Category: Weekly News Update

Most Important Story of the Week – 13 September 2019: Debunking Some Apple Myths

This is my third try writing this week’s column. Apple TV+ is clearly the “most important story” this week since it’s Apple’s entry into the streaming wars. That’s like the United States entering World War II. What did my first two takes look like?

Attempt 1: An article about “ecosystems”, since that was the explanation du jour of the week. I wrote too much for this column.

Attempt 2: Really calling folks out for not digging into Apple’s financials. But that required me to do them too, which took too long for this week’s column. That’s an analysis article.

Still, I had so many thoughts on Apple that we’ll have enough for thoughts on Apple TV+/Channels today and in the future. Don’t worry.

(Programming note: I’m traveling for a music festival—Kaaboo 2019, the film festival for the middle-aged. Seriously, that’s how the bill it—so if I make any mistakes, I was rushed. And I’ll have my newsletter next week! Sign up now!)

Most Important Story of the Week – Debunking Some Apple TV+ Myths

Reading the coverage of Apple TV+’s pricing announcement, the media ecosystem swung from “$10 is way too expensive” to “$5 wins the content wars” immediately. That sort of surprised me. Bit of an overreaction, wouldn’t you say? Along the way, too, I noticed a lot of observers leveraging a lot of the same explanations and even numbers to explain the news. 

Let’s debunk a couple of those. Plus, I’ll add in the strategic risks for Apple implied by these mistakes. First, though, a new product that actually does make sense.

Apple Arcade Solves a Customer Problem: No in-app purchases

I play a few more iPad games then I probably want to admit. I loath pay-to-play, though. Just not how I was brought up to play games and the best games don’t feature this mechanic, in my opinion. Apple Arcade, their subscription video game service, solves this problem. Potentially. Right now, they probably don’t have enough games to warrant a subscription, but like all new businesses it will grow. And I hate subscription biz models anyways (for customers). So we’ll see. 

However, compared to Apple TV+, at least Arcade solves a customer need. Now how many customers are like me–which is market sizing–is a future question. But at least it solves a problem; it isn’t clear that folks were clamoring for more TV to subscribe to.

Debunking One: Apple TV+ is free. 

This is kind of true, in that yes, if you buy an Apple device, the service is free. But I saw tons of folks saying this free first year meant that Apple made it essentially free. That’s too far.

After a year, customers will need to start paying. I assume some others assumed that if customers buy multiple devices, they can keep stacking on year long free trials, but that doesn’t sound like any free trial I’ve ever seen. Most likely, after a year, the device that logged the free 12 months will have to start paying. And that, my friends, is where the true test of a business starts.

Strategic Risk for Apple: The Promotional Carousel Is Hard to Get Off.

Ask DirecTV or Hulu how offering ridiculously low prices worked for customer churn. Even if Apple doesn’t report subscriber numbers—they probably won’t—we’ll be able to tell by the discounts Apple does or doesn’t offer whether or not churn is happening.

Debunking Two: Apple will have 250 million potential customers.

This number is in fact true. It’s roughly how many iOS devices Apple sells per year. Roughly. The implications are not.

But is number of devices really the potential market? Consider two things. First, many families are on Apple’ plans. Which means even if the family owns four devices, or bought four, they’re still only subscribing once. More critically, look at this chart from Business Insider on iPhone sales.

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Huh. So the US portion is really 70 million phones per year, with another chunk of iPad and laptops, which I didn’t see reported anywhere. Everyone breathlessly went with the 250 million. Sure, Apple TV+ is launching in 100 countries, does that include China? It’s notoriously hard to launch content in China, and Netflix and Amazon aren’t there. So I’m skeptical. Overall, if you’re discussing Apple’s plans, be very careful about mixing up US-focused strategies and global numbers.

(Bonus chart. During research, I found this amazing chart at Asymco. It should look familiar.)

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Most Important Story of the Week – 6 September 2019: Quibi, Quibi, Quibi

Welcome to September. The kids are back in school, football is starting, and award season is bearing down on us like the Huns invading Rome. Meanwhile, the streaming wars will have their first battles, “The Invasion of Netflix-Land” by Disney’s 4th Army across the land will be joined Apple’s Airborne Channel Brigades. 

Meanwhile, one of the most talked about companies isn’t launching until…I still don’t know? And since I haven’t mentioned them, they get the top spot.

The Most Important Story of the Week – Quibi, Quibi, Quibi

Let’s take the Quibi story and change the name.

“Starting next year, NBC-Universal is launching MeeshMosh, a subscription short-form video on demand service designed for mobile. They have signed deals with top tier talent like JJ Abrams, Jordan Peele, and Greg Daniels. This will cost $5 a month with ads and $8 without. NBC-Universal plans to spend billions on this content in just the first year.”

To be clear, that is NOT true. I made it up. But if I presented that business model to you a year ago, would you have been ready to declare it the next champion of the streaming wars? No, right?

But that’s just the Quibi pitch with a different company. I can’t prove it but I don’t think that the current crop of Quibi fans would be as supportive of the NBC-Universal version of Quibi as the Quibi version of Quibi. What does Quibi have that NBC-Universal doesn’t? 

