Category: Netflix

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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“Hurry Up and Wait” for the Streaming Wars: Netflix’s Q3 2019 Earnings Report

(Before you start, consider signing up for my newsletter! Yes I know you have too many already, but this is the best way to help support independent writers such as myself. Sign up here.)

If you ever found yourself in the armed forces, you may be familiar with the phenomenon of “hurry up and wait”. It worked like this. A dignitary is coming in. Say a three star general. So your two star general plans a division parade. Which means the Command Sergeant Major sets it up. Scheduled to start at 1000 (ten hundred in parlance), the Division Sergeant Major tells his Brigades he wants them in position by 0930, so of course that means standing in place at 0915.

Woe to the unit that is late, by the way, which is why everyone is “hurrying”.

Here’s where the fun starts. The brigades don’t want to be late for the 0915 “time hack”, so they have their troops show up in formation at 0830, to be ready 30 minutes early too. Then the battalions say, well, “Let’s be ready 30 minutes before that.”

And so on. With companies, platoons and even squads.

Eventually, you have thousands of soldiers leaving their houses at 0500 in the morning—and skipping PT— so that they can stand in formation for 3 hours doing nothing. Hurry up and wait.

That’s my feeling for Netflix’s latest earnings report. If I can speak for my fellow Netflix hawks—be they bulls or bears—we had this date circled since July. Will Netflix miss subscribers targets again? Could the stock tank? Or will Netflix crush estimates? And what will Reed Hastings and Ted Sarandos have to say about the “streaming wars”, which start next month? 

No kidding, the (hashtag) streaming wars made it in the shareholder letter.

IMAGE 1 - The Streaming Wars

After all the waiting…we didn’t learn much. Netflix hit almost all their targets on the dot and Hastings/Sarandos didn’t reveal any ground breaking news.

Instead, we hurried up, but we’re still waiting for the streaming wars. Sigh. Still, we learned a few things in the latest earnings report. Let’s start with strategy, touch on the specifics and end with the subscribers/financials. Oh, and meta thoughts to conclude.

Strategy: Focused, but Narrow?

When it comes to strategy, Netflix probably has the clearest plan and simplest business model of all the streamers. They sell subscriptions and they plan to dominate all scripted and reality viewing. If you want to know their strategic advantage, it’s that. They know what they are, and they’re extremely focused on that.

And they still have a big goals: they want to take over TV all over the globe. If you want Netflix’s global upside for share price, it’s all this. Honestly, “Netflix bears” like myself probably neglect how much additional revenue can come from this global conquest.

But it isn’t cheap, of course. Netflix is spending $10 billion in amortized and $15+ billion in actual cash each year (from 10K) to get those new subscribers. Worse, the most valuable subscribers are in the United States, then Europe, then Japan and then descending down the GDP per capita income ladder. And those most valuable markets are nearing Netflix saturation. (Meanwhile some, like China, remain off limits.)

The most interesting observation, for me, was about the content strategy. Here’s the introduction to the content section of the shareholder letter:

IMAGE 2 - Content Strategy Summary

This content strategy manages to be both broad and limited, at the same time. Broad because Netflix is competing on film and TV and scripted and unscripted for kids and adults and everyone. 

And it’s limited because that’s all they are competing on? If “live TV” isn’t an option, that means  events, sports and news just aren’t in the cards.

In other words, for all the growth in content spend, many TV consumers will want a TV service that provides news and sports. If Netflix can’t fulfill someone’s entire TV demand, that means customers will have to watch other options too. If you value Netflix’s stock price as “becoming TV”, well you’re seeing a company that knows it won’t be that. Sure, it has a chance (that is becoming smaller every week) of “become all scripted and reality TV”, but that will be a pricey fight.

My view is that as long as customers need to have other TV services, Netflix is increasingly likely to be churned out of someone’s regular diet.

Nor does Netflix have the capital to branch out into a large new business like either buying DAZN or Roku or even a Lionsgate. They could merge with any of those, but any new venture that has huge upfront costs will stress their cash flow even further. Apple, Amazon and Disney don’t have those hindrances. That means Netflix needs to be perfect on everything decision from here on out to maximize that share price. That’s tough. 

So let’s get into those specifics.

Content: Some Selected Datecdotes Tell Us Some Things

Let’s start with the headlines you did not see yesterday. And the “null results” because I want to place in your easily available forebrain the idea that most shows aren’t doing well on Netflix. Or they are and it behooves Netflix to keep them secret. (I guess.)

