Category: Weekly News Update

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

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

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

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

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

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

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

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

What happened?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Some final implications:

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

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

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

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

unnamed

Other Contenders for Most Important Story – AMC+

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

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

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

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

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

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

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

This is backed up by the Google Trends:

Screen Shot 2020-10-30 at 10.35.36 AM

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

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

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

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

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

Screen Shot 2020-10-30 at 9.45.11 AM

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

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

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

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

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

Other Contenders for Most Important Story – Comcast Earnings Report

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

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

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

  1. Peacock has 22 million users.

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

  1. Touting the executive reorganization.

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

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

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

  1. Cord-cutting continued, but decelerated.

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

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

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

How Google’s Antitrust Case Explain Quibi’s Demise – Most Important Story of the Week – 23 Oct 20

Honestly, it’s either feast or famine with news in entertainment. Some weeks, I look at all the stories and can’t figure out what is the most important. Then other weeks, I have a plethora to choose from. This week fell on the “plethora” end of the spectrum.

Two stories led the pack. Quibi raised and lost $2 billion dollars. So that’s a big story. Yet, splitting up Google could have tens of billions of market moving ramifications. How do I pick when Quibi is so juicy, but Google is so important? Why, by combining the two! 

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

Most Important Story of the Week  – Google’s Antitrust Lawsuit and Quibi’s Demise

The background, in case you didn’t hear: 

– The Department of Justice under Bill Barr filed a lawsuit with 12 state attorney’s general arguing that Google is an uncompetitive monopoly in search. This lawsuit makes lots of similar arguments to the Microsoft case of the 1990s about using their power to exclude competitors. 

– Quibi is exploring options to shut down, as reported in the Wall Street Journal.

So how does the former relate to the latter?

To explain that, consider a thought experiment. Imagine that along the way, Jeffrey Katzenberg pitched Susan Wojcicki (the head of Youtube) the plan for Quibi. And she loved it. (Hypothetically.) She replies, “Jeff, don’t launch Quibi as a standalone service, we’ll buy it! And you run it as a standalone venture.” Then assume they keep everything else the same. The same budgets. The same product. The same everything.

Would Quibi still be around? 

Yes!!!

And the explanation is fairly simple: Google can afford $2 billion in losses over three years. In fact, Google can afford to lose $2 billion dollars every year on one business. And maybe more. 

My favorite example to show this is the money pit that is Youtube TV. When it launched, Youtube TV cost $35 per month. After adding some more channels, it bumped up its price to nearly $60. And that’s every month. For nearly 2 million subscribers. The thing is Youtube was likely losing money every month on Youtube TV, and potentially still is losing money every month on that service.If Google is losing $20 per subscriber per month, then they could easily be losing half a billion dollars per year. If not more. 

In other words, Google will easily lose billions on a speculative streaming venture.

This gets to the realization I’ve had debating the streaming wars over the last year or so. And it started with Apple TV+. Essentially, I’d find myself talking past folks when we discussed our opinions on Apple TV+. I’d say that I thought the lack of a library, lack of ownership in original content and unclear pricing were strategically bad decisions. Then folks would counter that it didn’t matter because Apple could afford the losses. The same arguments are made for Amazon and Google in a number of businesses as well.

But these are two different arguments. One is about the quality of the strategy. One is about the access to resources. These two questions help frame the streaming wars. And they are two questions we should ask about every major player (from both entertainment and technology) in the streaming wars:

  1. Does a streamer have a good business strategy?
  2. Does the parent company have immense resources to allow deficit financing?

For example, I’d say that Apple TV+ has a bad strategy overall, but they have a parent company that can shield those losses. And while Prime Video has eventually clawed its way into second or third place in the US streaming rankings, it likely has lost lots of money in the process. But who cares because Jeff Bezos is the world’s richest man.

We could go on, or I could make a quad chart to give you my take on this equation:

Screen Shot 2020-10-23 at 9.00.56 AM

For Quibi, a questionable strategy meant they ran out of business. For Apple TV+, who has arguably the same bad strategy (if not even more cash burn), it doesn’t matter because they can burn cash unlimitedly. Disney likely can’t afford perpetual losses. Netflix is the only firm in the middle because it’s strategy clearly worked, but it also lost tons of money. It also needs to make some money, because it doesn’t have a wealthy parent, yet some would argue the equity markets do that for them.

