Category: Netflix

Most Important Story of the Week and Other Good Reads – 12 July 2019: Netflix Has It’s First Merchandised Hit

Stranger Things season 3 came out for the Fourth of July weekend and I think it is safe to say it’s the biggest TV series in America, whether or not we truly believe Netflix’s latest datecdote or third parties, like Nielsen or Parrot Analytics.

If you really want to know if something is “popular”, I recommend waiting until people put their money where their eyes are. In other words, are businesses willing to stake their real world cash on a show?

In Stranger Things’s case, the answer is a resounding yes. Which means that: 1. Netflix has their biggest show and 2. I have a most important story of the week.

The Most Important Story of the Week – Netflix Has It’s First Licensed Merchandise Hit

How do you know Stranger Things has made it? Well, they have a Funko Pop.

Funko Website Image.png

Stranger Things actually has quite a few pops, and Funko is the type of company who can be choosey with who they do deals with. (Hence, this reporter’s quest for a Funko Pop for Bosch.) Given that Netflix finally got a Funko for a series they only just released data for, we can safely say this series is popular enough to get merchandise treatment. As far as I can tell, there aren’t any Amazon or Hulu Funkos, and previous to this, Netflix only had an Orange is the New Black pop. But those efforts pale in comparison to this Stranger Things take over.

For all the success of Netflix and Stranger Things, the future of licensing is far from assured for the streaming giant. Moreover, I’ve seen some misconceptions about product licensing and confusion. So let’s clear that up and dig into Netflix’s strategy just a bit.

Misconception 1: Product licensing is the golden goose.

The problem with product licensing is that Disney is so good at it. As I’ve written before, Disney has some really merchandise-able properties and expertise in licensing going back to the 1920s. Then Disney bought the other champion of product licensing, Star Wars/Lucasfilm. Thus, whenever licensing is mentioned, inevitably Disney is cited as the potential upside.

This is like comparing your pick up basketball game to Kawhi Leonard’s. Kawhi isn’t just good, he may be the best player in the world. Maybe you do play tenacious defense like him, but if you don’t have inhumanely long arms and athleticism, well you aren’t Kawhi. So don’t compare yourself to him. Disney is the same way: they have an entire division focused on licensing…do you? Disney takes up 50% of the shelf space in some retailers…can you compete with that? So sure, Disney’s upside is huge, but what is your real upside?

Licensing upside is also usually overhyped in the press. As I’ve written twice now (the explainer is really this piece on Lucasfilm), retail sales are usually cited by licensing folks, though a studio or network only takes home 5% or so of total sales. If you read that Star Wars has sold $20 billion in toys and licensed products, that means they “only” made $1 billion. Which is a huge number, but 20 times less than reported. You need to move a LOT of merchandise to make a dent in your revenue. I just found this Hollywood Reporter table showing Disney’s revenue by segment, and it helps get this point across:

Screen Shot 2019-07-15 at 12.46.29 PM.png

Misconception 2: Now that Netflix has conquered licensing, it can move kids products.

The irony of the success of Netflix’s success with Stranger Things is that it comes as I continue to read articles about how much trouble Netflix has had with product merchandise aimed at kids. For all the hype of primetime licensed merchandise, outside of Game of Thrones, kids series and movies dominate the sales.

Netflix faces three challenges in moving successfully into kids merchandise. First, they still don’t release ratings data. And while for adult products you can use alternative methods to triangulate demand–Google Trend data, social data, etc–those methods don’t work nearly as well for preschoolers who (I hope to god) aren’t using Twitter.

Second, the binge release/marketing model has proven extremely poor for licensing. All the episodes drop at one time, and then quickly decay as new shows are promoted to replace them. Disney Junior and PBS roll their shows out every day–on their own apps too–which keep kids more engaged with the properties on the TV side. On the feature film side, Disney and Universal roll out with 9 figure marketing campaigns. No kids property on Netflix gets that kind of love/spending.

Third, Netflix still doesn’t own a lot of their own kids content. A lot of their kids series–especially the Dreamworks series–are co-productions where the licensing rights are often owned by the owner of the IP. Hence, Netflix doesn’t have the rights to make products. (Tying back to Orange is the New Black, that was a series co-produced by Lionsgate, which probably helped make the Funko Pop.)

Misconception 3: Product-ties ins are not product licensing.

Stranger Things product roll outs have been much more about integrated marketing campaigns than true money-making consumer products. Which you’ve like seen on everything from KFC to Coca-Cola to Eggos. That’s free advertising for Netflix, which is a model Disney and Lucasfilm had also perfected over the years. While valuable, there is also much less risk for the CPG company, who doesn’t lose much by changing its packaging. If you want to know how much Stranger Things is potentially making for Netflix, ignore the Eggos and Coca-Colas, and even Windows 1, and look for shirts, toys, and games (both board and video).

