Category: Weekly News Update

What the Democratic Wins in the Senate Mean for Hollywood – Most Important Story of the Week – 15 Jan 21

Well, living through the last two weeks of news has shown that the pace of news in 2021 isn’t slowing down. The most notable story for entertainment–though it was pushed off the front page within 24 hours–has to be the Democratic Senate wins in Georgia last Tuesday. This week we’re seeing the ramifications of it in policy. So let’s make it the…

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Most Important Story of the Week – What the Georgia Election Could Mean for Hollywood

(A caveat before I start: this section is not trying to explain what should or shouldn’t happen in a Biden administration from a political standpoint. Meaning, I’m not advocating for or against any given policy, but merely trying to sketch out what could happen. So you can be prepared for what may come next. Whether you agree with those policies is up to you.)

To start, President-Elect Biden winning in November was itself a defining moment in the course of American history. I don’t subscribe to the school of thought that both parties are identical. They clearly have different perspectives on everything from regulation to taxes to unions. Switching out one party for another has a big impact on the conduct of business. When Biden won the presidency, that meant things would change.

However, if you’ve followed US politics for the last twelve or so years, it is clear that if a President’s party doesn’t have control over both chambers of Congress, then they can’t get much done. Given that control of the US Senate ended up in a stalemate in November, the question of how much Joe Biden could change was left open.

Then the Democrats took control of the Senate last Tuesday. And, frankly, now the potential impacts are even bigger. Lots of things that could be contested no longer are, including cabinet, judicial and regulatory appointments. Essentially, all the jobs required to run the executive and judiciary. And some things that weren’t possible now are. Like passing bills through budget reconciliation, which only requires a bare majority in the Senate. Democrats control the agenda in both legislative chambers. That itself is meaningful.

We’re already seeing the unleashing of Biden this week. For example:

– Biden appointed Gary Gensler as SEC chairman. Gensler is fairly progressive and was a tough regulator in the Obama administration. In a Republican controlled Senate, he may not have gotten approved. Now he will sail through.

– Biden announced a huge new stimulus bill. Specifically, $1.9 billion in additional stimulus. This will be targeted for both Covid-19 and just economic recovery. In a Republican controlled Senate, this bill would be dead on arrival.

So what happens to Hollywood in this environment? Is it good? Bad? Or somewhere in between?

Probably somewhere in between. And that starts with the idea that “Hollywood” is now fairly amorphous. In Los Angeles specifically, actors, celebrities and Hollywood power brokers love to host fundraising parties for big politicians. As a result, they have Democrat’s ears on a lot of issues. 

Do their corporate leaders? Maybe. A few years back Hollywood tried to pass a suite of content protection legislation and Silicon Valley basically shot it down. So Hollywood influence isn’t without limits. And while Silicon Valley–which is now entwined with Hollywood–used to curry the same favor, they’re now enemy number one. 

In all, we’ll have to see. A lot of positions remain unfilled in Biden’s team, and some of those decisions could definitely impact Hollywood for good or ill. But here are some ways that a unified Congress/Presidency could help or hurt Hollywood:

Economic Recovery. 

This is the biggest area. If Senator Mitch McConnell controlled the Senate, likely there would be no additional stimulus to the U.S. economy. Or it would have to be heavily negotiated and come nowhere near the price tags Biden wants. Given the general economic consensus that we need to drive to full-employment, and that means stimulus, this is good news for Hollywood. (In general, good economies are better than bad, though entertainment is somewhat recession proof.)

Covid-19 Recovery. 

Responding to the virus is as important as repairing the economy. Winning control of the Senate likely won’t have as big an impact on this as simply taking over the Presidency. That said, if the Biden administration really does approve an extra $400 billion to fight the virus, that will supercharge efforts at vaccine distribution. (I’d toss in that even if America gets to 100% vaccination, the rest of the world will lag, and a true recovery will need to be global.)

Targeted Aid to Theaters. 

The last stimulus contained some aid for independent theaters and concerts, but notably only smaller venues. Under intense lobbying, I could see bigger theater chains convincing lawmakers they need help as well. Again, good news for Hollywood in general.

Antitrust (Big Tech)

I’ve written about this a few times. So read those articles to get a flavor for how I think renewed antitrust could impact Hollywood. As for how the Senate changes this, it means that if Biden considers corporate consolidation a problem, he can appoint folks to the DoJ, FTC and FCC who take it much more seriously. If you are traditional Hollywood, part of you would love to see the big Tech Titans taken down a peg!

Antitrust (Old Hollywood)

But what if they come for the rest of the industries? There are hardly any two industries more reviled by customers than cable or cellular phones. Or more consolidated. The biggest risk for very consolidated industries is that antitrust fever spreads from the Big Tech Titans to cable, cellular and entertainment companies broadly. We still need to hear about the specific appointments before we make a judgement call. Depending on which company you are (the big or the small) this could be good or bad.

FCC regulation

This is another wildcard area. There aren’t a lot of hot button policy issues that Democrats want to pursue, though net neutrality is one. The FCC also can regulate the size and consolidation of media companies, which relates to antitrust above. Make this a wildcard for now.

Unions

Labor power has ebbed over the last few decades in America. Entertainment is one of the few industries remaining with strong unions for its members. Biden has said he’s going to be the most “pro-union” president America has seen. If he’s successful, and his pick Marty Walsh can follow through as Secretary of Labor, this could be good for below-the-line and above-the-line talent in Hollywood. It would be bad for companies, since profit margins could be squeezed. A Democratic controlled Congress could also help by passing labor-friendly laws. That said, of all the areas I’ve discussed, this the one I’m most skeptical of. I’ll believe unions are making a comeback when they start to make a comeback.

Other Contenders for Most Important Story

Two weeks into 2021 and we’ve seen a new streamer launched, a new one announced and an old one shutting down. That’s right, a lot of other stories to get to.

AT&T is Shutting Down AT&T Now

In AT&T’s quest to confuse customers, it rebranded DirecTV Now a few years back as AT&T Now, while then launching a product called AT&T TV. DirecTV Now was one of the first vMVPD (digital cable bundle) to run the “start at a cheap price that rises dramatically” playbook. And it was punished the most harshly for this bait and switch. (Youtube TV and Hulu Live TV seemed to avoid quite as severe cord cutting.) Now, AT&T is shutting down AT&T Now.

Overall, the vMVPD market is fascinating. Customers desperately want cheap cable bundles. So they sign up for them in droves. When they go up in price, they drop them in droves. So bundles are good; expensive bundles are not.

Univision Launches a Streamer

It’s about time!

While there are Spanish language streamers out there, there doesn’t seem to be one that dominates the market. (This is an area I’d love to research more.) Netflix obviously has lots of Spanish language content. And Peacock incorporates Telemundo into its offering. And there are smaller services that most English speakers haven’t heard of. But no one has dominated this market yet.

Which makes Univision’s new streamer a fascinating entrant and potential disruptor. One of my theories is that local content can rival Netflix if it is targeted to the local situation. Univision is about to test that thesis. Can they offer a more authentic experience to a targeted demographic than a service trying to be everything to everyone? We’ll see.

Netflix Announces a Big 2021 Film Slate

The widely repeated headline is that Netflix is planning to release a new film every weekend for 2021. Not to be that guy, but didn’t they already do this?

By my count, they’ve released more than a hundred films in 2019 and 2020. And nearly 100 in 2018. That’s why I made charts like these…

Screen Shot 2021-01-15 at 1.48.03 PM

Of course, many of those films were documentaries or in other languages. So sure, maybe this is a change. 

The challenge for Netflix’s film group, which I’ll write about more next week, is that for all the quantity Netflix has not delivered the quality. So looking at this slate, I can’t tell you if this new 2021 slate will dramatically improve Netflix’s fortunes or not. We’ll have to see.

Disneyland Cancels Annual Passes

Lastly, Disney announced that they are cancelling annual passports for Disneyland, and this news shocked me. These have been an institution for decades in southern California. So is this a good sign or a bad sign for their finances? Probably a good one.

A few things likely influenced Disney. First, the price tags are getting so high that the value proposition for an annual pass is no longer there. If you aren’t making customers happy, then it probably shouldn’t continue. (Not to mention actively antagonizing them with big price increases.) Second, with variable pricing, Disney thinks they can keep the parks at full capacity, and maximize the profits of a given day. If Southern California residents want to go for cheap, they can go in off-peak times of year.

Lastly, this may be some indication Disney sees upside in attendance this year, whenever parks reopen. Because there might be lots and lots of pent up demand. In other words, Disney may not need annual passports to keep parks at capacity.

Data of the Week – Nielsen in Growth of OTT Usage

Here’s a fascinating tidbit in Nielsen’s 2020 annual report on streaming:

Nielsen Usage - Growth by 3% in raw

Wouldn’t you have thought it was higher? I mean, the narrative in March was that everyone was streaming all the time now. But while viewership of TV went way up, streaming “only” took 3% of the usage. 

By the way, if you want my take on Nielsen’s annual list, see this thread:

Is Streaming Winner Take All? My Question of the Year for 2021

Well, give 2021 credit for trying to catch up with 2020 in terms of monumental new stories. This is absolutely one of the craziest weeks in my lifetime and I assume many of the folks who read. (Though, for historical hindsight, we tend to forget how absolutely chaotic the 1960s were, which featured the assassinations of at least 3 major political leaders. This isn’t to downplay the events of this week, but to emphasize that US democracy is always a fragile creature.)

The holidays tend to be slow for entertainment news, so we can take our time catching up on it. The biggest story–how did the big straight-to-streaming films perform?–I’ll handled over at Decider. In the meantime, let’s get reflective on the year that will be.

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Most Important Question of the Year – Is Streaming a Winner-Take-All Market?

In my first column last year, I said that 2020 would be defined by this question:

“What is the same and what is different between streaming and traditional distribution?”

Little did I know that we’d have a lot of things that were extremely different in 2020, namely a global pandemic that threatened to upend streaming and traditional media. (The biggest hypothesis is still that Covid-19 “changed everything”. I don’t really buy that; flashy world-altering headlines get the clicks but I’m a little skeptical about how much actually changed. We’ll see.)

My 2020 question and the lack of an answer shows a lot of the problem with articles predicting the future. It turns out that’s really hard! That’s why I like the approach of not predicting the future, but figuring out the most important question for the given year. And I have the question that I think 2021 will potentially answer. And if it does answer it, the consequences for entertainment are huge:

Is Streaming Video a “Winner-Take-All” Market?

Specifically, will one firm take a commanding lead? Will they capture a huge portion of the marketplace? Something like 70-90% of the value of the market? Contrariwise, do the streamers split the market—defined by subscribers, revenue, viewership, you name it—roughly evenly? Or does it land somewhere in-between? Say a few big winners with a lot of smaller players fighting for scraps?

Take the United States, which is probably the most mature market. As it stands, we’re in between the extremes of market consolidation. There is one clear dominant streamer, but it has by no means a monopoly on viewing. Specifically, Netflix has roughly 30-35% of the viewership depending who is measuring and when:

Comscore via Hedgeye by Type copy

This year, that number grew a pinch. Long term, that share of streaming viewership is declining. This massive viewership translates into the largest streamer by total subscribers:

chart-us-paid-streaming-subscribers

That said, Netflix got to develop such a dominant position because until 2019, Netflix only had two real rivals, Hulu and Prime Video (CBS All-Access is older than you think, but until recently has felt like a side project for CBS.) Now Disney, HBO and NBC are all-in on streaming. And ViacomCBS is half-in on streaming.

Can those firms catch up to Netflix? Or does Netflix keep growing and outpace its rivals? Can Disney+ catch up with Netflix in total US subscribers? Or Peacock and HBO Max? 

I think 2021 is the year we find out. Not all the services will catch up to Netflix in one year, but we’ll at least find out if this is going to be competitive or not. And that’s huge.

The Ramifications of this Question

To start, Netflix is the biggest beneficiary of the assumption that there will be one winner in streaming. The thesis is that “Netflix will become TV”. Not just a channel, but the whole shebang. That’s a winner-take-all economy. That’s network effects. That’s what has driven the huge valuations of the rest of the FAANGs (Facebook, Apple, Amazon and Google).

If Netflix can’t dominate streaming, then the better analogy is that Netflix is a new “bundle of channels”, much like what Disney, NBC-Universal and Viacom-CBS already were in cable. What has changed is the distribution. If that’s the case, woe to Netflix’s stock price.

This also matters for all the other streamers. They want to be a piece of the streaming pie. If Netflix owns the whole pie outright, then the investments of Amazon, AT&T, Disney and Comcast will utterly fail.

Further, this impacts the device and operating systems of the world, Roku, Amazon, Microsoft, Apple and Sony (the RAMAS if you will). If Netflix is the once and future king, it will have the leverage to negotiate those devices into oblivion. If they aren’t, then all the streamers may lose to the RAMAS’ value capture. (Their fees to sell subscriptions will capture most of the profit margin from the streamers.) 

My Take? Streaming Won’t Consolidate

If you’ve read my website for any amount of time, you can guess how I think this question will be answered. (So fine, I am making a prediction!) While content often performs with “logarithmic distribution of returns”, channels don’t have quite the same variability. (Or the winners can shift over time fairly easily. NBC won the 1990s, CBS won the 2000s; HBO won the 2000s, but Showtime almost caught them until Game of Thrones.) Frankly, this is where I see streaming headed: consumers will have multiple streaming services simultaneously, meaning there will be leaders, but not dominant winners.