The lesson here is really for practitioners. The business leaders out there. Draw lessons from those with good strategy, not those who have cash resources you may or may not have the ability to match. Good strategy is still good strategy. (What is good strategy? Books are written on it, but for me it’s a product that matches the needs of a targeted customer segment that creates value over the long term, by leveraging a competitive advantage.)

Society could also take some lessons from this. The market should pick winners or losers because they have good strategies. Because that means companies are creating value. When external factors support money losing enterprises, it’s usually because they are trying to acquire monopoly power, which is bad for innovation and customers.

These are trends that Quibi tried to fight against, but ultimately failed. Too many folks are spending too much in ways that don’t require earning money for it to have a fighting chance. Whether or not Jeffrey Katzenberg and Meg Whitman should have seen that coming is an open question. And likely their business model was flawed, as I’ve written about before. But the reason they went bankrupt, ultimately, is because they didn’t have a parent company support massive losses. 

This is the power of Big Tech and while the current antitrust lawsuit isn’t about this price gouging specifically, it’s still about the power of Big Tech. 

Additional Google Antitrust Thoughts

– Does this impact M&A by Big Tech? Especially when it comes to big tech snatching up smaller entertainment companies? I constantly read that Amazon should buy Viacom-CBS. Heck, just last week I wondered why Netflix doesn’t buy Sony, since they license all their shows. A source said he’s heard a lot of rumors that Netflix wants to buy Viacom-CBS. All of a sudden, mergers for vertical integration purposes look a lot dicier.

– What about entertainment mergers? That’s a good question. The ire of antitrust litigators will likely stay focused on Big Tech for the foreseeable future. If the DoJ casts their eye of Sauron around, though, Comcast and AT&T are the next in the crosshairs, given their mutual penchant for mergers, the local and national monopolies and vertical consolidation.

– Is this bad for Youtube? Potentially. One of the easy remedies for the government to insist on is that Google divest Youtube to diversify the advertising market. Given that Youtube makes almost as much money as Netflix each year in revenues, this is a reasonable request. However, the current case makes no mention of breaking up big tech, and neither did the Cicilline report. 

– What about price gouging/predatory pricing in entertainment? This is much more of a stretch, but a potential spinoff branch of antitrust. In other words, under scrutiny, the DoJ could say, “Hey, if you run a video service as part of a vertically integrated firm, you can’t lose money simply to gain market share.” This is the least likely outcome of these questions, but if it were enacted it would have the largest ramifications on streaming video of any other decision.

(I had more thoughts on Quibi too that will be up at a different outlet later.)

Data of the Week – What Happened to HBO’s 88 million International Subscribers?

When I spent weeks trying to figure out how much money Game of Thrones made for HBO, it required understanding HBO’s subscriber totals. Unfortunately, Warner Bros (now Warner Media) never made it easy. Before 2011 they didn’t report anything, so I had to rely on news sources. When AT&T acquired Warner Media, it stopped reporting HBO subscribers at all. Meanwhile, they combined Cinemax and HBO subscribers in the same total, even though most Cinemax subscribers were subscribed to both. To top it off, Warner never actually broke out subscribers in a table, you had to search the narrative to find the totals.

Last earnings report, AT&T decided to bring back HBO subscriber totals. So I updated my long term tracker. But AT&T decided to only report domestic/United States subscribers. Huh. Then in the latest earnings report, they added international subscribers, but claimed it was only 21 million. Double huh. So here’s my updated chart for HBO subscribers:

Screen Shot 2020-10-22 at 9.11.17 PM

What happened to the 94 million at peak and 88 million as of 2017? And how high did it get in 2019 as Game of Thrones debuted?

I’ve reached out to HBO for comment, and will let you know if they reply.

