journal visualization I saw on Twitter last week:

WSJ Map of Universe.png

Source: Wall Street Journal

What I love about that image is that it conveys multiple pieces of information in a 2D fashion. That’s really hard to do. That’s the gold standard of charts/tables/maps. This image conveys the names of companies, types of entertainment they offer, who competes in multiple areas and who doesn’t. Good job.

But while I love that lay out for what it does, it still has limitations. Mainly, you don’t know the directions of the various branches. Are they all separate types of services or are they interrelated? Are some companies distributing the other types of entertainment? How do they relate? How distinct are live TV, ad-supported and sports content anyways?

So while that visualization is good, it is still incomplete. (To be clear, I liked the image. A lot.) I want to build on that chart and others, but to do so, I need more tools. My goal is to explain the business of entertainment, and to do that requires first explaining some of the tools I plan to use. These tools explain not just what the companies are competing in, but how they compete and relate to each other.  Today, I’ll explain the “value chain; tomorrow, I’ll explain a different tool. Then we can build our own map of the entertainment universe. 

Note before I start: These two tools are both super complicated. My explainers do not do them justice. I mean chapters and chapters in strategy text books have been written on this. And I felt I needed to reread those chapters in my still saved text books as refreshers before writing today. So at some point I’ll make a reading list if you’re interested.

Value Chains

Let’s start a series of shapes. 

A shapeOkay, that didn’t help. Let’s add three words to make the simplest value chain imaginable:

Image 1 Simplest

The “chain” here is the journey of a product to a customer. Essentially, someone makes a good. They sell it to a store who sells it to a customer. If each step “adds value”, that’s your “value chain” in action. (What if someone doesn’t add value? Well, they’re still here in the value chain. That’s what we call it.) Here’s a pic from my strategy text book, just vertically rotated:


Same really simple principle.

In my experience, good strategy starts with this core tool. Even if you think you know your industry top to bottom, back to front, you should still use this tool. First, it’s a good refresher to challenge how your industry has changed over time. Second, as new industries emerge, you can use this tool to understand their emerging value chains. In my previous role, when I dug into a new business opportunity, I would sketch out an initial value chain and use that to figure out how to research the new industry. It never failed to generate some insights.

(An aside, yes, I’m explaining a “strategy 101” concept here. The basics of industry analysis. Some super smart executives definitely don’t need me to teach this to them. If you’re one, skip ahead. That said, at three different companies, I never saw this tool used. Even as business models changed rapidly. It’s a basic yet powerful tool, like value creation. And I doubt business affairs, creative development or production executives have ever seen it.)

The value chain is a little tricky for digital goods. It started its life as a tool for manufactured goods. You know, the hey day of American might and exceptionalism in the 1960s. So I’m going to explain the tool with a manufactured good. Trust me, we’ll get to digital video.

Let’s use a delicious example, potato chips. This will pair nicely with my example for value creation, craft beer. Throw these two articles together and you got a party. The first step? The potatoes:


How do farmers add value? Well they grow a crop that wouldn’t exist if they didn’t. Harvesting the raw supplies. But now we need someone to come in and turn potatoes into something:

Potatoes and ManufacturersThe manufacturers add value in two ways. First, by turning potatoes into chips, they make a tasty treat. Then, they also pay for the marketing to make you want to eat that tasty treat. But potato chip companies like Frito-Lay don’t own all the stores. And often don’t have the distribution to sell everywhere. So they use:

Full Value ChainThe distributor has the logistic excellence the factory doesn’t to get the chips out there and the store has customer service and variety of products. (Again, in an ideal world.)

You can see that you start with potato farmers, who sell to potato chip manufacturers. They sell to distributors or wholesalers who sell to stores. At each level, they take their margin, so that a potato sold for say $0.25 becomes a $3.99 bag of chips at the store. In an ideal world, each level is “creating value” for the end consumer. The potato farmer creates a potato that wouldn’t exist otherwise, the potato chip manufacture transforms it to make it delicious using special techniques. We need one last piece though.