Notably, part of this thesis stems from a skepticism on the presence of “network effects” for streaming video. (And the dreaded “flywheel” for Netflix.) For user-generated content, network effects were very, very real. The more users posting videos on one platform, the more viewers used the platform, so the more creators who posted videos on that platform. Hence, Youtube has demand-side increased returns, and it’s winner-take-all. Same for Google in search, Facebook in social, and Amazon more web marketplaces. 

The biggest input for streaming video, though, isn’t user data—which allegedly is Netflix’s driver of their winner-take-all flywheel—but the quality of content. And since the difference between 30 million subscribers and 60 million in data terms doesn’t produce that much better content, network effects in streaming video likely won’t appear. So it won’t be a winner-take-all market.

At least that’s my theory!

I’m not certain and as an analyst I’m willing to be upfront with you, instead of pretending to a level of uncertainty most analysts can’t truly possess. (Is this a bit of shade throwing at some of my entertainment business peers? Sure. Welcome to 2021!) The rest of this year will help me/us figure out if we are/were right or wrong. 

Other Questions That Will Define 2021

Does the live/experiential economy feature a boom?

When a vaccine was announced, I speculated about the upcoming “year of bacchanalia”. Over the break, I was glad to see another pundit take this same stand in Andrew Sullivan. His/my thesis is that once the vaccine begins rolling out in force, we’ll see folks make up for the lost time of 2021 by partying. For entertainment, this means lots of potential revenue. Concerts will see booming attendance, same with music festivals, bars, parties, travel, theme parks. You name it, we celebrate it. Quoting myself:

Customers in 2021. My biggest prediction is that we see a big rebound emotionally/culturally/socially. Take the Roaring 1920s and pack it into one year. Folks throwing big parties. Or holding double birthday parties. Splurging on outdoor concerts and festivals. Big vacations. In other words, 2021 becomes the year of the party. The pent up demand hypothesis.

The challenge will be figuring out if this is happening. If we use full-year numbers, it will be hard to see, since no one knows when we’ll feel safe to party again. It could be by March (if deaths fall quicker than expected) or fall (when we achieve herd immunity). Or somewhere in between. I’ll be looking to use per capita numbers as much as possible to untangle this.

What happens to theaters?

They’ll suffer the same uncertainty as the live economy, with more pronounced scheduling problems. The key date for me is May 7th, when Black Widow premieres. If theaters can be at full capacity in America by then, the entire world looks better. The other question is how firm the theatrical release slate is and how much the studios are willing to spend on marketing. And then whether or not the theaters can make it to May. Lots of question marks.

What happens to the economy?

The entertainment industry isn’t quite as recession proof as folks have made it out before. If wallets are trimmed, some entertainment spending goes with it. Some cheaper forms of entertainment, though, can resist this trend (like theaters) and some limited capacity forms of entertainment can also focus on high-wealth individuals (like concerts, sporting events and some theme parks). 

Thus, in 2021, entertainment folks would rather have a booming economy than a stagnant one. Folks are now openly speculating about a “v-shaped” recovery again, but it remains to be seen if the damage of 2020 can be overcome that easily. (Lots of businesses closed that may never come back, and that damage can take years to overcome.) The solution is lots of stimulus, which it sounds like Biden is considering.

Other Contenders for Most Important Story

If I weren’t speculating about the future of this year, what could have been the story of the week? Glad you asked. 

Roku Acquires Quibi’s Library

Is this a good deal for Roku? Who knows. If I knew the price, I still couldn’t tell you because I don’t know how good these shows are. If the price was very, very low, then maybe. Really, though, this is still a content licensing deal since Quibi didn’t own most of the shows, but was either licensing them or co-producing them with top talent.

Apple TV+’s Bold January Release Schedule

I’m sure if Apple TV+ could have, they would have released a lot of season 2 TV series back in the fall, a year or so after they launched. Instead, a lot of shows got the “Covid-19 pause” and it looks like Apple TV+ is on track for a big January, with Dickinson, Servant, Losing Alice and Palmer releasing each week in January. Also–and this is big–Apple TV+ is moving some shows to a weekly release

The upside is this will keep folks engaged (hopefully) through Q1. So I love that. The downside is a few other big shows still have vague “2021” release dates, like The Morning Show and Foundation. Apple TV+ still has new service growing pains, clearly.

For those keeping track, Disney+,  Apple TV+ and Prime Video have all released some shows weekly. (HBO Max has flip flopped on this point.) At this point we have to ask, who really knows more about release schedules: the rest of the market or Netflix?

Discovery Plus Launched

And it’s here! Discovery+ launched this week, and the reviews are much stronger than I anticipated. Rick Ellis makes the case that Discovery+ will help a lot of folks cut the cord, what I would call the next gen of cord cutters. Dan Rayburn says it is intuitive to use and has a massive library. I’ll be curious when we see the numbers on this one.

I’d also add, the Food Network Kitchen experiment doesn’t seem to be going well, and I wonder how long that standalone service lasts.

Netflix Increases Prices in the UK

This brings the UK in line with US prices (roughly) so it wasn’t unexpected. (The price increase in the US was!) Still, it will be fascinating to see how these latest price hikes fare in the next year with much more competition.

CyberPunk 2077 Security Fraud Case

Read about this interesting case either at Sportico or Matt Levine’s newsletter. Essentially, some folks are suing the makers of CyberPunk 2077 for releasing a game that was so bad it had to be recalled. Of course, some entrepreneurial lawyers will always sue claiming “securities fraud” for almost anything. However, this could set a precedent for digital products that are released and fail to meet their billing.

M&A Updates

Amazon is acquiring another audio platform, podcaster Wondery, to boost its Amazon Music platform. As the article notes, Amazon also owns Audible, which competes with a separate subscription in narrative audio. When a company is so big it’s competing against itself, that’s probably too big, right?

As for the strategy, it’s fine. The biggest harbinger of doom is for Spotify, though. It would be much easier to corner the market on audio if Apple, Google and Amazon weren’t all fighting you for it. (We could also ask, is music streaming winner take all?)

Context Update 

When it comes to regulations, I have my eye on antitrust for 2021. (I should have put that in the other questions above!) I hadn’t really considered unionization, but this could absolutely become an issue for the big tech firms. Like antitrust, this is a regulatory issue where a motivated Biden Presidency could make lots of changes without Congress passing new laws. So keep an eye on Amazon to see if unionization pushes come to them.

Most Important Story of the Week – 22 Dec 20: CAA Settles with the WGA…Who Won?

Last week felt like the “winter finales” of the fall TV business season as we resolved two long simmering dramas in the land of TV. CAA settled with the WGA, bringing one of the last two major agencies into alignment with the WGA’s demands for agents. And HBO and Roku finally settled their long running feud over HBO Max. But which is more important?

While the latter story is certainly buzzier, I genuinely didn’t know if CAA would actually settle with the guild. (HBO Max on Roku felt inevitable.) So it wins the crown for my “story of the week”.

(Housekeeping: Expect my writing to be a little lighter with the Christmas and New Year’s Holidays. This will be my last weekly column until January, though I may have a few smaller articles pop up in the interim.)

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Most Important Story of the Week – CAA Settles with the Writer’s Guild

Right up front, let’s review the key deal terms:

– CAA agrees to phase out “packaging fees” by June 2022
– CAA will limit their ownership in production companies to 20%
– CAA will provide additional disclosures on their financial ownership.

Unlike our other contender for the week (HBO Max v Roku) we know a lot more about the actual terms of this deal. Thus we can talk a bit more confidently about who won or lost this deal.

Pyrrhic Victory Winner: The WGA

Look, the WGA got its major deal points. CAA won’t be able to own a production company, and packaging will go away eventually. The only reason why the WGA isn’t ecstatic with this outcome is they had hoped it would have come two years ago. The WGA wanted to settle with the agencies, moreover, so that they could negotiate a better deal with the studios. But since they couldn’t fight two battles simultaneously, their current agreement with the studios didn’t go as far as some WGA members wanted. 

Though, from the outside, the WGA looks well positioned for the next fight. Which will clearly be against the streamers. In the same way that folks say that Wonder Woman 1984 going to HBO Max helped the Roku deal, Warner Bros sending all their films to HBO Max may have sent a signal to the agents at CAA that they needed to settle with the WGA to protect their joint film interests. 

Loser: The Agencies

If anyone didn’t want the hold out of the last 20 months, it was probably the agents, given that it sunk one major agency’s IPO and then Coronavirus walloped the rest of their business models. Many agencies have had to lay off workers and furlough employees. Yes, Covid-19 caused that, but a concurrent work stand off didn’t help.

The most surprising part of it for me is the packaging piece. Ultimately, the agencies made a fortune off those arrangements. Why settle? My guess is the logic of “10% of something is better than 30% of nothing” ultimately won out. Agents made out like bandits in the packaging process, especially when it comes to lower level talent. Meanwhile, this deal also kicks the legs out of the agencies for their new business model of owning a piece of the content their talent makes. (Which was formerly illegal.) 

No change: The Studios

That’s the other funny outcome of the eventual deal: it doesn’t really seem like anything changed, did it? As many films and TV series as ever were greenlit, ordered and produced, but for the Covid-19 shutdown. Like all things, life/business finds a way. 

Which feels like the right end to this drama. (Though yes WME still hasn’t signed.) In the end, the business models will be tweaked, but talent is talent and the agents are agents, with a power struggle that is always ebbing and flowing, as they battle with studios in another power struggle.

Data of the Week – Nielsen Plans a Holistic Viewership Data for 2024

Nielsen is always updating their measurements, and this year rolled out streaming viewership numbers for public consumption. (A topic I’ve obviously loved, and, in full disclosure, Nielsen has provided me some data.) The news of a few weeks back is that Nieslen is planning to unify traditional linear viewership with streaming metrics. I’m intrigued by how they plan to do this (and how users can splice and dice the results) but this should be a win for any data heads out there. The only draw back? It’s still a long way off. (2022 it will start rolling out and by 2024 it will be their de facto measurement.)

Other Contender for Most Important Story – HBO Max and Roku Settle

The news is that Roku and HBO Max agreed on distribution terms, so HBO Max will replace all HBO apps on Roku devices. Like any deal, both sides had wins and losses. Let’s go by company, with who won what deal terms, and what we still don’t know.

Roku Negotiating Wins

– Roku can own the billing relationship. 

Owning the data? Valuable. Owning the user experience? Very valuable. Owning the customer relationship? The most valuable. Going forward, Roku will still be able to sell HBO Max subscriptions, which is key to the Roku platform business. Their key value add to consumers–besides the device itself/operating system–is to be able to sell bundled billing. While this deal can be a win for both sides (HBO could sell more subscriptions if Roku is pushing it), getting potentially 20% of perpetual monthly subscriptions for one sale is a great price.

HBO Negotiating Wins

– No more HBO period, only Max
– HBO owns the UX
– No free content for the Roku Channel

HBO meanwhile puts an end to the confusing branding proposition that has plagued them this year on another streaming platform. So that’s a win, and on Roku applications–from what I understand–HBO will get to own the customer user experience. Meaning you have to launch an HBO Max application to watch HBO Max content. As I said just above, in some ways, this is better than owning the data. (Though data and user experience are usually linked.) Best of all for HBO, they didn’t sacrifice any content to build Roku’s own streaming business. (Which probably would have been a deal-breaker for me too if I were HBO Max/Warner Media.)

Unclear Winners

– Split on ad-inventory (usually 30%)
– Split on subscription fees (usually 20%)

A lot of this is theoretical simply because we don’t know the results of the biggest point of all: who is getting what revenue? 

If HBO Max negotiated Roku to down to 5% of subscription revenue (unlikely!), that’s a huge win. If Roku kept it at 20% (unlikely!), that’s probably a win for them. Meanwhile, splitting ad-revenue is a big unknown since we still don’t have firm details on HBO Max’s plan. They could go big on advertising, or throw it in the trash heap. It remains to be seen. Since Roku has data on all viewing on their platform–including Netflix!–they have more upside with the ad monetization. There are some rumors that HBO caved on this point, which would also go into the Roku win column then.

Ultimate Verdict?

Both sides claim they’re happy with this deal, and that’s probably true. The biggest loser is probably both companies since this feels like a deal that could have been had in June. A lot of pain was had from May to now, without a lot of gain on either side (is my guess). Ultimately, though, that likely hurt HBO Max’s launch more than it hurt Roku’s sales.

Bonus Point: Antitrust Implications

These two quotes in the Wall Street Journal sum up the future antitrust implications if either Roku or Amazon take over a dominant position in device sales. (Or split the world and subtly cooperate on pricing.)

Screen Shot 2020-12-21 at 9.14.46 AM

Screen Shot 2020-12-21 at 9.15.18 AM

I’m clearly more bullish on a stronger antitrust future than most other business types. (I still read arguments that Amazon isn’t a monopoly and/or dominant player who uses their position to restrict competitors.) But with the deluge of Facebook and Google legal actions, it feels like the antitrust could be the future. And headlines like this won’t help Roku if one day regulators make their way down to video devices. (Dominant market position leading to higher rents being the key phrase.)