Misconception 4: There is ONLY so much you can do in licensing in the first place.

The final point with Netflix is that Stranger Things surprised them in how big it got and how quickly. I’d say that Game of Thrones likely surprised HBO in the same way as they’d never had a franchise like that before. 

This speaks to the core point of licensing. You can’t force it on customers. When a series gets popular, it gets orders of magnitude more popular than competitors, and basically licenses itself. What you have to do is be prepared to take advantage of these series when they come, and Netflix is finally ready to do that. We’ll see if they can sustain it.

M&A Update – Univision Is Looking for Suitors

The winds of merging entertainment giants may be blowing again. For instance, if you look to Wall Street, America had a banner year in the first six months when it came to “deals”, which the New York Times uses to mean anything from mergers, acquisitions, divestitures and what not. For all the hype, though, as I’ve laid out repeatedly since last summer, we’ve seen hardly any M&A in entertainment.

Is this about to change? Maybe.

The scoop is from the WSJ, but I saw it first by Jessica Toonkel in The Information (and I also saw it quoted in The Ankler). Basically, the one sentence hint is that Univision executives are at the Sun Valley conference looking for potential buyers and have hired investment banks to do the due diligence. And they should have a few. Univision would complement nearly every media conglomerate, except Comcast-NBCU (who owns Telemundo). Disney’s films already do well with Hispanic audiences. CBS needs more OTT services for the future retransmission wars. And Warner…nevermind AT&T is likely out of money.

Meanwhile, the news that Univision wants to sell itself makes this leak of monster Up Front sales records a little more self-interested.

Other Contenders for Most Important Story

Warner Media’s Streaming Service Has a Name (and Friends)

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My Questions for Netflix’s 2019 Q1 Earnings Call

I did something fun for the first time last week: I emailed questions for a corporate earnings call. Obviously, it was Netflix.

I’ll let you know why.. (And I’m under no illusions that I’ll actually have one of these questions asked.) Normally, if you asked me if earnings calls matter, I’d say no. Sure, the letter to shareholders will have some data, and the quarterly reports matter to investors, but the presentation is the most self-interested presentation imaginable. It would be like listening to just the closing statement of the prosecution in a trial. You’d get a lot more guilty verdicts, don’t you think?

But I have a much larger project I hope to unveil sometime this year where I make a “power ranking” of streaming/bundling services. From ad-supported to sports, anything digital video I will rank in one definitive list. Like sports power rankings, if you go to ESPN or any sports website nowadays.

To build that ranking requires good information, like all good decisions. And right now the company that has the most black holes in data, for me, is Netflix. Since I’ve written about their data and even coined a phrase about how selectively they pull it (read here for “datecdotes”), I naturally had the most questions for Netflix, and they convinced me to finally write an email.

To be fair—meaning unbiased across all digital video companies—I hope to roll out this type of feature semi-regularly with other digital video companies. Google, Apple and Disney are the most relevant, though Disney gets a brief reprieve with all the information they dropped on us last week. Youtube deserves a ton of questions and so does Apple with their paucity of information.

With that preamble, onto the questions. I have three big areas: Viewership (to see how valuable their content is), activity (to gauge how subscribers interact with the site) and subscribers (to probe their business model a bit). After each question, I’ll explain my reasoning in parentheses. These explanations I didn’t send!

Viewership

– In the last earnings call, Netflix reported that Bird Box was viewed by 80 million customers over the first four weeks. During that time, was it the most viewed movie on your platform? Over 2019 as a whole, was it the most viewed movie on your platform? Have any Star Wars, Marvel or Disney Animated films had more viewers than Bird Box since their respective launches?

(As we look to the battlefield of 2020, churn is the name of the game. Is the most popular content on Netflix leaving? I believe it is with either Friends (or other long running TV shows like it) or all the Disney content. This question helps get at that for the movies side, especially the Disney content.)

– In the Q3 earnings call of last year, you said that 80 million unique customer accounts had watched one or more “Summer of Love” romantic comedies on your site, was that using the same standard as Bird Box, where you counted “watched” as 70% completion of a film?

(If Netflix answers this, I’d be shocked. My guess is they moved to the 70% threshold after minor pushback on their Q3 report. They knew they had to explain the calculation, but waited for a film that did well enough, like Bird Box, to justify it. Still, if they say, “No”, then that “Summer of Love” number can be severely discounted. Likely they won’t ever answer either way.)