Headline one: 

Of 162 original launches in Q3, 93% did under 29 million viewers. They were bombs.

Fine that is a bit provocative. Technically, I don’t know how many series really had less than 29 million viewers. Just because the lowest Netflix datecdote was 29 million doesn’t mean some other movie secretly did more than that, and Netflix just didn’t say. (Which, why hide that?) How’s this:

We don’t know how 93% of Netflix originals performed last year.

It’s crazy to consider that’s how many launches Netflix had in Q3, but according to my data—which means sorting this long, long list from All Your Screens Rick Ellis—that’s accurate. And given that when we do get inadvertent leaks—Steven Soderbergh said in an interview High Flying Bird had 8 million views—they are much lower, I’d bet that most other content releases were much lower than the leaks.

On to the datecdotes (explanation here) we did receive. These are both higher and lower than it seems. On the high side, I counted 12 datecdotes (authorized or leaked) since Q2. No seriously, four movies and 8 TV series. The challenge is that four of these datecdotes apply to two series (Netflix released 7 and 28 day numbers for both Stranger Things and La Casa de Papel.) And three of the TV series releases didn’t actually have numbers just “biggest TV series in the country” (Sintonia, The Naked Director and Sacred Heart.)

Since I’ve done feature films the last two times, I’m going to try to draw out some conclusions from the TV side this edition. Here’s my summary table of the data:

Screen Shot 2019-10-17 at 4.28.29 PM.pngAnd now some implications.

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Why Most Netflix Charts Start in 2012: A History of Netflix Subscribers

On a recent The Weeds podcast, Matt Yglesias talked with Binyamin Applebaum about “how economists took over the world”, based on Applebaum’s recent book. Midway through, Applebaum told a fascinating story about how business leaders often get their forecasts about government regulations/interventions wrong. During the Great Depression, as part of the New Deal, President Roosevelt wanted to create the SEC and force companies to release audited financial statements. Apparently, part of the roaring 20s including gross accounting fraud, including create false prospectuses and financial documents.

Naturally, business folks and economist types of the time said these onerous requirements would destroy investing/capitalism.

But they didn’t! In fact, the value created from audited financial statements is arguably one of the greatest value creating regulations in financial history.

Why tell this story in an article ostensibly about Netflix? First, it’s a great example of how regulations make things better for society, despite the cries of protest from business.

Second, even now, a lot of financial statements are currently pretty rubbish. Sorry “suboptimal” in business parlance. What they lack in substance, they make up in heft; they are long, filled with hundreds of pages of legal jargon designed to obscure and CYA, but they still don’t tell you that much.

When you pull up the financials of a company like Google—for example—you discover that they only break out the operating segment information for two businesses: Google and moonshots “Other Bets”. What? Why not break out Youtube and Gmail and Waze? As Matt Stoller informed me, Google runs 8 businesses with 1 billion or more users; they shouldn’t be broken out by themselves? (Google does provide more granularity on revenue sources, but still only four revenue streams!)

Let’s look at Amazon: they run Prime Video, Music, Games, Channels, Twitch, and Comixology. Could they make a “media enterprises” business segment and share operating performance for all those companies combined?

Yep! And guess what, it would be fairly easy to do.

Which brings us to Netflix. They too have tried to minimize the numbers they provide over time. Worse, every so often they change their definitions, and stop reporting old numbers. Which makes an enterprise like the one I pursued last week much more fraught. To help build the table with subscriber numbers, I had to go through essentially 20 years of Netflix annual reports to figure out how they defined subscriber totals every year.  Fortunately, this deep dive taught me a lot about Netflix, and could help you understand their history a bit better.

Today, I’ll tell you what I learned, including the different definitions of subscribers, how they have evolved over time and the two pieces of data I’d still love to see.

The Six Definitions Netflix Has Used for Subscribers in the US

As I mentioned last week, here’s an example from Statista of a chart of Netflix global subscribers. 

IMAGE 1 - Statista Netflix Subscribers

Here’s another one. Here’s another one from my archives in Statista that doesn’t match my numbers:

IMAGE 2 - Statista NFLX 2011 Table

Meanwhile, most of the other charts I found with Netflix started in 2012. Which seems like an odd decision. Since I don’t like uncertainty in my estimates, I pulled the data myself for my article applying Bass Diffusion to Netflix. (I had previously done this back in March for this Decider article.)

