Category: Weekly News Update

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

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

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

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

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

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

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

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

Narratives

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

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

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

Demand

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

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

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

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

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

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

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

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

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

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

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

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

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

Supply

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

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

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

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

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

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

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

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

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

Employment

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

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

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

Strategic Recommendations

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

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

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

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

Other Contenders for Most Important Story

Quibi!!!

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

Crowded VOD

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

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

Most Important Story of the Week – 13 Mar 20: Love (Films) in the Time of Coronavirus

The most important thing in this time of crisis is to focus on staying healthy and being good citizens. So don’t hoard food, avoid public gatherings, and try to donate blood.

Still, the economic consequences will quickly become as real as the pandemic ones. This is really what we pay CEOs for; not how you govern in times of booming stock prices, but times of crisis. 

For the next few weeks, since Coronavirus will dominate the news coverage, it will dominate this column too. I plan to run through how all the parts of the traditional and digital video value chain could be impacted. 

Image 7 Video Value WEb

Emphasis on the “could”, because in times of crisis there is a lot more we don’t know then do.

Most Important Story of the Week – Hollywood Pauses Production; Theaters Begin to Close

In my last weekly column, I speculated that the Coronavirus Pandemic had finally reached the “economic consequences” stage. Arguably, I was too late to make this warning very useful. But if any doubters remained, last weekend cinched it. Every big film moved out of the Q2 time period and nearly every major sporting event was cancelled. This week—I’m dating this for the 13th of March, but posting on the 17th—most major theater chains have closed.

Still, I hedged. Especially about predicting what would happen to entertainment companies.

Indeed, I tried to commit to the position that I wasn’t going to forecast the future. Why? Well, it’s impossible.

Which hasn’t stopped folks of course. Within the swarm of actual news came the opinions you’d expect, usually verging on the apocalyptic. “This is the death of theaters” being a typical example.

How do movie studios banking on theatrical releases handle that uncertainty? Well, they have quite a few strategic options. Given that theaters are the most visible part of the video value chain, we’ll start this mini-series there.

Before that, though, a rant…

Probabilistic Scenarios vs Narratives

The biggest “narrative” impacting actual stock prices goes like this…

…the impending quarantine will leave Americans (and the globe) stuck at home.
…Americans (and the globe) like Netflix.
…Therefore, they will binge a lot of Netflix.
…So Netflix wins the coronavirus sweepstakes.

Um, maybe?

Like most things “Netflix” when it comes to the narratives the only thing larger than the impact of the narrative is the stridency of the belief. Once the “Quarantine and chill” narrative started, it quickly went from “hypothesis’ to “thesis” to “inevitable outcome”. 

But consider this: if all the studios have to freeze productions, and Netflix is a studio, then they will have to freeze productions. While that could definitely help Netflix’s near term cash flow, it also would kill the new content used to bring in new customers. Speaking of cash flow, if credit markets freeze up, then getting new high yield debt could be tricky. 

Or consider this. With the impending budget cuts, cable MVPDs may aggressively cut prices to keep customers around in a pandemic-cause recession. They know folks are stuck at home; don’t let the recession kill your business.

Or this. Free, ad-supported streaming TV service (FASTs) may actually take up viewing. They have the same volume as Netflix for a better price: free. Or Twitch. Or Youtube. Both free too.

Which one of those scenarios will happen? I don’t know. Maybe all of them. Or none of them. We’ll need to set up good metrics to measure the signal of what’s actually happening with customers, not the noise of social media.

Which is my point. While narratives feel good, they don’t tend to make good strategy, since they tend to reinforce stereotypes and biases instead of generate insights and understanding. We need a more systematic approach. Which is what I’ll try to provide. (And I’ll get to Netflix in the streaming article.)

My Tools for Understanding Coronavirus Impacts

To try to think about Coronavirus strategically, I ended up pulling out three tools that I’ll use together.

– Supply, demand, and employment: The impacts of the coranavirus are unique in that they impact both supply and demand, making this a unique crisis.

– What we know; what we don’t: In times of crisis, it’s often good to separate what you know from what you don’t and what you believe from what you assume. Otherwise, you’re likely just building a narrative that reinforces existing and preconceived biases.

– What could change permanently versus what is temporary. This ties back to my “question of the year” I speculated before we started. The question was, “With streaming, what is the same and what is different?” This same question applies to the Coronavirus: what is a temporary change in circumstances, and what could lead to a permanent change in how we consume content and entertain ourselves?

Along the way, I’ll try to call out the biggest narratives I see emerging and I’ll conclude with my tentative strategic recommendations. These are the strategies I’d pitch to CEOs if I worked at a theater or a film studio.

Theatrical Film Going – The Narratives

Theaters hold a special place in the entertainment industry’s heart. For as much as it is being displaced by streaming it still has that “je ne sais quoi” embodied by the Oscars every year. That experience of going to a theater to see a film with a bunch of strangers on opening weekend. And for my money, big budget epics just look better on the big screen.

But how will the industry fare in the Covid-19 times?

I’ve seen a few narratives. Most prominently, is the “This is the death of theaters” theory. Theaters had merged for several years, then spent significantly to upgrade the experience (better seats; alcohol). Meanwhile, theaters have always been a low margin business even in the best of times. While those are true facts financially, the narrative piece seems to be the prediction that somehow customers will turn against theaters as an experience. 

Will being stuck inside for 8 weeks really prove to Americans how little they enjoyed going to theaters in the first place?

Let’s dig in. 

Supply

What we know: Supply gets hit in two ways. First, theaters themselves are now closed in Los Angeles and New York. This will likely spread to other states and cities. Obviously, if folks can’t go to theaters, they can’t see films in those theaters. As of this writing, most major chains have gone dark and most films scheduled for Q2 have been postponed or moved to VOD.

As for release calendars, we know that studios are now getting creative. Some films have moved back to later in the year, some to 2020, some up to VOD and some indefinitely. As a result, we can say that the end of 2020 and start of 2021 will likely be fairly crowded release calendars.

What we don’t know: How long theaters will have to stay closed. As of two weeks ago, it looked like April was gone. Then last week, most would have predicted though the end of May. Now June and July and beyond are on the table. But this crisis is moving quickly, so if by the end of April cases start declining, who knows? Maybe June is available.

The bigger unknown is what happens to the release window now. While Universal has “broken” the theatrical window with Trolls and The Hunt, they have a pretty damn good explanation: theaters are literally shuttered. It’s not breaking a window that doesn’t exist. Some studio chiefs likely would like to experiment with smaller theatrical windows like NBC, while others, especially Disney, like things the way they are. I personally wouldn’t be confident predicting the future of the window in either direction.

As for release calendars, even these are pretty unknown. A few weeks back Richard Rushfield wondered aloud if any big budget films would venture to streaming. There are big financial differences between VOD—which has great unit ecnomics—and straight-to-streaming, which doesn’t. But more than anything none of these moves sets a precedence. 

Meanwhile, studios will be desperate to get films in theaters. Especially blockbusters. Studios make roughly $5 billion from domestic releases alone. You can’t remove $5 billion and expect the same level of production. Globally tosses in another $15-20 billion. And remember, the economics are much better in theaters than even VOD.

Demand

What we know: Honestly? That folks like going to big budget movies. But we also know that America is afraid and as a result no one is going to the theaters. 

What we don’t: How folks will feel about movies in the future. This is a classic narrative you can build to support both sides. Maybe the Coronavirus creates a new normal where Americans decide to permanently live sheltered in their homes. Streaming satisfies all their filmgoing needs.

Or maybe after a two month quarantine, stir crazy Americans flood back into theaters to escape their home. Maybe the theater experience really does have something to it. (Most theater attendees have Netflix right now!) That feels more likely to me. But when and how and if this can happen we don’t know. And how theater attendance fares in a potential extended slump is another unknown.