Also, this is just another data point that my thesis from last November is coming true.

Other Contenders for Most Important Story

Mind Geek and YouPorn Delete Lots of Their Content

The challenge with user generated content is make sure the users don’t generate bad content. Or frankly immoral, unethical and illegal content. The latest big tech player to deal with this is MindGeek, which owns a plethora of pornography websites. MindGeek had a fairly unscrupulous business model before a story broke that they turned a blind eye to child pornography on their site, including accusations of content piracy, revenge porn, monopolization and illegal content. Thus, Visa, Mastercard and American Express abandoning the website isn’t a huge shock.

Though it does mean something. On the one hand, Mind Geek could end up being a better partner to it’s actual suppliers of pornography, which it has largely ripped off. Interestingly, pornographic talent had been calling for this move for years. It will make it easier for legitimate users to make money. The downside for MindGeek is the value of user-generated content is usually because it is stealing other folks intellectual property. 

This shows the pitfalls of any business relying on user generated content. Even though it was obviously easier to have child pornogrpahy material on a site dedicated to pornogrpahy, many folks pointed out that Facebook, Youtube, Snap Chat, Tik Tok and others potentially have much worse problems with child predators, simply because they are much bigger. Yet, since those companies aren’t ostensibly pornography, they have much more good will. (It’s easy for everyone to pile on YouPorn.) 

All in all, this touches on the much larger political issues involving free speech, Section 230, piracy and countless other political issues. I will repeat a point, though, I’ve hammered Youtube on for years: It baffles me some of the most egregious piracy issues aren’t easier to solve/prosecute. Certain search terms are so clearly designed to lead to illegal content that I don’t know how that’s not actionable.

(For example, in sports. If Reddit users have threads called “Lakers Live Game Stream” it should be clear that’s an illegal stream of the game…right? How is that not actionable? The examples in child pornography are similarly egregious.)

So if it’s so easy to solve, why isn’t it? Money. All the user-generated content companies make billions. And some of that comes from content that skirts the line of legality. It’s better to pretend it doesn’t exist than to solve the piracy/illegality problems. That’s just the facts.

ESPN and SEC Sign $3 Billion Deal

Another huge sports rights deal, this time for the most valuable league in college football. Even during a pandemic, we’re waiting for the next sports rights deal that shows a flattening in growth.

How the Antitrust Case Against Facebook Could Upend the Streaming Wars: Most Important Story of the Week – 11 Dec 2

Disney is a marketer’s marketer. With the biggest brands in entertainment, they can serve up an investor day—an investor day that is for Wall Street investors!—that gets regular folks to turn in and trends on Twitter. Yet, for all the buzz, the basic story was that Disney is releasing Disney content on the Disney branded streamer. We’ll get to that, but another story could have bigger implications for entertainment.

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Most Important Story of the Week – The Antitrust Case Against Facebook

A few months back, following Epic’s Games epic lawsuit against Apple, I stated that I planned to follow “antitrust” news fairly closely. Because antitrust could be the new “deregulation”:

I’ve been scanning the landscape more over the last couple of months to look at the future. And the “blue ocean” space in the entertainment strategy landscape for me isn’t technology–again, the futurists have it covered–but how regulation could change business models. And this is a hypothesis I’m monitoring: 

Could antitrust enforcement could become the new deregulation?

Deregulation was arguably the biggest driver of disruption in the 1970s and 1980s. Deregulating industries across the globe from airlines to energy to telecommunications repeatedly enabled smart firms to seize new advantages. That airlines example above is a perfect example; Southwest likely doesn’t become Southwest without deregulation.

Generally, everything has been deregulated. So what comes next? My guess is a reversal of antitrust. 

Since then, the signs that antitrust is on the agenda have only picked up steam. Consider:

– The House Antitrust Subcommittee released the “Cicilline Report” which laid out how the four big tech firms have used their market power to hinder competition.

– The Department of Justice filed a lawsuit against Google for specific antitrust violations. State Attorneys General are expected to follow suit.

– Joe Biden was elected as the next President of the United States. While there is some bipartisan support of renewed antitrust legislation (see Google’s antitrust suit, filed by a Republican), Democrats are still clearly more supportive than Republicans on antitrust.

– This week, 48 states and the Federal Trade Commission filed an antitrust lawsuit against Facebook. (Also a bipartisan move.)

In August, I laid out a few waypoints that I would watch to see if increased antitrust enforcement was likely coming. We hit the big one (Biden’s election), the next biggest (Congress increasing pressure) and now antitrust is headed to the courts (Specific lawsuits against Google and Facebook). As the future becomes slightly clearer, then, it’s worth expanding the potential for what comes next, especially for entertainment and media.

Predictions

What happens next?

To start, more antitrust lawsuits for the rest of big tech feels inevitable. Amazon seems particularly easy given that they have leveraged their market power in retail for years to enter new industries or stifle competition. The complaints from smaller vendors are legion. (The diapers.com affair from the start of the decade is particularly egregious.) Apple is more beloved than Amazon, but the Fortnite fiasco basically illustrated in stark terms Apple’s market power, and brought up a host of smaller competitors crushed under their power. Both Amazon and Apple, though, are more popular than Google and Facebook, which have both been embroiled in partisan bickering.

After that? The states/FTC/DoJ will either win or lose their lawsuits. That proposition is dicey because these suits are decided by individual judges, many of whom were appointed by Republican presidents with The Federalist society backing “Borkians” who tend to downplay antitrust concerns. Or in some cases just don’t believe antitrust is worthy of government attention.

If the states lose their lawsuit, then it would require Congress to change the laws around antitrust. That’s a much tougher challenge in today’s political landscape. But not impossible. (The Georgia run-offs will say a lot on whether this is possible.) Assuming that the Big Tech companies lose their fight, then come the potential remedies, which adds another layer of complexity to predicting what happens next.

Potential Outcomes

Let’s be honest and let the air out of the balloon right off the bat: The most likely outcome is that Big Tech is mostly left in place. Think Microsoft in the 1990s. In the worst case, the companies agree to some measures to control their behavior, but immediately go back to not following them and paying minuscule fines.

This is, essentially, what has happened with most merger consent decrees this decade. Facebook said it wouldn’t integrate What’s App’s data, then did it anyways. AT&T said prices wouldn’t go up after mergers, then raised prices. The companies pay the fines and keep consolidating. Disney said it would keep producing Fox movies, but now may release fewer films in theaters post merger than they did before.

The best case would be consent decrees that are enforced. Like the Paramount Consent Decrees of the 1950s. This helped movie studios and theaters thrive. Or AT&T’s forced divestment of patents in the 1950s. This spurred innovation across the U.S. landscape, which really did help competition. (It does say something that success examples of this happened 70 years ago…)

The bigger, and more fun to imagine, scenario is breaking up big tech. (And while I try to avoid my own policy recommendations, this is the outcome that I believe would benefit America the most.) These breakups could be either horizontal (the same industry) or vertical (different business units in the same company in related fields). 

Vertical is actually easier in most cases since the different companies don’t need each other to survive. So for Amazon, spinning off AWS, for example, would hardly impact Amazon’s retail business. (Though it would deprive Amazon of a valuable profit stream.) Google has multiple business units that could easily survive on their own. I’d add that splitting up Instagram and What’s App from Facebook are horizontal break ups, but relatively easy to contemplate since customers wouldn’t notice a change. (I’d make the same case for Amazon breaking up their marketplace from their other retail enterprises.) 

While vertical break ups in many cases don’t address market power, they are still very helpful for competition, since it means the firms left in a given industry can compete more evenly. (And most vertical integration tends to be followed by price gouging, product tying or other anti-competitive behavior.)

The key question for entertainment is whether each of the big tech titan’s entertainment enterprises get divested individually or remain as part of the bigger conglomerate. I could argue that Google should easily divest Youtube. Youtube can clearly survive on its own, but this would also give a powerful new internet advertising option to marketers. Apple could divest its media fairly easily (they are all just apps running on their operating system). Amazon has a better case for Prime Video staying in Prime, but even that isn’t ironclad. (Ask yourself: couldn’t Amazon pay the new Prime Video to stay in their Prime bundle? Yes, obviously. So why wouldn’t they? Because the value isn’t actually in the current video/data, it’s the market penetration to gain dominance overall.)

This is an unlikely scenario I’ve laid out. The plaintiffs have to win their lawsuits and then the remedy has to be the most extreme of remedies (break up). But imagine we do get here. Who are the winners and losers of this world? Imagine that Prime Video becomes its own company (with Twitch, Amazon Music, Audible and maybe a few other assets). Apple One becomes its own company (Apple Music, iTunes, TV+, Arcade and so on). And Google spins off Youtube.

Who wins or loses in this scenario?

Winner: Netflix

Say what you will about being bearish on Netflix’s business model, they aren’t a monopoly. Some investors want them to become one (building a “moat”), but a company with only 8% of all viewing in the United States is hardly a monopoly. Indeed, the biggest threat to Netflix, in my mind, is the unlimited cash reserves of Apple and Amazon. If forced to compete on an even playing field, this would benefit Netflix. (With the caveat that multiple new streaming companies on the NASDAQ may impact all share prices simultaneously, for good or ill.)

Winners: Traditional Streamers

Cord cutting is the biggest pain point for traditional media. But the biggest challenge, more than anything, is competing against competitors who don’t have to make money. If Big Tech had to compete on a level playing field–read not deficit financed–traditional media has a much better chance to survive in a streaming world.

Further, there is a big difference between radical disruption (where revenue drops by double digits year over year), and slow evolution (where profit margins slowly decline). Both get to the same place (which is the likely outcome from streaming), but one has a lot less pain for the incumbents and their suppliers. 

Losers: Prime Video and Apple

These seem like the two biggest losers in all this because most folks acknowledge that their streaming business models just aren’t based on actually delivering a valuable product. Phrased differently, no VC firm would invest in Apple TV+ if it weren’t owned by Apple; there is no business plan there. Spun off from their parents, these new media companies would be valuable, but much less invincible.

Losers: AT&T and Comcast

After Big Tech, if Congress wanted to find the industries that are heavily consolidated and hated by customers, cellular and cable are next on their wishlist. (Then health care.) Breaking up Big Cable would probably be the most popular move of the Biden administration. 

Winners: Roku and Sonos

If devices are sold at cost, the independent device makers have a chance to succeed and thrive.

Winners: Talent…probably.

In a lot of ways, the boom of streaming and peak TV is the best of times and the worst of times for talent. More shows and films are being made than ever before, but back end cuts are smaller than ever before. Meanwhile, junior writers work for some of the worst pay in the last few decades. Arguably, with many more streamers who are less powerful, the guilds could negotiate better rates, especially down the line. 

However, this may be offset by the end of the so-called “Drunken Sailor Era” (™ Richard Rushfield) as firms have to start making actual money. So they could cut back on content spend. That means less potential jobs overall.

TBD: Customers

Like talent, this could go either way. On the one hand, it has been great for customers to have multiple firms willing to subsidize cord cutting. The problem is those subsidies are harmful long term and entrenched market power is awful too. So prices could go up, but they’d reflect economic reality. Meanwhile, customer choice would come either way.

The Caveat: All of this is Unlikely

Does a huge break up of Big Tech, including spinning of media firms actually happen? Probably not. But without throwing out random probabilities, it’s probably twice as likely as it was even in August. (So yes, this is like a streamer saying a show grew 50% year over year. 50% of what?)

Yet, Biden was elected President, and that’s huge. Combined with renewed emphasis by the Democratic coalition, and I think corporate consolidation is on the table for change. He’ll likely appoint attorneys general, federal judges and administrators who could put a renewed emphasis on antitrust. That will impact entertainment eventually.

Other Contenders for Most Important Story

Disney Investor Day

Few analysts are (and have been) as bullish on Disney’s streaming future as I have been. I write that to put in context what I’ll write next: I don’t think this Disney Investor’s Day deserves the hype it has been given.

Take a few of the headlines touting “10 New Star Wars and Marvel” series coming to Disney+. That sounds huge. But given that this will take place over the next few years, is it? In context? Take this analysis by Emily Horgan:

Or take my timeline I’ve been using to model Lucasfilm’s financials:

base

And for kids…

kids

In other words, Disney confirmed what I’ve been modeling for a while now. This Star Wars volume is a pinch higher, but considering the volume of one-offs, not that much more than I modeled. But most of Wall Street/the trades seem surprised by it. I’d add there are a few more caveats for why the total volume of content may not match the reality:

– Shows will likely get cancelled. Like Ghost Rider, Benioff and Weiss’ Star Wars Trilogy, Howard the Duck, Rion Johnson’s Star Wars Trilogy, more Han Solo films, and countless other projects over the years.
– A lot of this content is animated and for kids. Which is crucial to Disney’s future, but likely replaces exactly what they were making for Disney Channel, Disney XD and Disney Junior. Which we weren’t getting super excited for before streaming times.
– Some of the announcements really are for a long way off (like a Rogue Squadron film in 2023). Most announcements didn’t have dates.