As I churned through the financial docs, three big categories leapt out at me. Netflix has highlighted different numbers as their “top line” subscriber number, which news reports usually echo. For instance, up until the end of last year, Netflix reported “total subscribers” inluding free-trial and paid subscribers together. Now they’re only emphasizing paid subscribers. When they made the change, some folks thought their numbers had declined. Anyways, the three big areas I see are:

– Location: US, International or Global: Pretty self explanatory, and Netflix has combined these to report “global”. 

– Paid vs Free-Trials: I tend toward “paid” as my preference because it means the people have actually committed to the product and aren’t just sampling. (Netflix changed last year to focusing on paid vs free-trials, which is what they had reported before.)

– DVD vs Streaming: Before 2007, you could only rent DVDs through Netflix. After 2007, you could rent DVD or stream content or do both. Before 2011 a subscription paid for both, then it didn’t. 

The only challenge is some of those categories are mutually exclusive (paid vs free trial) and some aren’t (DVD vs streaming). So I made a table to simplify it in my head. 

IMAGE 3 - NFLX Metadata

The key is the “unique” number versus total subscribers when it comes to DVDs and streaming. For a short period, Netflix gave the total numbers, even when unique was more accurate. Nowadays, for the record, Netflix just gives streaming as DVD subscriptions decline.

Combining the Definitions in One Chart

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Why I Think Netflix Will End Up with 70 Million US Subscribers: Applying Bass Diffusion To The Streaming Wars

(Before we start, I launched a newsletter! It’s weekly and it’s short, and I explained my logic here. Sign up here.)

My goal is to try, as best I can, to explain the complicated parts of the entertainment biz, trying to walk readers through what I’m doing and how I’m doing it. Unfortunately, even when I’ve tried to simplify things, I’ve gotten comments that my articles are pretty dense. That’s what happens when you don’t have an editor. 

With that preamble, today’s article is math-y.

This is about as math-y as I can get. I’ll be slinging terms like linear programming and mean absolute percentage error. To help out, I’m going to start with a BLUF (bottom line up front) so you can read my findings even if you don’t want to read my process to learn how I pulled it off.

Today is the “Bass Diffusion Model” in action. In layman’s terms, the Bass Diffusion Model is a way to calculate a “total addressable market” (TAM or “market size” in non-jargon terms) for various new products or innovations. As the headline suggests, today we’re turning our gaze towards Netflix as a stand-in for the streaming world.

BLUF – Netflix’s Market Size in the US is closer to 70 million than 90 million

When you apply the Bass Diffusion Model to Netflix’s US operations, the model which fits best has a market size in the United States of around 70-72 million subscribers. In other words, a saturated US market is much closer to the low end of Netflix’s projected outcome (60 million) than the high end (90 million). 

The Bass Diffusion model fits the data pretty well. My average “error” fitting the Bass Model to Netflix is 1 million for streaming only and 600K for all subscribers.

That said, applying the Bass model to Netflix isn’t perfect. First, Netflix transitioned from a DVD company to a streaming company, which is arguably two different product innovations. Second, Netflix isn’t alone in the streaming world, and we only have current Netflix subscribers in any period, and don’t know how many folks are still streaming, but no longer Netflix subscribers. Third, this is a US only model. In the future, I plan to apply the projections to the international markets (which has its own problems) and for all streamers.

The Origin Story – Seeing Bass Diffusion Applied in the early 2010s.

Going to b-school during the Qwikster debacle of 2013 made for interesting class discussions. Overnight, Netflix became a laughing stock. Yet, even with that debacle the year before, they had kept adding streaming customers. They were the growth story already—23%!—leading some early analysts to throw out huge potential market sizes. How long would this double digit growth continue for?

That’s when my professor—a marketing professor, naturally—trotted out the Bass Diffusion Model. We’d all learned this model in marketing the year before; I’d never considered applying it here. He did, and out popped a total market size: about 60 million US subscribers. The model fit really well. 

That 60 million has stuck in my head and influenced my thinking ever since. It’s why I launched this series and why I kept my annual subscriber projections a bit lower than most observers last January. Seriously, look at this chart I made back for an article on Hulu at DeciderBass doesn’t leap off as strongly as it did for Fortnite, but you can see it for Netflix and especially see it for Hulu.

Image 1 - NFLX StartFrankly, because of that one application, the 60 million subscribers point in the US felt like the point where we’d see Netflix slow down. Then, in Q2 of this year…that reality finally happened.