– How many people watched The Christmas Chronicles? Or The Ballad of Buster Scruggs or Private Life? How many hours have customers viewed for any of this content? (You reported in the last earnings call that you do track hours viewed on site.)

(Again, this is to help flesh out the context of whatever numbers they do release. And the scale of losses. This is the best example of how one-sided an earnings report is. If there were a “defendant” making the bear case, these are the numbers their defense lawyers would seize on to make their case, to continue the prosecutor announcement from earlier.)

Activity

– In 2018, what was your monthly active users? What has been your monthly active users in 2019?

(Monthly active users is the metrics that “feels” right for me when it comes to truly understanding the people who love your service. I don’t have data, but my gut that it explains usage best. Monthly users are the people who devoured some piece of your content in their entertainment diet. Subscribers is not that. If I were “entertainment czar” all streamers would have to release this.)

– You reported the service “averages” 100 million hours a day of viewing in the US in a month. How much does that average vary by month? What does the time on site distribution look like by customer decile? What was the annual daily average?

(We all hate averages, don’t we? Well I do. They don’t tell use anything. And since someone quoted the “2 hours per day” number to me for Netflix usage recently, it made me want to know a lot more about it. Also, related to this is the variance overtime. December happens to be a huge month for Netflix, so touting numbers from December is deliberately overselling the annual performance.)

Subscribers

– In your Q4 report, you mentioned a net add of 29 million customer accounts. What was the number of gross adds versus net? How does this breakdown internationally versus US? You used to report gross adds in 2011, why did you move away from this metric?

(I didn’t know Netflix used to report this, and this is the type of number they should report, if you follow the standard, “Does the CEO get this information?” Because Reed Hastings definitely does. [I love that standard, by the way.] Again, churn is the name of the game, and the great thing about Netflix’s 60 million or subscribers is that it grows steadily every year. Which gives an illusion of stability the gross number would help understand. International is even more curious for me.)

– What is the total unique subscriber base you have had in the US since you launched streaming?

(My final way to get at the churn questions. Say Netflix had had 140 million unique subscribers in the US since launching in 2008. Some of those are duplicate accounts—people who signed up, then switched—surely. But some aren’t. That gets to the idea that it isn’t like Netflix is convincing people to try Netflix for the first time, but to come back. Which is fascinating, to me, and a different business challenge.)

Prediction Time: Forecasting the Effect of Netflix’s Price Increase on US Subscribers

Netflix moves the PR needle. Even I jumped into the Twitter maelstrom to generate clicks based on their two announcements last week, especially the decision to increase prices on US customers.

The problem, for me, is that Twitter, as a medium, is really bad at digging into numbers. It isn’t Twitter’s fault; spreadsheets just don’t really fit. (See my last big analysis article for another debate taken off-Twitter.)

As a result, a lot of the “debate” on Twitter devolves into “this is good” or “this is bad”, with some anecdotes thrown in and the occasional Twitter rant. The fun thing in the #StreamingWars2019 is we’ve all clearly taken a side and this war will only end with all our heads on pikes. (I’m rereading Game of Thrones/ASOIAF in preparation for April 14th and George R.R. Martin ends lots of events with that outcome.)

We can do better than Twitter debates. Today, I want to make the subtext of all the discussion on Netflix text. I want to change the terms of the debate around Netflix by moving into concrete specifics. Strategy is numbers, right? 

That means putting our predictions into quantitative terms. I described my process for this regarding M&A back in July and my series on Lucasfilm. So here’s the question:

How will Netflix’s price increase in 2019 impact US subscribers in 2019?

The results will come in when Netflix announces their annual/quarterly earning in January 2020. For the record, Netflix currently has 58.5 paid memberships at the end of Q4 2018, among three tiers of pricing. Over Q1 and Q2 of this year, they’ll increase prices $1 to $2, raises of 13-18%. 

I’m going to walk through my process to make a prediction. First, I’ll explain why I’m predicting customers in 2019, not other financial factors. Second, I’ll evaluate what we know and some good and bad ways to look at the problem. Third, I’ll talk a bit about the data and finally make my prediction. Feel free to leave yours as a comment on this article or in my Twitter feed.

Stating the Problem: If the number of subscribers who leave is lower than 18%, it’s a win.

This is the simplest of simple microeconomics that Netflix is practicing here. If you raise prices, but the units sold (in this case, customers) decreases less in percentage terms than the price increases, you make money. (Assuming no increases in costs.) Since this is digital and each additional “unit” sold has a marginal cost of zero, that math works. (Note: this is still an “assumption”. If you continue to need a larger and larger content library to woo subscribers, well then our magic “marginal costs is zero” isn’t actually true.)

economics model

Source: EconomicsHelp.org

Like the “value creation” model, the above chart is the simplest explanation of price and supply and how they interact, but it is woefully incomplete. Many, many other variables ultimately impact the number of units sold or customers who subscribe.