I can think of two things. First, NBC-Universal is legacy media and entertainment. And some observers just disdain anything that reeks of old Hollywood. The future is new and tech and disruptive, which is hard when you’re run by a cable company.

Second, is the “who”. You can’t read an article about Quibi without the inevitable mentions of Jeffrey Katzenberg. He is Quibi. Followed closely by Meg Whitman (of eBay, Hewlett-Packard and gubernatorial campaigns fame). Clearly a lot of the fandom of Quibi doesn’t reflect optimism over the product or content, but a bet on the founders being able to make good content and release a good product.

That’s why the news of the week is just a tad concerning. Over the last two weeks, the head of partnerships (Tim Connolly) and the head of news (Janice Min) left Quibi before it even launched. Listen, I don’t value any individual employee, even CEOs, super highly. Usually, the data is too noisy to draw judgements. But I don’t like “exoduses”. Two isn’t an exodus, but any more and we’ll start to wonder if Quibi is going HBO on us. 

Would folks have a reason to leave? These quotes from Dylan Byer’s scoop in his newsletter worry me:

Min had frustrations with Katzenberg’s management style, the sources said. The Hollywood mogul, though widely respected, is also known for being headstrong and relentlessly opinionated…

So if the strength of Quibi was its team, but that team isn’t actually functioning, what is its strength? Short form content? Do we not remember Vessel? Or Go90? YoutubeRed? Sure, a subscription for Hulu, Disney+ or Netflix at $8 makes sense–that’s long-form video–but do people want to pay for short form content they can mostly get for free?

Of course, Vessel, Luminary and Youtube all had/have different content strategies and pricing. Maybe Quibi will be the right mix of price and content to drive subscribers. But I’m skeptical.

(Josef Adalian has a good long read on Quibi’s plans here.)

Entertainment Strategy Guy Retraction Watch – Disney+ Vault Edition

Since I’ve called out others for potentially bad data, I should do the same self-reflection. Last week I heavily speculated that when Disney+ launches, it may be missing a few of its classic films and quite a few Pixar films. I did this based on a list of confirmed films at the LA Times and Bob Iger’s statements in the last earnings report. 

A few readers pointed out some other sources of information contradicting this assessment. In particular, at Disney’s Investor Day, they said the 13 “signature” films would make it on the service. I updated my Part II last week this data. Then, as the week went on, I discovered a few new data sources…

The New Data

On last week’s TV Top Five, Lesley Goldberg said that Disney said at D23 that the 13 signature films would be available on Disney+. If they repeated the 13 films at launch at D23, that’s pretty definitive, though it still leaves the newer Pixar and newer Disney films in the air.

Then, I read this great article from The Verge’s Julia Alexander reviewing Disney’s UX and platform from a D23 demo (which is worth a read). It doesn’t have any screenshots of films that weren’t in the LA Times announcement. Which could mean nothing, or could mean some of those films won’t be available at launch, as I initially speculated. 

The Chasm of Silence

The other data is the “dogs not barking” scenario. Which is I put up an article–and though my readership is small–I haven’t heard anything from Disney’s communications people. If they know I’m wrong, why leave out bad information? To further the silence piece, if Bob Iger knew that Disney’s 13 most important animated films will be available at launch, why not mention that along with the 8 Star Wars and 4 Marvel films? It seems like an obvious point to make.

My Explanation

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Most Important Story of the Week and Other Good Reads – 30 August 2019: The Rain in Spain is Streaming

My weekly column this week was initially about Disney+ library content. And surely, you saw how that turned into 5,000+ words of speculation. As a result, I’m going to go a bit quicker of an update this week. I kept returning to one article that inspired several ideas, so let’s make that the story of the week. (And since that came off, run a bit shorter today.)

Most Important Story of the Week (and Long Read) – The Rain in Spain is Streaming

The long read is this THR article by Jennifer Green, “How Spain Became a Case Study for the Global Streaming Wars.”

Well, you had me at “Case Study”! In seriousness, the “streaming wars” may be a true world war, fought territory by territory, country by country. Meaning this Spain case study is a pretty good stand-in for many countries to come. Here are some other insights or random thoughts I had.

Insight 1: The Value of Local Content/Employees

One of the aspects of the streaming wars I’m really curious about is how local streamers fare against their global rivals. In the Spanish case, it’s Movistar. Honestly, what is more American than an American company (or four) believing that they can launch global media companies that can simultaneously reflect the value of every local country?

As a result, studios need to rely on local content, but existing networks and streamers may understand the market dynamics better, putting the new streamers at a disadvantage. This is a tension I’m curious to see how it plays out. (This also pairs well with this article also in THR about European Networks from July.)

Insight 2: Everyone is coming simultaneously.

Sure, Netflix beat all the streamers to market. But they’re all coming simultaneously from Disney to Amazon to Viacom even. And again this will be replicated country-by-country around the world. 

