Category: Weekly News Update

A Skinny Bundle Murder Mystery (And Knives Out Thoughts) – Most Important Story of the Week – 2-April-2021

Much like Benoit Blanc, the title character of a film series I’m about to write about, every week I find myself hunting for clues. Tidbits. Hints. Insights to answer one, yearning question: What was the most important story this week? This week required a bit more searching than usual. (I don’t interview suspects, I read news stories.) To pound the detective analogy to death, the most likely suspect was not the most important. So what is?

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Most Important Story of the Week – T-Mobile Shuts Down “TVision”

Let’s say you’re driving around Los Angeles. You see a gas station selling gas for $1 per gallon. What do you think?

You think something is going horribly, horribly wrong.

Why? Because gas is a commodity, meaning mostly it sells for the going rate because there is no competitive advantage to any one gas station’s prices. (Is Chevron with Techron a lie? Not really, but it’s also not really different from most gas.) Since Los Angeles has some of the highest gas prices in the US, if someone is selling you $1 gasoline, they’re either scamming you, selling stolen gas, or they’re trying to corner the gasoline market by selling goods under cost.

This hypothetical–with all attendant alarm bells–should be in everyone’s head whenever a new bundler is out there touting some bundle with remarkably low costs for cable TV. Youtube TV and Hulu Live TV both started this trend. AT&T then doubled wayyyyy down on it. Others followed suit. But inevitably, they all had to raise prices over time. In some cases nearly doubling the initial offered price. 

The logic is sort of clear and inescapable: cable channels have set prices negotiated over years by cable and satellite providers (MVPDs) and the cable channel owners. Virtual MVPDs (like Youtube TV and Hulu TV) pay lower prices per channel, but not that much lower. Otherwise MVPDs would demand much lower prices too. There is basically a floor for how much it costs to run an MVPD or vMVPD.

Just how did Youtube, Hulu and AT&T manage to offer lower prices? By losing money on each given sale to gain market share. They sold gas at $1 per gallon, in other words. The old fashioned, if-we-lose-$1-on every-unit-we’ll-make-it-up-in-volume-thinking. But in this case, losing sometimes $20-30 per month. Once customers were hopefully locked in, they would raise prices and keep the customers. 

The problem, especially for DirecTV/AT&T’s offering, was they couldn’t keep the customers. Unlike MVPDs, which tend to have very high switching costs and/or local monopolies, digital is very easy to switch. As soon as costs go up, customers switch providers. 

Which made the T-Mobile announcement last year of a new skinny bundle called “TVision” all the more surprising. The skinny bundle had come and been found wanting. At the time of the announcement, I was skeptical that this time would be any different. Indeed, last week we found out that T-Mobile was ending TVision, and instead partnering with Youtube TV (who is likely still losing money per subscriber, but funding it via an advertising duopoly and search monopoly) and Philo TV. And now customers get a whole $10 off each respective service.

Why is this the most important story? Because it shows that customers do want these services, just nowhere near the prices demanded by the current cable bundle. This story both shows the lingering customer demand, but also the inevitable pricing challenges. My guess is this won’t be the last time we see a skinny bundle, but they’ll face the same challenges. The bundle is dead, but it won’t stay that way.

Covid-19 Tracker – Godzilla Big Weekend

Listen, if this article is supposed to cover the news of the last week, then arguably this “news” didn’t happen last week; it took place over the weekend. To defend myself, we had good indications by Friday that Gozilla vs Kong would have a strong opening weekend, and beat box office expectations. And it delivered, along with a very strong performance in China.

This feels meaningful for at least a few trends. First, the death of cinema and theatrical attendance is far from certain. Every weekend the box office outperforms expectations is a step closer to the new normal for theaters in America, especially as more theaters reopen, increase capacity, and feature bigger films. It could take months to get back to where theaters were pre-pandemic–if they ever even get there–but all the available data says we’ll be much closer to $11 billion per year spent on theater tickets than “$0”, which some analysts forecast last March.

(To channel Debbi Downer, though, the recovery will take months. So lots of pain still to come.)

As for the simultaneous HBO Max release…hoo boy that’s a big topic. And one I won’t answer today. Because we can’t. We only have one piece of data so far–box office–so we’re really missing one side of the equation, the streaming ratings.  I’ll reiterate what I said last week: I think shortened windows are here to stay, but tend to think day-and-date streaming and theatrical is not. But numbers like these help the streamers’ case that day-and-date streaming may not hurt theatrical. But in today’s Covid disrupted world, Im’ not ready to make that case yet.

Other Contender for Most Important Story – Netflix Buys Knives Out Sequels for $450 Million

I subscribe to so many newsletters on entertainment that I can’t keep count. (I probably could count them, but I won’t.) This allows me to see the story that tends to capture “conversation”, especially among the influencers, aspiring influencers, journalists and Celebrity Wall Street Media Futurists (trademark Patrick Crakes). This week, that story was pretty clearly Netflix shelling out $450 million to Rian Johnson and team (that part is important) for the sequels to Knives Out

I was as fascinated as anyone by this story. Though it clearly isn’t the most important of the week, it is the most “thought provoking”. So here are some odds and ends thoughts on it.

– I read all three trade articles on the deal and the biggest unknown is still all the unknowns. This goes from what exactly Netflix purchased (Sequel rights? Franchise rights? Fees to previous distributors? Distribution for the first film?) to how much they are actually paying. I’d break it down into three big areas: the rights for the sequels, the production/marketing costs for the films (with backend), and the rights for the franchise. If I could know anything, I’d love to know what those pieces are expected to cost and how long Netflix will own those rights.

– The best framework for looking at this deal is via risk. Yes, online we want to categorize things into “good or bad” deals. That’s easy. (And it fits the social media antagonistic mindset.) But in a probabilistic world–and if you don’t think we live in a probabilistic world, I’m probably not the website for you–no deal is all good or all bad. Instead, the better way to think about investments is how risky they are for the return. Likely, Netflix built a model. In that model, in some cases, they only make $200 million in revenue off this deal. That’s the bad case. But in some, very rare scenarios, they make a billion. That’s great! In some, they just make $400 million. In other words, you run all those scenarios, and the “expected value” of this rights deal could be, say, $470 million. (Again, a made up number.) If Netflix paid $450, then they expect to make about  $20 million on average in this deal. (Again, made up numbers for explanation purposes.)

– The deal is risky precisely because of that $20 million. (My guess, remember.) Whenever the price is sooooooo close to the expected value, the deal is by nature risky. And we know it is close because Apple and Amazon were aggressively bidding on it too. And since Rian Johnson and team likely chose the highest bidder, they probably got the deal closest to the “expected value” of this bundle of rights (remember, it could go from literally just the two sequels up to owning the entire series now). This is called, in economics, the “winner’s curse”. If you have a lot of bidders on something, the odds increase that the winner of the auction likely overpaid. To return it to the “risk” framing, the more bidders, with the more deep pockets, the riskier the deal will be.

– That is assuming the expected value is even positive. If you’ve bought a lottery ticket or gambled in Vegas, those are negative expected value propositions. Could Netflix and other suitors paid have been prepared to pay $450 for $400 million of expected value? Definitely. Because that happens in entertainment all the time. Especially when certain suitors can “afford” to lose money. (Though I hate that phrase.)

– It is also fascinating that it was three big tech companies that were the final three rumored bidders. If I could, I’d love a machine that would allow me to send news stories to analysts/opinion makers stripped of key details. (The dream would be for film criticism. Like you could send a film to a critic and say, “What do you think?” but they’d have no idea who directed it, do you think that would change some opinions?) In this case, I’m convinced that some analysts who praised this deal would have excoriated it, if they first were told it was done by Warner Bros or Disney. In other words, the same deal becomes a genius deal if a Big Tech firm does it, but disastrous if a legacy media firm does it. Obviously, I can’t prove this hypothetical, but in many cases I think it’s true. And bad analysis.

– Lastly, the main upside for Netflix seems to be the hoped for “franchise” play. Meaning that Netflix isn’t just buying two films, but a whole series of films, with potentially TV show spinoffs and international versions. Three quick thoughts on this. First, again after reading the trade coverage like a sleuth, I’m not convinced that’s the case. Given how enormous the paychecks were for keeping rights to the franchise, wouldn’t Rian Johnson and producing partner Ram Bergman have been smarter to keep those rights? I’d say so. That includes controlling international versions and TV rights. Is it really crazy to think that Netflix would pay $225 per film given that they paid that much for The Irishman? I don’t think so.

– Second, I saw some folks using franchise rights as a hand waive to say, “Well, it was worth it because you can’t put a price tag on owning a franchise.” Yes you can! I spent thousands of words explaining how Disney did that for Star Wars. And frankly, franchise rights are lower than most folks would guess. Basically, every film in a series is a chance to fail. And once a franchise fails, well, the sequels after it are much harder to justify. If you don’t believe me, look up The Hangover or Hobbit franchises. Or read my article on franchises here. It’s hard to make one good film. It’s even harder to make three in a row. (But the basic equation is the value of all potential franchise properties multiplied by the success rate of the franchise multiplied by the probability that you can make each one.)

– What about international adaptations? Well, sure, Netflix could make those, and distribute them to their platform. But, wait what? Isn’t the whole power of Netflix that they can make a film in India and make it popular globally? Why would a local audience want to watch a Knives Out remake if Netflix is already offering them the original? If you need to make local adaptations, that would seem to negate that advantage? Maybe the power of global distribution doesn’t actually work out as well as touted. (Indeed, Netflix is making Money Heist for South Korea.)

Other Contenders for Most Important Story

Let’s do some quick hits and wrap this thing up.

NBCU Is Considering Another Streamer?

To use my recent classification, is this “actual” news or potential? Well, the next three stories are all “potential” stories. In this case, there are rumors from a well connected reporter that NBCU is considering launching another streamer, maybe Universal branded, to pair with Peacock. If this happens–and it is a big if–we’ll have lots of strategy thoughts to roll out. But let’s wait until it happens.

Comcast Weights Pulling Universal Films From Rival Streamers

Same for this story. If Comcast, via Universal, keeps selling box office blockbuster juggernauts–like The Minions films or Fast and Furious series–to streamers like Netflix, Hulu or HBO Max, they really need to reconsider their strategy.

NCAA Case at Supreme Court

Lastly, we spend way too much time in political reporting guessing what the Supreme Court will do ahead of time. But it is fair to point out that the NCAA court case on amateurism could have huge ramifications on college athletics in America.

Is This Black Widow’s Last Move? Explaining the Latest Covid-Theater Disruption – Most Important Story of the Week – 26 March 21

The big story of last week is fairly obvious: Disney moved Black Widow to July, along with changing the distribution strategies for Luca (now straight-to-streaming) and Black Widow (now going to theaters and  premium VOD).

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Most Important Story of the Week – Theatrical Return So Far

In the past, I’ve used Uno games, climbing a hill, and going into bankruptcy as analogies for theaters and Covid-19. But this might be the most esoteric analogy I’ve used yet:The best analogy for the return of blockbuster movies in theaters may be calling for artillery fire. 

In case you haven’t ever actually directed artillery fire, here’s how it works. First, you call the position in to the guns. They aim their artillery pieces, load in the right amount of charge, and fire a shell. But the thing about artillery is that it isn’t very accurate. Usually your first round is pretty far off. So you call the artillery battery back, and you “adjust” the fire, left and right, and up and down to get the guns firing where you want. Usually you cut the distances in half, then in half again, until you are right on target. At which point you “fire for effect”, or launch all the shells.

That’s like the return of theaters. At first, films were delayed for a year or more. Then they were delayed by a matter of months. Now, we’re down to moving films back by weeks. Eventually, we’ll stop moving them entirely. If I had to guess, we’re now locked in to the schedule–with simultaneous streaming launches as needed–for the rest of the year. In other words, by Q2 of 2021, big blockbuster films will “fire for effect” and start releasing week after week to finish the year.

Good analogy, right? 

Still, there’s more to explain. Today I’ll cover four areas: the latest Covid news that matters, the impact on theatrical distribution, the impact on home entertainment, and what I think could happen next.

Covid 19 Updates

The biggest driver of all these moves is still Covid-19. So let’s check in on the most important Covid-19 news since I wrote about it three weeks ago. This is sort of a “higher level than daily headlines”, which, due to the need to drive clicks, can sometimes be more misleading than accurate:

– First, more and more vaccines are being approved, and increasingly they all show benefits after one shot. For instance, for all its failed public messaging, AstraZeneca’s latest test results show it is nearly 100% effective at preventing serious illness. It will still likely be approved too late for use in the US, but this should provide further proof that it will work as a vaccine. The more vaccines we have, the faster we can vaccinate the entire world. 

– Second, another study provided more evidence that the Pfizer and Moderna shots are nearly 80% effective after just one shot. 

– Third, the US is accelerating its vaccine roll out. This is almost exactly on the “linear” model line I had modeled out in February. That model forecast that we’d be distributing about 2.7 million shots per day (using the seven day average) and as of today, that’s right where we are. 