Yet, as rule of thumb, it works. The number, therefore, to watch out for is the subscriber growth or decrease. If Netflix decreases its subscribers to 55.6 million paid subscribers, that’s a 5% decrease. Since that is still lower than the 18% price increase, the move made financial sense. Thus, the terms of the debate change to, “will Netflix customers grow, slow or halt?” Here’s the past 7 years of subscriber numbers (paid, US):

subs from earnings reports

Predicting the Effects: How Many Subscribers will Drop from Netflix?

There are a couple of ways to try to triangulate this number, but let’s start with how not to do it.

The Bad Prediction Method: Using yourself as a data point.

Many people when discussing TV or film use themselves as the ur-example of a customer. I saw multiple people say on Twitter something along the lines of, “I use Netflix all the time. I don’t care about a $2 increase. Ipso facto, this doesn’t matter.”

Now, if you are a representative sample size of America, then congratulations. This analogy works. (Also, I have a ton of other questions to ask you. Like who will win the 2020 election? You should know.) If instead, you are a single data point, then we need something else.

The Trust Method: Believe in Netflix’s army of economists.

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Most Important Story of the Week and Other Good Reads – 18 January 2019: NBCU Streaming & Netflix Has Very Ordinary Economics

If you judged importance by following my Twitter feed, the most important story of the week is Netflix and Netflix and Netflix. For business leaders plotting the future of entertainment, though, remember to always look for the “signal” through the noise. A lot of Netflix news is Netflix noise. “Buzziness” may justify Netflix’s original programming goals, but it doesn’t tell us what stories really matter. (But yeah, I’ll have a Netflix take later.)

Most Important Story of the Week – Comcast NBC Universal Announces Free Streaming for Comcast/Sky Customers (and ads)

Sometimes, disagreements about the strategy of a company boil down to disagreements over who a company should be targeting with their newest products. For instance, at first, I was really skeptical about Quibi, the short-form, subscription video service. (This was a hold-over from my skepticism for Vessel.) My main criticism is I don’t think it will work on TV sets in living rooms. But that’s not Quibi’s plan: they’re focusing on mobile to reach even-younger-than-Millenials. In that sense, my critique of their distribution strategy doesn’t make sense.

That’s why I thought some of the criticism of Comcast NBC-Universal didn’t make a ton of sense either. (Beyond the criticisms that are just, “If you aren’t Netflix, you have already lost.” I can’t really debate that.) Instead, I think a lot of the criticism compared NBCU’s new plan to Netflix, when first you need to ask, who are they really going after here? Are they they same segment?

To evaluate a strategy fairly–and many times in business we don’t do it fairly–starts with understanding who they are targeting, then judging the tactics based on that plan. Or you explain why they shouldn’t target a given segment. The disingenuous way to do this is to assume a company should target a different segment, then evaluate their tactics in that vein.

With that mini-preamble, who is Comcast NBC-Universal (NBCU from here on) targeting with their latest offering?

This is where it gets tricky, as NBCU has both B2C (business-to-customers) and B2B (business-to-business) masters it is trying to serve. Starting with the customer side, the generous interpretation is that NBCU is trying to focus on customers who haven’t cut the cord yet. Essentially, get them used to streaming by offering it to them for free. (This could also be a different segment entirely, focusing on people who want a free streaming service.) In other words, making a streaming service for older-than-Millennials who already have cable.

In a lot of ways, this reminds me of the “TV Everywhere” push of the mid-2010s, just more centralized. TV Everywhere failed because it had too many offerings (an app for every channel and cable company), confusing offerings (5 rolling episodes), no guiding force (every channel was on their own) and lack of in-house technology and data analysis. This deficit extended from NBC Universal to Fox to Disney. That said, the purpose of TV Everywhere made sense. Even if this is just “TV Everywhere on steroids” or “alt-Hulu”, the focus on adding value to the traditional TV bundle could work.

Of course, the second set of masters for Comcast will appreciate this too. That’s all the MVPDs that Comcast risks offending by offering this new streaming service, including it’s own cable/satellite services. The problem plaguing the traditional studios is how to respond to Netflix while not trading streaming revenue (that is actually negative cash flow) while forgoing valuable subscriber fees (that is a huge free cash flow positive). The potential answer from Comcast seems to be a giant punt on the issue, which could be brilliant. If it works–a big “if”–then they’ve essentially cracked the most difficult nut of the whole “traditional studio with network transition to digital” piece.