This makes me more optimistic for local streamers. Instead of fighting a global battle for dominance, they can focus on winning in their region with their unique understanding of the market. Of course, there is the counter about global size, but wait two insights for my thoughts on that.

Insight 3: It isn’t “hits”, it’s portfolio performance.

Let’s say I’m running your mutual fund. (Wait, those are out now? Then, let’s say I’m running your hedge fund.) Back in 2007, I put a bunch of money into Disney and Apple. (True story.) Guess what? We made lots of money together.

Wait, you want to know how the rest of the fund did? Why? I had two hits. That’s all that matters.

“No, it’s not!” You say. “How were the rest of your picks?” Well, I put money into Chipotle a few years back…guess that wasn’t smart? The point is when it comes to investing, you analyze the entire portfolio.

The exact same thing applies to content portfolios. So congratulations to Netflix on having a hit in Money Heist (La Casa de Papel) as foreign-language, specifically Spanish-language series. The key question for all analysts and business types is: What was the hit rate? Without the denominator (total produced/acquired) the numerator (the hits) doesn’t matter. The article says Netflix has 20 Spanish originals in production, how many have they bought to date?

Take this article from WAY back I’ve been holding onto. Netflix is making 50 (50!) productions is Mexico. I guarantee when one becomes a moderate hit in the US, it’ll get hyped as “proving” Netflix is making money in Mexico. But without repeating the hit rate, we really don’t know. (And go here for my controversial take on Netflix’s hit rate.)

Insight 4: We do NOT know if Netflix overpaying for international originals is paying off.

Besides hit rate, it also depends how Netflix allocates content. Right now, Netflix and Amazon overpay in every market to get global rights. Which is strange: it isn’t often you can pay the most for eveyrthing and generate a good return. The key is how Netflix both allocates costs and then that pesky hit rate I just mentioned. If they assume a Spanish-language original generates half its money from North America, and it isn’t popular here, that may not be a good call. If they keep allocating most of the cost to the country of origin, then how can they possible make the money back?

All to say that the streaming wars will have multiple battlefields and it will be fun to see how they play out. To conclude, two random thoughts.

Random Thought 1: A new datecdote!

I missed that Money Heist had 34 million viewers during its first week. A new datecdote for the tracker. It doesn’t really change the distribution of hits for Netflix.

Random Thought 2: Bundle by Rich Greenfield

This isn’t an insight from me, but this Rich Greenfield tweet gets at how competitive it is in Spain too. And how the bundle always makes a come back.

Listen of the Week – NPR’s Planet Money on the “Modal American”

I love a good walkthrough on how to do data analysis well. So thank you Planet Money team for providing it! In their quest to find the “average American”, they turn to the mode to find the most “common” American you are likely to run into.

Of particular interest to long time readers is the mention of distributions as an example for why averages can be so misleading. Take age: America has two humps in our age distribution, the Boomers and Echo Boomers (nee Millennials). Thus, the median average that is somewhere between those two group (in the Gen Xers) is wildly misleading.

How can you use this? Well, do you use advertising to target your entertainment customers? Do you use overly broad groups like “ages 18-50”. Why? Some smaller demographics may be much easier to target.

More relevant is how you use data in the first place.  I’ve seen so many presentations, reports, analyses but especially news articles that give you the average. It’s always the average. But the average tells you nothing! The distribution is everything. If you run a business–and some of my readers do–don’t accept averages from your teams. Demand distributions. (My writings on distributions here.)

ICYMI – Entertainment Strategy Guy at The Ankler

If somehow you don’t subscribe to it, I was fortunate to be featured in last week’s Ankler newsletter by Richard Rushfield. I write about the “coming” M&A tsunami, which I’ve been harping on for a year. If you are an Ankler fan, I can say that we’ve been talking about combining our talents for a few projects so stay tuned.

Other Contenders for Most Important Story

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Most Important Story of the Week and Other Good Reads – 23 August 2019: Apple+ and The Case of the Missing Content Library

Last week, I tried to solve the mystery of who killed Game of Thrones. Well, throw on the trenchcoat and Fedora because I have another mystery. This time a missing person, er, library.

The Most Important Story of the Week – Apple’s Non-Existent Library

My theory of the case is pretty simple:

It is BANANAS to launch a streaming platform–and charge $10 a month for it–without library content.

It might be unprecedented. We’ve had subscription services launch without original content. (Netflix, Hulu and Prime Video in the early days; some movie platforms too.) But we’ve never had a service launch the opposite way. All originals–and not even that many–but no library? Truly, Apple is zagging while others zig.

But as much of a fan as I am of zagging, sometimes you can zag off a cliff. To explain, let’s retell the history of why companies have used library content.

Historical Reasons for Content Libraries

Going back to the dawn of television–we’re talking broadcast here–you had to have something on your channel at all times. Especially in the hours after work. If people turned on the TV, they expected to see something. As the medium matured, the broadcast networks controlled the primetime hours, but the local stations controlled the other hours. Local news was a cheap way to add value, but even then you couldn’t do all local news. So you bought old TV programs and reran them. This was cheaper than making your own shows, but still kept people on your channel.