Now, this is slower than I had hoped–I hoped we’d be at about 3.5 million per day by now–but even at this rate the US is on track to have 60% of the 16+ population vaccinated by the end of April. Including folks who have already had Covid-19, then the total protected could be as high as 75% by early May.

– Third, the increase in vaccinations is just starting to show signs that it is really driving down cases in the US, especially in the most vulnerable populations. This can be seen in the case rates and hospitalizations in older populations.

– Fourth, this distribution, though, isn’t equal. As this map from Covid Act Now clearly shows, states with warmer weather have seen cases drop much faster than in the northeast, just like last spring.

Screen Shot 2021-03-29 at 3.53.39 PM

– Fifth, this is all about the United States. Internationally, many fewer people are vaccinated than in the US, UK and Israel. As a result, some countries are seeing spring surges as they did last year. There are also signs of surges in the northeast states like New York, Connecticut and Michigan.

This last point likely influenced Disney the most.

The Impact on Theaters

As I wrote back in February, my model about theaters reopening was not about when blockbuster films would return to theaters. When I tackled blockbusters, one thing mattered above all:

Disney wants to maximize the revenue for potential blockbusters. It is one thing for films destined for $100 million in US box office to lose some revenue straight to streaming; it is another order of magnitude for a potential $1 billion dollar film to only collect 80-90% of its potential revenue.

Call this the “expected value” problem. When Disney had to make the call for how to distribute Black Widow–a call they had to make about six weeks early–two things likely scared them for how many theaters would be open by May of 2020:

1a. Europe is very likely going to be locked down.

1b. New York and other northeast states may return to lockdown, or their theaters won’t be at 50%+ capacity.

Above I talked about $1 billion in revenue, but that’s a global number; meaning Europe, America, China and the rest of the world. Disney needs the entire world to maximize revenue, and May just has too much uncertainty. Listen, forecasting vaccine distribution for one country is tough, so I didn’t bother building a model for Europe as well as the US. Same for predicting the course of the pandemic across the world. And looking just six weeks out, it is reasonable for Disney to think Europe will still be locked down. By July, likely even the slow rollouts of vaccines will have accelerated to the point to protect everyone.

I’d add that piracy makes this all worse. Once a film is released somewhere, it’s de facto released everywhere. So it made sense that Black Widow moved back dates. But then why did Disney also decide to release it on “Premier Access” at the same time?

The Impact on Home Entertainment

On the surface, this is an even bigger change. It is one thing to offer Raya and the Last Dragon on PVOD at the same time it went to theaters. Most theaters were closed. But Black Widow is the giant tentpole of the Disney franchise system. What are they thinking?

Well, probably that the pandemic could still be going on, and at some point Black Widow has to come out lest the entire movie calendar get stalled out. And if some places may still be on lockdown, then a PVOD offering can help those customers who can’t go to theaters. 

I’d call this the “Covid exception” at work. If the world has mostly reopened by September, I could see theaters pushing back on Disney on PVOD. For Black Widow, though? They’ll hold their fire. They need that giant tentpole.

The Future?

While I don’t like predicting the future, I think we can make a few guesses about what happens next. First off, I wouldn’t be surprised if more smaller films move around on the calendar. And by move, I mean move up into May. Again, Disney had billions (potentially) riding on Black Widow; if you have a smaller horror film, action flick or comedy, moving up into may get the best of both worlds: a mostly reopened American hungry to leave the house and a wide open release calendar. Indeed, I wasn’t tracking Wrath of Man, a Jason Statham action film, but it’s now coming out May 7th and released its trailer today.

These smaller films will get us through June. We can officially say that Q2 of 2020 will be bad for theaters…but starting in Q3 the revenue should be back. (Fast 9 opens June 25th.) Also, almost all the major theaters chains are fully capitalized through the end of the year. They probably can’t survive until 2022 with no tentpoles, but they can make it through the quarter.

As for home entertainment, I think that story will have to stabilize somewhere. Right now, each streamer/studio has their own plan. Netflix skips all extra windows; Comcast has a three week hold back until PVOD, and Disney keeps switching their plans. Meanwhile, even Warner Bros will likely be back to “normal” next year

I don’t think this will last. Business likes to settle into routines. It just makes life easier for everyone. So after this Covid disruption, I’d expect a new standard to emerge. The 90 day window is gone, but day-and-date streaming and wide theatrical feels unlikely too. Something along the lines of Comcast’s 3-week PVOD feels like the best bet for what all studios eventually commit to. But don’t hold me to that: the studios will settle on one standard, but precisely what is too hard to predict.

Other Contenders for Most Important Story

Viacom’s Stock Rise…and Fall?

A few weeks back, I noticed that ViacomCBS had been having a really good year. Their stock was actually up since the merger, which many folks doubted would ever happen. Then last week, as they planned to issue stock to take advantage of the price, a few Wall Street investors downgraded the stock and it went tumbling. In other words, over two years,  Viacom’s stock went as low as $14 and as high as $97, and ended up in the exact same spot as the merger price in December 2019:

Screen Shot 2021-03-29 at 2.37.28 PM

To make things crazier, now it turns out the stock dropped so quickly because of a highly leveraged hedge fund that had borrowed from multiple places. The story is still evolving, but the rise and fall could be because of this hedge fund, meme stocks and multiple other factors.

The lesson? Don’t pay attention to stock price, and especially not the day to day and even month to month movements. And especially don’t use stock price to tease out larger strategic lessons. If a stock can go as high as $97 and as low as $14, clearly it’s not a very precise signal to use!

Jason Kilar’s $52 million Salary

I wasn’t going to talk about this, but you know what? It is somewhat news. The top man at Warner Media–the man leading the turnaround–is getting paid a tremendous sum to make HBO Max a thing. Is it “worth” it for AT&T?

That’s the crazy part, because honestly I don’t think so. Frankly, I don’t think any top flight executives are worth these salaries. 

Think of it like this: who was competing with AT&T to pay Kilar $50 million dollars to run HBO Max? It’s not like Kilar would have that many other opportunities to run a huge multibillion dollar streamer. (Disney wasn’t hiring him, Netflix has Reed and Ted, Amazon had just hired another ex-Hulu manager and CBS seems satisfied with their Pluto team.) Why not offer him just $10 million dollars and the opportunity to run HBO? Did he have better offers? Who was AT&T bidding against? 

Or look at it from this angle: how many other folks would want this job? That’s the craziest part of this. There are hundreds of executives who would want and are qualified to have his job. And desperate to have it too.

In short, I don’t understand executive compensation. The ROI seems atrocious.

M&A Updates – Cable Companies Merge in Canada

In a sign that–despite what I’ve written–renewed antitrust enforcement isn’t on the table, up in Canada, the biggest cable companies are merging. Read about it here.

The Odds and Ends of the NFL Media Rights Deals – Most Important Story of the Week – 19 Mar 21

Last week the NFL media rights story went from “potential” to “actual” news. (The latter happens, the former is rumors.) Not to toot my own horn, but I wrote last week that the Disney-NHL deal would set the template for the NFL deal (and all future rights deals). And I was right.

That’s our story of the week. Which is a bit delayed because, frankly, March Madness basketball slowed me down.

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Most Important Story of the Week – The NFL Media Rights Grow 5.9% Per Year and Go Digital

Editorially, the NFL didn’t help me out. I had hoped the NFL would take a few more weeks to finish these deals, so my weekly column wouldn’t cover sports two weeks in a row. Last week’s column explored the strategic issues for all parts of the digital video value chain. This week, I’d like to provide a bit of context to the specific numbers for the NFL, speculate about the two remaining wild cards in the NFL media rights package, and give my overall thesis. In short, a bit of an “odds and ends” column.

Bottom Line: This Deal Isn’t “Earth Shattering”, But “Evolutionary”.

The NFL signed a big rights deal that we all knew was coming, and most observers assumed that all the major linear channels (Viacom, Fox and Disney) would insist on digital rights as well. Which is the deal we got. Did this stop some outlets from hyperventilating that this deal would “end the bundle as we know it”? 

Of course not.

Will it? Not really. If “earth shattering” means to figuratively have the Earth break apart like Alderaan in Star Wars, then this deal is not that. Unfortunately for narratives, most business trends resemble the slow but steady movement of the continents rather than earth-destroying super lasers.

For the vast majority of customers, they can (and will) watch TV mostly how they have before. Amidst this, TV consumption is slowly changing, as more Americans cut the cord. More but not all. As I often remind readers, though, this rate is still in the single digits percentage-wise. In 2021, cable “only” lost 6 million subscribers. Yes, this is a shrinking business, but the majority of TV viewers use cable or satellite to access TV.

This deal matches that slow evolution, not the online narrative. Since many customers are digital only, the NFL needs to reach them and ESPN+, Paramount, Prime video and Tubi provide that reach. But there are still so many traditional customers that the NFL can’t blow up the linear bundle entirely. Again, think “tectonic shifts” not “earth shattering”. 

(This is the “aggressively moderate” take versus the “headline grabbing soundbite” take.)

Whither Sunday Ticket?

Partly, I’m a bit disappointed that Sunday Ticket, the subscription service that lets DirecTV customers watch every NFL game, hasn’t been awarded to a suitor. Given the sorry state of DirecTV’s finances–they were just spun off from AT&T–it is unlikely they will renew this extremely expensive and exclusive contract.

So who grabs it? Amazon is often rumored, but likely the NFL has concerns that Amazon alone doesn’t have the reach to justify a deal. Neither would any one cable company, since no one cable company covers all of America. (That’s why the deal made so much sense for DirecTV, since every house was a potential customer.)

Hence Sunday Ticket is a “wildcard”. I think that the NFL could actually generate more revenue by letting multiple MVPDs and OTTs sell it as an add-on, for a given up front fee and splitting per customer revenue. (Say ESPN+, Apple TV+, Peacock, and Prime Video, plus any cable provider.) But that is much riskier for the NFL overall. The NFL prefers a big upfront paycheck, which may lend itself to one big (likely tech) player going all in. We’ll see which way they go.

Whither NFL Network?

One of the rumored sticking points in Thursday Night Football to Amazon was whether the deal was totally “exclusive”, meaning on every platform, or “digital exclusive”, meaning the only digital provider, as it was the last few years. The answer is the former, as TNF will leave its sometime home on the NFL Network. Losing an actual live sporting event will hurt the NFL Network’s negotiating position in the future, so conceding the point likely means the NFL knows the smaller linear sports channels days are numbered. Plus Amazon doubled the price tag, which likely makes up for the loss.

That said, there is the caveat that in their Press Release, the NFL said the NFL Network will carry some games. Hmmm. It will be fascinating to see what and how often these games show up on the calendar:

Screen Shot 2021-03-23 at 12.55.46 PM

Amazon Will Syndicate Airings to Local Broadcasters

That said, here’s a fun point: Amazon must syndicate rights to local markets for Thursday Night Football. That’s a footnote with big implications I didn’t see highlighted in the coverage!

Screen Shot 2021-03-23 at 12.56.17 PM

In other words, if hypothetically the Los Angeles Rams play the Kansas City Chiefs, a local broadcaster like KTLA could buy the rights for Los Angeles. In fact, Amazon must sell the rights to someone. Same for Kansas City. Everywhere else? They have to go to Prime Video to watch that week’s games.

How much does this decrease the overall value? Somewhat. Diehard NFL fans will tune in to Prime Video.  But the casual fans who only follow their team will have a non-Amazon option, which does decrease the upside for Prime Video. Does this make it a bad deal for Prime Video? Probably not. They still need to convince people to use Prime Video on a regular basis, and sports offer that opportunity.

This isn’t a “108%” increase, but a “5.9%” per year increase.

Whenever a big sports deal is announced, the league loves to celebrate the huge increase in price. Often announcing it “doubled” the previous deal. What they fail to mention is that the previous deal took place ten years before, so it doubled over ten years, which is less impressive. Since 2010, the S&P 500, for example, has gone up 249%, so if a sports right deal doubled in value, that’s less impressive than the just basic growth of the stock market!

I wrote about this before, here or here. How does this apply to the NFL? Well the previous deals were signed in 2014, roughly, meaning 9 years. Using the prices per year–from this great Sportico article–the actual per year increase is from $5.67 billion to $9.46 billion. That’s a combined annual growth rate (CAGR) of 5.9%, or an average growth rate of 7%.  Still really, really good to grow revenue by 5.9% per year! But not nearly as eye popping as 108% growth sounds.

For new readers, here’s the picture of what I call the Video Value Chain in all its glory.

The last two weeks, I’ve written about the Digital Video value chain. Here is that laid out in all its glory for those who don’t know:


What did the Twitterati have to say?

Every so often I collect your thoughts on Twitter. Here are the best hot takes I found:

Context Update – Antitrust Heats Up as Biden Appoints Lina Khan to FTC

Mergers & acquisitions are fun to write about. You get to imagine two companies putting together their combined business heft and dominating a new industry, or presenting a unique new value proposition. Ignore how often the mergers fail to deliver the expected value in real life; on paper they’re fun! (Especially compared to building a real strategy, which is often much harder.)