Further, if “subscribers” are the only metric of performance that matters then with a stroke NBC-Universal can take a lead in the streaming wars. Of course, the skeptic could and will say, “Sure they claim 50 million subscribers, how many use the service?” But neither Netflix, Amazon or Hulu has released Monthly, Weekly or Quarterly users yet. Why should Comcast be the first? In the meantime, we’ll have to triangulate with device installs, Nielsen/Comscore measurements and new subscribers to triangulate. But we won’t know for sure.

(Final note: Using the (3C–STP-4P Marketing Framework for the new conglomerates streaming platforms is a tremendously useful way to look at this problem. That will be fun, and take me weeks to make. Expect it in March or later.)

Data of the Week – The Extremely Ordinary Content Economics of Netflix

Where are my thoughts on Netflix raising prices? Well, my rule of thumb is if I write 2,000 words on something, it becomes its own article. So tomorrow I’ll release my thoughts on the Netflix’s price increase. That would have been a candidate for “Most Important” event in many weeks, but the NBC-Universal announcement bumped it. Earnings reports usually don’t make it in, unless they have ground-breaking news.

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Suspiciously Recurring Numbers and More Implications of The Netflix versus Crazy Rich Asians Debate

(This is the third part of a multi-part series exploring one specific Netflix number. To read the other pieces:

Introducting “Datecdotes”, when Streaming Companies use Data to Win the PR Wars

Did More People Watch Crazy Rich Asians or a Netflix Rom Com Last Summer?

Netflix versus Crazy Rich Asians: What Else Does Netflix “80 Million Customer Accounts Tell Us?)

Okay, enough skepticism. If we take the latest datecdote from Netflix, at face value, what can we learn from it?

Well, to start, let’s take a look at the history of “80 million” in Netflix releases…

What other evidence of “suspicious” numbers do you have?

In a future article, I’ll write about another “theme” of this website called, “Theme X: Be Skeptical”. Especially with competitors. Don’t give them the benefit of the doubt! 

One of the corollaries to that theme relates to data. The corollary is, “Be wary of large, rounded numbers.” Data isn’t often rounded so evenly. This applies to scientific studies, political causes and other social phenomena. Oh, and entertainment success stories.

I’d add, if the same company keeps repeating the same big number that would be weird, right?

Netflix has this problem with their original movies, and I don’t think anyone has pointed this out yet. Researching the “80 million customer accounts” I naturally googled to try to find every news source uncritically repeating this datecdote. Imagine my surprise when the first occurrence of 80 million accounts wasn’t October in the Q3 shareholder report, but actually in June!

See, their “Summer of Love” romantic comedies weren’t the first time they had “80 million customers” watch something. For example…

– In June, Reuters was given data from Netflix that 80 million customers had watched a Netflix Original movie in 2018.

– In June, Dana Feldman on Forbes also reported that 80 million customers had watched a “romance film” on the service. Rereading it, this looks like it includes both originals and licensed films. This came from a Netflix tweet.

Then in their Q3 letter to shareholders, Netflix repeated the 80 million customer accounts number.

Clearly there was some rounding going on. And for press releases or on information provided on background, Netflix is under no obligation to be precise. But let’s assume the numbers are close enough. If the baseline assumption is all Netflix movies combined get 80 million customers accounts involved, the “Summer of Love” films didn’t really boost viewership that much did they? Either for romance films or original films. Eighty million customers is just what big groups of movies promoted by Netflix tend to get.

But if I wanted to be skeptical, I mean, what are the odds that exactly 80 million customers watched an original in from January to June, which is the same number that over the previous year watched a “romance movie” and then, after two more months of Netflix rom-coms being released in the “Summer of Love”, they had all in 80 million customers watch an original romantic comedy? Is that crazy overlap, or three part coincidence?

What if we take all the recurring 80 million customers at face value? What can we learn from this number?

We can triangulate the floor for Netflix “Monthly Active Users”.

This is the biggest way that streaming video distributors, social platforms and subscriptions services in general try to game the narrative. A customer or user includes anyone who “samples” a subscription. So you order from Blue Apron, or start a Hulu free trial, or sign up for SnapChat. Those are all users or customers.

But Monthly Active Users (MAUs) is a much better approximation of who is actually using your service regularly. (Or weekly or daily active users, which are even smaller time periods.) That means actual people you can monetize through ads or monthly billing. With Netflix, we have no clue what their monthly or weekly active users are. Most social platforms include this in their SEC filings. Netflix does not—it isn’t a social platform—and instead focuses on “subscribers”.

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