As the cable bundle turned out to be really valuable, everyone wanted their own cable channels. These channels started as a low-cost proposition of buying old movies and TV series. It was only after years of programming like this that the cable channels eventually turned to premium scripted fare. AMC is the classic example here. Start with classic movies–which are dirt cheap–then move up the value chain. As Jack Donaghy said about another channel, “I remember when Bravo used to air operas.

In a weird twist, in the last two decades new broadcasters have emerged. Same low cost business plan. Leveraging must carry rules, broadcasters like Ion TV (launched 1998, rebranded 2007) and MeTV (launched 2005), are basically all old TV series and some films. Again, the goal is to just get some tune in in the cheapest way possible. (For the TV series, their syndication costs are super low after many previous runs.)

The streamers basically repeated this plan. Netflix and Amazon Prime Video started with old TV series and movies. Then they moved to newer movies and newer TV series and eventually started making their own. But in the beginning, the goal was eyeballs cheaply. Which meant library content. 

In each case, the logic is the same. You have the “bangers”–to steal from the British EDM scene–to get people in the door. That’s Pay 1 movies and new TV series. But to keep people watching, you need a huge volume of cheap content people already like. In short, library content provides “bang for buck”. 

So what could Apple be thinking? If they weren’t charging for these shows, I’d understand. But they may charge $10 a month for it. (More on that number later.) So I have a ton of conjectures.

Theory 1: Customers have to have a subscription to get channels.

This would be my guess if I knew it weren’t already false. Essentially, Apple+ will be a “tax” folks pay to use Apple Channels. This would resemble Amazon’s approach. You can’t use Amazon Channels if you aren’t already a Prime member. So Prime Video acts as a basis of content to the Amazon Channels line up. (Of course, Prime is 94% about free shipping, but don’t tell them that.) Looking at Apple’s website, this doesn’t seem to be the case. Moving on.

Theory 2: The Apple Bundle

Everyone seems to be assuming that Apple will offer a new bundle where the Apple+ is just added on. If you already pay for Apple Music at $10 a month and Apple News for another $10, well add on Apple+ for the whole thing for $5. Except, $5 is still too much if you don’t watch any of the new shows. Again, library content would help the bundle too. So this doesn’t explain why they don’t have any library content either. Next option.

Theory 3: They needed a library right when it got expensive.

Things escalated quickly–to quote Ron Burgundy–in the streaming wars. 

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I think at the start of 2018, a streamer could have assumed that content libraries would still be available for the right price in 2019. And Apple has been planning this launch since at least then. But then the Friends kerfluffle happened and Disney pulled all its content from Netflix and NBC is pulling all of its content. Yikes! All the content is gone, right when Apple needed a content library,. If you can’t buy a content library, well the other option is…

Theory 4: M&A is expensive, AND they don’t want it.

…buying a studio. If you bought Sony, they’d have to give you their content library. MGM or Lionsgate would be other options. Why make your number 2 a deal guy if you don’t plan to do more M&A? So why haven’t they?

Despite breathless proclamations about tech behemoths buying studios like Sony or Fox or Lionsgate or whoever, most of those tech executives have seen the history of studio acquisitions. You buy a studio to get content (cough Sony cough) and regret it within the year. AT&T and Disney may have both just overpaid to buy studios too. Why buy a studio with all the baggage and extra headcount when you can just build your own studio? Apple made it’s number a deal guy, but yet we haven’t seen any M&A. Maybe they planned to, but just couldn’t find the right deal at the right price.

And they likely said, “You know what, we can just do it ourselves!” Amazon and Netflix are.

I don’t quite buy the “buying a studio” is a worse deal than “building it”. And I have a bias towards building where possible. The challenge is speed. It turns out making TV shows is tough. Especially to do it well, on time and on budget. I’ve heard Apple has had trouble doing all three. And then going from zero shows to hundreds is even harder. So the “building a studio from scratch” plan seems much harder to execute in real life than on paper. (I should write more on this right?)

Really, the two numbers don’t make sense.

At the end of the day, the two numbers released this week don’t make sense. You can either launch a free TV service to bring people in, but then you can’t afford $6 billion in content spend. Or you can spend $6 billion on content, but you desperately need a library. One explanation is that both these numbers are wrong–which to credit reporting press–I’ve seen several arguments for that. Dylan Byers, for example, threw cold water on both numbers. So as long as we’re doubting all the anonymous numbers, let’s doubt teh whole thing.

Theory 5: There will be library content, they just haven’t announced it yet since it isn’t buzzy.

That’s actually a pretty reasonable theory, at which point just ignore this column. 

M&A Updates – Hasbro Buys Entertainment One

Hey there! Last week CBS and Viacom; this week Hasbro buys Entertainment One! The M&A tidal wave truly is rolling into town. Though, to show again how wrong those predictions about the M&A tidal wave were, here’s ANOTHER look into how M&A in entertainment peaked, if anything, four or five years ago.