In total, then, I don’t think this is really much more content than Disney was planning on making last year or the year before. Some of it may have shifted from film (previous pitches for movies may have turned into TV series, like potentially Obi-Wan), but it’s probably similar. At the end of the day, it looks like from 2021-2023 we can bank on a Disney live-action adult series every 2 months or so on the platform for Marvel and Star Wars. 

That feels about perfect. If they can keep up the quality, that’s a big slate that will keep folks subscribed. It’s also the “if” that defines all success in entertainment.

(Though Disney+ still has a big hole for adult TV outside of Marvel and Star Wars. That’s a tough hole to fill.)

As for business strategy, the biggest news is no news. Hulu stays where it is. Star is officially becoming Disney’s adult brand globally. ESPN+ will continue expanding, and be available within Hulu. And lastly only one film is “breaking” the theatrical window, with Raya going to Premiere Access (like Mulan’s $30 release) simultaneous with theaters. (I have a feeling it will do much smaller business than Mulan on PA.)

An NFL Update: Ratings are Down, but Good for Broadcast

Is the state of the NFL viewership good or bad? Maybe both. Americans consume NFL football more than any other sport–arguably more than any other type of content period–yet the ratings aren’t as high as past years (down about 8%) because linear TV viewing just isn’t as high as it was (down about 30%). This of course begs the question for what happens next. I can’t see a world where broadcast TV doesn’t nab a few more years of NFL rights, even non-exclusively, but the key question is, “At what price?” Likely they will be high.

Disney+/HBO Max and Comcast Integration

Disney+ and HBO Max will soon be available on Comcast’s Flex operating system. This is a smart next step for both Disney+ and HBO Max. (If anything it should have come sooner.) For all the talk of cord cutting–and there is a lot!–one of the surprising survivors is the cable box. This makes it much easier to reach another big group of customers that Netflix and Prime Video are already reaching.

Data of the Week – The Hallmark Channel Is Still Winning Christmas

Josef Adalian has the details in a recent newsletter, but 3.4 million folks tuned in on one Sunday for a Christmas movie. Linear TV is dead, but it won’t lie down.

M&A Updates

Just because antitrust is back on the agenda doesn’t mean that mergers won’t continue fast and furious. The two latest biggies both have tangential relations to entertainment. Slack is the de facto messaging service of lots of Hollywood, and it was just purchased by Salesforce. Meanwhile, S&P and IHS are merging for a huge price tag because they are both financial data firms. S&P fascinates me because they had earlier purchased SNL Kagan, and Kagan was a tremendous source for entertainment data back in the day.

Discovery+ Is Almost As Big as the Warner Bros 2021 News – Most Important Story of the Week: 4 Dec 20

Well, after two and a half years of writing this column, I’ve finally come to a tie. Sure, the buzz is with Warner Bros and the decision to finally end the exclusivity part of the theatrical window. Every columnist from here to Timbuktu will feature that in their entertainment newsletter this week.

And yet, Discovery+ feels as big. I could even make some back of the envelope numbers work for it too. Discovery makes $11 billion in revenue every year, which is, funnily, the same size as the US box office. If Discovery+ is as big of a success as David Zaslav hopes, that feels as important as the $10 billion a year theatrical window. (And that’s assuming theaters die completely, which is unlikely as I’ll cover below.)

But sure, I hear you. You want thoughts on both. We’ll start with Discovery+, and move to Warner Bros big plans.

Most Important Story of the Week – Discovery Announces Discovery+

Maybe it’s just the contrarian in me, but I’m fine with Discovery’s late entry to the streaming wars and their general plan. Actually, “fine” probably doesn’t cover it. I think this could be a shockingly strong entrant, given how many folks have given Discovery up for dead.

Let’s start with Discovery’s biggest strength, which is owning its own content library. This is one of the first things that Discovery pointed to during their announcement of Discovery+ and it’s a great thing to point to. There’s the old saying that you don’t make money making movies, you make money owning a content library. Well, Discovery has that with, as they said, 55,000 episodes of reality TV to provide. Sure, this isn’t “buzzy” content like Disney or HBO’s libraries, but it is a lot of content. And it’s valuable to different demographics.

Discovery is late to the streaming game, but in this case, I don’t think that’s the worst outcome. As I’ve been writing a bit over the last few weeks, the name of the game is building streaming revenue while not obliterating the more valuable cable revenue. And don’t kid yourself, that revenue is valuable for Discovery. Here are their affiliate fees for their top four channels on linear TV:

Screen Shot 2020-12-04 at 11.41.09 AM

And that’s leaving out a few channels and all their advertising revenue. In other words, for every customer that leaves traditional cable for streaming, Discovery will lose money. So they waited as long as they could. Plus, Discovery probably figured that their customers are some of the laggards in cord cutting, so they could hold off as most of the early adopters of Netflix were hungry for prestige, scripted content, which isn’t Discovery’s forte anyways.

Discovery also flies under the buzzy radar. If you use linear viewing as a proxy for overall value, Discovery doesn’t have a presence in the top five channels. But after that? Yeah, Discovery is basically the channels to go to watch something pointless in the background, especially after the merger with Scripps:

Screen Shot 2020-12-04 at 11.41.37 AM

Even if you, the New York or Los Angeles Millennial/Gen-Xer, don’t watch those channels–and in some cases look down on those who do–tons of folks do watch. (Maybe even folks you know. We just don’t talk about it…) And since this isn’t buzzy content, those primetime ratings probably undersell Discovery’s content a bit.

To finish, this is also a great “zig while others zag” move. HBO Max and Disney+ went right at Netflix, Hulu and Prime Video with scripted content. Discovery is playing a different game and it will be interesting to see if it works. (To be fair to Disney+, it has its share of cheaper reality content too.)

What’s Next? A Merger with A&E Would Make Sense

The other distinctive part of Discovery’s plan is to include some A&E content in the lineup, specifically from their more reality/lifestyle brands. I haven’t heard anything specifically, but you’d have to wonder if Discovery has floated buying out Disney’s 50% ownership so that they could get a near stranglehold on cheap reality programming. Adding the buzzy A&E channels would also help Discovery brace for the reduced channel lineup world with even more channels to negotiate with MVPDs and vMVPDs.

The What If? Netflix Had Bought Discovery…

In a lot of ways, Netflix knows how valuable Discovery’s content is. That’s why so many of their shows are clearly in the mold of Discovery programming that has left the service or will leave as Discovery+ launches its own programming. Nature programming? Netflix is building that. Shows where folks buy houses? Sure. Shows where folks renovate houses? Check. Cooking shows? Check. Cooking shows that are just reality shows? Check that box too. 

The problem is Netflix has to buy or rent it all. And they can’t replace nearly that volume or for nearly that price. From scratch. Can you imagine if they had bought Discovery a few years back and could add 55,000 episodes to their catalogue? Heck, even the cash flow from Discovery would have made Netflix breakeven. I’m not a fan of M&A as a strategy in general, but this move would have made sense to me.

Most Important Story of the Week – Warner Bros. Sends Their 2021 Slate “Straight” to HBO Max

If AT&T was reading my advice, they’d have seen a few pieces urging them not to release films straight to streaming. Like here. Or here. Or here. If anyone on the Internet writes about how valuable the theatrical window is to traditional movie studios more than I do, I’d love to see it.

My thesis is simple: skipping multiple windows decreases the overall revenue of a given film. Even today I was tweeting that:

Yet, multiple big studios seem to have said by their actions that I’m wrong:

– Disney’s Studio chief speculated that that several live-action adaptions would be headed for Disney+.
– Warner Bros. moved Wonder Woman 1984 straight to HBO Max on Christmas.
– Universal launched a new partnership with theaters for a new 3-week premium window for their films.
– Then, the big move, Warner Media moving its entire 2021 slate to a “day-and-date” HBO Max window with theaters.
– (Plus, there has been a lot of speculation, including hints from Disney, that on their investor day next week they’ll announce an expansion of their premium plan.) 

Who are you gonna trust, some guy on the internet or all the studio heads? Taken together, this seems like a clear indictment of my belief that studios will make more money by keeping theaters around then going straight-to-streaming. 

So how do I explain this discrepancy? Well, I did that over at Decider. And I have four reasons:

            – Clearly subscribers are the only metric that matters to Wall Street.

            – If you’re in the growth phase, losing money to gain subscribers makes some sense.

            – Covid-19. Covid-19. Covid-19.

            – The calendar is going to be jammed in 2021 anyways for box office.

For the details, head over to Decider. 

Yet, while I explained why this move happened, I didn’t explain what happens next. Because I don’t know. Because I can’t predict the future. Still, that’s the fun part, right? And there is one key tradeoff that will impact all the players. 

The Big The Tradeoff (Defined)

The best article I’ve read this year is from Doug Shapiro’s “One Casualty of the Streaming Wars: Profit”. Shaprio focuses on TV in that article, roughly arriving at the idea that TV in the United States is something like a $110 billion dollar industry. And one with some of the highest profit margins around.

Well, theaters are an extra $10 billion piece of that pie in the United States, of which the studios take home about 50%. Moreover, that leads into a fairly lucrative window of purchasing, whether formerly of physical discs, but now mostly digital sales. Which is billions more. 

As Shapiro quantifies, this streaming window just doesn’t have the same margins or volume as the old theater to home entertainment to premium to secondary windows model had. There are lots of folks who insist this isn’t the case, and they usually base their view on rosy customer lifetime value scenarios. But the math is the math. (Even if Celebrity Wall Street Media Futurists insist it is the case.)

This is why studios held off from going straight-to-streaming for so long. They don’t want to add $10 billion more in lost revenue to the huge potential lost revenue coming too. As I wrote in Decider, though, they may have finally been forced by this once in a century pandemic. 

This also explains why the studios all have different plans. No one quite knows what the right new distribution plan, but straight-to-streaming by itself likely won’t cut it. Here’s my landscape of the current situation:

IMAGE 1 - Approaches to Theaterical

Or this septet chart: 

Screen Shot 2020-12-03 at 2.57.33 PM

 What does this mean for all the parts of the value chain? Let’s explore. 

Theaters

One of the big questions is whether Warner Bros. had a plan for the theaters. The answer? No.

As of now, the theaters won’t get an extra piece of the theatrical pie. I expect this to change and both sides will keep negotiating, but if theaters don’t get on board, then a lot of extra revenue is at risk. 

Let’s assume Warner Bros (and Disney if they follow a similar course with “Premium Access”) eventually come to terms with theaters as Comcast did. What does this mean for the future of theaters?

Well, I don’t know. Here’s a range I’d give you: theatrical revenue could drop to $0, or stay the same ($10-11 billion per year) or even grow. And that’s in the United States. In China, where the streamers aren’t allowed, there will be much less change. 

If I had to bet, I’d guess theaters definitely lose some theatrical window revenue. How could they not when subscribers could watch the films for free? On the other hand, Comcast’s plan may not change things very much. And Disney hasn’t committed to this path for all films. 

Yet there is a large range from “lose some” revenue to “wiped out to zero”. (Which I saw headlines touting the “death knell” for theaters. Death knell implies zero.) It’s very rare for an industry to go to zero overnight, and even if theaters are losing some revenue, like DVDs it will likely take decades to truly, if ever, disappear. 

Plus, if the losses mount without driving huge subscribers growth, or tapping out at some level, theater only windows could subtly creep back into our lives.               

Smaller Studios

Meanwhile, without streamers boosting the bottom line, it’s tough to see what Sony and Lionsgate do from here. In some ways, theaters may appreciate their films even more since they are—for now—exclusive to theaters. You could also expect some “arms dealing” as some of the streamers vie for their films as they’ll need inventory. (Amazon and Netflix)

Still, if the overall theatrical pie shrinks (say some theaters go out of business), that’s bad for the smaller studios overall, especially as streaming will eventually pay less for films. (See below.) 

Other Streamers    

For Warner Bros in particular, this move will be great for HBO Max adoption. Though how great, sort of like for theaters above, remains to be seen. It’s not like HBO didn’t have a supply of top tier theatrical films. They’ve always had a steady selection of Warner Bros, Universal and Lionsgate films in the first window after home entertainment. It’s unclear how much bringing films 3-6 months early will boost the perceived value.

Still, even more than buzzy TV shows, theatrical films are great at acquiring new subscribers. This is the dirty secret of most straight-to-streaming films by Netflix and Prime Video. Yes, they’ve had some “hits”, but nothing compares to true box office blockbusters like Avengers, Star Wars or animated kids films. The key question though is what drives that: is it the films themselves, or the marketing of the films which builds anticipation? If HBO Max drastically cuts marketing budgets with less theatrical revenue coming in, then maybe these films don’t play as theatrical releases on streaming.

I’d be willing to wager that Netflix’s films will keep doing well on their platform, but the HBO Max slate in 2021 will likely beat it overall in terms of minutes viewed (in the United States).

As for Apple TV+, they have the biggest opportunity here. If they committed to theatrical and big back end, they could easily become a go to spot for filmmakers. Plus, Richard Plepler has the cachet to make this work.

Production Budgets

Right now, HBO Max, Comcast and Disney are making a lot of release decisions for films that are already made. Those are sunk costs. Meaning they are just trying to maximize what they can going forward.

However, with these new models, films that are greenlit going forward are in this new reality. And if the new, streaming only reality really does have less upside than the old model, then something has to give.