True Full Value ChainI like adding customers even though it is redundant in someways because it clarifies if the end of a value chain ends in customers or a business. And I always believe in reminders of the value of the customer. 

I’ll make one last point. I mentioned that the problem with the Wall Street Journal article was that it didn’t explain the relationship between the layers, and the value chain doesn’t either. What it does is explain what pieces feed into what to make a final product. So we need to start adding some numbers to get this thing rolling. And since I mentioned value, ideally we’d fill out a chart like this:

Value Creation Chart

Again, this is a vertical form of the horizontal value chain from above. (I’ll explain tomorrow why I left it horizontal.) But now if you can estimate the “willingness to pay” for customers, and you know the values of potato, then you can figure out all the prices and see who is capturing what value at what level. If I knew the actual numbers, I’d fill this out, but don’t want to lest I get something wrong. But you can see where you would put the numbers in. 

The next key insight, though, comes from using those numbers to see who captures the biggest share of the pie. (Technically, PIE, but do not have time to explain that in one article. That’s some math.) If one level captures an inordinate amount of the value, well, they are pretty powerful. 

Well, how do we explain that? With another tool for tomorrow.

Other Ideas/Notes

First, if you search “value chain”, or go to Wikipedia, you usually get this phrase tied to Michael Porter’s “value chain”, which is about a company internal value chain. That is specifically not how I am using it and again my professors teaching me were using value chains to discuss larger industry analysis. Which is how I use it. (And we’ll get to Porter tomorrow!)

That said, I do love always thinking about creating value and the similarities between a company and an industry. And this type of value chain analysis can be insightful. For entertainment, a development exec adds value by finding a great project, business affairs gets the talent signed for good prices, a production exec adds value by producing it on time and on budget, finance gets the money on time to pay for everything, and then marketing gets customers to pay for it. 

Second, value chains don’t always have one straight line. You can sell to multiple distributors, with their own value chains and outputs—say liquor stores or super markets or online—or have multiple suppliers—how many things go into a car, for example? But still, understanding them at a high level is usually useful. 

Why I’m Unveiling These Tools Now

I don’t like referring to strategic concepts that are even slightly advanced if I haven’t explained them. And on Thursday, I’m going to need to use the value chain to explain my next HUGE analysis article. (Analysis articles are where I use numbers to draw definitive conclusions. Like my series on Lucasfilm-Disney Acquisition, M&A in entertainment or the Pac-12. Just look to the column on the right for ideas.) I’m not telling what it is, but it involves dragons, orcs, talking lions, white walkers, rings and multiple media companies.

Also, the definition of digital video”, it seems to me, needs a better explanation. Understanding the value chain helps get there. The roll out of Apples Plus/TV product two weeks ago seems to necessitate better explanations of digital video’s value chain.

Oh, and last week, I mentioned value chains with agents! So if I see value chains all over the place, and they need explaining, well, I’ll help out.

Don’t Cross the Streams: Streaming Video Metrics…Explained!!!

A few months ago I briefly tried to explain the distinction between “customers” and “views” to help explain why Twitch is often over-hyped. Since I’ve spent a lot of the last two weeks banging my head against the Twitter wall insisting that we stop letting Netflix use misleading data, it seems time to break out that explanation into its own post.

To see the need for this, let’s look at a handful of recent Netflix announcements. They provide a case study for how a service can use multiple metrics that all kind of mean the same thing but all don’t. Worse, a lot of the journalism covering these reports mix up the different words. In 2018, at some point, Netflix has said…

80 million customer accounts watched a type of movie.

Customers watched 20 million streams of a single movie.

80 million customers watched a type of movie 300 million times.

In one day, Netflix had a total of 35 million hours viewed.