This game was especially fun over the last four decades, as US and global regulators mostly allowed every deal to pass through. (There are a few exceptions, like Comcast and Time-Warner Cable and AT&T and Sprint, but they are vastly the exception.) But has the tide turned on antitrust? And does the business community have an accurate gauge on that yet?

Maybe not. That’s my outlier hypothesis right now. As I wrote last November, whether or not Democrats will fundamentally change antitrust enforcement (from lax to aggressive) depends on President Biden’s appointments. On this front, he has been mixed. Some appointments are traditional (meaning lax) corporate lawyers. Others are strong advocates for renewed antitrust enforcement. Some advocates for stronger antitrust enforcement were disappointed when Biden nominated Rohit Chopra for head of the Consumer Financial Protection Bureau, since he was very aggressive on antitrust as a member of the Federal Trade Commission. Then Biden nominated Lina Khan to the FTC. She’s just as fierce of a critic, and a protege to Chopra, . Khan helped write the House Subcommittee on Antitrust report on Big Tech last year, and is a rising star. She’ll likely be a strong advocate for increased scrutiny on future mergers and acquisitions. 

Toss in economist Tim Wu joining the White House Council of Economic Advisors, Chopra’s commitment to enforcing rules at the CFPB, and the Senate weighing new antitrust bills that may–but likely won’t–have bipartisan support, and I see a changing landscape. Heck, when a Republican Senator writes an op-ed in favor of unions, anything is possible!

Yet the business community isn’t ready for this outcome. After a down year in deal-making due to Covid 19, they’re ready to get back on the merger train. (Speaking of, two big train companies want to merge.) Writing in his newsletter, Matt Stoller noted:

Screen Shot 2021-03-23 at 1.06.32 PM

So what is the most likely outcome? Well, deal making won’t slow down until the Biden Administration sends even clearer signals that it will stop deals from happening. I expect this will start first with increased scrutiny on “megadeals”, those over $5 billion in value. 

As for entertainment, this biggest potential impact is that Big Tech will be a pinch more worried. (Big Tech being at least Apple, Google, Facebook and Amazon, maybe Microsoft, maybe Netflix.) Sure, maybe increased antitrust scrutiny won’t come for train companies, but clearly Big Tech is in the crossfire. This could hamper the long hoped for M&A spree of Big Tech on smaller media companies. That would change a lot of potential strategy.

Other Contenders for Most Important Story

Netflix May (Huge May) Crack Down on Password Sharing

To continue the game of the last two weeks, is this “actual or potential” news? Every few months something about password sharing and Netflix circulates on the Twitter (and then news websites) rumor mill.

Is this one different? Maybe. On the actual side, Netflix is genuinely running test messages telling customers to not share passwords. On the potential side, Netflix hasn’t actually limited password sharing to one household yet either.

Tubi May Produce Original Programming

Because of course they will. Everyone is making originals. However, paired with the news that Tubi will carry Fox NFL games, clearly the remaining pieces of Fox post-merger with Disney (Fox broadcast, Fox Sports and Fox News) see Tubi as the future.

Alibaba May Have to Sell Media Businesses

For a perfect example of a “potential” news story, see this Alibaba news out of China. Sources say that Alibaba may have to spin off media businesses to stay on the Chinese government’s good side. Let’s wait until this actually happens, but China seems to be cracking down on media consolidation by Big Tech in their backyard.

Walmart Considering a Smart TV Device

Walmart has a confusing approach to the Digital Video/Big Tech “dust up”, as The Economist recently described it. (Tech is having a dust up whereas entertainment is having a war.) A year after buying Vudu and then selling it to Comcast, Walmart is back exploring if they should manufacture/brand a streaming stick under their brand.

The WME IPO is Back!

Buried in the news coverage was the return of the WME IPO, derailed by Covid-19 and a weak economy last year. Will it stick this time?

Lots of News with No News – March Madness

I’m sure I’ll stumble across articles either bemoaning, celebrating, worrying or any other emotion over the ratings for March Madness this year. Whatever they are, folks will likely use them to justify their preexisting beliefs on the future of TV, digital videos and the streaming wars. (Apply this to awards shows too if you’d like.)

I, meanwhile, will enjoy the tournament and how well the Pac-12 is dominating, especially my Bruins. Let’s hope they don’t delay any more columns!

ESPN Grabs NHL Rights, Setting the Sports Media Rights Template – Most Important Story of the Week – 12 Mar 21

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I love when a weekly column like this ends up having a “theme”. This week, that’s the difference between “actual” and “potential” news stories. The former are things that happen: a movie opens, a company launches a new product, or a studio head steps down. “Potential” news stories are all the things in the news that may happen: a company may be putting itself up for sale, a studio head is considering leaving or, most commonly and consequently, two companies are negotiating and are close to announcing a deal.

In the last few weeks, we’ve seen the difference between actual and potential stories play out with sports rights in particular. The NFL had quite a few “potential” stories, from a potential deal with Amazon (still not finalized) to potentially poor negotiations with Disney for Monday Night Football (also not finalized as of this Monday morning the 15th of March). Then, in the middle of last week, with no forewarning–that I saw–Disney and associated sports entities (ESPN, ABC, Hulu and ESPN+) and the NHL announced a 7 year, 2.8 billion sports rights deal with the NHL. That’s actual news! And it’s our…

Most Important Story of the Week – ESPN Grabs NHL Rights for Pay TV and Digital

Gosh I love this story. It combines sports with almost every part of the “digital video value chain”. First, I’ll go over the basics–if you missed them–and then the ramifications, from the most disrupting digital to the most disrupted linear.

First, Andrew Marchand delivered the basic facts in a tweet:

Marchand later adds that Disney is going to raise the price of their bundle from $13 per month to $14 upcoming, partially my guess is to pay for this deal. As John Ourand points out, this deal only covers some of the NHL’s content output. Potentially up for grabs are the NHL Network, NHL.TV, their digital OTT service, more national games for broadcast (about 20) and whatever happens to regional sports networks (RSNs).

The remarkable thing, overall, is how close this deal is to what I expected for the next round of sports rights. The rights are shared between linear and digital. And the deal is with a partner who can offer both linear and digital distribution, Disney. Some games will air exclusively on digital, but the crown jewel playoffs will air on ABC (and maybe simulcast ESPN+). Moreover, the rights aren’t on a league-owned platform, but part of the Disney bundle.

I can imagine that some of you won’t think the NHL is that big of a deal. But frankly, it is one of the four major sports leagues in the US, even if it is clearly fourth. Or fifth if you put college football ahead of it. Which is barely amateurism anyways. (Commentary!)

Let’s review the impact on each part of the value chain and speculate about what this deal may say about the future of sports rights.

Digital Streamers – ESPN+ is the first third-party streamer to grab sports rights for a major professional sports league. 

The non-NFL professional sports leagues had dabbled with owning their own streaming sports applications and channels “over the top”. Indeed, an MLB subsidiary, MLBAM, created the application for baseball.  The MLB then spun off this into BAMTech, which Disney bought to become the backbone for Disney’s streaming business. However, most of those league-owned applications are niche streamers at best. Because the true power of sports is in a bundle of sports in a bundle of content. 

Clearly, ESPN wants to deliver that sports bundle in the 21st century, the way they delivered that content for linear cable in the 2000s. I expect this trend to continue and most league-owned streamers will eventually fold or get purchased by larger sports streamers, as ESPN and Peacock have already done.

Traditional Broadcast – Still Not Dead…Yet.

I thought the sports leagues would avoid going “digital only” because the risk is that you lose quite a bit of eyeballs in the process of collecting extra revenue. As I wrote when Peacock secured the WWE streaming network, the risk of any league is that if only the hardcore fans follow you to a very small channel, your brand suffers as casual fans drop out. 

Hence, most leagues are looking for a partner who can offer both digital natives and traditional viewers content. As big as cord cutting is–a point I’ll make repeatedly–more folks have traditional cable than do not have cable in America. (See below) As a result, the traditional players still seem best positioned to secure sports rights for this round of negotiations. 

A traditional player and Big Tech company could partner to offer both digital and linear rights. But given that Comcast, CBS, AT&T and Disney all own streaming platforms, they won’t partner with a tech platform. That leaves Fox. The challenge then is “exclusivity”. Since having exclusive content drives so much of the value, splitting rights doesn’t traditionally work. Even then, it would make more sense for DAZN or Amazon to buy a linear channel than vice versa.

By the end of the decade, this could change. For now? I’d keep betting on most major sports deals to happen with the traditional players, but with digital rights included.

Traditional Cable – ESPN is still the behemoth.

ESPN was a must carry channel in the cable ecosystem. As such, it commanded the highest prices for customers in the traditional bundle. When it added the SEC Network and Longhorns network, it only entrenched this position further.

Traditionally, the focus is on the value of games. What is more fascinating is how ESPN did and does drive coverage outside of games. Frankly, with the NHL owned fully by NBC, ESPN downplayed its coverage of hockey. It covered Stanley Cups and the playoffs, but highlights took a backseat to the other sports. Some have speculated that this hurt the NHL’s brand and I agree. Will ESPN’s coverage of hockey increase after his deal? Probably.

As a result, any league, professional or amateur, needs to have some presence on ESPN. To have that share of voice. That said, I like having a second partner as well to keep prices honest. Take the NHL on NBC. That still gets a ton of publicity from NBC to drive the coverage. If I were advising sports leagues, I’d say your best bet is to be on ESPN in some capacity, but have a back up partner who is incentivized to drive your product, like either NBC/Peacock or TNT/HBO Max.

The NHL Network – At risk.

John Ourand covered this best, so I don’t want to steal his point and will just quote him:

…if you read between the lines, the future of that network does not look so rosy, especially since Disney’s high-respected affiliate team no longer will be handling its carriage deals.”

Meaning it could go away. Speaking of disappearing cable channels…

Regional Sports Networks – Unclear, but potentially very bad.

A big wild card for me is what happens to the regional sports networks now. Most  NHL, NBA and MLB teams own their local viewership rights. (The NFL controls national broadcasts since their supply is much more limited.) Regional sports networks first disrupted local broadcast channels by buying these rights, with some college rights throughout the 2000s. Ultimately, several teams disrupted the RSN disruptors and launched their own channels. (The Yankees and Lakers being arguably the two biggest.) As the bundle starts to collapse, RSNs will likely be one of the first casualties. (Though don’t guess when. Predicting the future can be easy, predicting when is very, very hard.)

My question about this deal is how many of these ESPN+ games are inventory previously dedicated to RSNs. If the answer is “all of them”, that’s a lot of lost content for RSNs to lose. My guess is that ESPN+ will have out-of-market rights. That obviously dampens a lot of the value for customers, since most fans still care about their local team first and foremost.

Was this a good price?

Uh, I don’t know? It was definitely a jump in price, the way all multi-year deals are. Specifically, the deal from 2013 with NBC was for about $200 million per year for seven years. This price alone doubles that price, and the NHL still has more games to sell. Overall, though, I’d say this is inline with past price increases. As for whether ESPN+ can make that back for Disney, maybe, but not by itself. Meaning this is a stepping stone deal in some ways.

What’s Next?

First, ESPN+ has a head start on everyone, including DAZN. They’ve managed to leverage their power position as ESPN to start securing OTT rights. That’s a big deal. But they can’t and likely won’t stop here.

Second, all eyes turn back to the NFL. Seriously guys, make a deal for something! My best guess is Disney and the NFL do a similar deal for Monday Night Football, and it likely mimics the key components of this deal, with digital and linear rights. Though don’t put it past Disney and friends to do something crazy with NFL Sunday Ticket.

Third, Amazon still wants NFL rights. The most likely outcome is they get more Thursday Night Football, but they could be the first digital only deal. But I doubt it. The NFL Network is more valuable than the NHL Network, and the NFL doesn’t want to hurt that value prematurely. Likely, a split-deal (not exclusive to digital) is still the likeliest outcome.

Fourth, since most biz executives are naturally conservative–in temperament, not political leaning–I expect most leagues will copy the NHL and ultimate NFL deals in their rights deals. However, between Disney, Comcast, AT&T, ViacomCBS, DAZN, Amazon and any wildcards I may have missed, the leagues should all drive higher prices for their content.

Lastly, customers will see all this in their digital streaming bills. As Andrew Marchand pointed out, the Disney bundle will be up to $14 after this deal is done, for Hulu with ads. In other words, as Disney bundles sports, some of that cost will be passed along to customers.

Entertainment Strategy Guy Update – Should Netflix License Its Content?

If you want a perfect example for why I wait to call a story news until it actually happens, here’s a headline from this very website last May I stumbled upon this week as I was updating my website:

Screen Shot 2021-03-15 at 3.07.04 PM

But you’ll notice, since that headline, Apple hasn’t actually bought a library. I jumped the gun. The premise was so sexy, I wrote an entire column on it. But I was wrong! (The strategic logic though is still spot on.)

I feel the same way for the huge headline dropped by The Information this week:

Screen Shot 2021-03-15 at 11.51.14 AM

First, The Information is definitely filling the void by the general move of the trades away from breaking stories. Since The Information is subscription-driven, not FYC advertising driven, they can drop a few bigger tidbits every so often. Credit to them for this scoop in a series of scoops.