Screen Shot 2019-08-23 at 8.24.05 AM.png

Source: Bloomberg

On to this deal specifically. It probably says more about the toy industry than it does the film or TV industry. Toys have been squeezed for a couple of different reasons–not all technological, though that hasn’t helped–and the safe harbor under pressure has been licensed toys, which sell better with brand recognition. As a result, all the toy companies have been trying to launch their own IP, to varying levels of success. Hasbro basically bought the best free agent available. What comes next? Probably not too much. Despite rumors every so often, I don’t think Disney wants or can afford to buy a toy company. Mattel neither.

Other Contenders for Most Important Story

The Big Bang Theory and Two and a Half Men Going to HBO Max; Seinfeld is Next

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Most Important Story of the Week and Other Good Reads – 16 August 2019: It’s Not The Size of the Merger That Counts, but How You Use It

It’s tough to stand out in the crowd of reporting this week on the Viacom-CBS merger. I was primed to pass strategic judgement on the merger, but don’t feel quite ready to do that (yet). Instead, let’s try the good ol fashioned Entertainment Strategy Guy slightly different take. 

The Most Important Story of the Week – Viacom and CBS Merge for “Scale”

Specifically, some context on the biggest word of the week “size”. 

(Programming note: I’m already calling the remaining pieces of 21st Century Fox “NuFox” and I refuse to call ViacomCBS that name because it is awful. I’m calling them SuperCBS for today’s article.)

This deal is about “size”, but what does being “big” mean?

This was the widely repeated headline of the week. The buzz for this deal was that Viacom and CBS had to merge to get bigger to compete. That’s actually been repeated for weeks. Here’s a sampling from Recode, NBC, and Indiewire, either using that set up in the headline or quoting an analyst. (And in fairness, I think Bob Bakish and/or Shari Redstone has said this too.)

IMAGE 1 Recode Size

Image 3 NBC News

Image 2 Indie Wire

The piece of the coverage, though, that bugged me was that if I did see “size” quantified, everyone trots out the same measurement. 

How did we measure size this week? Market capitalization.

This Recode visualization (and it really is high quality work, I’m just using it as an example) shows size by market capitalization.

IMAGE 4 Recode Market Cap

Axios made a similar chart here. (Again, a great visualization and they’ve been doing great work.)

Image 5 Axios

These are just the two visualizations I saw. Most other articles referred to market capitalization for the need to get bigger in the current entertainment landscape. I mean just look how small CBS is!

The problem with market capitalization as a metric.

Let’s start with an analogy to explain why this doesn’t make sense. And of course, I’ll use an NBA analogy. Let’s say I told you someone was the biggest player in basketball. Am I talking about height? That’s what you’d assume, and that’s the most common measurement in the NBA. Of course, those people really in the know understand that arm length is actually more valuable than raw height. Combining the two for “reach” is another measure that is arguably better than either of the previous two.

But why talk height when I said “big”. Maybe I just meant weight. So who is the heaviest basketball player? While being heavy doesn’t matter as much, tell that to centers facing Shaq at his peak. The point? When it comes to “size” in basketball, we have multiple ways to measure it.

One more analogy? Okay. My other go to is the Army. When it comes to militaries, you can measure the total number of troops (manpower), the total military expenditures, the total number of vehicles, the weight of the combined vehicles. The amount of firepower that can be brought to bear. (One guy with a machine gun is worth many with an assault rifles, for example.) And on and on. Again, when saying “biggest” you can measure in so many different ways.

The challenge for me, when using market capitalization–share price times shares outstanding–is that it relies so much on the opinion of the market (Wall Street). Which is fine. It’s accurate as far as anything is accurate in today’s efficient market, because the market is efficiently allocated. You can ask the Nobeler’s precisely what that means. (Fine, there is no Nobel prize for economics, but you know what I mean.)

But an example gnaws at me when it becomes the stand in for size the way height is a stand-in for size in the NBA. Take Netflix a few weeks back. They had a bad earnings report and suddenly they lost 20 billion in market capitalization with a 10% share price correction. So did they become 10% smaller overnight? In basketball you don’t just shrink because the market decides you aren’t as tall. Your size is your size.

(Also, market capitalization ignores debt. Which matters since debt holders get paid first. Really have to use both, which is “enterprise value”.)

Instead, if we want to compare size, we need to go a pinch deeper.

What are other measures of financial size?

When you talk companies, you think of organization designed around making money. The ideal measures could help give insight into how much revenue a company could bring in, how efficiently it brings that in, how many users it has and how much market share it has.

So here’s a table on it. I picked the three parts of the income statement (the top, middle, bottom), free cash flow (profit is opinion; cash is a fact), and some other potential measures of size. But the key–to really get the context–is to find some yardsticks to measure them against. In that vein, I picked four rough competitors: Netflix, the digital only superstar, Disney, the content king, AT&T, the telecom company with dreams of more, and Apple, the tech behemoth. 

IMAGE 6 - Financials

(For those who don’t know, revenues is all the money a company makes; EBITDA is after most of your non-financial type costs are factored in; profit is the money you make after you pay taxes and stuff. Free cash flow is subtly different because it’s the actual amount you make, which can be different than profit because of depreciation and amortization. The last two columns are the “indexes”. Roughly, anything over 1 is bigger.)