Other Contenders for Most Important Story

Netflix’s Earnings Report

If you want my initial thoughts, here’s the Twitter thread:

Reflecting on it, I’m surprisingly sanguine about Netflix’s earnings. I thought the content was more of a drag than it ended up being. For example, the films did pretty well with three besting the 70 million households watched by 2 minutes viewed total (55 million at 70% completion by my translation). Here’s a chart:

IMAGE 3 NFLX Viewership

Caveats abound, as I like to say. First, the challenge is that the shift from 2019’s 70% completion to 2020’s 2 minutes viewed just crushes the narrative. As Netflix has said, this conversion usually means a show gains about 35% more viewers. That’s a lot. And if you took all the Netflix shows down to the 70% threshold, the numbers look less impressive.

Second, the weakness may have been in television more than anything else. Really, Netflix’s top three series are Stranger Things, The Witcher and Money Heist (La Casa de Papel), in that order. And the last of those does very poorly in the United States. Given that binge-worthy TV series drive time on Netflix, not having one of those really does hurt Netflix, and that’s why they likely missed subscriber targets in Q3. 

The End of the Fast and the Furious

All things must come to an end, but even Universal’s biggest money maker of the last decade? As others said, we’ll see if Universal can hold to this promise.

A New Contender for “Next Game of Thrones”

The big question for 2022? Which series will be the “next Game of Thrones”, as I wrote about here. More than anything, every streamer is trying to mimic the success of HBO, even though it’s not clear to me audiences are clamoring for more fantasy series. (Contrary point? The Witcher did great numbers for Netflix.)

The news is that Disney+ is adapting 1988’s Willow into a TV series. This series immediately has more importance than many Netflix’ series. Mainly because Disney+ needs quarterly hits to drive subscribers and this is in “white space” that isn’t Marvel or Star Wars. (Netflix has tons of TV shows to bank on.) Plus, it could appeal to adults. Also, full disclosure: I loved Willow as a kid but haven’t rewatched on Disney+, so guess I’m doing that this weekend.

Charlie Brown Heads to Apple TV+

Well, how about that for a licensed content acquisition? All my hatred on not having a library, and then Apple grabs the Charlie Brown holiday specials, which are a tradition in many homes, exclusively for their service. 

I love this move for Apple. (Caveat: price is everything, and I don’t know the terms.) For a service that needs growth, this is a great move. Honestly, I think it will drive more subscriber acquisition than Borat or Coming to America 2 for Amazon Prime Video.

Most Important Story of the Week – 16 Oct 20: Dueling Re-Orgs by Disney and Netflix

This felt like a light week on the big stories. In entertainment at least; in politics, well good luck keeping up. 

My eye was drawn, then, to the Disney news of Tuesday that they’ve re-organized to focus on streaming. Meanwhile, another Netflix executive left the original side of the house. By most measures, Netflix is the global and US leader in streaming, and frankly I think Disney+ is second.

So let’s look at these org chart changes for the two most important streamers and what they mean for their respective strategies.

(As always, if you enjoy this column, consider signing up for my newsletter to get my articles delivered to your inbox every two weeks.)

Most Important Story of the Week – Dueling Re-Orgs by Disney and Netflix

Disney Re-Orgs the Chart To Focus on Streaming

There is nothing like re-organizing the org chart to prove that you mean business in a given strategic pursuit. Thus, The Walt Disney Company–under all sorts of stress, from theme parks to sports ratings to a letter from Senator Elizabeth Warren about firing employees–has re-organized their business units and leadership to focus on streaming. 

Or so they said. In reality, I’m not sure. 

Let’s start with what we know, and what we know about who reports to whom. Kareem Daniels, who used to head consumer products, video games and publishing, is taking over all media operations and distribution, that includes both the US TV networks business, the US direct-to-consumer business and worldwide P&L. His title is ostensibly “head of distribution”.

Notably, it doesn’t include the movies studio (and subsidiaries), the TV production, the sports group, or the theme parks and merchandise group. Further notably, the head of international direct-to-consumer (Rebecca Campbell) will report to both Daniels and CEO Bob Chapek. Daniels has worldwide P&L, but Campbell reports to both.