That said, I don’t want to go too far in calling this actual news, since, notably, we haven’t actually seen the goods. Netflix may ultimately license their wholly-owned series into second windows, or they may not. Or this story may be something less groundbreaking, but still interesting. Until we see a big series arrive on another streamer and/or linear channel, this is just a “potential” story.

But I had some quick thoughts.

– This may be cover to explain why some “Netflix Originals” will end up on other services/channels. For example, Orange is the New Black. That’s a show owned by Lionsgate. Essentially, Netflix has to pay to keep it streaming after a certain number of years pass. (We don’t know specifically.) Earlier shows like OiTNB had shorter hold back than some recent series, so it’s a show I’m keeping my eye on. Netflix could have leaked this story to help explain why more and more licensed shows end up elsewhere.

– The math here is pretty simple. If a show is worth more to someone else than it is to you, you sell it to them. Netflix benefitted from this for years; it was worth more to Netflix to license big movies to its service than it was for movie studios to keep them in the vault or on cable/home entertainment. 

– The converse could also be true now. Some linear channels or streamers could benefit more than Netflix by leveraging the buzz/awareness Netflix built for a show like Grace and Frankie or OiTNB to get some subscribers. Given the volume of new releases on Netflix and how most shows seem to disappear into their morass of library content, I could see content being more valuable off Netflix.

– The Marvel angle. Does everything revolve around Marvel? Maybe. The story to monitor here is when all these series with “Marvel” in front of them return to Disney, who owns them outright. Do they end up in the Marvel tab in Disney+? That’d help flesh out the Disney+ offering. I’d have said DIsney wouldn’t do this, since they could want a coherent MCU offering, but then they put the X-Men films onto Disney+, and even a Fox X-Men character–spoiler alert–in WandaVision. Given the commanding negotiating position of Disney in all negotiations, these Marvel shows could leave Netflix sooner than you’d guess.

– This article only referenced selling subsequent windows of content, but you have to wonder how far a revamped theatrical window is. Given that all the streamers have different windows, something could be worked out with one of the theater chains for some content.

If this happens, I’d call it both a big deal and the right strategy by Netflix. Clearly, this is a firm focused on cash flow positivity from here on out. Nothing is more cash flow generating than joining the content licensing biz. We’ll see if it happens.

Other Contenders for Most Important Story

Disney Investor Day: Disney Passes 100+ Million Subscribers; Will Close Some Retail Stores

The Disney streaming business chugs along, and they announced that they passed 100 million subscribers. I don’t have a lot of strategic takes on that big news, but Disney is also shutting some of their Disney stores across America. Likely, the explanation is what you think: Covid-19 crushed retail stores, especially malls. Lastly, Disney is planning to reopen Disneyland in California in April as California emerges from lock downs. Taking the balance of these two stories, theme parks have a higher upside than merchandise going forward.

Peacock Joins Hulu and Netflix in Losing Money

What if no one can actually make money in streaming? We know that Netflix lost money for a decade plus, that Hulu lost money for all its owners and all streaming is losing money for Disney. Now we know that Peacock has joined the money losing streaming crowd

Listen: all new businesses lose money at the start as they gain customers. But the key to valuations is accurately estimating how much money a business will make at full-strength. There is still the chance that streaming video is just much less lucrative than traditional cable. The sooner everyone can make money–and for Netflix go beyond just breaking even–the better for industry valuations.

Pay TV continues Its Losses According to Moffett Nathanson

Every year, Moffett Nathanson produced one of the definitive estimates of cable subscribers in the US, and recently it has highlighted the trend in cord cutting. 2020 was no different, though I will note that the potential acceleration of cord cutting presaged by Covid-19 didn’t really come to pass, as customer losses was about the same as 2019, a non-pandemic year.

AT&T Investor Day

AT&T announced they are expecting 120-150 million subscribers by 2025 and HBO Max’s AVOD option will come in the summer. The AVOD news interests me more, as it really seems like it will complicate their offering for customers. Previously, HBO Max had an easy value proposition to communicate. Well, actually they didn’t. Customers didn’t know if they had it, or if they had to pay and how. Now, customers may end up seeing a bunch of ads. So I’m hesitant to call this a good idea.

M&A Updates – Roku Acquiring Nielsen TV Advertising Biz

This is a small, but fascinating deal. Roku is acquiring Nielsen’s smallish smart advertising business. But in the acquisition, they’re also incorporating Nielsen into their TV measurement, which should make Nielsen numbers more accurate in the future. Axios has the details.

Cresting the Covid Hill – As Many Films are Moving Earlier in the Year for the First Time in This Pandemic – The Most Important Story of the Week – 5 Mar 21

When the biggest story of the week is essentially the same story as the previous week–Paramount+ launched to customers this week after they announced specifics at the previous week’s investor’s day–then you know it is a quiet week for news. Despite this, dare I say this week had some stories that could be described as “fun”? Not hugely important, but fun. 

But one story was important. This week may mark the week when the bleeding was stanched for theaters: as many films moved earlier in the release calendar as moved backwards. Since we haven’t written about movies in a pinch, with all the latest shuffling, it is the “story of the week”. 

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Most Important Story of the Week & Covid-19 Tracker – Fast 9 Moves From May to June

If I have a crutch, it is quoting my second favorite author too often. Several times in the life of this website, I’ve slipped in a Tale of Two Cities reference to explain a current strategy or trend. You know the quote–”the best of times and the worst of times”–but it’s such a terrific opening to a book, it’s worth quoting the first paragraph in full:

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way—in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”

Dickens, writing in Victorian England about England and France of seventy years before, is basically saying that all time periods have this universal feeling that things are the worst and best at the same time. And guess what?

That quote perfectly describes how we feel right now!

Many Americans will tell you that because of the pandemic, lockdowns, racial injustice, economic inequality, culture wars, and countless other issues, we are living in the worst of times. Both sides of the aisle will say this. The numerically inclined among us, though, would point out that, despite the pandemic, more folks around the world live longer, safer, richer and better lives than ever before. Even the pandemic, for all its tragedy, could be hopeful: a deadly new virus was cured in less than a year with a revolutionary vaccine process, which force a medical breakthrough that could lead to curing future diseases, like malaria.

(Also, how apt is the phrase, the “epoch of believe and the epoch of incredulity”, for our current media consumption/landscape?)

Enough English literature tangents. Theaters went through their own version of the “best of times/the worst of times” this week. After describing the latest movement in theatrical dates, I’ll update the latest Covid-19 vaccination rates data to update my “reopening hypothesis”. 

Part 1: For the first time, films are moving earlier in the calendar.

Here is that quick summary of the news:

– Sony’s Peter Rabbit sequel moved up to May 14th.
A Quiet Place 2 moved up to Memorial Day weekend, a date it now shares with Disney’s Cruella

These offset the big headline, which is that Fast 9 moved back to June, and that pushed the next Minions film even further backwards in the timeline.

Overall, if you’re a theater or theater chain, you have to feel more and more confident that distribution will be almost entirely back by May. President Biden recently announced enough vaccine doses for every American adult by the end of May and that likely means theaters will show films to almost fully-vaccinated audiences. 

Of course, folks read a column like this for hot takes predicting the future. Reading the trade leaves, my gut is that more shuffling is due to come, but don’t ask me when or how. Black Widow could still move, although more likely they’ll add Premiere Access to the distribution if they don’t think there are enough open theaters at full capacity. Some smaller films could still move up, but most films will likely stay where they are. In all, I don’t feel confident predicting specific moves because there are too many variables.

But I am confident that the vaccine roll out will change things.

Part 2: The vaccine roll out continues to reinforce my “reopening hypothesis”

In case you haven’t read my very, very long article forecasting reopening of society, here’s my core thesis on reopening in America:

If current lockdowns can drive down cases…
Which will drive down hospitalizations/deaths…
While the United States is vaccinating the highest-risk groups…
And if the pace of vaccination is increasing…
Since vaccines prevent deaths and hospitalization…

Then once we get the current hospitalization rate down, it will stay down until the next flu season (next November or December). If hospitalizations are down, deaths will stay down as well.

This will allow states to reopen, including theaters.

Let’s go part by part, rating each part of the thesis with a “more confident”, “less confident” or “neutral” status.

Current lockdowns are driving down cases → Neutral

This was trending towards strengthening until a few states ended mask and indoor mandates this week. Through February and into March, cases have continued to drop in Los Angeles and America broadly. Most experts believe we should avoid indoor activities with unvaccinated people, especially at full capacity, for a few more weeks to fully drive the number of cases downward. (This does not apply to outdoor activity.) But ending mandates could reverse the progress so far. Thus, it’s tough to predict that cases will continue declining as fast as they have. (We are also seeing a decline in testing, which we need to stay flat to catch as many cases of community spread as possible.)

Hospitalizations and deaths are declining → Strengthened.

Deaths have always lagged cases and hospitalizations. Both of which are still higher than our previous lows, but declining week-over-week. Crucially, where the initial and summer waves were concentrated by regions, the winter wave was a national event, so each region is arguably doing better than the previous waves. Also, while some visualizations showed spikes in death’s last week, this was actually bittersweet news. Deaths have declined so much that big states can review and update their mortality figures, like Texas, Virginia, Los Angeles, for example. In other words, the peak in fatalities in December and January was even higher than we realized at the time, but that means the current death toll is lower than the figures indicate.

Vaccinating the highest risk groups → Strengthened

The CDC tracks vaccinations by age, and the most vulnerable groups are the most vaccinated. There are hurdles, especially in underserved communities, but we are vaccinating older populations who are most at risk:

Screen Shot 2021-03-05 at 12.36.18 PM

Continue to increase vaccine distributions → Strengthened.

A week ago, a winter storm essentially slowed down all US vaccinations. That would have kept this rating at neutral last week.

But we’ve rebounded. We’ve almost returned to the linear growth we were at before the winter freeze. With Johnson & Johnson being approved and essentially a double dose of vaccines coming last week, America could, tentatively, pass the 3 million vaccinations per day threshold next week or the week after, having passed the 2 million threshold this week. 

Screen Shot 2021-03-05 at 12.38.01 PM

Vaccinations prevent deaths and hospitalizations –> Strengthened. 

All the data–which is becoming voluminous–indicates that vaccinations prevent deaths in high risk age groups, vaccine efficacy begins within 2 weeks of the first dose, and that vaccines prevent transmission. I can’t undersell just how well the vaccines work and how being vaccinated will allow people to return to normal life. This isn’t a selective reading of the data: there are mountains of evidence now that the vaccines are incredibly effective.

Add It Up: We’re on track to “return to normal” in the springtime

There are too many variables to put a specific month or week date on it, but the trendlines are growing. As I mentioned before, the main driver or reopenings will likely be the decline in the death rate.  If deaths go down, and stay down, even if cases rise later, society won’t return to lockdowns. 

Consider it like this: even if cases peaked at the same height as they did in the winter, the peak in deaths will likely be 44% lower, because 55% of the population who are age 65 and older are now vaccinated. 

Screen Shot 2021-03-05 at 1.27.01 PM

If we continue to vaccinate the 65+ group–and those aged 50-65–then the peak in deaths will be even lower. This is where we are as of this moment…in two weeks the deaths prevented will be even higher.

The other reopening criteria concerns the state and local guidelines. The news this week was that New York had lowered its case level to a point where theaters could reopen. San Francisco as well. This leaves Los Angeles as the holdout. According to California’s metrics, Los Angeles was at a “7.2 adjusted case load” and it needs to be below 7 for two weeks to reopen theaters at 25% capacity. If cases continue on their current trends in Los Angeles–a huge if–they’ll join SF and NY soon. 

Other Theatrical Stories – Tenet Finally Premieres in New York

Frankly, I wasn’t looking forward to my first film in theaters being Godzilla vs King Kong. But Tenet? Oh yeah, I’m down for that! Theaters in Los Angeles, San Francisco, New York and other big cities may have a surprising amount of inventory, which wouldn’t have been the case back in the fall, and this could help both theaters and studios confidently reopen.

Other Theatrical Stories – Alamo Drafthouse Bankruptcy

To finish on another depressing note, a theater chain has been claimed by the pandemic. Alamo Drafthouse declared bankruptcy, while expressing optimism for the rebound in customer demand. This filing may be more of a legal maneuver, as the chain says they will be able to continue operations, just with new financing/ownership. Still, they did have to declare bankruptcy.

Other Contenders for Most Important Story

Kevin Mayer Joins DAZN Sports Streamer

It didn’t take long for Kevin Mayer to end up at another streamer. After leaving Disney for Tiktok, then leaving in a political brouhaha, Mayer has ended up as chairman of DAZN, the sports streamer trying to vie with ESPN and FuboTV for future sports streaming glory. This is a fine move, but I would note that Mayer is known for deal-making–that was his key role at Disney–and this likely increases the odds that DAZN is involved in future deals, either acquiring or being acquired. (Given its size, I’d guess the latter.)