Here’s another example to heap more hatred on market capitalization. Say we’re comparing two companies. One makes more money (line 1), and generates three times more profit off that money too (line 3). On top of that, one company is losing cash every year (though they are profitable) (line 4). Well, obviously, if I asked you, “So who is bigger?” you’d answer the company making more money. But that’s CBS compared to Netflix.

Or take content spending, which is also a pretty good stand in for size. Right? With Netflix, you often see the $15 billion floated out there, but Disney beats that just on non-sports programming. Throw in sports and they’re much bigger. Heck the combined SuperCBS isn’t too far from Netflix on spending, and maybe the $3 billion gap is just the difference between profitability and growth.

Oh, and of course there are subscribers. That’s a measure of size too. The tough part when measuring anything is figuring out what matters. Everyone in the media focuses on digital subscribers, which is line 7. Yep, Netflix is way out in front. But why do linear subscribers not count? I essentially pay ESPN $9 a month. I pay HBO some split of the $15 for my linear feed. Sure, the companies don’t own my relationship–the cable company does–but they still have paying users. To show the “total” between digital and linear, I just added the 89 still around linear subscribers for CBS and Disney, and HBO’s roughly 45 million subscribers. So again, yes SuperCBS on one measure isn’t big enough; on another it is.

Of course, when we’re talking size, really everyone is scared of the last column. Apple makes more in cash than Disney makes in revenue. Yikes. That’s why Apple (and Amazon/Google too) can fearlessly “disrupt” the entertainment industry by losing lots of money to gain a foothold. 

Size does and doesn’t matter.

I don’t want to go overboard in counter-intuitive programming here. Obviously, size matters in providing a company leverage to negotiate with suppliers and customers. And the ability to lose billions in free cash flows–as Apple, Amazon and Google can–is a competitive disadvantage. (Though, not necessarily smart for investors.)

Of course, size by any metric only matters in how you can use it, which may be my biggest gripe with the market capitalization metric. It’s pretty easy to understand how revenue through to cash flow gives you an advantage the larger it is. (The more money you have, the more you can spend.) Market capitalization, though, isn’t really a tool you can leverage, unless it is to offer more shares to raise capital. Which is yes a tool, but not one used as often as your own revenues.

Most importantly, size–like M&A as I’ve written before–isn’t a strategy. And we should never pretend it is. Instead, strategy is a strategy. As I’ll write in the future, Shari Redstone and Bob Bakish’s challenge is to take this combined entity–that really is big enough to compete–and develop a competitive advantage in this landscape. That isn’t impossible. But it is so hard to do well.

Long Read of the Week – Good Reads on The Merger

So many excellent articles this week on the big story of the week. Apologies if I left out your take.

Alex Sherman at CNBC on “CBS and Viacom have finally agreed to merge — here’s what they could buy next”

Sherman had the best, “What should they buy next?” article after the merger. (Besides mine, of course.) But most importantly he used Enterprise Value instead of just market capitalization. Bravo.

Brian Steinberg on Madison Avenue‘s Perspective

SuperCBS will control 20% of national TV advertising. That’s big. Steinberg digs into the challenges facing the new entity.

Scott Porch at Decider “Why CBS and Viacom Are (Probably) Merging And What Happens Next

Porch wrote this before the merger, but I love his layout for how size will help SuperCBS in some specific areas like distribution.

ICYMI – Decider “The Boys’ Is a Hit for Amazon, But What Does That Mean?

While we all waited for Viacom and CBS to merge, Amazon had “one of” their most successful TV series launches. “One of” what does that even mean? Well, I took 800 words to take my best guess over at Decider, then followed up with another thousand on this site. (The answer? Yeah, for Amazon, this probably is a hit.)

Data of the Week – No More $200 million Blockbusters

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Most Important Story of the Week and Other Good Reads – 9 August 2019: We Have a (Disney) Bundle!

When a company beats quarterly expectations, the CEO usually celebrates it. When the company misses–as Bob Iger’s Disney did this quarter, well–the CEOs say they don’t care about expectations. I agree with the latter position, though I wouldn’t celebrate beating expectations either! For box office or earnings, it’s what’s actually happening that matters, not the expectations of what could have happened.

Especially since that focus on expectations can lead us to ignore the biggest story of the week…

The Most Important Story of the Week – We Have a (Disney) Bundle!

Too many people to name realized that the entertainment world was being disrupted. Probably sooner than I did, honestly. The disruption came from the Netflixes of the world, who provided a cheap (subsidized) alternative to TV. As they took eyeball-share, the traditional entertainment conglomerates realized they needed to launch streaming platforms of their own.

Then a lot of people realized if everyone had a streaming platform, well customers would need a holistic way to subscribe and watch it all. Eventually someone would offer a way to subscribe to multiple streaming sites at one time. This idea wasn’t that creative, hence the rise of the aggregators: Amazon, Hulu, Roku and soon Apple have or will offer the ability to subscribe to all the streaming sites. (Except Netflix.) 