Meanwhile, if theaters do go bankrupt in the quarantine, the impact on demand could be felt in the death of super hero films. Frankly, without home entertainment and theatrical releases powering billion dollar grosses, major studios will have to cut special effects driven films. What type of content will replace those films, if anything? Will folks miss super hero content when the next round of streaming series don’t have quite the same budgets?

Employment

What we know: Well, theaters employ lots and lots of people. From staff taking tickets to contractors cleaning the theaters. If there are no show times, there are no jobs to be had. And unlike sports teams which could choose to keep salaries going for the foreseeable future, theaters run much tighter margins.  

What we don’t know: What happens to these workers in an extended slowdown. 

My strategic recommendations

Since I started writing this column last Friday, things have already changed. The headline of headlines being that Universal broke the theatrical window.

1. Get creative. The Troll World Tour move to VOD makes a lot of sense. (I’m honestly surprised the price isn’t higher.) I’d recommend this for lots of films that are in this window; triage for what can go to theaters later, what can go to streaming now, and then theaters later and what will go to VOD never to emerge.

2. Be prepared for a “summer snap back”. If the virus is under control, I think August could shatter records as folks desperate for distraction seek entertainment out doors. This requires a lot of things going right, but seems on the table.

3. Assume a government intervention. Or reach out directly. Part of the reason I don’t think the window is irrevocably broken is that thousands of theaters going out of business would put tens of thousands of folks out of work, which would exacerbate the impending recession. If you can get a bail out for lost blockbuster revenue, VOD seems more attractive. 

Other Stories

Well that was the big story, but some other new stories were there too.

Netflix Biz Model Keeps Evolving

First, Netflix ended 30 day free trials in Australia. If I had to speculate? Well, churn is the name of the game. Second, Netflix is expanding their very cheap $3 plan to new territories. If I had to speculate? Subscribers are the name of the game.

Pixar’s Onward Stumble

If I’d gotten this column out on time last week, I would have noted the soft weekend opening of Onward. The most obvious explanation? It was Covid-19 worries. But the film felt like it had soft buzz even before it came out. Why is this big news? Well, I’m monitoring Disney Animation/Pixar for the first sign of stumble post-Lasseter exit and that was Onward. One is a data point, so we’ll look to Soul for a trend.

Fox Sports Brings Back Written Content

The “pivot to video” may be the worst strategic decision universally adopted by media since the dawn of the internet. And no surprise Fox has slowly reversed itself. Now if only ESPN would make their website more functional to read their great writers.

 

Most Important Story of the Week – 6 March 20: Coronavirus and the Entertainment Recession?

In times of crisis, it’s important to thread the line between adequately explaining a crisis and avoiding exacerbating the worry about that crisis. Enter the “coronavirus” (or Covid-19), the global pandemic–even if it hasn’t been called that yet–that is impacting economies from China to America, and whose full impact won’t be known for years.

If you want the “panic” side, well look at the market. Is this panic or warranted? Well, as I look at the industry I follow closest, the worry seems warranted. The impacts of Covid-19 will be particularly acute in the entertainment industry. Let’s explain why.

Most Important Story of the Week/Context Update – Coronavirus Impacts on Entertainment and the Economy

Before I explain my worries, let me iterate the caveat that all speculation about the economy should be taken with heaping grains of salt. One of my bibles for making predictions is The Signal and the Noise by Nate Silver, and he devotes a chapter to how bad economists are at forecasting growth or retraction in the economy. 

Take last year. Everyone worried about a recession. Sure enough, the fundamentals stayed relatively strong. Employment dropped to lows and median income growth actually started growing. This chart from Derek Thompson on Twitter captures the bullish case for the economy:

Thompson is right that the economy finally started turning around in 2015, and incomes have been rising. But the pessimists out there worry that if a deep recession starts right now due to Coronavirus, then middle America will likely be worse off than post 2009 great recession. That’s a terrible result for America, particularly lower income workers who just started to see income growth.

Frankly, I think the Coronavirus could cause a recession on its own, and it would start (partly) in the entertainment industry. We saw the contagion start as conferences were cancelled. But then, for entertainment specifically, this:

Most Important 14Mar

Recessions accelerate when consumers change their behavior. Specifically, restrict spending. All signs point to consumers restricting travel and avoiding large gatherings due to the global pandemic. Here’s an example that’s stuck with me since high school, when explaining why recessions/depressions start:

Farmer Fred has a bad crop due to weather. This means he can’t sell as much wheat at the market as he did the year before. As a result, he doesn’t buy a new pitch fork to replace his broken one. Since he doesn’t buy a new pitch fork, Store Owner Sally can’t replace her broken roof. So Roofer Ralph misses out on a job he thought he would have in the fall. Roofer Ralph starts spending less at Grocery Gina’s store. As a result, the next year even as Farmer Fred’s crop comes in, Gina can’t buy it.

The moral? A decrease in spending in one part of the economy can spiral out and cause a recession. Usually, this is really hard to predict. Hence why Nate Silver said economists are bad at it. (Matt Stoller has made this case too.)

But…isn’t it pretty obvious we’re headed for the recession scenario at this point? Here are the entertainment industry specific examples that feel fairly obvious are about to happen:

Theater Terry, Concert Carla: Folks decide not to leave their homes to avoid being out in public.

Conference Carl, Theme Park Tom – Folks don’t want to leave their home, and they don’t want to travel. 

Producer Paul: If gatherings of individuals or travel is restricted, studios may have to decrease production.

Expand that list to sporting events, airlines, hotels, tourism, travel, car rentals and more and you get an idea of the potential scope. The best thesis for a recession right now, is that this is a “human capital freeze” the way the Great Recession was a credit freeze. That freeze is hurting revenue, and hence profits. If all those industries see reduced revenues in the range of 10-25% (or even more), then layoffs will obviously happen. As The Indicator pointed out, travel and leisure makes up 13% of the work force. 

Those layoffs mean less spending–especially if unemployment insurance isn’t adequately deployed–and that turns this into a recession. Once a recession starts, then companies restrict advertising spending, and that only exacerbates the entertainment industry’s worries. 

So all the signs seem there. At this point we face a choice: do we want to wait to know for sure we’re in a recession to respond, or begin deploying countermeasures now?

I’d say now. Notably, the country American politicians most fear–China, our latest boogeyman–fully believes in Keynesian economics. Thus, as soon as they began experiencing supply shocks, China began encouraging banks to avoid defaults and started pumping money to keep their economy moving. America needs to do the same thing, and encourage a global response that includes fiscal as well as monetary stimulus.

The challenge for America is that our economic crisis is as much a supply problem as a consumer spending problem. America fortunately started on the right foot and the emergency spending measure just passed includes $7 billion in spending on small business loans. That’s great, but I’d recommend more. Specifically, measures designed to shore up consumer spending from the 90th income percentile on down.

Step 1 – Provide $500 to every tax payer in America. Via check in the mail. This would cost $70-100 billion dollars. And is inspired by this talk by Matt Yglesias and Claudia Sahms. The “Sahm rule” says to employ this as soon as the rolling three month job losses are over 0.5% of the last twelve months. Frankly, this is a lot better than waiting six months for two quarters of retraction. If anything, I wouldn’t wait for to trigger the rule since all the news says this is coming.

Step 2 – Do Trump’s payroll tax cut. This would cost another $50-100 billion. While Step 1 is more effective, this will help lots of employers.

Step 3 – Do Richard Neal’s infrastructure plan, but not the way he’s thinking. For some reason, the leading Democrat wants to do an infrastructure project in response to the financial crisis. Unfortunately, infrastructure is slow and would likely not happen until after the crisis has started. My proposal is to use the low interest rates in the treasury to build solar panels. This would help add money into folks pockets long after the recovery has started and fight climate change. Win, win, win.

Step 4 – Provide banks/high income earners a bail out. (The Fed already did that by cutting interest rates.)

My four steps provide a range of stimulus, but importantly, everyone gets to partake in the gains. Consumers win; employers win; infrastructure fans get their win. And banks have already got what they want. I will add the biggest hurdle is the lack of trust between both parties and the desire not to work together. The best way to ensure cooperation is to guarantee that any stimulus will be continued under a Democratic administration.