The problem this is supposedly supposed to solve is that the TV groups will finally forget about all that cable revenue from ESPN and broadcast ad revenue from ABC and focus on making TV for the streaming future. It also may bury some of the losses from media networks and streaming in the same org chart, making it unclear how Disney is or isn’t making money on media.

My worry is first with the dual org chart part. If streaming is the future, it should have one leader who is responsible for it on a global basis. Which is really Disney’s goal here. Instead, my gut is Campbell will end up thinking in international terms whereas Daniels will focus on the United States. (Which still is the majority of Disney’s current revenue, mainly driven by ESPN.) Meanwhile, can US based production studios really think globally for content? Especially on the TV side?

The biggest driver of success this decade at Disney–feature films–remains independent. Though, I don’t hate that. If anything, this acknowledges that while home entertainment, Pay 1, Pay 2 and Pay Infinity are collapsing, the box office isn’t quite dead. Which means Disney’s films will still plot a course through theaters…whenever they come back. Of course, does Daniels have control over theatrical distribution too? Meaning that even the studios are just glorified production companies? Maybe there are more questions in this re-org than answers.

Long term, this change reinforces another constant struggle at Disney to differentiate between “the United States” and “the rest of the world”. If anything, it looks like Disney will have one streaming strategy for the states (America is Disney+, Hulu and ESPN+) whereas the globe is Disney+ and Star (with a TBD on ESPN+). As I wrote a while back, I don’t hate this. The jury is still out on producing global TV content holistically versus buying good local programming. 

Netflix Loses a Third Content Executive in a Month

When Netflix promoted Bela Bajaria to head of global TV content, this seemingly foreshadowed Disney’s move. Netflix had bifurcated content teams and they want all content decisions made by the same person, but this time the person previously focused on international content. This aligns with their global strategy, which is good.

But that’s old news. What drew my eye this week was the departures at Netflix. Last week, Channing Dungey, Vice President of Original Content and Drama, departed. This week, the head of original series followed her out of the door, as Jane Wiseman left

Those departures are not necessarily good news. If you’re Netflix, though, they’ve managed to spin every firing, or even wave of firings, as insanely positive. You “fail the keeper test” and they let you go.

That explanation doesn’t pass my own test, “the smell test”. In other words, I smell BS.

What is happening at Netflix right now isn’t some clever, new tech, disruptive approach to human resources. Nope, this is an old school Hollywood power struggle. A new executive takes over (Bajaria, by the way, trained in the classic dark arts of Hollywood politics) and then cleans house to bring in “their” people. 

If the strategy is going great, then firing a wave of executives responsible for that strategy seems…foolish? No? But then again, this is Hollywood and it wouldn’t be the first time an executive came in and cleaned house even when things were working. (For instance, Alan Horn leaving Warner Bros after winning the 2000s to go to Disney…why did they let him go?!?!?) 

If the departures gain steam, then serious questions are raised with only two negative explanations: Either Netflix is firing quality execs in a power struggle, or they had a content strategy that wasn’t working (despite press to the contrary). 

Do Executive Reshufflings Matter?

Yes and no.

(A point I’ll keep making until I die.)

They do matter because structure is one of the pinnacles of internal strategy exemplified by the McKinsey 7S framework. (I haven’t “explained” this framework yet, but I do love using it.) 

Screen Shot 2020-10-16 at 10.35.08 AM

Often we focus on external strategy and disruption. But having an internal strategy (skills, structure, shared value, systems) to execute that external strategy can be as important as the value creation business models. So critiquing whether or not Disney and Netflix have got that right makes sense.

But you’ll note I haven’t commented on the personal qualities of any of these executives. This is the no side of the equation. We don’t have a lot of good “metrics” for executives. So judging whether or not Kareem Daniels or Rebecca Campbell is better than Cindy Holland or Bela Bajaria feels like a fool’s errand. And half the time the celebrated new executive flops in their new role.

So these moves are critical, but it remains tough to judge if they’re doing the right thing.