Recently, a group of people have come to the next logical conclusion. As long as all the subscribing to channels is taking place at the same time, on the same platform, instead of selling all the different streamers a la carte, you could make everyone happier by offering the best streaming sites together in one big package. In return for a lower overall price for customers, they’d get more content and all the streamers would get more reliable revenue streams.

We could call this combined package “a bundle”.

Which is what we used to call the cable TV package of channels.

The bundle lives!

With Disney announcing the bundle of Disney+, ESPN+ and Hulu (with ads), we have our first bundle. If CBS merges with Viacom, I’d expect a CBS All-Access, Pluto, Showtime and Viacom-something bundle. Amazon, as I just said, has probably explored offering a bundle of it’s “Amazon Channels” and Apple has been rumored to be planning a bundle. This week, Disney made the pretty obvious speculation a reality. The next step is for different companies to team up on the bundle.

If you think of streaming services as simple “on-demand TV channels”, it really is just the natural evolution. Everyone channel/streamer has some show a lot of people want to watch. They want Game of Thrones on HBO, Stranger Things on Netflix, Marvel movies on Disney, Star Trek on CBS and maybe The Office on NBC. (Or maybe that’s my wish list as a sci-fi fanperson, but you get the point.) Even if they don’t like every channel, it’s cheaper to offer everyone a huge bundle of channels and thus more choice overall.

So we have our first bundle with Disney. Long live the bundle.

Other Thoughts

That’s not all my thoughts on Disney’s earnings report. I put out two very, very long threads on Twitter, first with my initial reaction and then with my day after thoughts. Here are the greatest hits.

Thought 1: The price is delightful. Bob Iger said it was a coincidence that his new bundle priced at exactly Netflix’s standard tier. Good one. I agree with Alex Sherman that the primary implication of this is that it will be harder for both Netflix and HBO to raise prices now. I hope they have theme parks to fall back on to make money in the interim.

Thought 2: ESPN+ Doesn’t Have a “Killer App” Yet. As I debated the value of the new bundle in my head, I couldn’t come up with a good case for ESPN+. Even calling it “niche” is probably too complimentary. They need a killer piece of content that customers have to have, the way Disney+ has Marvel, Star Wars and Disney princesses. My recommendation is NFL Sunday Ticket. That would take ESPN+ of niche to must-have to tens of millions of sports fans (many of whom likely have kids who want to watch Disney+.)

Thought 3: Who wins the battle for T-Mobile/Sprint’s subscribers? This is the battle everyone should pay attention to next. Does Disney offer this new bundle to T-Mobile subscribers, or does Netflix up their game and offer high-definition subsidized to T-Mobile subscribers? Or does T-Mobile keep both deals and offer the choice to customers? Whoever wins this battle could have another leg up in the streaming wars.

Thought 4: Disney may have overpaid for Fox. Which isn’t a huge surprise since the fee ballooned with Comcast’s bid. But given the scale of integration, and now the underperforming of 21st Century Fox’s movies, Disney may have paid a lot when they really just wanted some IP assets and the Hulu ownership. (And Hotstar in India.) Of course, you can overpay and still have a deal be key for your future strategy. So it’s not all doom and gloom. But overpaying for anything makes getting a good return on investment that much harder.

Other Contenders for Most Important Story

Locast – The antenna non-profit gets sued

For a tiny non-profit, Locast has stirred up a lot of news coverage. As others have mentioned, it’s essentially Aereo 2.0, meaning a digital delivery of a remote “antenna” grabbing local signals. The key difference is it is being run as a “not-for-profit” by a former Dish lawyer. Given that retransmission fees are a key part of the broadcast channels profit models, they immediately sued to stop it.

I would have ignored this story–and I kind of have been–since I think the prior court rulings are fairly definitive, but AT&T made it a negotiating position with the CBS blackout. That seemed to elevate this issue from “start up trying out a new technology” to “massive conglomerate backing a startup to get lower fees”. While it’s unlikely that Locast survives in court, the biggest takeaway is that the satellite companies, at least, don’t want to pay retransmission fees anymore.

Other Earnings: Roku Passes 30 Million Users

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Most Important Story of the Week and Other Good Reads – 2 August 2019: Sprint & T-Mobile Clear Another Hurdle

Talk about an easy choice. I told you last Friday’s news about Sprint/T-Mobile would be the most important story of the week and nothing has stepped up to replace it.

The Most Important Story of the Week – Sprint & T-Mobile is Now Very Close

The merger of a German telecom giant’s US cellular operation (T-Mobile) with a Japanese tech-telecommunications giant US cellular operation (Sprint) is almost complete. It got the Federal government’s blessing via the antitrust division of the Department of Justice not moving to block it. This merger would fundamentally reshape cellular communications in the United States. Moreover, the deal would produce some strange winners and loses. But instead of recycling the “winners and losers” conceit, let’s try “who does this help, hurt or hinder?”