What Do You Do if You’re a Studio

Well, don’t panic. That’s first. 

Second, ask for government bail outs. As long as we’re providing stimulus, the government should provide targeted bail outs to all those industries most impacted by the pandemic.

After that, while I’d love to have detailed recommendations for each part of the entertainment value chain, I just can’t provide that. Recessions are tough to predict. Generally, I’m skeptical when folks say they can forecast who will win a recession. It can be easy to say who will lose–because we see that directly–but the winners are usually the folks who develop smart, recession proof strategies quickly. Sometimes that’s who you think it is; other times you don’t know.

So if you do run a company, that’s how I’d think about it. Your customers are about to worry about a financial crisis: how do you create value for them? How do you make and deliver content to folks under huge emotional and financial stress? It’s not an easy question to answer, but it is the most important.

Other Contenders for Most Important Story – Judge Judy is a Free Agent

Judge Judy is one of the most watched television shows. Period. Not just in syndication or in daytime, but every day period. (And yes this includes streaming shows.) So when that iconic show ends, it matters.

And Judy Sheindlin will launch another show called Judy Justice. That was fast. As for where it will go, we don’t quite know. Hence, the free agency.

Last point. Judge Judy has always been an excellent case study in how in certain situations talent can extract almost all the value for their creations. Syndication is a fairly well understood marketplace. Since Sheindlin is Judge Judy, she’s almost the entire value of the show. For a good explanation on this, see the latest PARQOR newsletter.

M&A Updates – FASTs on the Block

Here’s a fun question: are FASTs the new MCNs?

In the early 2010s, MCNs were growing rapidly and got snatched up by traditional studios just as quickly. With Maker Studios to Disney, Machinima to Warner. Awesomeness TV to Dreamworks. Fullscreen to Otter Media and then AT&T. And so on. They’ve since almost all been dissolved or written down.

FASTs–the free, ad-supports streaming TV services–have seen a similar boom. ViacomCBS started the trend by buying PlutoTV. Amazon launched IMDb TV, Roku has Roku TV and Walmart bought Vudu (and added a FAST element). Just last week Comcast bought Xumo and NuFox (the channel business) is rumored to be in talks with Tubi.

The big difference is that FASTs have a bit more control over their business model than MCNs, that relied 100% or more on Youtube. However, the FASTs do have a big dependency on the DVBs (digital video bundlers). If you can’t get on a Roku device and get prominent placement, it’s a lot harder to survive. Meanwhile, if every service is fiercely competing for ad-supported eyeballs, that makes every part of the business harder.

Related: IMDb TV Paying $500K Per Episode

Lot of sites/newsletters I follow called out that IMDb TV is reportedly paying $500K per episode for IMDb TV original series. My only response? That’s peanuts in today’s landscape. Few buzzy dramas come under the $5 million per episode tag nowadays, especially if there aren’t additional revenue opportunities. That’s cheap reality content on cable budgets, not scripted cable budgets.

Entertainment Strategy Guy Update – More Apple Worries

Two stories that cause me to worry about Apple TV+. First, an executive left Apple to go to 20th Century Fox TV. We’re so used to traditional execs leaping to streamers, not the other way around. Second, another Apple TV+show–Shantaram–is indefinitely delayed.

Third, Steven Spielberg helmed Amazing Stories dropped on Friday and had zero buzz, and negative reviews. That’s bad.

Most Important Story of the Week – 21 February 20: Rumors! Bob Iger and Apple TV+ Edition

Sometimes, you really don’t need to overthink your weekly column. Thank you, Disney, and really Bob Iger, for making this easy.

Most Important Story of the Week – Bob Iger Steps Down

Bob Iger stepped down from his role as CEO of Disney on Tuesday, but will remain as the company’s chairman of the board. What else do we know for sure?

– Iger said he’ll stay on in an active role to guide and manage content.
– His replacement, Bob Chapek, has had roles throughout Disney, from studios to merchandise to theme parks.
– Iger has long been speculated to want to retire, but kept staying on, first to see the 21st Century Fox Acquisition, and then to see the Disney+ launch.

Everything else is speculation. And there was plenty in the aftermath of this genuinely surprising news. The question for this column isn’t what happened or why or what fun rumor to promote, but what it means for the strategic landscape

The Entertainment CEO Hype Cycle

I occasionally write about CEO departures, but usually not as the most important story of the week. Why not? Well, frankly, most CEOs are “average”. Their company is moving along before they get there, and will mostly continue after they leavd. (Unless, of course, you’re a CEO reading this. I think you’re above average. Definitely. This is about all those other CEOs.)

This is especially true for lower level executives. For example, Discovery hired a new DTC boss from Hulu, Hulu promoted a new president, and CBS rearranged programming execs at All-Access, but neither will get a mention in my “other contenders” section down below. (Again, unless you’re a lower lever exec. You’re above average. Definitely. It’s all the other ones I’m talking about.)

To be clear, this isn’t because CEOs aren’t important. It’s more a comment that I don’t think anyone is really good at accurately judging who is good or not. Especially via the Hollywood trades. When a new head of a studio is hired, one or multiple trades/important papers (roughly, Variety, Hollywood Reporter, Deadline, NY Times, LA Times, Bloomberg and Wall Street Journal) writes a long in-depth article based around an interview with the executive. Their strengths are highlighted; their weaknesses minimized.

This makes sense. If you want to get Jen Salke to join your executive roundtable, you better talk her up right after she takes the job.

Then comes the downfall. Kevin Drum mentioned this on his blog a few weeks back and I’d call it the “candidate hype cycles”. UCLA political scientists have called this process in elections the “discover, scrutiny and decline” cycle. 

Image 1 - Hype Cycle

Well, the same thing happens with CEOs. They start, get tons of hype, and inevitably either fail or retire quietly. We could call it “hype, status quo and departure”. Like a politician, they have two paths at the end: If they get fired, you bury them; if they retire you celebrate their run.

Meanwhile, we never hear the bad things until they get fired or leave. For example, The Information revealed that Amazon hired Mike Hopkins was hired due to concerns about shows being late, over budget and, presumably, not that popular. Which would speak poorly of Salke, but again I’ve never seen a trade report that.

Every so often a CEO comes along though, who never loses the hype cycle. 

Value Over Replacement CEO

In the knowledge economy, the best workers aren’t just a little more valuable than their peers, but multiples better. The returns aren’t linear, but logarithmic. This applies to CEOs too; the best CEO isn’t just a little better than their peers, they are miles and miles better in terms of return on investment.

The best way to think about this, as I’ve written before, is the “Value over Replacement” concept from baseball and basketball. In basketball, this is LeBron James. His dominance is so much that singlehandedly he gave Miami and Cleveland championships and may do the same for the Lakers. As a result, he’s worth much more than any other player.

Let’s put this in a chart. Imagine every executive is ranked on a zero to 100 point scale. A fifty is the “average” employee or student or basketball player or CEO. The top is the 99th percentile employees, the one delivering outsized returns. The 1% are the folks who don’t just do average work, but actively damage your organization.

(And by the way, this is how I categorize every person I work/worked/could work with. At business school, since we did so many group projects, I was constantly scouting for who would help deliver outsized returns. Which made getting good grades easy. And yes this doesn’t apply to you if I worked with you. You were way above average. It’s about everyone else.)

This is how the chart would look. The percentiles are on the right; the returns on the left.

IMAGE 2 - VORCEO Chart

The question for Disney is…where is Bob Iger on that chart? Where is Bob Chapek?

The Disney Challenge

As I said above, I’m pretty brutally honest about where executives are on that “value over” chart and so often I’ve seen that when one executives gets replaced, despite all the internal worry, it usually ends up being about the same. So 95% of the time, say, if a CEO leaves a big company, since they were probably average, and their replacement will be average, everything will go on just the same. (Just usually paid more. See next section.)