The good news for Netflix is the last few years have had better subscriber growth for Netflix than that old Bass model. (For those keeping score, my projection last year was probably too low.) The bad news? Well, 90 million subscribers is looking MUCH harder to reach. But instead of relying on old estimates, today is about making new ones.

The Task – Forecast Netflix Subscriber Growth in the United States

Just to be clear, my goal today is to apply the Bass Diffusion Model to Netflix’s US subscriber count. Why US only? Well, it has a few more data points which will make it a bit more accurate. More over, the recent slow down point gives me a bit more confidence that we’re seeing the inflection, which I’m not sure we’ve seen internationally yet. 

I’ll be building two models, though, because Netflix has actually had two products: the DVD delivery and streaming video. Unfortunately, Netflix has been a bit tricky when it releases subscriber counts, which means I needed to make some assumptions. Let’s explain those.

The Data – Netflix Subscriber Counts Over Time

To really make the Bass model work, I needed to do a lot of cleaning of my Netflix subscriber data to make sure everything I was calculating was apples-to-apples. Wait, doesn’t Netflix provide this? They do, every year. Here’s a Statista table summarizing that. Can’t we just use that?

Unfortunately, it’s a bit unreliable. When I use data, I pull it myself so I can vet it. For example, with those Statista numbers, are those numbers paid subscribers or free? Streaming only? Or all subscribers? Many tables and charts for Netflix actually mix up those categories in the same chart.

In fact, even in my chart above—the one for Decider—I did a bit of that.

So I updated all my Netflix subscriber numbers, calculating streaming and all subscribers for Netflix from the beginning of time. This took me SO long—and I had some insights into Netflix’s history from it—that I’m going to write it up as its own, probably too-in-the-weeds, article. In the meantime, just know these colors are the six different ways Netflix has revealed subscribers to investors:

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Read My Latest at Decider: “To Binge or Not to Binge: Who Won the Battle Between Game of Thrones and Stranger Things”?

I just had a guest article published at Decider, this time asking, “Should Netflix keep binge releasing all its series?” My conclusion: not all of them. Essentially, Netflix is leaving “awareness” on the table.

Take a read and share on social media. Also, shout out to Alan Wolk, who tackled this back in the spring with Game of Thrones. I’d been toying with this idea when I read his take, and tried to update his thesis with the Stranger Things data point.

Like all long articles I write, I had two ideas that didn’t fit in the main piece. Here they are.

Has Hulu’s Weekly Release Helped?

It’s tough to say. Here’s the brutal case against it:

Image 8 - G Trends with Handmaids

Frankly, The Handmaid’s Tale is their most popular series and it is clearly the lightweight to the Game of Thrones/Stranger Things heavyweights. So let’s drop those two, and throw it up against some similar competition.

Chart 7 - Google Trends TV.png

That’s better, and you can see the same weekly interest boost that Big Little Lies and Game of Thrones had, just on a different scale. Instead, I still think that Hulu is just much, much smaller than Netflix right now. (Which, yes, isn’t breaking news.) Or about where HBO is, given that the interest almost matches something like Big Little Lies.

The counter to the binge model, though, could also be this chart. If The Handmaid’s Tale had dropped on one weekend, would Hulu even have a chance to keep it in the conversation? I don’t think so. In this case, Hulu made the right decision. This naturally leads us to ask about not just the current streamers, but the future streamers.

What Should the DAWN (Disney, Apple, Warner and NBC) Streamers Do?

Well, it depends on who you are and what your business model is, but overall, I’d be flexible. If you have a show with tons of pent up demand—like the upcoming Lord of the Rings on Amazon—consider weekly releases for the first season. Ride the potential enthusiasm to help launch weeks worth of content.

For the rest, I’d consider what type of content you have. Disney has a lot of shows that will benefit from weekly releases. Star Wars or Marvel TV series are guaranteed to drive conversation on comics and sci-f (fanboy) websites and podcasts. Weekly releases will amplify their reach from season one. For other dramas? Maybe not.

For HBO Max, they know all about launching prestige television, but HBO is about to quickly run out of days to launch all their content. In that sense, having more binge releases may make sense. Though again many of their fantasy or superhero series are destined to be stars in recap culture. For NBC, I still know so little about their platform that I won’t even speculate.

Apple may benefit the most from the binge release model. They are buying a ton of content and needs lots of buzz right from launch. Moreover, they aren’t trying to build a streaming platform per se, but a TV platform of which the content serves a subsidiary purpose. They should probably consider an approach closer to launching all series on binge, then rolling out the hits weekly for season twos.