Other Contenders for Most Important Story

Netflix Ends Free Trials

The masters of PR are at it again. And I don’t say this begrudgingly for a Netflix “bear”: I genuinely consider their press relations to be a source of competitive advantage. (I’d add their deal teams are particularly creative too.)

Thus, in August, Netflix announced they are making some content free for everyone, and got praise in outlets across the spectrum. Then in October, they shut down free trials in the United States–following a global trend–and no one reported on it until friend of the website Hedgeye’s Andrew Freedman asked about it on Twitter. For two weeks, no one realized Netflix had stopped free trials. Not a single article!!!

Ending free trials is fairly smart for Netflix, though it’s a warning sign for the streaming wars. It’s smart because increasingly customers are signing up to a service simply to binge the wares and bounce to the next streamer. Given that more folks know what they are signing up to watch and when, allowing this sampling is unnecessary for Netflix. 

(Anecdotally, I’ve heard that Starz, Showtime and HBO saw much, much higher churn numbers on Amazon Channels, which is one driver for HBO insisting that HBO Max stay off that platform. Amazon promotes churn, which is bad for the SVODs.)

The worry, for Netflix, is that the behavior is still there where folks churn in and out of streaming services. Netflix is as close as any service to the “universal” streamer. The “must have” everyone must own. But even they are seeing customers opting in and out of Netflix after customers have binged most of the stuff folks want to watch.

If you’re looking for numbers for the streaming wars, churn is in the top 5. Arguably the most important number. If churn goes up for everyone–including Netflix–that’s bad for everyone. My favorite theory of the streaming wars–from Richard Rushfield–is everyone is losing the streaming wars simultaneously. Churn is how that could happen.

(By the way, Apple TV+ is extending free-trials for some customers into February 2021. So maybe they really need free trials.)

Coming 2 America 2 is Coming to Amazon for $125 million joining Borat 2

Amazon is on a movie buying spree. Frankly, they’re taking advantage of films that can’t get distribution in the shut down theatrical landscape, but it doesn’t make sense to hold until 2021, which will be brutally crowded. Of course, they can overpay for this privilege because we don’t know how much money they make on streaming. I tend to agree with others that I don’t see how they break even on this film. (Past math on streaming video economics here, here, or here if want to see why.)

Context Update – Stimulus This Year Looks Unlikely

Which is bad for the economy. That’s plain and simple. The more stimulus going to consumers and businesses the easier it is to handle lockdowns while shortening the recession. Even waiting until January will likely cause the recession to deepen sharply. This is easily the biggest economics story to monitor.

Data of the Week – HBO Max Saw a Rise in Downloads

If Disney is in “hit-driven business” club, well HBO Max wants to join. This week, they featured a read-through of an episode of The West Wing with the original cast and it drove new downloads according to Apptopia:

This in particular solves HBO Max’s biggest business problem, which is converting HBO users to HBO Max users. So adding a few hundred thousand new users is a win. Future events like The Friends reunion–in particular–should help further.

M&A Updates – The DoJ Is Preventing a Dish and DirecTV Merger

Not all M&A deals are getting approved. (Though it likely doesn’t help AT&T that they angered the current administration by owning CNN.)

Most Important Story of the Week – 9 Oct 20: Movie Theaters…What Comes Next?

Seeing this Sonny Bunch tweet over last weekend was probably the most disappointing news I’ve seen in a while:

Is this the final nail in the theatrical coffin for 2020? Probably. So let’s once again check in with theaters.

(As always, if you want the Entertainment Strategy Guy in your inbox, sign up for my substack newsletter, which comes out every two weeks. Or connect on Linked-In.)

Most Important Story of the Week  – Movie Theaters…What Comes Next?

This seems to me like an unforced economic error. California and New York simply won’t reopen theaters or theme parks until an extremely efficacious therapeutic (meaning lowering death to below 1 in 10,000 for all ages) or vaccine is developed. And since California and New York are high-wealth and high-population states, it’s keeping studios from launching any films in America. And since America is at least 25% and sometimes 50% of a film’s gross, it’s keeping new films from launching anywhere globally.