Iger, was, though, firmly planted in the top 99%. Here’s Disney’s performance the last 20 years compared to the S&P 500. (He took over four years in to this chart.)

Image 3b DIS vs SP with Label

That’s an elite performance. And if like me you think stock performance isn’t the be-all-end-all, well, all the other narrative stuff from the acquisitions to the box office dominance to the pivot to streaming reinforces this. Iger was an elite CEO, which is a statement. Being top 1% of CEOs is supremely rare and valuable.

The challenge for Chapek is that no matter how good he is or isn’t, odds are he isn’t a 99% CEO. Just run the numbers: if we can’t predict how a CEO will turn out, then we have a “uniform distribution” meaning each outcome is equally likely. Therefore, Chapek has about a 1 in hundred chance matching or exceeding Iger’s performance. (That’s obviously why the board tried to cling to Iger for as long as possible.)

The Disney Nightmare Scenario

Does this mean the “end of Disney’s run”? Absolutely not. The situation Chapek is walking into is about as strong as you can get. Just being average means the company will be fine. If he’s slightly above average they’ll keep growing.

But every company has upside scenarios and downside scenarios, and the downside scenario feels a little more likely for me. If Chapek turns out to be worse than “average”, and there’s a fifty percent chance of that, then the company could regress.

But it could pair with four other potential risks:

– First, Lasseter turns out to be have been crucial for animation. (Like Frank G Wells was in the 1980s.) Arguably, since Iger moved Lasseter to Disney Animation, that side of the business rebounded. (Why might this not be true? Read Kim Master’s take here.) We’ll find out in about 1 to 2 years if this is true.
– Second, something happens to Kevin Feige. He runs the Marvel golden goose, If another company poached him, that would be “sub-optimal”.
– Third, streaming ins’t profitable and cord cutting accelerates. This your regular reminder that for all the value in parks and merchandise, uh, networks (specifically ESPN) actually powered Iger’s rise.

Screen Shot 2019-07-15 at 12.46.29 PM

– Fourth, the studios run out of creative energy on all the non-Marvel, Star Wars and animated films, having mostly coasted on remakes of classic Disney films. 

Those five risks could, to be clear, could not happen. And probably not all together.

But if I’m a Disney competitor, I’m happy with this news. I’d be optimistic that my studio/network/streamer has a chance to catch up to Disney. It’ll still be tough, but the chance is there.

Other Thoughts

– Is there another shoe to drop?
I have no idea. And based on all the reporting and speculation either way, I don’t think anyone knows anything. So your guess is as good as mine, so I’d guess status quo.

– What about the dual bosses structure?
I’m a little more concerned about this. Dual CEO structures are tricky. Sometimes a minor change like this can actually muck things up, more than the previous boss retiring and just exiting stage left. But we’ll see.

– Was Iger really that good?
Yes. I love hot takes as much as anyone. I’m one of the few folks who think that Plepler leaving HBO and then joining Apple could be the most overhyped stories of the year. But even I can’t with good conscious argue against Iger’s run.

That said, the context was also tremendous. While we rightfully praise Iger for his acquisitions, we sometimes forget that the real income driver in the 2000s was ESPN and it’s sky high sub-fee. (Look that chart just above!) Take that revenue/operating income from Iger and arguably he doesn’t have the cash for Marvel or Star Wars.

– If so many CEOs are average why do they get paid so much?
Bad oversight. Most corporate boards are fairly poor at actually identifying the value their CEOs generate. This is mostly to do with institutional structures. Even though they have average CEOs, they don’t realize it and pay them above average.

Data (?) of the Week – Apple TV+ Ratings?

In a few different conversations, I’ve been hearing that Apple TV+ is underperforming expectations. Honestly, even that isn’t strong enough. The ratings, the rumors imply, are so low that most observers wouldn’t actually believe it.

The challenge is to separate out the rumors that end up being completely false from those based on a nugget of truth. And fortunately, I spent some time doing this in a completely different field: military intelligence.

In intelligence, the hardest part is to manage “human intelligence”, meaning people. Specifically people who are usually betraying their country or allies and providing you information. The goal is to run a “source” who is well placed, so that they can provide a track record of accurate information. That builds trust.

Still, you only trust them so far. Even if one source tells you something, you always want to confirm it. Multiple sources is always better than one source. And ideally from multiple types of intelligence. So a good analyst pairs signals intelligence (tapping phones) with human intelligence (people telling you what is happening) with imagery and other analysis.

I trust the rumor mill in this case. And I wouldn’t pass this rumor on if I only had one source. Like I said, I’ve heard this in a few conversations and from folks I really trust. I know they’re hearing this from folks on the inside. (None of my sources come from Apple directly, in full disclosure.)

Still, that’s just human intelligence. Can we triangulate this? Sure. Take this “open source” intelligence from Bernstein Research via Bloomberg. According to their research, via analyzing Apple’s earnings report, fewer than 10% of eligible Apple customers signed up for Apple TV+, or about 10 million folks.

My rumor is about viewership specifically, but the two are correlated. If you only get 10 million folks to sign up in the first place, the available folks to watch the shows is just smaller. Similarly, if the content isn’t resonating or buzzy, then you won’t get folks to sign up. 

Moreover, the rumors I’m hearing are about recent viewership. As in since the new year started. The key driver there is, of the folks who signed up, how many hung around? Well, when in doubt, Google Trends…

IMAGE 5 -GTrend NFLX vs Dis vs ATV

In other words, this look at Google Trends implies that Apple TV+ has never quite had the brand resonance as either Netflix or Disney. Notably, this is just using search terms, which tells a slightly different story than this Google Trends look, by topic, which shows a Disney+ decline. Google Trends is just one measurement I use, and it can have some quirks that don’t capture the true underlying awareness.

For Apple TV+, I still think the name is clunky. Which may hurt it in Google searches. So let’s look for specific shows instead. In the rumors, I’m hearing that Apple is seeing a big decline since the launch. So look at this chart:

IMAGE 6 - G Trend without Mando

In other words, the decay is real. It’s a little slower than Netflix or Amazon series, because the weekly release still generates news stories when the series concludes, which you see in The Morning Show, but the decay is there. Worse, the new shows aren’t launching nearly as well as the initial batch and accompanying marketing spend.

And how do the Apple shows do compared to, say, The Mandalorian?

IMAGE 7 - G Trend with Mando

They disappear entirely.

This matches other metrics that are publicly available. Say what you will about IMDb and Rotten Tomatoes, but the volume of reviews actually is fairly predictive of viewership. Not everyone leaves a review, but more viewed shows tend to have more reviews. Which makes sense. You can see the decline in popularity in Apple shows recently in reviews too:

IMAGE 8 - Ratings Data

Here’s my whole table if you want to see the by show look:

IMAGE 9 Ratings TableMaybe Amazing Stories comes out in April and completely arrests this slide. But Apple will have to rely almost entirely on paid marketing to get the word out since usage of their app seems to be low. Moreover, the biggest challenge is just that Apple TV+ won’t have a lot of shows for the rest of the year, if the lack of announced shows is to be believed. Here’s that table converted to chart form:

IMAGE 9 Count of Shows by Year

And that’s assuming a lot of the renewed shows make it by the end of 2020, which I bet doesn’t happen.

What Does this Mean for Apple’s Plans?

This week Tim Cook repeated that he’s not in the business of renting content. Apple TV+ is originals. That’s the brand.

This strategy doesn’t make sense. Netflix and Amazon had tons of licensed content to keep folks engaged while they built out originals. Disney+, HBO Max and Peacock will have loads of library content as originals ramp. Apple TV+ has none of that. So Apple needs to either ramp originals much more quickly than they are…or they need to rent some TV shows.

Here’s the analogy I’d use. Say about 25,000 people per night tune into Apple TV+. Using Michael Schneider’s annual look at cable channels, that means Apple TV+ is the El Rey Network. Which is bad. 