Doesn’t it?

That’s why, when I first heard about Disney+ floating the idea of some of their live-action films going to Disney+, my response was “Oh, they’ll lower the budgets.” Even Alan Horn mentioned that going straight to Disney+ would save on marketing costs. But that was fine because no one cares about cutting costs on marketing. 

Folks do care, though, if you skimp on production budgets. (And talent cares about their pay!) Making a film that could cost $80 million for $20 million feels cheap. But it’s also inevitable. Again, Disney Channel, HBO and even Lifetime have made movies for years for TV. But they know that a movie going straight to TV has a limited upside, so the budgets are similarly limited.

That’s something to watch in 2021. If films really aren’t marking as much going forward, something has to give.

Talent and Backend

This is the biggest wildcard for me. Right now, the current workaround to go straight to streaming is to just guarantee more payment to top talent up front. This has its own risks, though. Mainly that instead of shifting the risk of backend to only guaranteed hits, you essentially make every film a “hit” in terms of talent costs. That hurts the bottom line.

So again, something will have to give. Either talent will make less money or the studios will.

Data of the Week – Daytime TV Viewing Is Up

I just wanted to point out this fun article from Nielsen because it is the worst indictment of working from home imaginable, and I think more managers should be aware of it. If your employees have time to watch TV, you need less employees. (And probably fewer Zoom meetings, not more.)

Wonder Woman 1984 and the Messy Estimates of Customer Lifetime Value – Most Important Story of the Week: 24 Nov 20

HBO Max made lots of news last week. First with a deal with Amazon. I thought nothing could top that. Then they announced that Wonder Woman 1984 was going to HBO Max. That’s a big deal, so let’s make that our story of the week.

Programming note: I delayed last week’s column to today due to the shortened work week for the U.S. Thanksgiving celebration on Thursday. I’ll be off until next Monday.

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Most Important Story of the Week – Wonder Woman 1984 to HBO Max and the Messy Estimates of Customer Lifetime Value

One of my favorite media criticisms comes from Ryen Russillo, formerly of ESPN and currently of the Ringer. He brought up the point that whenever a radio or TV personality says the phrase, “And frankly, it isn’t even a DEBATE!” it usually means it is definitely a debate. In the spring, the basketball version of this was folks saying, “Michael Jordan is the greatest basketball player to ever live, and frankly, it isn’t even a DEBATE!” Of course, it is absolutely a debate since LeBron James has a terrific case.

(And crazily enough, both sides are wrong. Kareem Abdul-Jabbar is the greatest to ever play. And frankly, it isn’t even a debate.)

Do we see this in the streaming wars? Of course. My Twitter feed is filled with folks letting me know that Netflix has already won the streaming wars, and frankly it isn’t even a debate. (Reminder from last week’s article, the more a person tells you the more certain they are about the future, the less you should listen to them.)

The news that HBO Max is moving Wonder Woman 1984 to HBO Max for one month in December brought out a lot of hot takes about streaming, theaters and the future of film. Including some, “This isn’t even a debate”-type commentary. This baffles me given how many known unknowns, unknown unknowns and assumptions we have to make about everything related to film right now. Today, let’s debunk some of the worst takes. Or, if not quite debunk, more try to cast some doubt on them.

Starting with the biggest known unknown of HBO Max: the value of a subscriber. Because once you see how little we understand about it, you’ll understand why I’m so hesitant to make a lot of predictions.

Estimating Customer Lifetime Value for HBO Max is Nigh Impossible

One of my rules to live life by is that “Strategy is Numbers”. If you read a media analyst, but they don’t use any numbers, well you should be very hesitant to trust them. (And by numbers, I mean predictions with dollar signs.) They don’t need to have all numbers, but if they don’t use any models to forecast, well they are likely more soothsayer than business strategist.

Thus, when it comes to analyzing Warner Media’s decision to release Wonder Woman 1984 to HBO Max, if I’m taking my own advice, it would seem like the best place to start is with some numbers, right? After all, I”ve done this math for The Irishman and Extraction on Netflix. Surely I could do the same here?

Not at all!

For all the gruff I give Netflix about hiding numbers, they provide a fair deal of information about the performance of their business (because their business is only streaming and they have to comply with SEC regulations, if they didn’t provide the details, they’d be providing nothing). This enables us to estimate, with a good bit of confidence, the customer lifetime value of a given Netflix subscriber.

Customer Lifetime Value (or CLV) is really the name of the game in subscriptions. It’s the financial tool that says, “Hey, if you attract this many folks, this is how much money you’ll make in the long run.” As I’ve written before, it can be used and abused, but it’s why Wall Street loves subscriptions for everything. (Basically, recurring revenue.)

Here’s the thing: if you don’t know any of the inputs, you can’t calculate it. Or even estimate it. Because little swings can have huge changes to the output. Moreover, CLV is an estimate. Meaning a forecast. Meaning a prediction. Predictions are more accurate with lots of data. And they can still be wrong. Frankly even HBO Max has very little data on HBO Max, because it’s only been around since May.

Here’s how little we know about HBO Max:

– First, we don’t know the average revenue per user of an HBO Max subscriber. AT&T doesn’t break out HBO Max and HBO subscribers separately. We don’t know their splits with device manufacturers or have any historical data.
– Second, we have no idea what it costs to acquire an HBO Max subscriber in marketing.
– Third, and most important, we have no idea how long a new HBO Max subscriber will hang around. If it’s 12 months, that’s pretty bad. If it’s 36 months, that’s pretty good. I’ve seen one estimate of this, but it came from the summer, right after HBO Max launched. No one knows if that number will be above or below trend. Moreover, even HBO Max doesn’t know this number, because it is happening in the future!
– Fourth, we don’t know how much Wonder Woman 1984 would have grossed at the box office either. And now we never will.
– Finally, none of this matters since the real question isn’t what is the value of a new customer, but what is the value of HBO Max on the CLV of an existing HBO subscriber. Meaning, what is the value of an “activation” which is the AT&T term for someone who downloads and logs into HBO Max. Again, we won’t know this for years.

If you don’t have CLV, you can’t even begin to answer the question, “Will Wonder Woman 1984 make money?” or the related, “Should they have waited to release it in the summer?” All the other methods to do this–taking a month or year of subscribers and attributing them to viewers–end up either double counting customers or making every other piece of content worthless on the site. (In short, if a customer signs up to watch Wonder Woman 1984, but then binges all of Game of Thrones and stays for a year, why does WW84 get 100% of their subscriber revenue? See that doesn’t make sense.)

Now that we know how little we know for this key variable, we can “debunk” the strangest narratives about HBO Max following this announcement. 

The HBO Max/Wonder Woman 1984 Hot Takes

1. Warner Media will Make Much More Money with This Strategy

How would you know? I just showed how uncertain the math is, so how could an analyst with way less data make that claim? This ties back to my introduction. The reason why Warner Media struggled so much with the decision to move Wonder Woman 1984 or release it to HBO Max is because they know as little as we do. They had to make a call, and it was clearly a tough debate, with likely evidence that they could lose or make lots of money with either decision. So how can an analyst outside Warner Media confidently predict the future?

2. This Will Kill Theaters

We don’t know if Warner Media will make any money off this release (and in lots of scenarios they’ll still lose money), so why wouldn’t they keep sending films to theaters? Instead, one thing is killing theaters right now, and that’s Covid 19. Full stop. If the virus were under control, then Warner Media would be happily planning on Wonder Woman 1984 being the big Christmas Day film.

3. Warner Media Will Pivot to “Day-and-Date” for Future Films.

I’m sure there are some folks inside Warner Media debating and even advocating for this future. But then there are likely others pointing to the economics of theatrical releases showing that having a theatrical window has some clear benefits for movie studios, mainly much more additional revenue. Meanwhile, any idea that this “test” can provide future guidance means accounting for the coronavirus, which is a tough variable to pull out of the analysis!

4. Alternatively, Warner Media Definitely Should Have Waited on Wonder Woman 1984

I’m not so sure. HBO Max needs a win, and this looks like a great opportunity to convince a lot of folks who don’t use HBO Max to try it out. If it turns out that a one-time blockbuster can single handedly boost usage, I can see how that’s a big win for Warner Media. A billion dollar box office win? I don’t know, but I won’t dismiss it out of hand.

5. Wonder Woman 1984 isn’t HBO Material

This is maybe the take that shows the least understanding of the HBO subscriber base. Sure, on the coasts, especially in the business, we think of HBO and think Emmys/Succession/Euphoria. Big critically acclaimed shows that drive “the conversation”. But guess what? Every Saturday HBO debuts a big new blockbuster film, including all the DC films and hosts of other big blockbusters. After all, it is the “Home Box Office”. HBO is known for this by customers as much as anything else. Wonder Woman 1984 isn’t a departure from HBO programming, but a reinforcement of it.

6. Amazon/Roku Did/Will Make a Deal Because of Wonder Woman 1984

No, they made a deal because they came to terms. These are 3-5 year partnerships. No big film, no matter how buzzy, will make one of these deals happen. Frankly, it just doesn’t move the needle enough. It may have helped some of the accounting on the HBO side, or provided some pressure, but on the device side it mattered very little. (The Christmas season in general was more of a driver than this specific launch.

End of the Day: We Don’t Know if Wonder Woman 1984 Will “Make Money” on HBO Max

Frankly, even getting the return of just its domestic box office haul, in the hypothetical non-Covid 19 world, will be tough. Yet, given how much HBO Max needs to pull in subscribers, this deficit financed maneuver may be worth it. Will it set trends for all future releases? Doubtful, unless lots of actors are willing to take pay cuts on current projects. At the end of the day, this is a big decision but as for whether or not it was a good call or bad call remains to be seen. (And likely we’ll never know.)

Context Update – A Second and Third Vaccine

By the end of 2021, society will be in a better place than it is right now. If for no other reason than Covid-19 has a good chance to be under control. Of course, variables could still stymy this, from a double dip recession to unwarranted vaccine fears preventing widespread vaccination. Still this is good news. In the summer, many headlines worried that Covid-19 wouldn’t be responsive to a vaccine. Those fears have been almost entirely dismissed (and evidence is increasingly showing a vaccine could be good for multiple years even), which is great news for the economy in the long run.

(We just need a good transition of government in the United States to ensure vaccines are distributed as quickly and effectively as possible. We also definitely need additional stimulus. Both of these scenarios are at risk.)

Other Contenders for Most Important Story

Speaking of the HBO Max/Amazon Deal…

This likely would have been the biggest story of the week but for the Wonder Woman 1984 news. Ultimately, though, like most big deals, we know very little about the terms. From what I can tell, the deal does seem like a bit of give on both sides. HBO shows will stay on Amazon Prime Channels until the end of the year while HBO Channel subscribers get access to HBO Max. As for everything else (pricing, marketing agreements or content sharing), we just don’t know.

The most important variable, for me, is that HBO will ultimately control the user experience. We often talk about “controlling the data” and that is important. Obviously. But for streaming, controlling the UX is much more valuable. Truthfully, Prime Channels does a terrible job featuring third-party series and films, and HBO Max is a much better experience. That’s the win for HBO Max here more than anything else.

The next question is when does Roku do a deal with HBO Max? Some folks say a deal is close, whereas others say it is far apart. Likely they are “negotiating in public” but it will be fascinating to see how it ends up.

Disney Live-Action Films Headed for Disney+

The news is that Disney is considering putting some of its live-action remakes straight to Disney+. Unlike Wonder Woman 1984, this is much more “signal” than noise that Disney could change release plans. Still, there is also some Disney obfuscation of how much of a real change this is, which is what you expect from any streamer.

The key for Disney isn’t how it releases these films, but what budget the films are. My guess is that if these films were destined for theaters, they’d be 9 figure production budgets. When they go to Disney+, my guess is they’ll be around a quarter to half that. Disney could say it’s only about the marketing budget, but I think the production budgets see a hit too. If that’s the case, then it really isn’t that Disney is releasing theatrical films to streaming, but straight-to-video films to streaming. 

Roblox IPOs (and is losing money?)

Roblox released its “S1” to file publicly on the stock market. Like every digital company, it loses money every year. The key question is whether it loses money in as bad a fashion as others, and from what I can tell the cash losses seem to be exactly what Roblox spends on R&D. Assuming the R&D is accurately classified (not actually COGS). The worry here is that while Roblox saw nearly 100% growth in the Covid-19 lockdown, it saw its losses quadruple. 

Roblox is like most digital companies executing the underpants gnomes digital strategy: attract users, something something something, profit.

Rick & Morty Are Very Popular

In a world with no ratings–which we don’t live in, but it feels like it–you could always default to another metric: where the money goes. In that world, Rick & Morty may be one of the most popular shows on television. The latest product the animated show is pushing is the Playstation 5, but that’s just the latest in a long line of product tie-ins. The other candidate for this is Stranger Things, which did a ton of branding last summer, but even there traditional TV has an edge. Rick & Morty is coming out much more frequently (about twice a year) and replayed much more often, which helps advertisers.

Netflix and Cinemark Testing The Christmas Chronicles 2 in Theaters

Lastly, as theaters are “dying”, Netflix is partnering with Cinemark to release Christmas Chronicles sequel to theaters. See, Covid-19 makes strange bedfellows of us all. I love this move for Netflix since theaters will provide straight revenue to the bottom line.