So here is the specific news, if you didn’t see it last week:

– Jame Bond’s latest installment No Time to Die moved to 2021.
– Disney’s Black Widow moved from November 6th to May 2021. 
– Dune moved to 2021. 
– Universal then moved the next Jurassic World film to 2022.
Soul is going straight to Disney+.
– Wonder Woman 1984 hasn’t moved from Q4. (Yet.)
– Since those films are moving, Regal closed theaters again to all films. As of this publication, AMC and Cinemark have not followed suit.

Is this bad for theater chains? Yes. Most forecasts at the beginning of the pandemic said they could last for 3-6 months, and a few could survive to 2021 as long as some films started returning to theaters. The last quarter of the year was the backstop…and now that backstop is gone. 

The question, then, is what comes next? I haven’t seen that answered. Instead, I just see eulogies for theaters. Well, if you want a job done right, you got to do it yourself. First, some thoughts on the industry. Then the potential outcomes.

Thought 1: The Theatrical Distribution Industry is NOT Theater Businesses

The theatrical industry is made up of AMC, Regal, Cinemark and countless smaller independent theaters and smaller chains. But the industry will exist even if/after those chains go bankrupt or disappear. In other words, the business model is not the business, if that makes sense. We need to discuss two different questions:

– First, will theatrical filmgoing survive?
– Second, will the current theater chains survive?

We should keep those two questions separate as we forecast the future.

Thought 2: The smaller chains will have different outcomes than the giants.

Yes, AMC, Regal and Cinemark own a vast majority of theaters in the United States. But many smaller chains exist, and in some cases have better flexibility to survive in a post-Covid 19 world. In other cases, they have even tighter financials and will struggle to survive.

Thought 3: This is Disruption We’ve Never Seen

Meaning, I don’t have a lot of great comps for this business situation. Amazon disrupted retail, but that took years to take place. The internet disrupted daily newspapers, but again that took two decades to take place. Blockbuster was replaced by Netflix, but again that took years. (And Redbox and iTunes don’t get enough credit for their role too.) Same for cell phones, cable, and other disruptive technologies. 

I honestly can’t think of a business situation that compares to the situation facing certain industries right now. Thus, all forecasting is that much more uncertain.

Thesis: The Theatrical Industry will Survive.

In some form. I would bet heavily on this outcome and invest heavily if I ran a hedge fund, private equity or conglomerate with cash to invest in media and entertainment.

The logic is fairly inescapable. A good portion of customers want to see films. I’ve written before that theatrical filmgoing has been remarkably resilient. For all the “death of theaters” narratives, the data frankly doesn’t support it. 

Think of this like a Porter’s Five Forces analysis to ask if this is a good industry to enter. We just showed customer demand. Competition will wipe out some theaters, meaning competition is reduced. Meanwhile, theaters are unique buildings that don’t lend themselves to easy re-use. That means the land has a limited set of buyers. Plus studios still want box office. 

If you have customer demand, weak competition, low barriers to entry, and cheap supply, then that’s a market to get into!

To top it off, if you’re the type of person who wants an innovative new theater experience, you could do that too. I’m not sure what this will be and how much innovation is possible, but if tons of theaters are left vacant, a clever venture capitalist will have lots of inventory to play with.

(Is there a chance the model is fundamentally broken and we’ll just stream from now on? Maybe. But the competitive logic makes it very unlikely. As many have noted, the industry earned over $11 billion in America last year and $42.5 billion worldwide.)

What Comes Next for Theater Companies?

To repeat ground rule 1, just because theaters will survive, doesn’t mean the same companies will. This is where all the uncertainty comes in. When we’re uncertain, our range of outcomes should be wide. Therefore, this is a list of many potential. Some of these will work together, while others are contradictory.