Would you buy a phone for the El Rey Network? Probably not.

Other Contenders for Most Important Story

A+E Networks signs a big licensing deal with Peacock

The definition of a conglomerate should be any firm so big you forget they own half of another big company. In this case, A&E Networks is a legitimate cable business, but Disney quietly owns half. Instead of licensing their highly viewed unscripted originals for Hulu, Peacock got the rights. This is another bold move for Peacock. They are leaning into broad content, which I respect. (The History content pairs well with Law and Order and Chicago series.) Meanwhile, Hulu seems increasingly falling into the prestige lane. This leaves a gap for Disney: they need a streaming service that’s broad, but not genre like Disney+. It should be Hulu, but they’re not making the moves for that.

Discovery May Launch a Streamer

Discovery had their earnings, which were overwhelmed by the surge of news about stock market declines. On the streaming side, they’re contemplating launching a streamer in the US later this year, while happy with their other efforts. So continue to monitor for now.

Most Important Story of the Week – 21 February 20: Youtube Offers HBO Max…and an “All Update” Column

As I stared at the list of stories I wanted to put in my weekly column last week, I couldn’t help but notice that they all connected back to some previous article I’ve written before. So here’s an “All Update” column, starting with a distribution story that hits on the most important trend of the streaming wars.

Most Important Story of the Week – Youtube TV Will Offer an HBO Max Add-On

A contrarian may see this as just another minor move in the distribution landscape. Equivalent to Disney+ finally getting distribution on Fire TV devices. And I didn’t make a big deal about that. 

Well, this is bigger. 

Google/Youtube is moving its troops onto the “key terrain” of the streaming wars. As I wrote back in November, the rise of “digital video bundlers” (or DVBs) is the trend to monitor when looking for who will “win” the streaming wars. The bundlers will, potentially, control the fates of the streamers. And hence have the best chance to capture the most value in the digital video value chain. The Youtube partnership with HBO Max could cause a cascade of strategy moves.

First, this is Youtube getting into the “streaming bundling game” versus just the “vMVPD” game. The distinction is subtle, but important. In the “virtual multichannel video programming distributor” game, the vMVPDs are mostly mimicking traditional cable bunde\le. So Youtube, Hulu, Sony Vue (rest in peace), DirecTV and Sling are mostly offering a bundle of traditional channels in a new package. This has only worked out so-so well so far.

Now that Youtube TV is going to offer HBO Max, they aren’t just about linear channels. While this isn’t their first streaming service they offered—they have the AMC owned niche streamers like Sundance Now, Shudder, and Urban Movie Channel—this will be their biggest streamer add-on. And the broadest offering so far. Likely this won’t be their last move either. Could CBS All-Access be next? Or even Disney+?

If so, then the line between vMVPDs and “channels” businesses will blur further. Here’s my quick take on how the potential DVBs are shaping up:

Screen Shot 2020-02-24 at 2.14.25 PMYoutube also needs this since right now Google is lagging on the device front. While the Chromecast works very, very well, Google can’t monetize it. You can’t download apps to it, just stream from another device. This will mean they need to lean on Youtube/Youtube TV even more to bundle their offerings.

Second, this is a smart move for HBO Max. May is rapidly approaching and scanning the other Live TV services and Channels, I haven’t seen a lot of announcements about where/who will distribute HBO Max. On the one hand, AT&T claimed that if you subscribe to HBO you’ll get HBO Max. But how that will work in practice remains to be seen. Does that just include linear offerings? Or only AT&T owned offerings? Does it include Amazon and Apple? That’s being negotiated right now.

AT&T’s goal, like Disney+, is to get HBO Max out via as many distribution channels as possible. Frankly, to make your money back, this makes sense. (Though it also shows that the power is mostly with the distributors, not the streamers.) Youtube is the first step.

Third, this impacts how the other vMVPDs will respond to HBO Max. Does Hulu—which offers HBO—automatically offer HBO Max as well? It would make sense, but that would then be a game changer for Hulu, which doesn’t offer any other streamers yet. And if it’s offering access to HBO’s streamer, why not sell Disney+ subscriptions and/or access right along side?

So Youtube could be the domino that starts a chain of OTT offerings.

Fourth, Netflix. 

(Legally I have to mention them every week) 

There is a careful balance for each streamer between reach—being on the most devices—and controlling the customer relationship—in both user experience, data and owning the credit card data. Netflix is on the extreme of one end; as the most successful streamer, they don’t care about reach and want to own everything about the customer relationship. 

HBO Max is clearly willing to give up some of that with Youtube TV for the reach. Disney, with Amazon for example, gave up some data to get Disney+ on Fire devices. Disney+ though, is NOT in Amazon’s channel business. Because they don’t want Amazon to own that relationship.

If I were Netflix—and I don’t think they quite understand this—I’d be worried that the distributors are going to offer increasingly compelling user experiences sans Netflix. Be it Youtube or Roku or Hulu or Amazon Channels or Apple Channels, customers are going to increasingly find themselves using one ecosystem. While switching between Disney+ and HBO Max and Netflix isn’t that difficult, it’s still a small barrier to entry. 

But little things can add up. And if folks only use Youtube TV to get 60% of their TV viewing, then that could rise to 70%. Then 80%. And Netflix could be the piece on the outside looking in. (Alternatively, some streamers like CBS All-Access and Peacock could never even get a look.)

Is it guaranteed to happen? Obviously not. But if Youtube TV “becomes TV”, then Netflix can’t. And only one of those two companies is banking on “becoming TV” to support its stock price.

Last note: Youtube TV’s price point is still uncompetitive. It is somehow the only remaining Live TV bundle offered at $50. As a result, it’s boosted it’s subscribers from 1 million last year to roughly 2 million this year, as it announced in its latest earnings. The key question is how much they lose every month. $1? $5? More? The higher the number, then the more Google is using revenue from one business to enter another using predatory pricing. That’s not good business necessarily, but market power. It stifles innovation in the long run and should worry us.

Entertainment Strategy Guy Update – ViacomCBS’ House of Brands 

So did CBS let us know what their strategy is? Scanning their last earnings report, not really.

They could be a content arms dealer. Mentioned it. They could lean into streaming. Mentioned it. They could lean into live TV. Mentioned it. They could be a leader in advertising. Mentioned it too. They want to be all things to all people

So that’s the downside case. They still don’t have one strategy. But if we’re looking for bright spots, at least they are making some smart moves. They plan to expand their streaming offering. Here’s their pitch:

Screen Shot 2020-02-24 at 10.45.03 AM

Ignoring the misuse of the term “ecosystem”, if they execute the “House of Brands” strategy it may provide a better user experience than some other streamers. And it will work better than trying to launch BET+ on its own and Smithsonian on its own and so on. In general, broad services have the advantage over niche platforms, and CBS already has a “broad” advantage like their fellow legacy media conglomerates. As I wrote in August, you could imagine a version of Disney+’s brands…

disney-plus-layout

..with ViacomCBS brands like BET, Paramount, MTV, Comedy Central and Paramount instead. (If I were better at Photoshop, I’d have done it.) Is that better than Disney? No. But it’s a clearer offering than if Netflix tried to offer something similar for its library of Babel offering. (Still probably behind HBO Max and Peacock though.)

I said back in August that trying to offer “the perfect bundle” is their best strategy. I happen to like their three tiers: Free is a great entry price; CBS-All Access can compete with Disney+, Peacock and HBO Max while Showtime goes for HBO and Netflix. That seems to be our three tiers right now. 

Notably, though, I don’t think they can be a streamer and a “content arms dealer”. If you sell genuine hits like South Park, Sponge Bob and Yellowstone to competitors, there won’t be enough left for your service. Given that they can’t survive without a viable streamer, they need to focus on that strategy. 

(For my past articles on SuperCBS, click here, here or here.)

