Category: Analysis

The 2019 Star Wars Business Report – Toys

This is part III in a multi-part series estimating how much money Disney made off “Star Wars” in 2019. Go here for my larger series on Disney purchasing Lucasfilm in 2012.)

Introduction and Feature Films
Television

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

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

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

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

Licensed Merchandise: The Missed Opportunity of 2019?

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

IMAGE 1 - Baby Yoda

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

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

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

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

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

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

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

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

Licensed Merchandise – My Estimates on The Top and Bottom Lines

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

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

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

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

Screen Shot 2020-05-04 at 12.10.31 PM

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

 

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

Add it up and here’s my take. 

Screen Shot 2020-05-04 at 3.02.18 PM

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

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

The Impact of Coronavirus on Licensed Merchandise

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

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

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

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

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

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

Consumer Products Impact on Brand Value

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

Money from 2019 (most accurately, operating profit)

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

Long term impacts on the financial model and the 2012 deal

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

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

Brand Value

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

A Final Caveat

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

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

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

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

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

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

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

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

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

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

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

Bottom Line, Up Front  – My Estimates for Primetime Viewing

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

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

Image 1 - Estimates

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

Why use “average minute audience”? 

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

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

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

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

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

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

Methodology

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

First, gather your sources. 

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

IMAGE 2 - Top 25 Channels

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

IMAGE 3 - Total Viewing Q4

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

IMAGE 4 - Nielsen Originals March

Second, make an estimate between the first two sources.

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

IMAGE 5 - Total Viewership

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

IMAGE 6 - Updated Implied Total Viewership

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

Image 1 - Estimates

Third, make some margin of error.

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

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

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

Fourth, sanity check your estimate.

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

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

IMAGE 7 - Raw Tables

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

But I have some huge caveats.

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

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

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

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

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

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

IMAGE 9 - with additions

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

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

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

Next Time and My Data

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

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

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

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

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

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

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

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

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

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

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

Narratives

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

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

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

Demand

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

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

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

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

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

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

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

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

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

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

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

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

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

Supply

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

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

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

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

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

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

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

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

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

Employment

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

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

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

Strategic Recommendations

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

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

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

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

Other Contenders for Most Important Story

Quibi!!!

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

Crowded VOD

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

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

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.

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

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

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

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

TV Series

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

Screen Shot 2020-02-13 at 8.08.54 AM

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

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

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

Screen Shot 2020-02-13 at 10.35.32 AM

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

Table 3 - Mandalorian

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

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

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

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

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

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

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

Base

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

KidsAnd the “high side” case:

High

Money from 2019 (most accurately, operating profit)

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

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

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

Long term impacts on the financial model and the 2012 deal

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

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

Brand Value

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

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

Recommendations

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

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

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

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

91YK2vwbfZL.jpg

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

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

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

We use numbers. Strategy is numbers, right?

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

What this Analysis is NOT

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

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

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

What this Analysis IS

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

Profit from 2019 (most accurately, operating profit)

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

Long term impacts on the financial model and the 2014 deal

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

Brand Value

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

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

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

Movies

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

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

Star Wars Feature Film Trend Lines

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

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

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

Chart 3 - Star Wars v03

Chart 2 - Star Wars v01

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

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

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

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

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

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

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

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

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

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

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

Bottom Line, Up Front

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

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

Avengers: Endgame.

Q: Okay, explain.

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

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

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

Q: Excuse me, oil?

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

Image 1 - Economist Oil 20171223_XMC600_weblarge.png

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

871878e86165ef98858ea0235551942d

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

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

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

Q: And can we quantify that?

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

Image 2 - Financial Waterfall Historically

And here are my recent assumptions:

IMAGE 3 - Financial Waterfall Now

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

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

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

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

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

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

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

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

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

IMAGE 4 - Netflix Film Comps

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IMAGE 20 - Irishman Profiitability

For the full model, here you go:

Image 21 - Irishman Full Model

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

The Model Details

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

Determining US versus International Split

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

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

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

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

Changes to Best Picture Bump

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

Adding in Box Office?

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

Frequently Asked Questions

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

What is the best case for Netflix?

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

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

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

You know what, he’s right!

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

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

Analogy 1: The Scientific Method

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

And it doesn’t apply here.

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

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

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

Analogy 2: Sports

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

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

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

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

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

Analogy 3: Military Intelligence

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

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

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

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

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

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