M&A Updates

Lastly, Buzzfeed and HuffPost are merging. This is an interesting merger more than anything, because it is unclear to me that this new scale will save either firm’s underlying traffic problems.

The Impacts of Pfizer’s Vaccine on the Entertainment Industry: Most Important Story of the Week – 13 Nov 20

For the second week in a row, we all knew the most important story of the week by Tuesday. And even more than the election, the news of a potentially very effective Covid-19 vaccine has direct benefits to the entertainment industry.

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Most Important Story of the Week – Pfizer’s Vaccine and Ending the Entertainment Recession

When I finally anointed Covid-19 the “most important story” of the week back in March, I speculated that we could call the impending recession the “entertainment recession” since so many parts of the industry could be impacted. That take was generally correct, as the novel coronavirus walloped the industry broadly.

(Though, in hindsight, leisure and travel industries like hotels and airlines, were probably even more impacted. Small in-person businesses like bars, gyms and restaurants were also crushed.)

That’s what makes the news so notable that Pfizer has a working vaccine that delivers 90% immunity. This follows rumors going back to August that China has a working vaccine that they’ve given to over 300,000 people. Or similar rumblings that Astrazeneca is also close to a working vaccine. (Honestly, I’m a little surprised we only learned of one vaccine this week.) Given that Pfizer’s vaccine is effective, many expect other vaccines to be similarly impactful.

Like all things, I want to temper my optimism with some doses of reality. Or, better said, uncertainty. Trying to predict how an entire society rebounds from a devastating pandemic is a fool’s errand. But that’s what we get paid the big bucks to do, so we’ll try. But first, the caveats.

The Caveats

1. We still need more caution in our sociological predictions. It amazes me how often we predict confidently in the behavior of large groups of people, and they end up confounding our predictions. Take this virus. While virologists predicted a big surge of cases in the fall, few predicted a big surge of cases in the summer.  If society wide predictions were easy, we wouldn’t need capitalism and could have a state-run economy. But they aren’t, so we don’t.

2. A vaccine doesn’t fix the recession. Covid-19 forced tens of thousands of businesses to permanently close their doors. That’s economic activity that doesn’t just come back. Even if a vaccine is widely distributed, and distributed faster than expected, economic activity may not follow. (Or it will rebound quickly, a point which I’ve seen some opinion makers make.) While the vaccine is unqualified good news, it doesn’t make forecasting the economy any easier. I could see everything from a big muddle (especially without stimulus) to a strong rebound.

3. We don’t know how quickly a vaccine will be distributed. It may end up surprising us on either end. We could look back and find out that the US/European/Chineses governments supercharged distribution faster than expected. Or it may be the end of summer and we’re wondering why we still don’t have vaccine doses at scale. Disney, for example, expects theme park closures to last into March. That’s probably the earliest we could see widespread distribution. On the other hand, vaccine production is tough and it could be until the end of Q3 or further. The median is sometime in the summer.

4. The current outbreak is spreading uncontrolled. What final damage does this leave? Does it force theater chains to close if Wonder Woman 1984 can’t make it’s Christmas Day release? (See below.) This is a big (and tragic) wildcard.

5. What does the government do? We’re potentially in an even more muddled position than before the election. If one party controlled all three levers of power, you could see an effort to spend big to rescue industries and distribute the vaccine. As it is, spending bills could fail to materialize as helping the economy is increasingly seen as a political concession to the party that controls the White House.

The Predictions

In all, a messy picture. My (incredibly uncertain) gut says we should be optimistic for the entertainment industry now that a vaccine with proven effectiveness will be available. In rough order of who stands to benefit the most from an efficacious vaccine:

– Customers in 2021. My biggest prediction is that we see a big rebound emotionally/culturally/socially. Take the Roaring 1920s and pack it into one year. Folks throwing big parties. Or holding double birthday parties. Splurging on outdoor concerts and festivals. Big vacations. In other words, 2021 becomes the year of the party. The pent up demand hypothesis.

– Concerts see the biggest gain. Frankly, live-streamed concerts have come and been found wanting. There is nothing like an in-person experience and I think concerts (and the artists performing in them) have the most to gain from herd immunity. Concerts do take time to put on (as Hedgeye analysts Andrew Freedman put in his recent coverage of Live Nation). That said, these are extraordinary times. When concert promoters see an opening, there will be all effort made to be the first concerts back. And to celebrate that fact.

– Theme parks are next up. They have as much to gain as concerts, except there just aren’t as many. (And some are already open.) At first, I’d guess that local customers are the big arrivals, and we’ll see Disney and Universal studios offer lots of local discounts to get the parks full, especially in California.

– Live sports will rebound, but likely without the same enthusiasm as concerts. Frankly, watching the game on TV is still how most folks consume sports, even if ticket revenues are a huge portion of any league’s revenue. Conversely, each team will celebrate its return to competition and teams could see a surge in interest as folks are ready to get out of the house.

– Theaters could see the next big benefit, but they have a tough road to get there. 2020 will forever be a black mark at the box office, and it may take AMC Theaters with it. If they can get to/through the first quarter, though, I think studios will finally hold the line and let films get released. Meanwhile, the slate of films will essentially be double packed, with the best of 2020 and 2021 in the same year. This could actually hurt individual film grosses, but should lift all boats in general. I wouldn’t forecast we see a record breaking box office year, though, because Q1 will still have head winds from the current outbreak.

– Streaming and linear will…? If folks are spending lots of extra spending on everything, presumably that means they won’t be at home watching TV. But does this benefit the streamers? Or did they pull forward cord cutting? What about the traditional bundle? Will it see more cord cutting as folks go back outside? All that is unclear to me. Likely cord cutting continues at its current pace, but viewership could slide back from lockdown highs. However, competitive dynamics will probably have more of an impact than Covid-19.

Conclusion

I will be wrong on some of the predictions above. For example, some folks may not trust the vaccine. And have permanently turned into homebodies. Or the recession hurts wallets more than the end of lockdowns motivates folks to spend. Or the vaccine really isn’t broadly distributed until the last quarter of the year.

We’ll see! 2021 should start off on a positive trend and it will make for lots of news to unpack. But in all, if you work in entertainment, this is good news.

M&A Updates – Sony is Looking to Buy Crunchyroll

This news has been floating around for a few weeks, but I’ve been waiting to see it confirmed. (Which it hasn’t.) Like all deals, the terms are key. Allegedly AT&T wanted as high as $4 billion for the anime-focused streamer. The current floating price is $1 billion. That makes a huge difference between the two.

Assuming it’s closer to the smaller number, is this a good deal for Sony? I’m still not sure.

I’m fine with niche streaming services and think they will have a role in the streaming wars. You’ll have the general interest streamers like Netflix, HBO Max, and Disney+/Hulu playing the role of broadcast channels and you’ll have niche streamers playing the role of cable channel upstarts. Crunchyroll fits into that latter category well. They allegedly have 3 million subscribers, which isn’t bad.

With two caveats, though. Like folks asked with Disney+, though, at what average revenue per user? 3 million users paying what?

Second, there is a lot of anime content out there in the world. Everyone from Hulu to Netflix to HBO Max to Prime Video has a vertical on anime. I’m not an anime fan, and haven’t studied this industry so I’m not sure exactly how far ahead Crunchyroll’s lead really is. I’ve been told that if you’re an anime fan, due to exclusives, you have to have it. But if Netflix decided to go all-in on anime even further, it could likely outbid Crunchyroll.

Can a company keep and maintain a competitive advantage in a genre of content? Maybe. Shudder has arguably done very well appealing to horror fans with tailored content delivered by key influencers in an authentic way. Has Crunchyroll done the same? I think so, but we’ll see if they can sustain it under new leadership.

Other Contenders for Most Important Story

Disney Earnings

The fiercest traditional competitor to Netflix in the streaming wars had its earnings report on Thursday. In short, Disney was walloped by Covid-19 and a new vaccine is key to rebounding. For the gory details, I’d recommend my thread:

The other big news was that Disney has passed 73 million global subscribers. Pay attention to how Disney+ adds new territories, as we’ve seen big surges in subscribers tied to those launches:

Screen Shot 2020-11-13 at 5.30.49 PM

Looming over the coverage, though, was the “Mulan question”. Specifically, did the test workout? On the earnings call, CEO Bob Chapek said it did, though notably Soul, will be premiering on Disney+ directly without the option to pre-buy. So if the test “worked” why not do it again? Well, likely Disney wants Soul to drive end of year subscriber numbers like The Witcher did for Netflix last year. They also just announced that WandaVision, the first big Marvel Cinematic Universe show, won’t be coming until January, so they need Soul to keep subscribers for the next quarter.

Lastly, part of me expects Disney to announce an expanded Premier Access program for 2021. (Their name for the Mulan experiment.) The date to watch is December 10th when Disney hosts its investor day. Reading the tea leaves–executives constantly referring to investor day, the stated success of Mulan, a similar program in India–I think it’s likely that Disney announces a new tier to Disney+ on that day. If they do, we’ll discuss the pros and cons of that new bifurcated strategy.

Comcast’s Freaky Is the First of the New Model with AMC

Specifically, the shortened PVOD window model agreed to last spring. So what do I think? I’ll have my thoughts up at Decider early next week.

The Wonder Woman 1984 Question

Freaky though isn’t the big question for theaters. That’s what happens to Wonder Woman 1984. As I write, Warner Bros is debating between keeping the date (and getting it on HBO Max early) or moving it to the summer, now that a vaccine is for sure on its way. My bet is it moves, but if it stays to bolster HBO Max, that’s a sign that Jason Kilar has his hands on the strategic steering wheel.

Discovery Earnings

Discovery will enter the streaming wars at some point. Because they have to. Rumors are that Discovery+ will premiere sometime in early 2021 and CEO David Zaslav has been promising a direct-to-consumer service soon. In their earnings call, they repeated plans to launch a streamer. When we learn more, we can discuss the strategy in depth.

Judge Judy to IMDb TV, Disney’s Globo Bundle, and Other Stories of the Week – 9 Nov 20

The story of the last week in American and around the globe was the election of President-Elect Joe Biden to the American presidency. Will this impact the entertainment industry? Assuredly, though exactly how remains to be seen. And as I wrote on Friday, we’re still counting votes to see who will win control of the legislative branches and by how much. We’ll have weeks/months to unpack that.

The election, though, wasn’t the only news. So let’s do a run through of the other stories of last week (or so).

Other Contenders for Most Important Story

Judge Judy to IMDb TV

Judge Judy is headed to IMDb TV for the next generation of her daytime legal show. Given that she hosts one of the of the most popular shows on TV period, this is news. Frankly, as Rick Ellis pointed out in his newsletter, if this show costs the same as say a Borat 2, it could be actually be a more cost effective move for Amazon Studios, even if it is less buzzworthy. Unlike a big film, that only draws in viewers once, Judy Sheindlin has loyal fans who tune in everyday.

With two caveats.

First, the challenge for Amazon is whether those older viewers will figure out how to tune into IMDb TV and other streaming services. Maybe Judge Judy can act as a draw…or IMDbTV will act as a pseudo-exclusive platform that essentially means she loses her ability to reach her audience. The Joe Budden/Spotify example I brought up a few weeks back, in other words. Broadcast is ubiquitous whereas free streaming TV adoption is not.

Second, CBS bought the rights to all the episodes of Judge Judy (the show) back in 2017 for $95 million. Meaning someday Paramount TV will have Judge Judy. Or HBO Max. Or Discovery TBD. Plus she’ll still be in syndication via repeats. Do viewers of Judge Judy need new episodes? That remains to be seen.

Disney+/Globo Plan a Bundle in Brazil

As Disney+ plans to enter Latin America, they’re partnering with telecom firms, as they have around the globe. In Brazil, they’re partnering with Brazilian leader Globo and will be offered as part of a bundle, though they’re calling it a “shared subscription”. I love this strategy for Disney, as I’ve said before. It allows immediate penetration into key markets and Disney content is seen as must have for major telecom providers. 

T-Mobile Enters the Streaming Wars

Another telecom company is offering another virtual MVPD. This time it’s T-Mobile with their offering of “TVision”. However, TVision is already running into trouble as cable channels are making noises that T-Mobile is violating the terms of their deals due to what channels are offered in what packages.

Frankly, virtual MVPDs are just tough businesses to be in. They don’t really solve any problems for customers, and the only reason they’ve gained market share is that they’ve offered severe price discounts. Like Youtube TV, DirecTV Now and others before it, T-Mobile seems to be offering a deal which is too good to be true, 30 channels for only $10. It likely won’t last.

Roblox Is Going to IPO

Kid focused video-game company Roblox is going public, having filed confidentially for an IPO. Roblox has an interesting approach, since they let users design games, which means they have a lot of games for very little cost to Roblox. Throw in some hefty doses of social, and the platform is very popular with the kids. (Though, it has some risks, as I highlighted in a newsletter a few weeks back.) In all, this is a company to watch, like a less buzzy Fortnite.