M&A Update – Apple Looks for a Library/MGM on the Sales Block

After it’s nine original TV series—plus or minus 2—there isn’t a lot else to watch on Apple TV+. Which is why I thought it was bonkers launch without a content library for customers. The biggest library on the block is MGM’s and a few months back the Wall Street Journal reported Apple was indeed in talks to acquire the former major studio (and its library).

Yet it didn’t happen then. Still, as Alex Sherman comments in his look at M&A in 2020, it’s probably more likely that MGM gets sold than not. It’s long been rumored that its private equity owners are looking for an exit. So why hasn’t it happened? My gut is that between the PE folks desire for a sizable return and the strings attached to their library—most of it is rented out for the next few years—it gets hard to find the right deal.

(Related note: In the Wall Street Journal article, the Pac-12 was also in negotiations with Apple that apparently didn’t go anywhere. I remain skeptical that going to one distributor like an Apple will be worth it for the Pac-12, but we’ll see. Here are my big articles on the Pac-12 and what that implies about the future of sports here.)

Entertainment Strategy Guy Update – What about the Oscars?

Are the Oscars just an increasingly unpopular TV event or a portent of the eventual declines all feature cinema? Probably just the former. The global box office hit an all time high last year. Instead, as I’ve long suggested, the Academy needs to nominate more popular films to bring in a bigger audience. (And not just via a popular film category.) Here’s an updated table on how unpopular the nominated films were in general:

Screen Shot 2020-02-24 at 2.15.17 PM

Screen Shot 2020-02-24 at 2.14.55 PM

So while there was a slight rise in “unadjusted box office”, the trend is still downward from the 2010 recent peak. (Adjusting box office for inflation shows an even worse decline.) Hence, the ratings were down again.

A related question is whether this push for Oscar nominated films makes sense for those producing the films, such as the streamers. As two recent articles show, Oscar nominations lead to box office revenue. And presumably Netflix viewership. The only caution? Well, the cost of those increasingly expensive awards campaigns may not pay back even that amount of Oscar revenue.

(For my articles on Oscars and popularity, click here, here or here.)

Entertainment Strategy Guy Update – Netflix Originals Aren’t Permanent

Over in the United Kingdom, the Netflix “Original” Happy Valley  is going to be departing the platform soon. This shouldn’t be a huge surprise for business watchers, but I have the feeling that customers won’t quite understand it. If originals are original, then how can they leave? Well, it depends more on how Netflix paid for it (rent it, lease it or buy it) then whether they call it an original. What’s On Netflix has a good article on this here.

(For my articles on what an original is, read my definitions from back in May. Or read my article at Decider from last month which also explains the difference.)

Most Important Story of the Week – 14 February 20: What Is SuperCBS Super Power?

When CBS finally merged with Viacom after a “will they/won’t they” that rivaled Ross and Rachel (and previously Sam and Diane, I’m told…). The big question was, “What is their strategy?” Will they be a content Arms Dealer, as Rich Greenfield suggested? Will they lean into the declining bundle, as NuFox is doing? Or will they go all in on streaming, as I suggested?

Well, last week it looks like we got an answer. Kind of.

Most Important Story of the Week – SuperCBS Plans to Launch a Streamer

In my unofficial straw poll on Twitter—check in most Thursdays or Fridays for it—this was the story everyone wanted me to write about. While folks on “the Twitter” may think ViacomCBS is already too late to the streaming wars, I’m still willing to give them a shot. The news (and technically it broke last week) is that SuperCBS is considering a new streaming service with potentially 4 layers:

– Pluto TV – Ad-free
– CBS All Access – Ad-free
– CBS All Access – No ads
– Showtime Add-On

Honestly, it reminds me of the Spanish Armada.

I’m currently reading the last book in the Pillars of the Earth series. Taking place during The Reformation, the defeat of the Spanish Armada by the British (four hundred year spoiler warning) plays a prominent role. For those who don’t remember, King Felipe of Spain planned to sail to his army to England to overthrow the protestant Queen Elizabeth. With loads of silver coming from the New World, Spain had the largest Navy in the world at the time, and featured huge galleons.

And yet, a more maneuverable English Navy, combined with some fearless maneuvers and an assist from the weather, meant that the Spanish Armada was routed in the English channel. Harassed by smaller English ships and picked off one-by-one, the Spanish Navy eventually had to retreat back to Spain. As always the lesson is that sometimes underdogs have the advantage.

The question for me is who is who in this analogy? Is broadcast CBS (with all of linear TV) the Spanish Armada sailing for England to destroy upstart digital streaming? Maybe, since Catholicism was older and it needed to retake its crown.

But I could make a better argument Netflix is the Spanish Armada of this analogy. With loads of silver from the New World of cheap internet multiples, it’s goal is to crush all comers with a huge war chest of content. (Spain was also at war with the Netherlands around this time, and parts of Italy too.)

Which is what makes the response of the traditional providers so fascinating. Maybe none of them can be the same size as the Netflix behemoth with 6% of all TV viewing (see below). But maybe the old guard can harass Netflix as the English harassed the Spanish Armada. Disney can pick off folks who want the top tier family content. And Peacock can fill a niche for folks who want news and sports. And Discovery will eventually pick off the folks who just want cheap reality shows. And HBO Max will have Friends? (Fine, that last one is not a niche approach.) 

My theory? If you have key strengths or can be “excellent” at something, despite your weaknesses you can carve a niche in any ecosystem. That’s my key question for SuperCBS (and whatever they end up offering): 

What can a SuperCBS streamer be “excellent” at?

I see a few potential areas:

“Be Middle America’s Streamer” – A lot of CBS’ bench—though they don’t own a lot of it—was built over the last two decades by Les Moonves to appeal to the areas of the country not on the coasts. (Though as I explained in this article, a surprising amount of CBS viewing happens even in the liberal bastions.) I still think there is room for a streaming platform that is deliberately not high brow. Not prestige. Not event TV. Not even peak TV. Just scripted fare designed to sit back and watch. Cop shows. Doctor shows. Lawyer shows. Comedies that have lots of big gags and laughs. With laugh tracks. The biggest benefit to this approach is that they can save lots of money by not competing for top tier talent at exorbitant rates.

“Go after the “franchise” crown – This may be a stretch, but it requires believing that Paramount is actually a viable movie studio. The facts militate against this, given that most years recently they’ve finished behind Warners and Universal (and everyone finishes behind Disney). But Star Trek has continued to do well in theaters and on their streamer. Combined with a Mission Impossible and Transformers smart refresh, and suddenly they look viable in building franchises. 

“Buy Roku” – Buying a company isn’t really a strength, but in my mind CBS still has a surprisingly strong “ad-supported” business via CBS (the top ad-supported brand on linear) and PlutoTV (in the free, ad-supported space). So if you buy one of the biggest devices for watching over the top TV, CBS could ensure it’s content gets distributed to a huge number of households. Of all the contenders in the streaming wars, I think CBS may need Roku the most.

“Go for sports” – This piggy backs on their live TV strength via CBS. If you’re about to lose the rights to the SEC Network, you may as well take your money elsewhere. Specifically the NFL streaming rights. The NFL–from all reporting–seems very hesitant to go digital only, so they need a partner(s) who can be both digital and linear. CBS perfectly fits the bill. (I’d add even if they shared rights with an ESPN, having a piece of the NFL ensures some viewership in the United States.)

I’ll add, identifying a strength isn’t’ the same thing as having multiple tiny niche streaming services. The niche services have proven they don’t have the volume to compete with Netflix. The tricky balance is being broad enough to draw in lots of folks, but still having a strength in something.

So…What is SuperCBS’ Strategy?

There is an old saw in leadership drilled into most officers: “The only bad decision is no decision.” I’ve actually changed my mind on this (inspired by Star Wars’s last trilogy actually). Worse than no decision is flip flopping. So the ranking of decisions is…

  1. Good decisions
  2. Bad decisions
  3. No decisions
  4. Flip flopping decisions.

Overall, CBS is flip-flopping or no-decision-ing their strategy. My two part article from last August really hasn’t changed much from this little news dump and next week I doubt SuperCBS announces much more. From what I can tell they still haven’t chosen a direction. They’re trying to execute multiple strategies. From Arms Dealing to Streaming to Live TV. 