Fine, What About Netflix?

If I were Netflix, I think they are missing something essential about how the social conversation drives a show to new heights. Right now, they have one potential mega-hit in Stranger Things. Even if they want to keep binge releases for all ten thousand other releases, they should consider carving exceptions for their biggest hits. A Stranger Things weekly release likely would have brought in new customer which they, um, need nowadays.

The key boils down to flexibility and being innovative. Innovation is not saying “Never, never, never.” It’s about understanding your customers, your business models and the attention landscape to maximize your return on assets.

“Neverflix” – What Netflix’s Q2 Earnings Says About Their Future Strategy

This sub-bullet in CNBC’s “prepare you for the earnings report” article caught my attention:

QUOTE 11 - Wont catch p soonOn the surface, it’s clearly true. One bad earnings report won’t power Disney+ or HBO Max to 150 million subscribers. But as I reflected on it, the key variable is “when is soon?” By the end of the year, sure, Netflix is safe. But what about the end of 2020? Or 2021? If someone does catch up to Netflix, then the streaming wars will have a new champion.

Let’s see if the earnings report sheds any light on that question.

Strategy

Most earnings reports don’t reveal monumental shifts in strategy. This report would mostly qualify, except that Netflix did rule out a key potential revenue stream in fairly definitive terms.

“Neverflix”

At the end of last year, when it came to a Netflix show airing on a linear channel, I called Netflix the “company of Never”:

QUOTE 12 Neverflix

This earnings report doubled down on the fact that Netflix will NOT roll out advertising any time soon. I believe them and agree with this position. Adding advertisements will concretely change the user experience, likely leading to higher subscriber churn than the ad wizards begging for it expect.

I have softened on the position of “never” recently. I do appreciate Netflix’s relentless focus. A good strategy is a focused strategy, and saying “No” to efforts that divide your energy can be a wise tactic. But let’s not go overboard. For example, releasing episodes weekly.

I’d argue that decision is not material to the Netflix customer experience. Instead, binge releasing is a decision they made, and now cling to unnecessarily. Why isn’t, for example, Stranger Things 3 being released weekly? Having one series go weekly won’t lead to customer churn. There may be a 10,000 angry fans on the internet who want the binge, but again that’s noise, not signal. (I like this issue so much, I wrote an article for another publication coming out soon.)

Oh, and one other “never” that should really worry Reed Hastings.

The Never That Terrifies Me: Aggregation

If I understand the Netflix bulls correctly, the sky-high stock price—if it isn’t based on past performance being sky-high—is due to the fact that at some point, Netflix will be TV. Netflix isn’t just “another streamer”, it’s the future of TV. But is that future already in the rear view mirror?

Currently, many people get their HBO, Showtime and Starz through Amazon Channels. More will get Disney+, HBO and Showtime through Hulu. Apple will have another set of channels. Already, people experience streaming through Roku, and they added the ability to buy channels too. 

In other words, as Ben Thompson coined, the streamers are getting aggregated.

Eventually, the aggregators will offer bundles or discounts. Netflix, though, won’t be included because they have started pushing everyone to subscribe through the internet, instead of through those platforms. They did this because all those aggregators charge fees to sell the channels. I see two sub-optimal outcomes for Netflix as a result:

1. Eventually they get aggregated, which means they are “just” HBO.

2. They struggle to get awareness and presence outside the bundled aggregators.

Either choice is bad, and the sooner Netflix realizes it the better. (Hopefully more to come on this topic.)

Distribution: The good news

If avoiding digital bundlers is the downside case for Netflix, the upside case is integration with MVPD providers. Netflix announced that they will now be on AT&T’s devices that enable streaming integration. I’ve seen this work on Cox’s (via Comcast) Contour system, and it really does complement the cable bundle. Amazon Prime/Video is right behind them, and both are well ahead of the new streamers to catch up to their head start.

Competition: This is the low water mark for digital streaming.

Speaking of new SVODs, the other looming cloud over Netflix is the impending launch of the DAWNs: Disney, Apple, Warner-Media, and NBC-Universal. (Hat tip to Variety for coining.) Obviously, this will put pressure on Netflix to keep prices low to stay competitive—they are just below HBO in cost—and keep spending high to produce original content—they lap everyone when it comes to spending.