BBC/ITV/Channel Four May Team Up..and That’s Smart

A few weeks back, I stumbled on this fun look at European TV revenue from one of my favorite analyst groups, Ampere Analysis:


The size of Netflix’s revenue growth is impressive, though in context it’s smaller than I would have guessed. (And I’d guess many others think it’s higher, given huge headlines like the one above.) But those revenue numbers can explain this fun story that British broadcasters are merging their free to view applications. Something along the lines of the enemy of my enemy is my friend, but it could be a compelling offering for customers. 

Ion TV/Scripps is a Masterclass in Strategy

I respect great strategy, and Scripps (with some private equity help) show us how it’s done. (Not that there is a lot to love with PE, but they can make sharp business moves.) In this case, Scripps sold it’s channels to Discovery at nearly the height of their value. Now, Scripps is going to launch new cable channels through Ion TV because American rules state that cable providers must carry broadcast channels, with certain restrictions. Toss in the ability to sell linear channels to the FASTs in their boom, and this just smart strategy. 

Twitter’s Publishing Moves

I write long threads on Twitter, and now Twitter is constantly letting me know that they have a newsletter product. That and everyone is worked up that folks may start charging for access to tweets. Frankly, everyone is charging for content nowadays so this isn’t surprising. But will it work? I’m less sure. For as influential as Twitter is, most Americans don’t consume their news through it and those who do usually soon feel like it’s bad for them. (I certainly do.) But given that their advertising revenue just isn’t cutting it, this move makes sense.

Apple TV Comes to Google Chromecast

Another round in the “distribution” wars, this time with Apple TV coming to Google’s Chromecast, which is a phrase that would have made no sense ten years ago. It makes crucial sense for Apple. Most folks have Apple devices of some sort, but they don’t necessarily watch TV through Apple. So getting more distribution for their app make will help justify the content investments.

Is Paramount Plus “Focused” on Winning? – The Most Important Story of the Week: 26-Feb-21

Sometimes, I can only fight it so much. As much as I want to pivot and pick a unique story from every other analyst, sometimes I just can’t. The top story is what it is. Yes, every columnist wrote about Paramount Plus investor presentation this week. But it really was the story of the week.

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Most Important Story of the Week – Paramount Plus Is a Focused Strategy, But Is It Focused Enough?

Part of me is sympathetic to ViacomCBS. Their executives read the news coverage as much as anyone else and all they see is analysts calling them out for not going all in on streaming. Then, when they try to go all in on streaming, as they did this week, those same analysts call them out for being too late or not doing it right.

They just can’t win.

Of course, if you get that much criticism, some of it is likely warranted. ViacomCBS has been far from perfect, starting with that merged name. But they’ve been undervalued for so long they’re probably overvalued now. First, CBS is dismissed by observers because, frankly, they make shows for the part of the country that isn’t online. Second, I think their brands have more value than they’re given credit for. Third, between Showtime, CBS and Viacom, their library assets are strong. Fourth, Pluto really does seem to be killing it.

I can synthesize these two differing viewpoints down to this one word:


A good strategy, as strategy guru/UCLA Anderson professor Richard Rumelt describes it, is “focused strategy”. If you want to know the genius of Netflix over the last twelve years, it is that they were insanely focused on streaming.

Focus is also usually how disruptors beat incumbents. The incumbent has legacy businesses to protect. Sometimes–like with cable channels–those legacy businesses make lots and lots of money. Getting rid of that cash flow usually isn’t wise. So the legacy business will half-heartedly start a second business unit to mimic the disruptor. That means a company will have two different businesses competing with each other. By definition, that strategy isn’t focused. The genius of Disney under Iger was how swiftly he executed the pivot to streaming once he decided to do it. That was a focused strategy.

ViacomCBS has not been focused, even since the merger. While the announced a renewed focus on streaming, by planning to put all their Viacom assets onto CBS All-Access, they turned around and sold many of their current top series to other streamers. Like Yellowstone or Spongebob Squarepants. And Showtime is still lingering out there as it’s own streamer. Add to that Shari Redstone’s comments that they aren’t focused only on streaming and it’s not crazy to conclude that, yeah, they still don’t have a focused strategy.

But–and this is key–isn’t Paramount Plus their most focused strategy decision to date? They’ll be putting nearly all their best content into that streamer. Sure, they’ll still have two or three different streamers–Paramount Plus for subscription, maybe Showtime still, and Pluto TV for AVOD viewing–but the whole company is mostly behind them. In other words, they’re more focused than they ever have been. True, they aren’t winding down their cable and broadcast channels, hence Redstone’s comments about being a content company, but those businesses make billions each year. It’s one thing to be disrupted; it’s another to destroy legitimate cash flows too soon.

So that’s the “focus” part, but is this a “strategy”? Simply getting into streaming isn’t enough. Streaming is just a technology. Strategy is having a business plan to win.

Streamers need focus, but importantly they need to focus on a strategy. The successful streamers have had focused strategies leveraging their strengths. Disney is a house of uber popular brands, and Disney+ reflects that. Discovery Plus is the type of reality shows that, again, Hollywood chattering classes don’t watch. (Or do, but won’t say so on Twitter.) Peacock’s focus is on every part of TV that isn’t scripted. Those are all strategies I like.

My gut is that Viacom CBS is realizing that their streamer needs to be the scripted version of Discovery Plus. The home for the type of shows that made CBS the most watched network in the 2000s. Whether they have enough content or whether they can avoid the shiny objects of prestige TV, but at least they could have a strategy. And if that doesn’t work, just having the NFL could be enough. (Seriously, if ESPN+, Peacock and Paramount Plus end up as the future homes of the NFL, that’s a lot of guaranteed subscribers in the US.)

Overall, Viacom CBS is far from Disney or NBC Universal when it comes to showmanship in an investor day presentation. But that doesn’t matter for customers. (And an investor presentation is notably not for customers.) What matters is whether a company has a unique value proposition they can market to customers. I’d argue ViacomCBS is more focused on their strategy than they ever have been with the Paramount+ rebrand. I still wouldn’t put it in the same tier as the other streamers I just mentioned, but it’s better than it has been.

(Last point: the dunking on the choice of a name just needs to stop. Paramount is a much bigger brand outside the US than any option Viacom CBS had. Clearly they have global aspirations–which most of the dunking analysts also claim to want–and want a brand name that can deliver that. Meanwhile, the Paramount logo is still recognized in the US. Lastly, it doesn’t matter. 20 years ago, Netflix and Amazon weren’t brands. Now they are. Brands and name changes can come and go easily.)

Data of the Week – Discovery+ Gets To 11 Million Subscribers Worldwide

I’ve avoided setting projections for each streamer’s launch, because the error bars in those projections are huge. (Indeed, those who did project subscriber estimates for Disney+–especially the Disney bears–were off by tens of millions. That should dissuade any of us from making estimates!) However, I doubt I would have predicted that Discovery+ would get to 11 million subscribers in less than two months. 

When I update my “estimates of US subscribers” for the end of 2020 (coming soon!) Discovery Plus will be on the borderline between the tier 2 streamers (20-50 million subscribers) and the bottom tier. If they can double this number in their first year, they will be well on their way to establishing a foothold in the streaming wars. Notably, this is a worldwide figure, so parsing out the US totals will still require some guess work.

Other Contenders for Most Important Story

Direct TV spin off

AT&T is spinning off DirecTV to raise money to both pay down debt and buy wireless spectrum. The new venture will be 30% owned by private equity firm TPG. AT&T has long been looking to offset the disastrous DirecTV acquisition, so this isn’t a huge surprise and AT&T will still have a majority stake in the new venture. Long term, I don’t see this changing their priorities in streaming or cellular much.

The FCC’s Wireless Spectrum Auctions

I won’t pretend to be an expert on wireless spectrum, but the other big news from the week was that the FCC held an auction for additional “spectrum” that is needed for 5G. Verizon bought the most licenses in the new “c-band”, which is crucial for 5G. Overall, the spectrum set records for the FCC, indicating the high value of 5G for the cellular companies.

Disney+ Acquiring Licensed Series Globally

In the kids front–read my take on that from last week–Disney+ has acquired the streaming rights for two different series. Even Disney can’t produce everything they need for streaming. (Hat tip Emily Horgan.)

M&A – Vivendi Plans an IPO for Universal Music

With the fierce competition in music streaming from all the big tech companies and Spotify, music catalogues have seen their values rise considerably. As such, Vivendi is actually spinning out Universal Music Group into its own company. I’ll be curious how long it lasts as its own entity before getting purchased by some other player.

Lots of News with No News – NFL’s Next Round of Contracts

There have been lots of headlines about potential prices for the next round of NFL media rights deals. But very little facts. Let’s wait until this story finishes, then we can write about the implications. 

Kids Programming is “Easy Strategy” – Most Important Story of the Week – 19-Feb-21

Last week got away from me. Fine, I got away from it by diving down a data hole. Specifically, a Covid-19 data problem. For all the forecasting being done, few people are answering the query, “Hey, when will all this end?” I’ve seen answers ranging from “Never” to “2022” to “maybe a few weeks”. Hence I dove deep into the data to make my own guess, especially as it relates to theaters. Check it out here.

It was a good week to be distracted, since the week felt light on big news. (Unlike this week, which is already trending upwards in big stories.) The most consequential story was actually spread out between a few different streamers, who all announced new forays into producing kids programming.

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Most Important Story of the Week – Why Every Streamer is Investing in Kids Programming

Take a gander at these headlines:

“Apple/Skydance Animation Set Multi-Year Feature & TV Deal”
“Warner Media Kids Debut Cartoonito Preschool Programming Block”
“Youtube Announces 2021 Slate of More than 30 Kids Originals”
“Netflix Plans Six Animated Feature Films Per Year”

That’s a lot of kids content. And with it a lot of hyperbolic headlines and coverage. Kids content is a key part of the streaming wars, but it deserves more nuance than most coverage provides.

Consider an actual war. Many battles are important, but they aren’t all equally important. In the Civil War–since I use too many World War II analogies–the main event was the Army of the Potomac fighting the Confederate Army of Northern Virginia. That’s the adult content battlefield. The main event. The showdown that truly decided the war. But the campaigns to retake the Mississippi River, Sherman’s March through Georgia and the naval blockade of the South were all crucial to winning the war as well. All were important, but none were the main event.

Why Kids Content is a Pinch Overrated

Often, explanations for why a company gets into kids programming is treated as obvious. As if it’s a no-brainer decision that every streamer is right to pursue it. I don’t buy that for a few reasons that don’t get nearly as much press:

– First, there are way less kids than adults. This seems obvious, and yet it’s worth pointing out to make it explicit. Given that I just pulled a bunch of demographic data, it’s worth reminding everyone that these are the number of kids in America. In other words, if the “total addressable market” for adult TV in the United States is 130 million households, by definition the market for kids is a fraction of that. If you target preschoolers–5 and under–then your market is, by definition, 6% as large as the entire US viewing market.


– Second, licensed consumer products (toys, shirts, what not) aren’t as lucrative as some casual observations make it seem. In the past, I’ve said that on average they make up 5-10% of a film’s total revenue. Further, it’s not like licensed products are a growth industry. If anything it’s the opposite. There are a few factors driving this, from Disney’s dominance on one end to consolidation in sellers (Amazon, Walmart and Target) on the other to disruption by digital in the middle. In all, yes, if you have a Spongebob, Mickey Mouse or Peppa Pig, you can generate billions in retail sales, of which you keep 5%. But if you aren’t in that top tier, you make much, much less. Toy sales alone cannot justify kids programming.

– Third, competition is fierce, as the headlines suggest. There are a lot of folks competing for a limited number of kids eyeballs.

– Fourth, replacements for TV are legion, from video games to social media, which makes it even harder to compete.

Add those four variables up, and it doesn’t scream out that kids content is a business you want to be in. It seems as competitive as adult competition, with only marginally better upside. Using Porter’s Five Forces analysis, arguably every variable is against you. It’s easy for competitors to enter, the competition is fierce within the field, sellers of toys offer poor margins, and there are lots of replacements to kids TV competing with you as well!

As a result, we probably have too many firms competing for kids’ attention right now. There is an old saw that there are always six major film studios. They may change names, but there are always six. (I’ve been meaning to write an article on this since I launched.) Well, given the smaller market size, then I’d say there are only 3-4 major kids content producers. In the 1980s, this was Disney with the three broadcast channels. By the 1990s to 2000s, this shifted to Disney/Dreamworks in movies and Disney Channel, Nickelodeon and Cartoon Network. (PBS also has had a place for preschoolers. Again, it’s complicated.) As streaming took kids attention, this has shifted to Disney, Universal (Dreamworks/Illumination), Netflix and Youtube.

Can HBO Max, Viacom CBS, Prime Video and Apple all break/rebreak into that and succeed? Probably not.

Why Kids Content is Valuable

Still, I’ve presented a bit of a conundrum. Clearly kids content is a tough biz to be in, yet everyone wants in! What do they see that I don’t?