M&A Updates – Viacom and Sprint Merger Cleared By a Judge

If ViacomCBS launching a streamer isn’t the most important story of the week, it’s probably this merger saga. Moving from four providers of cellular phones to three will have an impact on competitiveness. A negative impact. It’s hard to believe it won’t be to raise prices and hence profit!

What does this mean for the entertainment folks, from video to music to gaming? Well, the last line this chart:

Image 7 Video Value WEb

Just got a pinch less competitive. And when it’s less competitive they can charge higher rents to reach their customers. If I had to guess—and it’s been my working theory—I think that unless we get more competition in digital video, we’ll find out that customers are paying higher prices for video than they were before the streaming revolution. Without having the specific numbers—I’ve had this bookmarked to calculate for a while—my gut is that cable/cellular bills will eventually reach the price of the old cable+TV bundle, just without TV. Then customers will have to pay for streamers on top of that. 

So we’ll pay the same or more, just for less content than the good old days of linear TV. 

(Bonus M&A story: That strange news that the FTC is investigating all the big tech company mergers of the last decade. This is either a huge deal, a stall tactic, or busy work. But a lot depends on who is president in 2020.)

Data of the Week – Nielsen Q4 Report

Nielsen released their Q4 “Total Viewing” report. I still haven’t found a copy of the report, so I believe Nielsen just provided a summary to reporters, since they mostly mentioned the same thing. The headline is that streaming is “only” 19% of video viewing or “already” up to 19% of all video viewing in the US. Bloomberg provided a break down by streamer:

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After thinking on this for a day, a thought hit me, “Oh hey, we know how much video viewership Netflix is then!” and the answer is a whopping 5.9% of US video time. Which led me to thinking on Twitter that Netflix has previously told us they account for 10% of US TV screen time:

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This led me to create this timeline:

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Does this mean that Netflix is down in usage? Not necessarily. I’m the first to admit when data isn’t apples-to-apples. In this case, while it measures mostly the same thing (Netflix and Nielsen were both measuring viewership on TV screens in the US only by time spent), Netflix was simply estimating whereas Nielsen was using actual topline data. I dont’ think this means Netflix’s usage is declining, but even with a good Q4 for them, I don’t think it is increasing either.

Still, the pie chart in a lot of ways is the future of the streaming wars. The size of the pie will increase going forward as cord cutting continues. But it’s hard to imagine Netflix’s slice of the US pie getting that much bigger. Especially as Disney+ and HBO Max ramp up. And if that’s the case, well I dont’ think it will go well for their stock price. If I’m wrong, then their stock has no ceiling.

By the way, if Netflix has a lot at risk when new entrants come on board, then Amazon has even more. They’ve been in the streaming game since the early part of this decade, and still only get 8% of streaming hours. That’s a story we don’t cover enough.

Other Contenders for Most Important Story

As usual, we’re long, so let’s go quick.

Mike Hopkins in at “Amazon Entertainment”

I read this description of Amazon in The Information via Byer’s market and it’s a great way to describe everything from Prime Video to Twitch to Audible to Comixology to Amazon Channels. I don’t know if all that will report to Mike Hopkins, but if it did it would simplify Amazon’s org chart.

This is a big move that could change Amazon’s fortunes for good or ill. Unfortunately, I can’t tell you which way it will go. On Twitter I saw folks calling his tenure at Hulu underwhelming and strong. So I don’t know. When Amazon hired Jen Salke, a lot of the trades praised her hire and saw a turnaround from the previous era. Now, The Information says that her shows have been late and over-budget, as were her predecessor’s shows. Will Hopkins be the magic fix? I’m skeptical.

Youtube May Go “Channels”

Innovation in the M-GAFA tech companies is copying each other mercilessly. So since Apple, Amazon and Facebook have or have dabbled with a “channels’ business, obviously Youtube needs one too.

Bosch Renewed at Amazon

Speaking of Amazon Prime Video Studios, their longest running show is now Bosch. A cop show. Maybe all streamers should take note?

Thomas the Tank Engine

Oh and checking in on the, “Pivot to original content” at Netflix move, it’s going about as well as Obama’s “pivot to Asia”, meaning it keeps not happening. The latest iteration is Netflix licensing the rights to Thomas the Tank Engine.

Most Important Story of the Week – 7 February 20: Why Timmy Failure Launching on Disney+ Spells the Death of Mid-Budget Films

With the Oscars airing on Sunday, it seems appropriate to join the crowd asking, “What will happen to the mid-budget theatrical film?” This seems to always come up this time of year as folks–usually critics–bemoan that Hollywood doesn’t “make these types of movies any more”. But what types of moveis? And for whom?

So let’s dig in.

Most Important Story – Why Timmy Failure Launching on Disney+ Spells the Death of Mid-Budget Theatrical Films

If you’re looking for the canary in the coal mine for mid-budget films–again, hold on a moment for a definition of that–don’t worry about the Oscars or Sundance. Instead, look at this:

Timmy_Failure_Mistakes_Were_Made_Poster.jpeg

Disney, not Netflix, is the place to watch for the future of movies. If even Disney abandons theaters, then all hope is lost. (They won’t; the economics don’t work as I’ve written before. Many times.) But just because Disney will keep major franchises in theaters doesn’t mean mid-budget films have the same hope. 

The traditional narrative goes that fortunately, even as mid-budget films abandon theaters Netflix will swoop into save them. Sort of like Disney+ with Timmy Failure. 

But will they? I don’t know. So let’s explore this issue fresh. I’m going to ask a few questions to myself to figure it out. (Consider this a mini-extension of this series on releasing films straight to streaming.)

Definition: What is a mid-budget film?

As a business writer, I tend to find a lot of articles about Hollywood tend to play fast and loose with definitions. Take, for example,  “independent film”. Most indie films are made or now distributed by giant studios. Which is hardly independent! Instead, we use “independent” as a catch all for “prestige” or “award-contending” films. This makes data analysis tough.

Defining “mid-budget films” has the same challenge. I can probably tell you what is too high to count, anything over 9 figures in production costs. And too low. Anything below $10 million.

But a range of $10-$99 million in production costs seems too big. And likely some films around $75-100 million are still big budget films, just slightly cheaper than others. If I had to pick a number, I’d say production budgets of $40 million is what most people are thinking of as “mid-budget”, with a range of $20-50 million. (This isn’t an exact science.)

What does the narrative say?

If you search for articles on mid-budget films, you’ll find critics or reporters saying they are dead, dying, returning or thriving. So it depends on how you define mid-budget, what you consider success and really whether or not a mid-budget film (Get Out, Knives Out) has come out recently or not to provide an anecdote for the author. 

Instead, let’s turn to…

What does the data say?

Well, I don’t have it. Why not? Because no website tracks production costs in easy to download tables. Or in ways that I trust. Wikipedia usually has estimates, but those are often unreliably sourced. Since I don’t have a data set to manipulate, I can’t figure out the answer for myself.

Sleuthing the internet, I did find one data based article by Stephen Follows. I’ve used his data before and I love this work. He used IMDb data and the answer turns out, like it often does, to be complicated. The number of “mid-budget drama” films is actually fine. He tracks the percentage of films that have production budgets between $15 and $60 million and he finds virtually no change in the percentage of mid-budget films. 

He did find, though, that drama budgets have been declining. And so have budgets for romantic comedies, action films or comedies. This–combined with lack of box office success compared to franchises, sequels and remakes–does support the thesis that mid-budget films are dying. Of course, data can only tell us what happened. For what will happen, I’d argue we need to turn to the models.

What do the models say?

Well, they do sort of make the case that studios should make fewer “mid-budget” films. By models, I mean this distribution chart of box office:

Chart 2 Movies AgainIf you learn nothing else from the Entertainment Strategy Guy, learn “logarithmic distribution”. That’s the shape of the table above. In other words, a few films earn outsized returns whereas everything else fails. On its own, though, the performance of films doesn’t quite tell the whole story.