Starz Update

Streaming service Starz has reached 9.2 million streaming subscribers, though how exactly this is calculated is, as always, confusing. Does this mean streaming only? Or more likely folks who subscribe anywhere, but have streamed content? If it is a legit 9.2 million streaming-only subscribers, that’s a great number.

Either way, the news came as part of their earnings call, and other articles indicated that Lionsgate is willing to spin Starz into its own company. Which could be a sign that efforts to sell Starz have finally ended, or this is a way to sell the company without having to actually sell it via the traditional process.

Hulu/Youtube TV Dropping RSNs

More bad news for regional sports networks. Hulu has live sports, but won’t carry regional sports networks, apparently. As a result, Sinclair wrote down the value of their regional sports networks by half. Partly, this does reflect that Sinclair overpaid for the channels, but this doesn’t necessarily mean they overpaid at the time. In a non-Covid-19 timeline, they may have been fine. Still, over the entire sports ecosystem, RSNs may be the first weak point. Though…

Utah Jazz sell for $1.6 Billion

For all the worries about cord cutting impacting sports valuations, we haven’t seen it yet and the Utah Jazz sold for a tremendous price tag given their market.

Entertainment Strategy Guy Update – Esports

Are esports trending up or down? I’d say neither, but the bad news headlines I’ve seen recently worry me.

On the good side, Learfield IMG is launching a collegiate esports league since the NCAA has mostly punted on allowing esports. Toss in “VENN”, a streaming only esports channel that recently launched and you see the rush to make money off esports.

On the bad side, you see the folks rushing out of esports. Both ESPN and Cheddar are shrinking their esports coverage. There are also rumors that VENN is having trouble with its audience. Moreover, Overwatch league switched commissioners this spring.

The question is whether this is because esports is really, really popular but folks don’t want traditional style sports coverage, or whether it just isn’t that popular yet? As I’ve been writing for a while, I think it’s the former: esports is growing, but some of the numbers about it’s popularity are wildly overhyped. As such, the reason why no one is watching esports content is because it isn’t popular enough to demand that coverage. (Indeed, whenever traditional ratings are used, esports viewership is anemic. Then another excuse is brought up that esports fans don’t watch via traditional channels. Maybe! Or maybe it just isn’t as popular in raw viewership terms.)

I’d also make a clear distinction I don’t see enough: esports does not equal live-streaming video games. They overlap but do not necessarily need to both be true. Folks can love watching people on Twitch, but also esports leagues could come and go and never really break through. And while I remain skeptical on esports, you won’t find that skepticism for live-streaming.

Nate Silver Wasn’t Wrong…We Were: What Hollywood Can Learn from the Election – Most Important Story of the Week 6-Nov-20

Let’s not kid ourselves. This week was about one story. Everyone in America–and around the globe–was watching for the results of Tuesday’s election. I didn’t get any work done on Tuesday or Wednesday because I was distracted by following the news.

So it’s our story of the week!

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Most Important Story of the Week – What a Electoral Polling Mistake Says About Decision-Making

I won’t discuss the impact of the election from a political perspective. That is for political pundits, which I am not.

If I’m anything, though, I’m a Nate Silver fanboy. Silver has been incredibly influential for this site. I regularly cite him and his work. I use the phrases “signal and the noise” a lot. And I try to build forecasting models for entertainment. That’s my political affiliation: data truther. 

Which is why the narrative bothers me. Imagine this scenario.

Pennsylvania’s legislature allows votes to be counted several days before the election, whereas Florida votes to end early counting. 

Then, on election night Joe Biden is declared the winner in Pennsylvania. 

Would the narrative have been different? Heck yes.

(To be clear, while Biden leads in Pennsylvania, the race hasn’t been called by networks or the AP nor have final votes been tallied, the latter being the true “count”.)

But the “narrative” is not reality. The narrative is the collective chattering of talking heads, social media conversation, and news coverage. But notably, the narrative is not reality. Reality is reality. See how easily the narrative changes if just two states count their votes differently?

On top of the narrative are the “expectations” that came into the election. These were set, overwhelmingly, by Nate Silver and his 538 model. His model is based on the polls, which had another error like 2016 that underestimated Donald Trump.  (We don’t know the true magnitude yet, which I’ll get to.) This set up a lot of optimistic expectations for Democrats. This set up another narrative, that Silver screwed up his models or that polls are irrevocably broken, or both. Even more than the results, this could be the narrative driving Twitter, “How did 538 lead us so astray?!?!?”

Let me provide just one example from my experience. In my previous role at a streamer, I gathered all the data to help the key decision-makers decide what shows to order and renew. Yet, the data wasn’t mine alone. Often, executives wanted the data immediately. Meaning a streaming show premieres on a Friday morning, and the executives wanted email updates for how the show was performing. Sometimes hourly! Several times, a show would start slow, for whatever reason, and finish strong. Or vice versa. But executives checking every hour would often use their first impression as the takeaway for how the show did.

In other words, I routinely saw the mistakes being made for this election at  a big company in America.

If you’re a decision-maker, your goal is to focus on reality, not the narrative. And where they diverge, you take advantage. If you’re an investor, you invest to make money when the narrative clashes with reality. If you’re in business, you build a competitive strategy off it. And if you’re in politics, you win future elections.

In general, the biggest “error” was not from the polling. The biggest error was how we consumed election night information. (And I’m guilty here too.) Understanding that will help us all–and especially business leaders–make better decisions.

What Nate Silver’s 538 Is Trying to Do (And Other Modelers)

Before we can understand what went wrong, we have to understand what both polls and models of polls are trying to do.

The goal of a poll is to forecast the feelings, opinions or thoughts of potential voters for upcoming elections. It’s a survey! Of course, the goal of this survey is to be accurate. If you could, you’d survey everyone in America. But that would be really expensive! The compromise is to survey a sample and draw conclusions from it. 

The challenge is how pollsters gather that sample. If their sample is biased, the survey won’t be accurate. That is why pollsters get paid the big bucks. Eh, big is too high. Let’s say “some bucks”. Surveys are easy to do, but really hard to do well.

In America, recent technological developments have weakened the ability to survey various populations. Specifically, the rise of cell phones with caller ID has decreased the number of respondents who talk to pollsters. Unlike the past when landlines were ubiquitous, many homes do not have a landline. The potential replacement–internet polls–come with their own sampling problems.

The solution is to adjust the sample population and weight it by various demographic categories. Like age, gender, location, income, past voting history and now educational attainment. Various pollsters use different methods to adjust these results and have done this for decades. Yet, this introduces its own uncertainty. It means that polls are models of what they anticipate the electorate to look like in a given election. 

This brings us to Nate Silver. He makes a model based on polls. Or a “poll of polls”. But since the polls are models, really he makes a “model of models”. The logic is that the average of multiple data points will be more accurate than picking any individual poll by itself. (He’s right here, by a long shot.) And his model crunches tons of additional data and historical evidence to make it as representative of potential outcomes as possible. 

Yet, if all the polls Nate Silver uses have the same correlated error, his model won’t be accurate.

In other words, garbage in, garbage out. But garbage is too strong. So “slightly biased data in”, slightly biased data out. (As it stands, his model predicted 47 of 50 states, but we have to wait to find the margin of error, which is more important.) A model is only as good as the data going into it.

The Models Weren’t Wrong…We Were

Yet, the most misleading thing about the election wasn’t polling errors. The bigger mistakes are still being made.

  • A lot of folks saw the results on Tuesday night, and then rushed out to provide their takes.
  • Worse, even more  folks consumed a lot of data about the election on election night. And then they stopped. (Or they will stop when the election is called.) 

If you’re a voracious news consumer, you’re actually more at risk of this. For example, can you tell me what the polling error was in California in 2016? Did you know that polling actually underestimated Democrats in that election? (If you listen to Nate Silver’s 538 podcast, then yeah, you probably heard him say this, which is where I got it from.)

Yet, because California wasn’t a swing state and folks didn’t check in for final results (which take weeks, unfortunately, to get) most folks never internalized this lesson. They only internalized the miss in Rust Belt swing states. In other words, most folks were not properly informed about what happened politically in 2016 if they focused on election night. Meaning if they had to draw conclusions from 2016, they were more likely to make the wrong conclusions. 

Let’s explain what these decision-making errors are (via their logical fallacies if possible) to correct these mistakes.

Using biased samples/Drawing conclusions too early

This is perhaps the biggest problem with drawing any conclusions from the election:

We don’t have all the data in!

As I write this, California only has about 74% of its vote counted. Many other states are like this as well, and states are still certifying their results. Frankly, you can’t draw conclusions until you have a complete data set, otherwise you risk a biased sample size. 

Which is really ironic, isn’t it? 

The problem with the polls is they have some correlated error which makes them biased…and we judged that on election night with a biased sample size!

Specifically, many urban centers are very slow in counting ballots since they have orders of magnitude more votes to count. Yet, that definitionally makes conclusions biased towards rural communities. This is definitional bias in the “poll” of current vote tallies.

This happens outside of elections. For example, folks evaluate a feature film’s performance on its opening weekend box office. Which is pretty correlated with final performance, as I’ve written. But the two week box office numbers are even more correlated with performance. If you wait two weekends, in other words, you can have a more accurate recall of box office numbers.

The “Temporal data fallacy”/Drawing narratives from sequential data drops.

Obviously, the order of revealing the data shouldn’t impact our conclusions from the data as a whole. What matters are the final results. I’ve taken to calling this the:

The “Temporal Data Fallacy” is drawing a narrative based on the sequential release of data, when the timing of release is uncorrelated with the outcome.

And it doesn’t just happen for elections. In sports, we often weigh what happens at the end of a game much more strongly than what happens in the middle. But a missed basket in the second quarter impacts the outcome just as much as a missed basket at the end, for example.

Availability heuristic/Rare events are easier to recall than common ones.

If you watch all of election night, but have to go back to work the next two nights, then when you recall the election later, you focus on events in the moment, but not the outcomes that happen later. Moreover, the stronger the emotions you feel (like despair at losing) means you recall those events with even more alacrity. Which is why Biden could wind up winning with a greater margin than George Bush in 2004, yet it will feel like he lost because he lost Florida early on Tuesday night.

Folks like to mention Capital in the 21st Century as the most common book that is purchased but not read by intellectuals. I’d offer that Thinking Fast and Slow by Daniel Kahneman as the book that was most read but least applied. We all know the availability heuristic is a thing, but we still are walloped by it on a regular basis.

The curse of small sample sizes/Overconfidence in results.

Elections are a pretty small sample. Which Nate Silver repeatedly tries to tell us, but we usually forget. (They only occur every two years, and Presidential elections every four.)

That’s why his model had everything from a close Biden win to a big Biden blow out in their range of outcomes. With small sample sizes comes greater uncertainty. While Silver has tremendous uncertainty in his model, most folks only focus on the average outcome.

Valuing Process over Results/Expectations

This also relates to the penultimate problem, which is the focus on results over process. Maybe this is philosophical, but I’d rather be wrong for the right reasons, then right for the wrong reasons. The former means I’m still making accurate predictions; the latter means I don’t know. In Nate Silver’s case, his model only gets tested one out of every four years. Sure, sometimes he’s going to miss, but the value is in the model, not the results.

Meanwhile, we often only care about results in terms of the expectations. Thus, Biden will likely win, but since folks thought Democrats would win the Senate too, it feels like a loss. (Winning the Senate, House and Presidency had about the same odds as Hillary winning in 2016, 70-77% in 538’s model.) But the Democrats will likely win an election against an incumbent, which is really, really, really hard to do! That’s worth celebrating, though folks won’t. 

This happens in entertainment even more often. Say two films have the same budget. One is expected to gross $300 million and gets $280. The other is expected to gross $100 and gets $180 million. Sometimes the narrative praises the latter film, even though it made less money. But it beat expectations.

My Advice

So I have recommendations. To make you slightly better at analyzing data in your everyday life and professional role:

– Get rid of dashboards. Dashboards are the election night of data. They take a stream of data in and folks can check them whenever. Even if they don’t need the data or the data is wrong or a decision doesn’t need to be made.

– Determine what numbers are your signal, what numbers are noise, and don’t check the latter. Checking data that isn’t tied to key outcomes will only jumble the narrative and pollute your thinking.

– Check data less often. And check later. This is the hardest thing in the world for decision-makers. A new TV show comes out, so everyone wants to see the ratings. But if you don’t have a reason to check the data–and reason means a decision to make–then checking the data could mean you’re absorbing misleading data. Which the availability heuristic shows will be tough to forget later. 

– Have a “data” plan for your company. (And a communication plan while you’re at it.) This plan should explain what numbers your value and when you check them. And that should be tied to decisions.

– Lower or raise your statistical significance. One of the crazy parts of statistical analysis is how much we still rely on the 5% threshold for statistical significance. This is an artifact of pre-computer calculations. But for some measurements, we need more confidence, and others we actually need less. You should analyze your data with this in mind.

– Ignore most headlines with statistics you haven’t tracked. And please don’t repeat them if you don’t know how they were calculated. Those are likely datecdotes.

Entertainment Implications/Entertainment Strategy Guy Updates to Old Ideas

Entertainment is Filled with Small Sample Sizes

If you take away nothing else, remember this. Much data in entertainment tends to be annual, and that means your sample size is only as big as the number of years in your sample size. In other words, when drawing conclusions, be careful about overconfidence.