Help: AT&T and Verizon

And don’t let them tell you different. As the number of companies in an industry shifts, the amount of competition decreases and hence prices (and profits) rise. Eventually, if you get to one single company, well it becomes the monopolist pricing situation. In this situation, they extract all the value they can from customers. If you imagine this as a timeline of possible cell phone concentration, well we’re two notches from complete monopoly. 

Even if AT&T and Verizon have a stronger new competitor (and don’t forget AT&T tried to buy T-Mobile this decade), going from four to three competitors is good for all the incumbents.

Help: Dish (and its new mobile provider)

Dish is probably in the most trouble of the MVPDs as they face declining video subscribers, but don’t have the ability–like cable companies–to just raise the prices on internet access. (Better margins on that business too for cable companies.) As a solution, Dish has been buying up wireless spectrum with the now revealed plan to launch their own cellular network. If this merger had been blocked, Dish would have lacked that pivot ability and would have had to spend much more to get in the cellular game. Whether Dish can truly pull this off remains to be seen, but this merger will help.

Help: Softbank

Read Bloomberg’s Tara Lachappelle for this one:

Image 2 - Softbank

And that last sentence helps reinforce that this deal helps all the incumbents as well as Sprint/T-Mobile.

Hold: 5G Implementation

The biggest explanation for “why let them merge?” seems to be “for faster 5G implementation”. The challenge is that no matter what companies say to get approval for a merger, they don’t have to really do any of it. This line from Matt Yglesias’ article on the merger stuck with me, referencing Comcast’s merger with NBC-Universal:

IMAGE 3 Vox Quote

Even if the company’s promise 5G implementation, if they fail and they’re already merged, what is the government going to do? Break them up? When was the last time that happened? Under an Elizabeth Warren administration, maybe her Department of Justice would. Under everyone else? Probably nothing would happen.

Meanwhile, the easiest way to advance giant infrastructure projects is government spending on infrastructure. If you want 5G, you just pay cellular phone companies to build it. We could debate the method (direct government spending, low interest loans, tax rebates) but government spending gets things built faster than the private sector using capital markets. This merger may accelerate 5G investment but could just as easily not because of the lack of a competition motive.

Hinder: Antitrust Enforcement

Antitrust enforcement in the Trump Presidency (and this isn’t political, but about forecasting) has been very uneven. The Department of Justice sued to stop AT&T’s merger, even though Disney’s merger with Fox was arguably larger. Then Trump’s DoJ supports the T-Mobile/Sprint merger, even as it launches investigations into big tech for monopoly power. Overall, there is just a level of incoherence that a lot of smart people have pointed out.

Hinder: Giant Tech Companies

More consolidation means more control over mobile access to the internet, with potential restrictions on the big players from Netflix to Amazon to Google, depending on the service and need to access the cloud. At least that’s my near term take. Longer term, I’m intrigued by the theory that 5G will strengthen the cloud based companies, which could benefit Amazon, Microsoft and Google. Still, consolidation in one industry increases that specific industry’s buying and selling power, which hurts the businesses that have to use that platform. Fortunately for them, the tech giants are huge.

Hinder: Regulatory Certainty

Before the Department of Justice blessed the merger, many state Attorney Generals had sued to block the merger. That lawsuit may not start until December. So this merger may go through, or may still be blocked or in limbo for years. That’s uncertainty for everyone which is bad for business.

Hurt: Either Hulu or Netflix

Both T-Mobile and Sprint have deals offering free Netflix and Hulu respectively to their customers. Invariably, this flood of subsidized customers helps boost overall subscriber numbers. Will the new T-Mobile keep both deals? Unlikely, so inevitably one side will lose those subscribers from the mobile deal.

Hurt: The Unaffiliated Streamers

Related to the subscribers is one of the next “carriage wars” I described a few weeks back. Even with 5G, mobile data and bandwidth will be a weapon mobile carriers can use against streaming companies. In other words, if you only have three mobile carriers, they can demand extra fees to carry your streaming content over it’s airwaves. In economics, that’s called rent seeking. Given their leverage, it’s hard for me to see how that doesn’t happen. Which leads to our last point…

Hurt: Customers

I already told you this above, but some combination of increased prices or decreased quality is in the offing for customers. My most likely guess is a hypothetical roll out of 5G, but at much higher prices than in a competitive industry.

Other Contenders for Most Important Story

BritBox Plans to Launch in UK

Thanks to Twitter reader Jack Genovese for this suggestion. And even though I had Tweeted out the Axios Media newsletter on this last week, I somehow ignored it myself for last week’s column. The news is that BritBox, an ITV/BBC joint streaming platform that launched in North America will launch in the UK. Which feels slightly odd that the British are now in a territory where by definition all their shows are already, but in a cord-cutting world it all works out.

Tthe update this week is that all that good BBC back catalogue–the type of stuff that helped grow Netflix early on–is going to HBO Max. Which seems weird that it wouldn’t go to BritBox itself. My guess is that AT&T just had deeper pockets and is willing to spend a la Netflix in the early days. Meanwhile, Digiday says that while everyone goes Millennial, they’ve gone older to strong results.

CBS All-Access Surging in Dish Carriage Dispute

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