Instead, the key is the correlations between budgets and performance. Blockbuster budgets and campaigns (which means franchises, sequels and remakes) are highly correlated with higher box office. Again, look at my hit rate from my recent Star Wars series:

Table 7 PErcentage with buckets

Unfortunately, I don’t have the data to compare blockbuster franchises to comedies, dramas or rom-coms. If I did–this is based on my personal experience–I’d tell you that those other categories don’t have as high of ceilings as fantasy, sci-fi or super hero films. They just don’t.

This means—and this is what I mean by using the model–that you may as well make your comedies and dramas for as cheap as possible to get the greatest return on investment. But if this is the case, why did we have so many mid-budget films in those genres in the 1980s, 90s and 2000s?

What are the forces hurting mid-budget films?

I see three major forces, and they aren’t the ones usually mentioned (which is just “streaming!”:

  1. First, the death of home entertainment. Physical home entertainment had some of the best margins in the revenue stream. The rule of thumb in the 90s was a film could make it’s production budget in box office, then home entertainment could pay for the rest. While DVDs aren’t completely dead, like music they are way below their peak.
  2. Second, the decline of median incomes. Subscribe here to read my Ankler guest post, but my theory is that the stagnation of American income has stalled theatrical revenue growth.

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  1. Third, the blockbusters are getting bigger. This is because digital distribution in theaters means that a theater can now expand a movie to every available theater if its a huge, huge hit. So when Avengers: Endgame came out, it set a record for the number of theaters showing it, which means all the mid-budget films got crushed. Counter-programming sometimes works, but often doesn’t. 

The multi-billion dollar question, though, is can streaming offset all those forces? In other words, can streaming revenue replace the lost mid-budget theatrical movie. 

How does all this impact Disney/Disney+?

Which brings us to the House of Mouse. And Timmy Failure, a film very few of us probably heard got released. Unless you went to Disney+ this weekend. As with any film, I like to use “comps”, meaning a comparable film. In this case, not only can I find a kids movie that Disney released for families, I can find one about another Tim:

The_Odd_Life_of_Timothy_Green

They both are mid-budget films (Failure was $40 million; Green was $25 million), both based on preexisting IP, both targeted at families. But one went to theaters and made $53 million; the other went straight to Disney+ last week. Hmmm.

Or take films about Alaska featuring canines and aging A-List actors. Togo was a Disney film costing $40 million and it went straight to Disney+ last December. Meanwhile, Call of the Wild comes out at the end of the month. The difference? It cost $109 million.

What do I take from all this? Well, when it can, Disney is deciding that mid-budget films are going straight to streaming too. Even it has started to skip theaters. If you want to know why this is the most important story of the week, here you go. 

What about Netflix?

Who started skipping theaters altogether? Netflix. That’s why there are so many articles about how they’ve killed theaters and/or changed cinema for good

This narrative is both obviously true and frankly also unknown. On the one hand, yes they clearly decided to launch a stream of mid-budget films from their Adam Sandler films to their summer of rom-coms to Bird Box. 

On the other hand, are those mid-budget films? In some cases, I think their budgets may actually be more equivalent to low-budget films, especially the rom-coms. In other cases, say any film with A or B-List talent, I think they may blow past my $50 million threshold. (As we know The Irishman did.) So how many “mid-budget films” Netflix actually makes we don’t know. 

For a good take on this as well, and partly the inspiration of this series, here’s The Netflix Film Project on a recent Netflix mid-budget film, The Shadow of the Moon that no one is talking about. It’s cool they made a mid-budget film…but if no one sees it did it matter?

Which brings us to the crux of the issue. So Netflix is making mid-budget films? Are they working for them? Or for Disney?

The Implications (and huge worry) for Mid-Budget Films Direct to Streamers

Is anyone watching mid-budget films on Netflix? Or Disney+?

We have no idea.

A point I’ve made over and over and so has half of the journalists covering Netflix. 

But I’ll say this. My models that show that you may as well either make huge tentpole movies or small films that cost nothing has the exact same logic on streamers. If you’re going to spend $50 million making a film, you may as well spend $100 and quadruple your viewership. Or decrease spending to $10 million and get about the same viewership for a quarter the cost. What you don’t want to do is get stuck in the middle. 

As long as profit and making money don’t matter, then mid-budget films are fine to draw in talent. Why not? It’s not like Wall Street cares. If that changes though, it’s hard not to see mid-budget films as the first casualties in the content budget.

In other words, if you want mid-budget films, don’t hold your breath for streamers to be your savior. They are now, but the forces that decreased the budgets of theatrical mid-budget films (they didn’t die) are coming for streaming. At some point.

Other Contenders for Most Important Story

Hulu’s Big Week

Meanwhile, the biggest “event” news story was the departure of another CEO from Hulu, with the consequences that Hulu is now reporting in to Kevin Mayer at Disney. The Disney consolidation of Hulu is nearly complete and combined with Disney+ this gives Disney their both shot at disrupting Netflix globally.

When will that happen? Sometime in 2021. Disney is going to roll out Disney+ internationally, learn it’s lessons, then roll out Hulu (backed by FX content) next year. Which is a smart strategy.

Earnings Report Summary – Disney+ gets to 28.6 million subscribers.

This week’s buzziest story was all about the Disney earnings report. But, like Netflix, it’s really a tale of two numbers for me. The headline number is the Disney+, ESPN+ and Hulu subscribers, which were all up in big, big ways. Obviously, this was driven by their aggressive pricing and discounts, but it worked:

Screen Shot 2020-02-04 at 1.44.49 PM(Yes, Disney+ is available in Canada, Australia, New Zealand and the Netherlands. Even if you subtract 25% from the Disney+ total, it’s still likely Disney has more “subscribers” than Netflix by the end of the year if not the next quarter.)

If I had a caution, and it’s the same one I have for Netflix, it’s that these costs are being born by Disney in the terms of declining free cash flow. Disney in 2018 Q1 made $900 in cash; in 2019, that dropped to $292 million. In other words, they are on track to lose $2.4 billion in free cash flow this year. Just like Netflix! 

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Pay attention to this story as HBO and NBC join the money losing crowd this year.

Data of the Week – Youtube Earnings

I’ve long had the wish that Google would disclose Youtube’s financial numbers. Well, it must have been my birthday because I got my wish. The headline numbers are that Youtube makes $15 billion dollars a year, has 2 million Youtube Live Subscribers and 20 million Youtube Music and Premium subscribers. In other words, Youtube is the behemoth we thought it was. 

M&A Updates – 2019 Off to a Slow Start

That’s the headline of this Financial Times article and it matches the broader feeling of the landscape. I still think the fundamentals mean that M&A will likely stay slow for the foreseeable future in entertainment. (My series on M&A provides a good long term look at M&A in entertainment, without some of the hyperbole you see.)

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EntStrategyGuy Update – Checking Back in with Luminary/The Ringer

When a company launches as the “Netflix of Podcasting” you have my attention. In a negative way. I was skeptical folks would pay more than Disney+ for access to a few exclusive podcasts. (And I’m also skeptical of companies founded by the children of billionaires with access to capital.) Sure enough, Luminary has lowered their price

The biggest worry, though, has to be Spotify’s continued gobbling up for podcasting companies, the latest being Bill Simmon’s The Ringer for $250 million.

Lots of News with No News – Super Bowl Ratings Are Slightly Up

The ratings for the Super Bowl were up year over year for the first time in five years. Why is this not “news”? Because any one year’s ratings can be noisy, and despite being slightly up are still in line with the historical average. My recommendation? Check out Wikipedia for the charts that tell the best story:

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So while I’d love to tell you this means the Patriots are bad for ratings, I can’t in good faith do that. (Though I was glad I didn’t have to watch them again. Sorry Boston fans.)