(Think box office year over year. Most folks will willingly tout all sorts of reasons for why the box office declined year-over-year or raised, but most likely it’s just statistical noise.)

Surveying Customers Is Still Valuable

One result of the election is folks questioning all political polling. Or asking if this is the end of quantitative data. It isn’t.

 In general, I’m a fan of more data in general: surveys, polling, quantitative, behavioral, even focus groups! They al have a role.

The key is finding which data matters and when it matters. But will “qualitative” data replace quantitative? Hardly. Surveys will still be better than relying on anecdata or datecdotes. 

(In TV in particular, if you get rid of ratings, and rely only on making TV shows using “qualitative” data, that could mean making TV for folks like you. Since you aren’t a representative sample size, this is a bad decision.)

The Presidential Race is Logarithmically Popular

My favorite chart returns! The spending/awareness for Presidential races is orders of magnitude larger than dozens of senate races, hundreds of house races and thousands of state legislatures. That’s logarithmically distributed!

Image 8 - without additionsStreaming Analytics Firms Have Polling Error…But What Is It?

This is a lens I plan to analyze all the streaming analytics companies through, some day. Some firms have potentially biased sample sizes (all users of their service is not representative), others have limited sampling (potential bias), others are limited by their own data (streamers know exactly how many folks watch their content, but not other streamer’s data) and some firms have models with unknown weighting (so you can’t judge the process).  

Given they are the best data we have, I will use their data. Heavily. But I’m aware of its limitations, which lots of news coverage doesn’t seem to be.

Netflix Is Raising Prices Because It is Shifting Strategies: Most Important Story of the Week – 30 Oct 20

As of Wednesday, I was flailing for a story of the week. Well, thank you Thursday! And happy Halloween to everyone. Stay safe.

Lots of stories, but we have to go with Netflix…

(As always, sign up for my newsletter to get all my writings and my favorite entertainment business picks from the last 2 weeks or so.)

Most Important Story of the Week – Netflix Raises Prices. But Why?

Not a lot is truly surprising in the streaming wars. Take the recent service launches. First, a pivot to streaming is rumored. Then confirmed. Then details are leaked. Then when they roll out, for the most part they are what we expect. 

Or take Netflix. They usually telegraph price hikes a few months early to help prepare us. In their last earnings call, for example, they hinted that with all the content coming in the second half of 2021, maybe a price hike was due. So we set our watches for the once every two year price hike.

And then they announced on Thursday it’s coming in November!

What happened?

Well, increasingly Netflix is shifting from a company focused on growth to one focused on making money. This is a typical transition as a company ages. Netflix is “entering middle age” as I recently wrote. The challenge for Netflix is to manage this transition while sustaining their stock price.

Which is hypothetically the point for every company, but seems even more important for Netflix. My feeling is that the debate between the bulls and the bears is really about what financial metrics we’re looking at. Some analysts only focus on the subscriber growth, either US or global. Some toss in revenue, which has grown with subscribers. Then a select few focus on the free cash flow and subscribers. 

The tough part for any company is getting all of the metrics to go up simultaneously. I’m reminded of a story the Manager-Tools founder Mark Horstmann would tell. Some executives are sitting around looking at a set of inputs for an engineering project. If you add weight, you decrease speed, but maybe save costs. If you cut costs, the quality goes down. And one exec says, “Well it would be great if all the numbers would go up simultaneously!” Yeah it would! That’s the tough part of engineering. And strategy.

Indeed, that’s the goal of a good strategy: to increase all your performance metrics simultaneously. But that’s really rare!

We see this with Netflix. Essentially, they’re shifting from one strategy to their next stage of life, but that comes with lots of tradeoffs. To see this, let’s start with the inputs Netflix can control. Roughly, I’d say there are three big buckets:

– Prices for customers
– Short-term content spend (licensed content)
– Long-term content spend (library)

These lead to a few key metrics that relate to the strategies:

– Subscribers
– Revenue (the top line amount of money someone makes)
– Free cash flow (the amount of money a firm actually makes, as distinct from profit.)

(Why not use profit? Because content amortization plays so much of a role that it’s hard to evaluate. Some folks use EBITDA as a proxy for profit, which cuts out some of this.)

Those financial outputs also tie to the lifestage/strategy of a company, neatly summarized by Salil Dalvi in this tweet, which inspired this article:

Thus we can summarize it like this, with each stage/strategy having different inputs that drive the strategy and different financial metrics:

– “Growth” phase:
Key financial metric: Subscribers.
Key Inputs: Low prices, lots of short-term content spend.

– “Building” phase:
Key financial metric: Revenue and Capital expenditures
Key Inputs: Wholly-owned content spend.

– “Make money” phase:
Key financial metric: Free cash flow
Key Inputs: High prices, lower content spend.

Netflix started life in the “growth” phase. That’s what allowed the stock price to explode. And they rode that, while pivoting to the “building” phase, that meant spending more than the rest of Hollywood combined on content. The goal was to build a library/moat to sustain their subscriber advantage. (The challenge is how much of that content they own, even now.) If they are now pivoting to a “make money” phase, how does that impacts their stock price?

I’ve been deliberately using “tradeoffs” as the word to describe this because for the most part it is a different combination of inputs for different strategies. Netflix would love to grow subscribers and revenue and free cash flow, but it can’t/never has. It could do two of those simultaneously (revenue and subscribers, for example or revenue and cash flow), but not all three. The huge growth of the last decade came with a big price tag, losing $10 billion in cash in the last 12 years, and more in opportunity costs. 

Ironically, the “Covid Caveat” times may have forced Netflix to move to “make money” sooner than their plans. The Q2 immense lock down growth pulled forward future growth, which hurts the growth narrative for Wall Street. Meanwhile, shutting all productions basically will allow them to be cash flow breakeven to positive for the year without seeming impacts on subscriber churn.

Once you realize Netflix is no longer focusing on growth, a lot of recent decisions make a lot of sense:

– Raising prices in the United States? All about boosting revenue and cash flow.
– Ending free trials? Reduces churn and boosts revenue per new subscribers.
– Cancelling underperforming shows? Reduces overall content spend.
– Rearranging the entire TV team? Actually, no this isn’t explained by the goal to drive revenue. (Listen, some grand theories can’t explain everything.)

In other words, in some territories growth is running out. And meanwhile Netflix is constantly worrying about what Wall Street thinks. If they show positive cash flow one year, but then lose $3 billion the next, does that crush the price? Or if they show stalled global subscribers without higher revenue, does that lower their multiple? Or just low single digits revenue growth? What does that do to the valuation?

 When you’re one of the highest price stocks in all history in terms of profit or cash flow, you worry about what will make the market finally change their mind. 

Some final implications:

– First, you really see that the traditional conglomerates have a different tradeoff. They’ll hemorrhage current cash flow by going to streaming, but they won’t have to worry about building long term libraries. They already have those. After they catch up in the growth phase, this could be an advantage.

– Second, this shift isn’t necessarily global. Some territories will mature at different rates. Most of this story is a United States story. But, despite the narrative, by most metrics the United States is about 50% of Netflix’s business. (Like in revenue.) 

– Third, this is what puts the Netflix stock in a different category than it’s fellow “FAANGs”. The others see booming user, revenue and cash flow growth simultaneously. Netflix has to choose.

– Fourth, this chart from Evolution Media Capital tells the story of the price hikes perfectly:

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Other Contenders for Most Important Story – AMC+

AMC+ was announced in June as a bundle of AMC streaming services for one price of $5 on Comcast. The news earlier this month was that it expanded to the Amazon and Apple Channels programs for $9. (The streamers include AMC content, Shudder, Sundance TV, iFC Films and BBC America.) 

I’ve been meaning to dig into this news for a pinch, since it’s a big strategy shift for a smaller strategy player. But it really deserves its own 2,000+ word deep dive.

In the meantime, I like this move for AMC, with the caveat that they’ll never win the streaming wars with it. Essentially, this is admitting that AMC knows their strategic limitations. (Analogies: this is the Frey’s allying with the Lannisters. Or Canada in World War II joining the winning team.) They don’t have the cash flow to build a technology platform. So let Apple, Comcast and Disney do that, and accept lower profit/cash flow with it. Meanwhile, the new AMC+ isn’t quite a bundle, but it is broader than the niche services. That’s smart.

Data of the Week/Entertainment Strategy Guy Update – The Straight to Streaming Market

Each week for the rest of the year, maybe for the rest of time, will be a referendum on whether or not films should go “straight-to-streaming”. This week had some fun updates on that. The big caveat is that one film doesn’t prove the thesis either way. Sort of like how no individual poll in the current election is decisive. Take the average.

Let’s start with the success. Borat 2, or whatever it’s long title is. Borat did what any film hopes for, which is to get tons of earned media exposure by becoming a national news story. (Thanks Rudy!) As such, it did really well for Amazon Prime/Video/Studios/Channels/IMDb. Here’s the quote Apptopia sent me:

Today’s finding: Amazon Prime Video just achieved its highest number of single-day installs (on mobile) on record (our data goes back to 2015) with about 520K on Sunday. 

This is backed up by the Google Trends:

Screen Shot 2020-10-30 at 10.35.36 AM

(The caveat is we can’t untangle how much folks were searching for news on Borat versus viewership. That said, I expect it will make it into Nielsen’s top ten in three weeks.)

Of course, a deal isn’t good just on performance alone. What matters is the price for that performance. Or return on investment. (Lebron James isn’t the best because he’s the best, but because he’s the best and his salary is capped at $30 or so million per year, when he could be worth double that.) The news via Deadline is this film cost $80 million to acquire directly from Sacha Baron Cohen

So did Amazon Prime/Video/Studios/Channels make any money on it? I honestly don’t know. Folks have asked if I could run my “Great Irishman” model on it, but we cannot. Because we don’t have the Prime Video inputs. We know how many Prime subscribers there are as of January, but not how many folks actually watch the service, let alone value it. At $80 million, we’re definitely on the “needed to be a big hit” side of the ledger, but this looks like it got there. (We’re closer to running this analysis with Disney+ than Amazon because at least Disney gives us subscribers every quarter.) 

(I’d add, we also don’t know the full terms for Borat 2. How long does Amazon have exclusivity? Do they have ownership later? We don’t know.)

Speaking of pay days, the best rumor of the week comes from The Hollywood Reporter (and others) that MGM was asking for up to $600 million for the rights to James Bond for some period of time. Which is eye-popping on one regard, but also eminently reasonable in the other. James Bond films make bucks at the box office, which means they make money in home entertainment and in subsequent windows:

Screen Shot 2020-10-30 at 9.45.11 AM

The best summary of the landscape comes from Brandon Katz at Observer:

What I’d say is there is a ceiling to straight-to-streaming releases, and it’s right around $100 million production budgets. (If not a bit lower.) Every so often a streamer will go over–Netflix with The Irishman and Triple Frontier/6 Underground; Prime Video with Coming 2 America 2; Apple TV with the next Scorsese budget pit–but those are the two biggest, and even then they’ll likely lose money.

(This is why I wrote in the Ankler that the straight-to-streaming move could end “blockbusters” as we know it. And talent would lose a lot of money too.)

Most importantly, using my “need to make money” framework, MGM is the type of firm that needs to make money. If MGM spends $200 million to make a film, they can’t just lose money on it and make up some imaginary source of data/subscriber retention to justify it. They have Private Equity guys breathing down their necks to make a return.

So yeah, they explored selling to streamers, but at that price tag only theaters can make money on it.

Other Contenders for Most Important Story – Comcast Earnings Report

Comcast made the most “news” with their earnings report. So let’s rank the insights in order of importance.

  1. Content doesn’t have one home, it goes to the best platform.

With this quote alone, Comcast/NBC/Universal/Peacock has moved up my power rankings. I’ve been advocating this position for awhile, and loved it when CBS started airing The Good Fight on CBS. Essentially, you can easily overvalue “exclusivity” for streaming, and the goal is to make a good piece of content and make as much money on it as possible. This doesn’t apply to Netflix or Prime Video, since they don’t have other channels, but for NBC, Disney and HBO this absolutely should be the plan: make content, find the best first home, and then the second best home and so on. (Essentially HBO Max is already doing this with HBO shows.)

  1. Peacock has 22 million users.

Caveats abound. (How many active users? How many paid?) But at least they provided a number.

  1. Touting the executive reorganization.

If I were in Afghanistan, I’d hate it if my boss changed every six months in relentless reorgs. Instead, we simply changed the entire leadership every year. (Wait, that was fairly bad too. Truly an awful organizational decision.) Let’s hope this sticks and they finally have a streamlined organization with clear spans of control.

  1. Comcast is holding to their theatrical/PVOD plan, regardless of theater closures.

Which makes sense. They can’t delay forever, and at some point these costs are sunk.

  1. Cord-cutting continued, but decelerated.

Which is interesting. Here’s the best chart from Evolution Media Capital:

Lots of News with No News – Rest of the Earnings Reports

Congratulations to Amazon, Apple and Google for providing very little insight into their streaming video businesses. Their earnings reports are a credit to a lack of transparency. We should break them up if for no other reason than because they make billions in cash but can’t bother to provide details into any of their business units.