  1. Bankruptcy. This is simple. Some theater chains will declare bankruptcy to survive in some form or sell off assets. A few of the chains have quite a bit of debt, so this could be the precursor to everything else which happens.
  2. The chains squeak by. Yep, it sounds inconceivable, but, some of the theater chains could manage to survive despite everything. As I showed before–and the theaters themselves mentioned–they’ve cut costs to the bone and a lot of their costs are variable and tied to the exhibition of films. The biggest fixed costs are leases, but if their lessors play hardball, then the landlords are cutting off their nose to spite their face. (If your biggest tenant leaves, it could depress revenues for months or years until a new theater chain takes over.) Still, banks could provide loans or new ownership groups could buy ownership shares to help survive this downturn.
  3. The government bails out theaters. (Sonny Bunch inspired me with this idea in his newsletter.) How likely is this? Who knows? This is the type of scenario that is wildly tough to estimate probabilities. On the one hand, bailing out theaters will be much cheaper than bailing out airlines. On the other, no one likes bail outs, especially to over-leveraged theater chains that are both monopolies and private equity playgrounds. Conversely, given that over 150,000 folks are employed by theaters, it could be a popular case.
  4. Studios buy the theater chains. That’s legal now, remember? If the price for say Cinemark drops to below a billion dollars, maybe Disney says, “Yeah, we’ll do that.” That would be a better use of their dividend than more streaming content, in my opinion. And you know Comcast will buy anything.
  5. A big tech company buys one. Big tech has bought 500 companies in the last 20 years, what’s a few more theater chains? The only caveat? The big tech firms are finally under scrutiny for monopoly power. (See context below.)
  6. Private equity buys a chain or pieces of a few chains. This seems as likely as anything. Once firms go into bankruptcy, they’ll need cash and private equity has cash to invest. Whether in whole or in part, this is likely.
  7. Smaller theater chains move up the value chain. Whether this is a smaller company like Arclight or Alamo, or a new company set up to buy theaters or something else entirely, the big chains could be replaced by a series of smaller chains. This could be powered by private equity too.
  8. A new theater chain is born. Again, if AMC goes bankrupt, its theaters across the landscape are suddenly empty. Depending on how many it actually owns versus leases, these are now assets to be acquired. While monied players are more likely to swoop in, a clever new business could buy the theaters and start a new chain with an entirely new business model.

This Process Won’t Be Pleasant

Let’s be clear about that. Going through bankruptcy, or needing a bail out or barely squeaking by means lots of economic pain.  Even if new companies buy theaters, that will cause immense disruption, hurting studio profits and closing many smaller theater chains too. And it could take years for the situation to shake out. 

Data of the Week – Sports Ratings Are…?

Read More

Most Important Story of the Week – 2 Oct 20: Google’s New Chromecast (And Netflix Offer)

This week my head has been deep in the data of the streaming wars for my latest article for Decider. I reviewed multiple different data sources to sort through the content of the last two months. Go read that article if you haven’t yet to know who won September!

Overall, the political news of the week overshadowed major entertainment stories. But one story has intriguing long term implications.

(As always, make sure you subscribe to my newsletter, which goes out every two weeks. It’s the best way to make sure you don’t miss my writing.)

Most Important Story of the Week – Google’s New Chromecast (and Netflix Offer)

Google’s first Chromecast is probably underrated for its role in the streaming TV revolution. Instead of needing a fancy new box or “smart” TV, you could plug in a small device into the back of your television and stream Netflix to your living room TV. Even if a majority of cordcutters opted for a better solution long term (usually a Roku), I think Chromecast was the hook folks used to sample streaming on TV. (It was also cheap.) 

It’s been rumored that Google was working on a next generation Chromecast or TV device/operating system, and this week we got the announcement. Here are the key details, with the caveat that I haven’t actually used the new device, and am going off reporting on the announcement:

– Google TV is the interface built into the new Chromecast.
– At launch, HBO Max, Disney+, Netflix and Youtube TV are available, with Peacock coming soon.
– The ability to search for content is the pitched differentiator of this service.
– They are bundling the service with a Netflix subscription for one year.
– You will still need to watch content in the streaming applications themselves, like with Apple or Amazon. But the new Google TV app puts all the content in one place.

So what do we make of this? A few things. Here are my hot takes and some others.

Devices Are Key…

Thanks, Captain Obvious. 

In TV, someone is always going to be the rent seeker, placing themselves between customers and content. Previously, it was cable providers. But now Roku, Google, Amazon and Apple are playing that role. Hence why Peacock and HBO Max are still fighting to get on Amazon at terms they can agree to.