In those four datecdotes, we have, really, three different concepts: streams, hours and customers. The key is understanding how they all interact so we don’t use them haphazardly or misleadingly. If this explanation comes across as obvious, well apologies in advance. But as I think about it, I didn’t know it before I worked at a streaming video company, did I? Nope, and I spent a lot to time explaining to senior leadership what our numbers did and didn’t mean. 

So let’s get started at the smallest level. 

The Starting Point: An entry in a database

To understand where all the streaming numbers come from, you first have to understand that every data point for a streaming video company comes from somewhere. That somewhere is a single entry in a database. 

Yeah, it seems obvious, but worth mentioning. There is a database that holds the record of every customer’s every interaction with Netflix, Hulu, Amazon, CBS All-Access, Showtime, DC Universe and Youtube. And any new streaming service down the road. That’s where all the data comes from. A massive database that tracks every interaction.

The key is that lowest level, “the interaction”. The specific details around the record will differ by company and for different reasons. But the general broad strokes are the same. These interactions are then complied and collated and analyzed to develop all the other advanced metrics.

A Sample Entry Explained

The best way to visualize an interaction is to see a sample. So let’s see what a sample database entry looks like. This way you can understand the specific pieces of knowledge the companies can track. It starts with the “Five W’s” (who, what, when, where) and builds out from there. (The “why” is the key to good decision-making, and simple statistics can’t tell you that.)

Streaming Entry

An entry is generated when you—the user—clicks on a show or movie to watch on a streaming platform. That something can be a movie, TV show, trailer, commercial or whatever. Or piece of music for a streaming service. But the click via mouse click, remote control tap, voice command or finger tap starts the process.

Let’s just go through each piece. Start with the “who”. Every customer is tracked by some sort of customer ID number. This means that it tracks everything related to one account. I called this a “customer”, but you could call it users or customer accounts. Notably, it could be different than a “profile”, which Netflix has. (And if you have a “kids” section, then you are subject to COPPA regulations, and shouldn’t track identifying data, a different issue.)

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Disney-Lucasfilm Deal – Appendix: Feature Film Finances Explained!

(This is an “Appendix article” to a multi-part series answering the question: “How Much Money Did Disney Make on the Lucasfilm deal?” Previous sections are here:

Part I: Introduction & “The Time Value of Money Explained”
Appendix: Feature Film Finances Explained!
Part II: Star Wars Movie Revenue So Far
Part III: The Economics of Blockbusters
Part IV: Movie Revenue – Modeling the Scenarios
Part V: The Analysis! Implications, Takeaways and Cautions about Projected Revenue
Part VI: The Television!
Part VII: Licensing (Merchandise, Like Toys, Books, Comics, Video Games and Stuff)
Part VIII: The Theme Parks Make The Rest of the Money)

So after a planned family vacation and an unplanned family emergency, I’m back with my series estimating how much money Disney has made on the Lucasfilm acquisition. The next place to go is movies. How much will Disney make on the new Star Wars films?


Listen, I was all set to dive into the economics of Star Wars movies. Then I realized some readers may not know how movie accounting really works (or doesn’t work?). Before I can get into the specifics of these films, I feel like I should explain all feature film economics.

Can I explain it all? Given that some professionals spend their lives working on this and books have been written on it and courses taught on it, no. What I think I can do—what I will try to do—is provide enough of a summary right now that you’ll know how I calculated the movie returns, and you’ll have an idea for how this works.

I also decided that this isn’t really “Part II” of my series. If I were writing a report on this, I’d put this section in the Appendix. You don’t have to know it to get to the conclusion, but you may want to read it. And if you don’t know it, you’d want to read it before Part II. So here is is: my explanation for how film economics works and my confidence in various pieces.

A Brief Movie Windowing Model
A movies’ finances breaks down into four rough areas: costs, revenues, studio fees and back end. They appear (either going out or coming in) in roughly that order, which is also important. (As I wrote in Part I about the time value of money, you can skip ahead if you know this, but you may still enjoy it.)