More interesting is how this will impact subscribers. While the launch of these streamers may inspire more cord cutting, which would benefit Netflix, the launch could also lead people to “cutflix” and trim the number of streaming options. But let’s move to our next section to discuss those implications.

Subscribers

How Many Subscribers Will Disney+ Grab?

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Netflix Q2 Earnings Report – A Lot Less for The Bulls

Back in the halcyon days of April, Netflix had just crushed another quarterly earnings report and it was riding high. In Decider, I said their report had something for both sides—for the haters and the lovers, skeptics and the supporters, bears and the bulls.

Well, Netflix finally had a bad earnings report.

The most fascinating thought, to me, was this one by Gene Munster:

“As much as I love the company, I just think its best days, unfortunately, are in fact behind it…I think we’re going to look back at this quarter as one of the pivotal moments in the Netflix story.”

If the laws of entropy are indeed correct, well at some point, every company’s best days are behind it. Unfortunately, we hardly ever realize this in the moment. This doesn’t mean the companies go out of business a la Blockbuster—IBM is well past it’s high water mark, but it’s still around and publicly traded—and it doesn’t even mean the stock price will decline—since stocks in general have gone up in general even faster than inflation. But at some point everything declines.

So is this the moment of Netflix’s high water market? Honestly, it may be. But we won’t know for sure until years from now.

To figure it out, I’m going to dig through Netflix’s last earnings report for the strategic insights I can find. As a reminder: I’m not here to give you stock advice. I’m here to critique strategy and Netflix’s quarterly reports are the best time to update my priors/data on Netflix’s strategy. Today, let’s discuss meta thoughts and content strategy; tomorrow I’ll go over strategy, subscriber and financial thoughts.

Meta Thoughts

At Least Netflix Gives Us Financial Data to Parse.

Let’s praise Netflix for one thing to start: producing this document in the first place. 

If Apple had bought Netflix in 2015, Netflix would have become an operating segment, which means that Apple could pick and choose selected numbers to release about their performance.  Likely they would have hidden as much as possible, they way they now hide iPhone sales. So I’d have much less data to judge them on.

To get a feel for this, take a gander at AT&T. We used to get a lot of HBO data every quarter—even as part of Warner-Media—but since AT&T acquired them, they went back to not reporting on HBO specifically. Meanwhile, if HBO were a standalone company, we’d have even more data than both previous reporting situations. The current situation leaves us guessing about their revenue, operating income and subscriber totals. We only get little tidbits if AT&T deigns to give it to us.

If we had to power rank the streaming platforms based on data released, right now it looks like this:

1. Youtube
2. Netflix
3. HBO
4. CBS All-Access
5. Hulu
6. Amazon Prime/Video/Studios

And all of them pale compared to the networks and TV channels of old who had TV ratings released every day and provided us financials. To Netflix’s credit, they give us their financials to make columns like this possible.

What is a “Netflix Killer” Anways?

Alan Wolk had a good article at TVRev clarifying that Netflix won’t actually disappear anytime soon, which is a statement I wholeheartedly agree with. Why, then, do so many headlines have “Netflix Killer” in them? 

Well, fuzziness in definitions. For a lot of folks, Netflix is one of the most over-priced companies in the world. They’re usually reacting to folks who think that Netflix is destined to conquer all of television. So you could reasonably say that any of the following end states is the “death of Netflix”, depending on your point of view:

1. Netflix suffers a few bad quarters and ends up with a price-to-earnings ratio around 20-25. (To show the gap, Netflix is currently at 123; most media firms trade between 15-20; Disney is currently a 20.5.)
2. Netflix is acquired by another larger digital company. (I recommend Facebook in this article.)
3. Netflix becomes the 3rd or 4th most subscribed OTT platform in America and/or the world.
4. Netflix goes out of business.

This is how I can think that Munster may be right—Netflix’s best days are behind them—and that Alan Wolk is right—there is a no “Netflix killer”. It depends on the definition. My personal opinion is that option 3 above is exceedingly likely, which means Netflix should valued like HBO, not like Amazon. Netflix is here to stay, but maybe not one of the most highly valued companies in the world, which may be death depending on how much stock you hold.

Content

How do you evaluate the biggest spender in Hollywood’s performance when they dole out so little data? By my count, they’ve released 17 “datecdotes” going back to the Q3 2018 earnings report. They’ve doled out a few more to news outlets over time, like this one to Reuters, this one to Variety or this tweet for Stranger Things last week. 

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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.)