Going back to the Five Forces, it’s not an insurmountably tough business to be in. In technical terms, the barriers to entry are low, especially once you’ve set up a streamer. The marginal costs of adding kids programming to general entertainment is fairly low, once you’ve set up a streamer in the first place. Animation tends to be much cheaper than producing full-episodes of live-action television. Moreover, kids, especially preschoolers, don’t know what legacy brands are. Except for Mickey Mouse, new preschool brands can and do break it. Just look at Peppa Pig.

And if it works, it’s sticky. Sure, kids are a small population, but they’re influential to their parent’s decision-making process. If kids want the content, and the content passes the parental approval test, it can be very sticky. The kids who watched Frozen every week weren’t going to just stop watching it when it left Netflix.

However, if I’m being cynical–and if you’ve read me for any length of time you know I am–then partly it’s an easy strategy. Which isn’t “good strategy”. Easy strategy is when there is an opportunity in front of a company and they take it simply because they can. It can sometimes allow business leaders to “empire build” as well. Going into kids programming lets you hire a brand new direct report and team of people. That’s easy strategy, like mergers & acquisitions or getting into original content.

Who Will Win The Kids Space?

Not everyone can win in kids programming. There are only so many preschoolers and elementary schoolers to bring into your ecosystem to justify the costs. Some folks will quietly dial back their investment. Indeed, some streamers seem to have realized there is already so much kids programming out there–and again kids don’t need new content to be satisfied–that you can rent all the programming you need, instead of making originals.

Still, if you do want to win, I have two (fairly obvious) recommendations. First, building a defined brand really is a differentiator. Disney has this. Netflix does too. Quietly PBS also has one of the stronger brands (and fairly high viewership on mobile devices). Even those brands need constant renewal to stay fresh. Nickelodeon lost brand equity rapidly in the last decade. But a brand is valuable.

The second way is to make hits. It seems obvious, but sometimes the best strategy is obvious. Disney is “Disney” because of three immensely lucrative time periods, driven by three innovative development executives: Walt Disney in the 1930s and 1960s, Frank G. Wells in the 1980s and John Lasseter from the 2000s. John Lasseter, the creative force behind Pixar before he was fired and then hired by Skydance, just signed the big deal with Apple. Indeed, of all the headlines above, the Apple/Skydance partnership interest me the most.

If I had one overwhelming recommendation for everyone except Disney, really, it would be to not just produce kids content or have kids content, but to have a kids strategy. This battlefield will be fierce coming up, and simply dabbling in it won’t be enough.

Entertainment Strategy Guy Update/Lots of News with No News – Roku’s Push Into Originals?

Based on one job opening, the speculation mill was unleashed last week that Roku may be starting a big push into “Originals”. Like I said, originals are an “easy strategy”.

When they announced earnings, Roku splashed cold water on this idea. Likely they are evaluating originals as a space to be in. There is a great reason to make original content, but just as good of a reason to skip it altogether. Let’s explain each:

The Best Reason for Roku to Make Originals: To Sell Targeted Advertising

One of the profit drivers over at Roku has been The Roku Channel, which is their version of an advertising streamer. (Either AVOD or FAST, whichever acronym you prefer.) Unlike other FASTs, the genius of Roku’s platform is that they can sell advertising targeted to any streaming service’s customers. Think of it like this, you’re an advertiser. You want to sell ads to folks who watch The Queen’s Gambit. With Roku, you can do that, since Roku knows everything a customer watches.

This is why Roku is so insistent that they get advertising share for any ad-supported service on their platform. Because they can charge higher CPMs (cost per thousand) to advertisers with this unique targeting. (This demand notably held up Peacock and HBO Max launches. Amazon demands something similar.)

Of course, this genius system only works if customers aren’t watching Netflix. Which is where the free Roku Channel comes in. It’s basically a vehicle for Roku to sell extra, highly targeted ads. But it only works if folks are watching it. Hence, the need for programming. Mostly, this has been library programming.

This is where original programming could (big tentative could) come in. If the higher CPMs provide a true edge, Roku can outbid for AVOD programming since it will have higher margins. Hypothetically this could even include original content. Except…

The Best Reason for Roku NOT to Make Originals: They are limited by distribution.

Every so often some cable, satellite, cellular or device maker contemplates getting into the originals game. The logic goes: if originals work at driving customer acquisition, and since our customers are really valuable, maybe we should make originals. Think AT&T Originals, Spectrum Originals, Verizon’s Go 90 and Microsoft Studios. In the end, they all get shut down.

Why? Because unlike a streamer, who is available in at least 90% of connected households, devices and MVPDs are not as widely available. A simple thought exercise shows why. If someone wants to watch The Mandalorian, they can find a way to download Disney+ to their iPad, iPhone or connected TV. Then they can watch. Literally, almost anyone in America with broadband. On the contrary: if you didn’t live in an area with Spectrum cable, you couldn’t watch the Mad About You reboot. (Yes, they rebooted that.)

In other words, a device-based original has an upside directly tied to the market share of its device. As big as Roku is in connected devices, it’s far from a monopoly. Roku is only 30% of connected device sales in the US. If you factor in the folks not watching streaming at all, those on mobile devices, and those with connected TV sets not using Roku’s operating system, then the vast majority of TV viewing is not on Roku. That’s always going to limit Roku’s upside in producing originals, since their distribution footprint is that much smaller.

That will be the key element in whether or not Roku does get into originals: The trade off between reduced distribution (which will constrain costs) and higher CPMs with targeted ads (which could boost revenue). We’ll see which side wins out.

Other Contenders for Most Important Story

Theaters: China’s Big Theater Weekend

An Avengers: Endgame milestone–albeit a slightly obscure one–was taken down last weekend. Detective Chinatown 3 launched in China and surpassed Endgame as the biggest single country opening weekend of all time. In other words, theaters are back! (in China)

By the way, if you missed it Soul as well did really well in China too.

Streaming: Disney+ Launching First European Originals

Given that all the major streamers are US-owned (mainly), there was a concern in Europe that local productions would begin to be overtaken by foreing content. So the EU passed a law mandating that streamers would need to have a minimum amount of locally produced content available. Thus Disney+ is staying in line with this law by releasing European produced originals.

I do love the one potential ramification of this law, which is that if every country around the world passed a similar law, it would basically end global originals. If 30% of your content has to be European in Europe, and 30% has to be Brazilian in Brazil, and 30% has to be Indonesian in Indonesia (the last two are hypothetical), then Netflix would only have 10% of their content left to make for global originals! Obviously, they wouldn’t do that, but by definition a market quota will inhibit truly global footprints.

Another Aggregator Leaves Another Bundler – Explaining ViacomCBS Ending Their Apple TV Bundle – Most Important Story of the Week – 12 Feb 21

The goal this week? Keep this column under 2,000 words and not split into two parts. Can we do it? Sure. Even better? We can do it with a story most folked missed! The only challenge will be restraining myself on Covid-19 thoughts. Let’s get to it.

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Most Important Story of the Week – ViacomCBS ends their Apple Bundle

The news, reported by 9-5 Mac, is that the first Apple bundle (CBS All-Access and Showtime for $10 if you have Apple TV+) is no longer being offered by Apple. When this deal was first announced, I hailed it–fine, hailed is too strong, but noted–that this was the second bundle after the Disney only bundle. 

At the time, though, I still had worries/concerns. Frankly, could Apple TV+ drive enough new subscribers to offset the huge discount offered? And who was paying for the clearly massive discount offered? And would CBS ever learn they needed to control the customer experience?

Well, my skepticism was warranted. The CBS bundle on Apple TV is already over.

And it died because ViacomCBS knows it needs its streamer to thrive outside of the bundle.

I’ve been pushing this thesis since 2019. While most coverage focuses on the war between streamers, the bigger battle is between the streamers and the device owners. For those who haven’t read my big take on this, take a gander at this map:


Aggregators are anyone aggregating content for customers. The steamers are included (like Netflix, HBO Max, Peacock, Prime Video, Disney+, et al) but so are the FASTs (like Pluto TV and Tubi). But using this language, old fashioned cable channels are aggregators of content and so are virtual channels. These are the folks aggregating a curated selection of content, usually tied to some brand.

So what’s the difference between an aggregator and bundler? Well, the bundler offers you the bundle of aggregators. This could be a cable channel or, in the digital sphere, the device or operating system that is bundling streamers for you. Roku, Amazon, Apple, and Google all want to bundle experiences for you. I’ve speculated that Comcast does too.

This the Holy Grail for bundlers: move just upstream from all the streamers to take over the user experience, data, payments, you name it, from the streamers. With that power ultimately comes the profit maximizing position too. 

Indeed, if you want to know the downside for Netflix in a nutshell, it’s this thesis. If customers ultimately have to have more than one streamer, they’ll want one experience for all their content. If Netflix loses their UX, data and content advantage–if another bundler essentially takes over as the brand–then they’ll no longer have pricing power and the whole “flywheel” collapses into, well, whatever a broken apart flywheel looks like. But that’s the risk. Right now, Netflix controls the whole customer experience and owns the “TV Habit” for many people. Bundlers want that control, and some have hundreds of billions to spend in this mission.

Hence, the streamers are fighting like hell to keep everything separate. Understanding this battle explains quite a bit of the positioning of the streaming wars:

HBO Max didn’t do deals with Roku and Amazon Fire TV until it could control the UX and where their content was played in their application. They also wanted access to customer data.
– Netflix was touted as being a part of Google’s new Chromecast, but Netflix pulled its content from Google’s front page.
– Peacock still hasn’t come to terms with FireTV. (I’ve speculated Comcast would like to be a bundler too with their Flex operating system/device.)

The Paramount+ launch gives SuperCBS the opportunity to abandon the poor Apple TV+ decision. Likely Apple underwrote the cost, but the deal didn’t have the promised returns. Given that Apple TV+ was a small part of CBS’ total subscriber base, this is likely a fine move:


And frankly this is the right strategy for any streamer of a certain size. While likely the bundlers will eventually win, the top tier streamers need to fight as hard as they can to control the experience. The combined ViacomCBS streamers are just big enough in the US to compete, as long as they don’t make any more strategic mistakes. (My rule of thumb is traditional studios have the libraries to compete; the viability threshold is likely getting to 40 million or so US subscribers. Anything smaller will likely get sucked up into bundlers.)

Interestingly, while many media observers hate on bundles, customers love bundles. Both the 9-to-5 Mac story and the Google Chromecast story feature complaints that the Apple or Google bundle are better than being bounced around to several apps. The unified experience is just objectively better for customers, but it’s also much worse for streamers. 

Thus the next few years will be a battle between bundlers and aggregators, with bundlers offering a better product, but streamers fighting like hell to stop it. It will be fascinating to see who wins.

Entertainment Strategy Guy Update – When Will Movies Return?

Like clockwork, it’s another Friday and there is a Variety article asking, “When do F9 and Black Widow move dates?” The crazy thing is the Variety article isn’ tasking “if” they will move, but “when”. Given that since last March, the story has only been one of moving release dates, on one hand, it makes sense they’d move dates again. 

But is this math still right?

A way to consider this is like a regression equation. You take a bunch of data, and test to see if it’s correlated with something you want to predict. In this case, there have been a lot of Covid cases in the US. These cases kept theaters closed. There are currently lots of cases in the US. Therefore, extrapolating out, theaters will stay closed. (Indeed, Variety says “under current circumstances” theaters are nowhere near max capacity. Will current circumstances be the same as future circumstances?)

This math only works, though, if all the drivers of Covid-19 cases stay the same. To use the legalese boilerplate for investment advice, past returns may not be predictive of future performance!

And right now the biggest new variable is the number of folks getting vaccinated every day. The most important fact in vaccinations that–while every article written has to obligatorily mention they are not high enough–vaccinations are steadily growing every week. 

Screen Shot 2021-02-12 at 12.16.25 PM

Pair this with a big drop in cases, hospitalizations and (given the two to three week lag) deaths, then the key question is whether these trends–closed theaters in particular–will still be true in May. Yes, 9 months is a long way away. 

Specifically, May 7th, the tentative launch of Black Widow. A date that is both closer to and farther away than it seems. If Disney wants six weeks of promotional activity, they need to start advertising by the end of March. That’s not long! On the other hand, we still have almost three full months to vaccinate folks and open theaters. 

Which is why I listened closely to Bob Chapek on Diseny’s earnings call. He echoed Dr. Anthony Fauci in anticipating that the general population could be vaccinated as early as April. Indeed, only two weeks ago Fauci wasn’t anticipating that the general US population would be vaccinated until mid-summer. That’s because the current administration is absolutely under-promising so they can over-deliver. In Fauci’s case, he said, “If current vaccination rates hold, we won’t be vaccinating general population until the summer.” But, as he surely knew, vaccination rates were not holding. They’re growing every week! Again, over-delivering on under-promising.

If the general population is getting vaccinated, and presumably all the high risk groups have been vaccinated, then it seems fairly reasonable that deaths will be very low by May, meaning theaters could reopen in New York, Los Angeles and other big cities. 

But will they? And if not, does Black Widow move back again? 

Honestly, I would still bet on that. It’s easier to assume studios will be more risk averse than not. They want a guarantee of theatrical revenue. Or does Disney won’t move Black Widow, but add the “Premium Access Window”. Any and all of those options are on the table.