A note before I start. I call this a “windowing” model, but I’ve heard it called all sorts of things. If you make it before the film is released, then you’d call it a “greenlight” model. It’s called that because you forecast all the numbers to give a movie the “greenlight” to release. It’s called a windowing model because each phase comes in successive windows. Otherwise it could be called an accounting statement for purposes of talent.

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How much money will Disney make (or lose) on the Lucasfilm deal? Part I

(This is Part I of a multi-part series answering the question: “How Much Money Did Disney Make on the Lucasfilm deal?” Previous sections are here:

Part I: Introduction & “The Time Value of Money Explained”
Appendix: Feature Film Finances Explained!
Part II: Star Wars Movie Revenue So Far
Part III: The Economics of Blockbusters
Part IV: Movie Revenue – Modeling the Scenarios
Part V: The Analysis! Implications, Takeaways and Cautions about Projected Revenue
Part VI: The Television!
Part VII: Licensing (Merchandise, Like Toys, Books, Comics, Video Games and Stuff)
Part VIII: The Theme Parks Make The Rest of the Money)

Let me take you into the mind of a business school student. While in school, you’re taught to be super critical of any business presented to you in the form of a Harvard case study. Even if things look super rosy, there are some bad numbers hidden in the appendix you need to find.

At the same time, you’re taught to be super positive for any business that is doing well on the stock market at the moment. You don’t have appendices to go searching through to find flaws. It’s a weird dichotomy of simultaneous criticism and optimism.

The company that was flying high when I was at business school—and has been a darling of Harvard case studies since the 1990s—was The Walt Disney Company. During my first year as an MBA student, Disney acquired Lucasfilm, the maker of Star Wars and Indiana Jones (if somehow you didn’t know that). I was so enthused by the deal that I used it as my topic for our speech class. To call me “enthusiastic” would undersell my opinion: I thought it was a guaranteed home run.

So when I came up with my first “analysis” article for this website: “How Much Money Has Disney Made on the Lucasfilm deal?” I remembered I’d already tried to answer that question. In that presentation above.

So I pulled out the presentation. I searched for my numbers to see what I said. I only found one slide with any numbers on it. I laid out the challenge for The Walt Disney Company: to make a good return on its investment, Disney would need to earn nearly $550 million per year to make up its money.


That’s a huge number. So did my speech predict how much money Disney would eventually make on the deal?


If I could make one change to the entertainment business press—and I’d make a few—it would probably be to enforce this rule: You don’t have a strategy if you don’t have any numbers. Looking back on that presentation in speech class, I didn’t obey my own rule! My presentation didn’t have any numbers. Well that’s not quite true, I had some tables showing that Disney does well at the box office and international growth is important, but I didn’t project how much money I thought Disney would make or lose by that deal. I just said I loved it and listed some general strategic points.

That’s what most of us do day in and day out in business, and I want to change that.

Strategy is numbers, and today I want to look back at that deal. It feels like a good time to update our thoughts on the Lucasfilm acquisition. While the last film was a box office smash (the number one movie in 2017), it had the worst customer feedback since The Phantom Menace. Worse, Solo had a troubled production, worrying fans on the Twitter/Reddit. And when Disney announced a new trilogy with Benioff and Weiss, it was met with a giant “Eh” and articles worrying about “saturation”.

Today, as a business analyst who loves Disney’s model and a Star Wars fan who loves the franchise, I want to combine these two things and answer a question I haven’t seen anywhere else: How much money will Disney make on the Lucasfilm deal?

Blink and Gut Analysis
When I write an “analysis” article, I’m going to try out an approach different from most other analysts. I laid out my rationale here, but to summarize, too often when we think about complex questions (like the one I laid out above) we don’t clearly own up to our initial reactions and gut thinking, even though that inevitably informs our final analysis. To combat that, I’m putting my “blink” and “gut” reactions right up front, then seeing how they change as I run the numbers. Read More