But part of me is much more optimistic than the coverage I’m reading. We could be fully-open by May, and most folks aren’t ready for that level of positivity yet. Maybe not concerts and sporting events, but indoor activities? Potentially.

Let me be honest, this is my second attempt to write this section. The first version went for 1,600 words and included my scenarios for Covid-19 cases and deaths in the US. So it got cut for space. But when I run the math, especially looking at the growth in vaccination rates, I’m much more optimistic than the news coverage.

Other Contenders for Most Important Story

Sundance Sets Another Record Sale at $25 million

It’s unclear to me if this means the whole market is healthy, but my gut is that the ongoing need for content by the streamers will likely make the virtual Sundance a success. It seems like quite a few films have sold, but we don’t have holistic data on sales at Sundance year-to-year. As I wrote on Linked-In before, basically one or two deep pocketed buyers can make the market, and Apple TV+ is playing that role this year

Cinemascore Will Update Their Measurement for Streaming

Cinemascore provides one of the better qualitative measurements of a film’s performance by customers. So I like using it when I can. Of course, streaming and lockdowns make it much harder to poll audiences leaving a theater, so they’ll have to adapt. They claim to have a plan for that, which could be great additional data at our disposal. Hat tip to Sonny Bunch for finding.

HBO Max News: Launching in Latin America and More Animation

HBO Max is preparing for its first international roll out, starting with Latin America. From what I understand, HBO as a brand is already strong in that region, and given the language similarities it can be easier to launch. As such, this move makes sense and it will be fascinating to see if HBO Max can drive a similar boost in global subscribers as Disney+.

Meanwhile, given the pandemic lock down, HBO Max will be filling a lot of their future pipeline with animated content. Hat tip to Lesley Goldberg for the deep read on this.

Disney+ Keeps Growing

With Disney’s earnings report, we should have all of our contenders for US subscriber counts updated. I’ll do that in a future article. However, for now, we can say that Disney continues to drive big customer growth via Disney+, with slower growth by ESPN+ and Hulu. Currently, Disney is over 94.9 million customers for Disney+ globally, which is frankly huge. They added 8 million folks in the last month. Also, it turns out that the skeptics who thought the Verizon free deal was terrible for Disney+ and would lead to huge subscriber churn were, frankly, wrong.

Lots of News with No News – Warner Bros and NBC-Universal Vague Merger Speculation

Let me be blunt: mergers are not a strategy.

Mergers can be part of a strategy, but they are not strategy in and of themselves. What they are, though, is easy. And flashy. So lots of folks love to speculate about who could buy whom and for how much.

Frankly, this is easier than doing real strategy, which is understanding your company’s strengths and weaknesses, understanding the marketplace, understanding customers and developing products and businesses to deliver on a value proposition. That all takes work! Instead, we could just buy our competitors.

The latest edition of this is the simplistic idea floating around that either Comcast or AT&T should buy the content arm of the other or both spin them off or something.


Right now, both Peacock and HBO Max are executing genuine strategies. (I like Peacock’s more, but both have strategies.) Merging entities is the easy–and usually poor–version of strategy. Indeed, aren’t Comcast and AT&T both living examples of merger-as-strategy gone wrong?

Earnings Reports Galore – Other Contenders for the Story of the Week – 5 Feb 21

Last week’s news was notable for how much “lots of news with no news” that came across my inbox.  In other words, part of me thinks that following the news closely last week probably resulted in more misunderstanding than wisdom. Which we’ll get to, but first a few companies reported quarterly or annual earnings recently with some genuine news, and we’ll run through the highlights.

(Catch my most important story of the week–Jeff Bezos stepping down as CEO–here.)

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Other Contenders for Most Important Story – Earnings Galore

The general theme of earnings continues to be that big tech is making oodles and oodles of billions. How much of that comes from video? Well we haven’t the foggiest, except for one company…


As advertising revenue has rebounded from the Q2 Covid dip, Google has benefited. They control half of the internet advertising market, and returning ad dollars have gone digital. Notably for entertainment, Youtube drove huge growth in the fourth quarter. For all our focus on the subscription streaming wars, Google’s lead in the advertising streaming wars is considerable. (And I think more sustainable than Netflix’s streaming lead.)

Also, since I didn’t mention it last earnings season, Youtube TV is up to 3 million paid subscribers, even after raising prices, up from 2.2 million last February. Also, the number of Youtube Music/Premium subscribers grew from 20 million to 30 million.


Lionsgate is notable for being one of the most upfront entertainment companies in terms of their overall performance in the streaming wars. Specifically, they release their actual subscribers, for both linear and OTT for Starz. The story there is that growth in linear is flat (not surprising), while OTT grew from 9.2 million subs to 9.5 (which is fine). The rest of Lionsgate suffered from, you guessed it, the pandemic. Overall, Starz on its own probably isn’t big enough to survive the streaming wars. But at least they provide subscriber numbers!


The headline is that Peacock grew its sign-ups from 22 million, as of the last earnings report, to 33 million. They still haven’t reported actual paying subscribers, though even if they did it would be fairly complicated to unpack, sort of like HBO’s confusing org chart of definitions. This doesn’t bother me as much as it bothers some others. As long as they keep their definitions the same–and keep reporting them–we can monitor their growth. In that sense, the growth seems roughly on the same path as Disney. It’s just less valuable growth. (Paying subscribers are much more valuable than “sign-ups”. If Disney+ were free who knows how many sign-ups they’d have!)

Outside of Peacock, the NBC-Universal story was one of losses–like other studios–because theaters and theme parks are still closed. Clearly, a VOD-only window won’t be enough to offset the revenue theaters provided. Meanwhile, while Comcast lost video subscribers for the year, it grew it’s broadband subscriber base overall. (Interestingly, Charter reported that its video subscriber growth was flat in the last year.)


The Netflix of music also had a great year for subscriber growth. Running the Netflix playbook in music, they added tons of users/subscribers, but are only just eking by profit/cash flow. One difference is that Spotify’s profit accounting is much closer to their cash flow. Of that cash flow, for 155 million users, Spotify lost $74 million Euros. Which isn’t the world’s largest deficit financing, but they still seem some ways away from making huge cash flows. And if anything competition in music is even tougher than the streaming wars.

(Fierce Video has a great running story of all earnings if you want to dig deeper.)

Lots of News with No News

Apple and Amazon Earnings

As for Apple and Amazon? They continue to impress by their ability to spend billions on content, but provide next to nothing in terms of performance.

The Golden Globes

To steal a thought from Richard Rushfield, we’re really going to pretend to give out awards to movies when we had a year without movies? 

TV awards are a bit more reasonable since everyone was streaming everything. However, I still don’t put stock in awards as a signifier of business trends, which makes me fairly unique among the entertainment observer class. When the body of voters is small and easily targeted–read into that what you will–awards say more about the willingness to spend than the quality of the underlying shows.

Did Advertisers Pull Out of the Super Bowl?

When I saw the initial “Advertisers pull out from the Super Bowl” headlines, this was trending to be my story for the week. A Super Bowl with Coca Cola? Pepsi? And Budweiser? What’s happening?

Well, reading past the headline, I found out that while “Budweiser” wasn’t advertising in the Super Bowl, “Bud Light” was. Which felt like a distinction without difference. And then Pepsi still sponsored the half-time show, so it’s not like they abandoned it completely. Really, only Coca Cola was missing. Meanwhile, ads still still went for $5.5 million per spot, up from $4.4 million as of 2016. And CBS sold out all their spots (while selling quite a few to themselves, see next section). 

As an explanation, some commentators speculated that brands were potentially wary about the “national mood” and how comedy would play. To which I say: hogwash. The funny ads in the Super Bowl did just fine. In fact, if your marketing consultants told you something had fundamentally changed in the last year, well they were probably wrong. When in doubt, things change much slower than we usually think, and that goes for funny commercials. In all, this was lots of news with little news.

(Bonus forecast lots of news with no news: There will be the usual gnashing of teeth over Super Bowl ratings. Don’t listen to it, either good or bad. One data point is not a trend and has huge variance.)

Paramount+ Super Bowl Ad Campaign

The joys of synergy meant CBS aired a lot of ads for Paramount+ during the Super Bowl. I’d caution folks from taking too much away from any one ad or campaign spot–I still remember forecasts that Disney+ wasn’t resonating with Americans based on their ads–because your personal opinion usually doesn’t represent America. 

Though we can take away this: ViacomCBS finally seems to be “all in” on streaming if advertising spend is the metric to judge.

Data of the Week – We Reached Peak TV!

The news is that, according to the FX Research department, the number of scripted series finally dipped year over year. If this holds, we’ll have peaked in 2019 at 532 new scripted series.


(Source: FX Networks via Axios data team.)

Of course, Hollywood did this by accident. Or precisely, because of the “Covid Caveat”. As many productions were struggling to resume shooting even in July of last year, we naturally aired less new scripted series. 

Could 2021 come roaring back? Definitely, but not for certain. It really depends on how fast traditional studios transition broadcast/cable production to the streamers and whether Netflix pulls back on content spending. (Netflix in particular has such a long post-production period for dubbing that their first half of 2021 may be notably slow.) More likely 2022 will be the next peak.

Best Amazon Hot Takes

On Twitter, I called for the best hot takes on Amazon in honor of Jeff Bezos’ role change. To start, here’s a fun content release strategy, likely tied to Disney’s carriage on Fire TV:

Then two similar thoughts about Amazon’s lack of consumer products for kids:

Lastly, a good reminder that Amazon is the everything store of video:

Was Prime Video a Loss Leader or Loss Loser? – Most Important Story of the Week – 5 Feb 21

Jeff Bezos ending his run as CEO of Amazon is certainly neé clearly neé absolutely the biggest story in business this week. Is it also the biggest story in media, entertainment and communications broadly? Sure. 

Bezos is a man who built Amazon to be “the everything store”. That includes your video watching habits. As I’ll explain, if there is a way to deliver video, Jeff Bezos’ Amazon has launched a business unit for it. That makes this big announcement an easy winner of the “most important story of the week”.

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Most Important Story of the Week – Was Prime Video a Loss Leader or Loss Loser?

When I opine on Twitter about Amazon, usually critically, someone inevitably opines that Prime Video is a “loss leader”, as if I didn’t know that it was the purpose of Prime Video. But I’ve been around the entertainment-strategy-take game long enough to have read that rationale for Prime Video’s existence. Multiple times. 

The challenge, for me, is that “loss leader” is a vague term. Like it’s cousin “flywheel”–read my thoughts on that phrase here or here–my concern is that loss leader can be used to justify bad decisions. The logic goes: Amazon/Apple/Google/Facebook are big and successful, they invested in Product/Business/Vertical, then even if it doesn’t make money it must be worth it.

When I’m questioning Big Tech’s strategy in video, the words I’m focused on aren’t “loss leader”, but the words “investment” and “worth it”. That’s where we need to start to understand how all of Amazon’s entertainment/media enterprises will fare under Andrew Jassy.

Loss Leaders vs Loss Losers: Is the Investment Worth It?

A “loss leader” is a simple concept: a business sells a given product at a loss to sell more of a different product.

Take an example from the legal world that I just heard on All The Presidents’ Lawyers. Sometimes, a defense attorney will take a high profile case and waive the fees. They do this because the case is so notorious they will get lots of free publicity. The gain in additional paying clients offsets the initial lack of payment.

But consider a defense attorney who represented President Donald Trump in his election lawsuits. Normally, representing the President would be worth reduced fees, because the publicity would be huge. But Trump was so toxic that many firms risked losing paying clients because they were associated with frivolous election lawsuits that were destroying democracy. That’s not a “loss leader”, but the opposite.

For lack of a better term, I’d call bad loss leaders “loss losers”. How do we judge if a potential “loss leader” is good or bad? Well, if the extra sales exceed the costs. One could simplify that to:

A loss leader is worth it if the costs (the losses) are exceeded by the benefit (the sales elsewhere).

Take Roku. They sell their hardware at cost, meaning almost exactly what they pay for it. Devices are loss leaders. They make up the revenue by selling subscriptions and advertising. But if “loss leaders” are good, why not go further? Why doesn’t Roku lose money on each device? Don’t stop there. Could Roku pay every American $100 to take a device? Or higher? $1,000? 

Obviously not. Because at some point the losses don’t lead to enough additional sales. So the question isn’t “Is Amazon’s video investment a loss leader?”. Instead the question is, “Has this loss leader strategy worked?”

Beyond the Black Box: The Hazy Economics of Big Tech

So the obvious question becomes, “What has been Amazon’s return on investment in all of entertainment?”

And we have no idea.

I’m tempted to say we can’t know because Prime Video is a “black box”. Honestly, even calling it a “black box” would be wrong. A true black box is when you have known inputs, that go into an equation/algorithm/process, which spits out known outputs. The black box is the process. For Amazon, we don’t know the inputs (costs, mainly), the process (how Amazon accounts for success) or, most importantly, the outputs (performance, revenue, usage, etc). 

This applies to a range of Big Tech investments. Google, until very recently, reported no financials for Youtube in their earnings reports. Apple hasn’t told us any performance details of everything from Apple News to Apple Music to Apple Arcade to Apple TV+. Amazon has a range of smaller investments beyond Prime Video, all of which are bundled under three vague business lines in their earnings report. 

I’d call it an “invisible box”, where we don’t even know what is going in or out of the system. To compound it further, Amazon isn’t one invisible box, but a stack of several, sometimes competing, invisible boxes.

Amazon Prime/Video/Studios/Twitch/Channels/IMDb TV/Music: Amazon’s Voluminous Investment

Even defining “video” for Amazon is probably the most confusing of the Big Tech firms. Google is primarily focused on Youtube (though it also owns Google Play and Youtube TV), Netflix is only Netflix, Facebook has Facebook Watch (though it also owns Instagram videos), and Apple only has Apple TV, TV+…okay it’s confusing for all the tech companies except Netflix.

But Amazon makes an art of how many different investments in video they have: 

– Amazon makes its own content via Amazon Studios.
– It distributes this via Prime Video, while also licensing a huge content library content.
– Folks can upload their own videos to Prime Video using Prime Video Direct.
– Amazon also sells movies from all the studios to rent or buy. (This was actually Amazon’s first digital video business.)
– Further, Amazon also sells other streaming services via its Amazon Channels business.
– On top of it all, it sells devices that can be used to stream, the Fire TV and stick.
– Lastly, Amazon has other investments in video including Twitch, IMDb TV and Amazon Live. 

And honestly, if you told me there were five more businesses I missed I’d believe you. That list also leaves out music, podcasts, Alexa and video games. That’s a lot of stacked up invisible boxes.

If we can’t say if the investment was good or bad, what can we say? That there were good arguments on both sides.

So is All of Amazon’s Video Investment a Loss Leader or Loss Loser?

I don’t know. Without the inputs and outputs, it’s all guess work. But the alternatives–relying on the CEO interviews, stock price, vague assertions of flywheels and loss leaders –just aren’t very informative.

Instead of providing a definitive answer, I’ll provide both sides. Consider this both the prosecution and defense arguments around Amazon Video broadly, though I’ll center it around “Prime Video”, which is still probably the most well known investment. 

The Cases For Amazon’s Video Investment

The Customer Lifetime Value Math is Very Enticing. 

Given that Prime renews yearly, even a small increase in retention year-over-year can have huge impacts on the potential customer lifetime value of Prime. The best upside math for this comes from Scott Galloway. In his accounting, boosting Prime retention from 80% to 91%–based on some survey data–essentially results in $47 billion in market capitalization for Amazon…and that was pre-pandemic!

Galloway Flywheel

(Source: Scott Galloway Talk)

Now, I quibble with some of his math, but this is clearly the upside. If Prime Video–and the Channels ecosystem broadly–can lock folks in for a cost of a few billion per year, that’s worth it.

Prime Video enabled the Amazon Fire TV Ecosystem. 

Like flywheel, “ecosystem” is overused. But this is a true ecosystem! Amazon leveraged Amazon Video (selling movies/TV series) and Prime Video to launch the Fire TV system, which launched Amazon Channels. Now that they’ve built it, there is the question if it makes money on its own, since it is increasingly removed from additional retail sales, but they did build a valuable ecosystem.

Some analysts think the media/entertainment upside is even higher. 

For example, Laura Martin of Needham. Including advertising on Amazon–which I don’t count as entertainment, since it is the price of doing business on their retail platform–she puts it at $500 billion in value. In other words, Amazon likely spent a few billion dollars every year on content, but it built a $500 billion business, about 30% of their current value.

It seems like Amazon has been successful. 

If you care about awards, Amazon Studios has won with Manchester by the Sea, Transparent and The Marvelous Mrs. Maisel. And the trendline is good: The Boys is likely their biggest hit yet and Upload, Hanna and Hunters made the Nielsen top ten last year. Moreover, the Channels business may exceed them all as Amazon is likely the biggest seller of third party subscriptions, including Showtime, CBS-All Access and HBO/HBO-Max.

Moreover, Amazon hasn’t killed off its video investments yet.

Amazon isn’t innovative so much as adaptive. Or put uncharitably, they’re a copycat. Amazon doesn’t innovate, they let others do that, and then “fast follow” with a copycat product. Diapers dot com. Angie’s List dot com. Etsy dot com. Amazon has created clone businesses of them all. (Indeed, Prime Video is a Netflix clone, IMDb TV is a Pluto clone, and even Fire TV is a Roku/Chromecast clone.) Yet Amazon has axed many businesses if they don’t work. Video, though, has lasted. This would be circumstantial evidence that it must be doing well.

All of Big Tech is into video. 

More circumstantial evidence that video surely must be worth it. If it were a bad investment, why are Google, Facebook, Apple and Amazon all investing billions in it?

The upside in success is that Amazon would likely have built the oft searched for “moat” in digital video. 

Or “monopoly” in layman’s terms. With millions of devices and tens of millions of subscriptions sold, Amazon can demand better and better terms for supply of content, be it movies to rent, subscription to sell, or content to buy. In short, they used profits from AWS to acquire a dominant position in digital TV and now will be able to generate big returns (in pro-business terms) or extract rents (in pro-market terms). There is nothing more profitable than oligopoly, and if Prime Video paved the way for that for Amazon, then that justifies all the investment.

(Consider if Fire TV acts as one of say three distributors of streaming TV by the 2030s, presumably with Apple and Roku. Instead of collecting huge rents on a regional basis, as cable did in the 2000s in America, Fire TV could do that globally. That upside is huge!)

The Cases Against Amazon’s Video Investment

At this point, going all-in on video seems like the smartest decision made by an executive of all time. Not so fast…

The spending was likely out of control. 

Richard Rushfield called Netflix’s last half decade the “drunken sailor” era of spending. Was Amazon the “Not-drunk-but-can’t-drive-home sailor” era of spending then? Whenever you see estimates of spending, Prime Video is usually right behind Netflix in terms of spending on streaming at about $6-7 billion per year. Including traditional content producers, Amazon still spends more than everyone except Netflix, Comcast and Disney.

Screen Shot 2021-02-05 at 8.55.00 AM

(Source: Variety 2019 Dare to Stream Report)

And Amazon discounts other parts of video too. Fire TVs were often aggressively discounted to move units as well. Same for Amazon Channels, which often offered extremely low or subsidized rates to get users. In other words, Amazon sold Fire TVs at a loss, so they could sell more Prime Video at a loss, all to sell more socks. That’s a double loss leader. 

Usage is still low comparatively. 

Going strictly by Prime Video, has the investment been worth it? Prime Video is either second (using Comscore data), third (using Nielsen data) or fourth (using my estimates) place in the streaming wars. Moreover, the streaming wars are just getting started. Can Prime Video hold off Disney+ and HBO Max forever?

Comscore via Hedgeye by Type

(Source: Hedgeye Comm)

In other words, if Amazon’s content spend was about half of Netflix’s spend, but it got about 1/4th of the usage. That’s not great.



What would a third party pay for all of Amazon’s entertainment products? 

When in doubt, in other words, let the market be our guide. Far from Martin’s valuation, I think you would struggle to find a valuation for all of these businesses even approaching Netflix’s $250 billion valuation. And that’s because while everyone currently subscribed to Netflix is doing it (mostly) deliberately, the vast majority of Prime Video users consider it a luxury. If you sever that link, how many folks keep using Prime Video? I can’t begin to guess.

(Fine, I’ll try. If Roku’s market capitalization is $50 or so billion, say the Fire TV/Channels business gets 100% of that value. Then call it $25 billion (one tenth of Netflix) for video and $6 billion for Amazon Music (10% of Spotify) and say everything else is $2 billion. So is “Amazon Entertainment” worth $82 billion? That would be about 5% of Amazon’s current value.)

Did Amazon have to “build it”? 

Imagine instead of Prime Video and Music, Amazon had offered free Netflix and Spotify to every customer. What would be the better subscription, the current version or those? Most folks would prefer free Netflix and Spotify to free Prime Video and Amazon Music. In other words, Amazon could just do what Verizon does and partner with other streamers to give away better video products than Prime Video.

Presumably, licensing the rights temporarily is much cheaper than building an entire video ecosystem. This is why Verizon doesn’t build it’s own streamer, but simply gives away whatever the buzzy streamer of the moment is, from Netflix to Disney+ to Discovery+. If the return is the same in terms of customer retention, then the better ROI is in partnering, not building a new video subscription.

Most folks overvalue the “hidden business” model. 

In addition to CLV, folks love to repeat the Bezos quote that Amazon invested in Prime Video so customers would “buy more socks”. I call this a hidden business model because most folks stop there and don’t do the simple math to ask, “Well how many more socks?” (The previous king of the hidden business model was MoviePass. It would lose money on tickets to sell “data”. But data isn’t worth that much.)

I’ve done the math, and frankly because retail margins are so low, this is at best about $5.50 per month:

Amazon Retail Margins

(By the way, it’s tricky to nail down exactly what the lift is for new sales and what Amazon’s actual retail margins are. Some folks claim they are still really low (actually under 2-3%!), but then advertising is booming, which is really the price of doing business on Amazon. Play with the numbers to make your own estimate.)

Yes, it’s valuable to sell more socks. But that’s not an unlimited pot of gold. In fact, it’s an increasingly tapped out mine. (The highest net worth customers have already adopted Amazon, so Prime acquisitions will decrease in value.) So for Prime Video to act as a loss leader, its costs need to be under $5.50 per customer per month. And that’s for the folks who use Prime Video. In other words, you could imagine that the content budget definitely doesn’t make up for itself in extra socks sold. 

Big Tech loves video, everyone else can’t make the math work.

Interestingly, whenever conventional companies look into video, they tend not to have the stomach for it. Microsoft abandoned Microsoft Studios very early on. Verizon gave up on Go90. And most notably, Wal-Mart looked at video, even launched its own membership, and bought Vudu. Then they decided that video is not a good business. Clearly they weren’t going to sell more socks! And thus Walmart sold Vudu to Comcast. What does Wal-mart see that Amazon doesn’t? 

Big Tech may be into video because there is nowhere else to go. 

As Matt Stoller has written, as consolidation has risen across industries, firms and investors have few places to park their cash. And since firms can only do so many share buybacks–like Apple–video is the logical extension. Video is one of the more simple/obvious ways to use digital technology, so Big Tech is into video because they have so much cash from their monopolies/oligopolies (cloud/ecommerce, search, social or app store, depending) that they’re blowing it on video. This doesn’t really mean it’s a bad investment, but probably a sign something is wrong with our economy.

It is a loss loser, but Jeff Bezos didn’t care.

I said I’d use this quote quite a bit, and here’s my first chance. The question isn’t if Prime Video is a loss leader, but a loss leader for what?

Screen Shot 2021-02-05 at 9.03.56 AM

Results: Shrug emoji

Look at those lists and draw your own conclusion. Each pro has its similar con. All of Big Tech is into video, but Walmart/Verizon abandoned it. The CLV gains are huge, but the additional sales are likely overrated. Prime Video may be second place in usage, but hardly anyone would pay for it. Again, this is the shoulder shrug emoji of analysis.

So what’s my point? Simply that I’d like more skepticism about Amazon out there in the world.

In conventional wisdom, Prime Video and related investments have been considered tremendous successes. I don’t see the evidence or data to justify that. If you just glance a pinch more skeptically at Amazon next time someone touts their success, then I’ll consider my job done.

Bonus Most Important Thought: What Happens Next?

Probably nothing. Jeff Bezos has said as chairman of the board, he’ll likely have final say on any “one way” decisions. Selling or giving up on devices or video would be fairly final, and given Bezos’ clear backing of those investments, I can’t see him approving that. Moreover, as the con side laid out above, who would buy Prime Video and related businesses if most of their value is tied to the Prime ecosystem? $82 billion is likely the high watermark and I could see, under scrutiny, most potential buyers fleeing to the hills.

However, levels of investment can fluctuate, and that could impact Amazon’s multitude of entertainment investments. Amazon has famously often competed with itself, for example two different business units now produce original audio, Audible and Wondery. Maybe Jassy streamlines video/music and kills underperforming units. Or just drastically cuts back on “investment”, meaning content spend. 

Moreover, there is the antitrust wild card. One article mentioned that Jeff Bezos would likely break up his creation before letting regulators do itEven if Amazon did get ahead of the curve in breaking itself up before regulators can try, it’s hard to see video getting cleaved from retail. Even if Prime Video sells less socks than they claim, it’s value is still clearly as part of a Prime membership. And that serves as the basis for Fire TV devices, so it will likely stay bundled together. AWS could, though, be split off with fairly little disruption. Twitch is part of AWS, from what I understand, and I could see it going with either AWS or staying in the remaining retail/Prime Amazon.

I’d argue that even if Prime Video isn’t performing well enough to actually boost the CLV of Prime, simply the dream in Amazon’s head of selling more sock has/will keep Prime Video alive.

(How well does Amazon retail do without AWS covering any potential losses? The finances are so entangled it is impossible to say and makes the mind reel at the ramifications.)