To truly grab the attractive profits, these device makers are desperately trying to control the user experience. They’ve all started with similar/identical abilities to search for content and have it all aggregated on the home page. While they tout it as revolutionary–Google pitching search–it’s still mostly the ability to search content from a variety of channels/apps in one place.

..but the True “Aggreggedon Scenario” Hasn’t Happened Yet

That’s the scenario where you watch The Mandalorian in Google TV and then Stranger Things autoplays right after without the user needing to leave Google TV. Why is this such a hurdle? Because it is the whole value proposition. And the streamers know it.

If Disney+’s content is branded with everything else in streaming, then given shows no longer build Disney’s crucial brand equity. If Netflix can’t have its algorithm sell on you another show, then it loses all the value of its honed algorithm. If Peacock can’t offer you their linear channels while you’re watching Parks and Recreation, then their value proposition takes a hit.

The big tech giants know this, and want to take all that value for themselves. The golden goose is to be the sole provider, which makes all the content providers simply commodity brokers. So far, Netflix, Disney, HBO and others have held off on this, and it will be curious to see how long it lasts.

Will Folks Criticize Netflix for Getting Cheap Subscribers?

They won’t. Though the narrative would be more accurate if they did.

Netflix has been as aggressive as Prime Video, Disney and HBO Max in courting subscribers with free subscriptions bundled into other services. (Notably T-Mobile for years, a subscription many customers didn’t know they had.) This is a bad thing for Netflix; without knowing the deal terms, my gut is Google is paying nearly full-freight on this deal because they have money to lose and market share to gain. If this helps keep Netflix subscribers stable through 2021, it’s a good idea for the streamer of record.

From Parqor: This is the Search Engine Interface

I like this take, because no one uses Google search data more than me. And while it isn’t perfect, it is a great signal for “interest” in a given topic. Moreover, Google’s extremely big advantage in search–over say an Apple or Amazon–they really could make a smarter search at driving to shows folks want to watch. As such, I’d give them a leg up over Apple in the smart TV race. (Though behind Amazon and Roku, who have been doing better for longer.)

Entertainment Strategy Guy Update/Data of the Week – Mulan’s Data Update from Nielsen

The other contender for most important story of the week was Nielsen’s SVOD Top Ten list this week. (Did I write it up? Yes. Will it be an article on Tuesday next week? Yes too.) 

Because one detail in particular shocked me:

Mulan made the top ten list!

(As a note, Nielsen delays their SVOD rankings for four weeks while they calculate. And no, I’m not a Nielsen skeptic. Their data is very useful.)

For a single movie to go up against shows with dozens of episodes really does show the demand of Mulan. On one hand, this matches the Google Trends data, which showed that Mulan was really popular. Look at this take from my recent Decider article, where Mulan is multiple times more popular than Enola Holmes, which is the current Netflix popularity champion:

Still, when I did some quick math (like LOTS of folks on Twitter), I got really worried. If 525 millions minutes were consumed of Mulan, divided by 120 minutes as the rough length of the film, then that means it was watched over 4.5 million times. If each household purchased it per viewing, that’s 4.5 million purchases, nearly 4 times what I calculated.

Yikes!

Calm down, calm down. See, like all things, we just need to get everything back to apples-to-apples. Nielsen is measuring minutes viewed, but we were estimating purchases. That’s essentially two different ends of the customer journey.

To think through it, it’s worth first considering the user behavior that influences how many folks actually watch a show. (Some of which I thought of, some of which users on Twitter pointed out.)

– First, customers have to buy it. That’s what we’re trying to estimate.
– Second, they have to watch it all the way through.
– Third, they can choose to rewatch it or not. If they loved it, they will.
– Fourth, they can share their account with others, who can also watch the film.

When I analyze data, I alway think back to the customer use case first and foremost. It helps ground the data thinking in the real world, as opposed to number cherry picking. In this case, all these factors could influence how much the 4.1 million viewers actually relate purchases.

The next step is understanding how Nielsen got to their number. They measure the average minute audience, the way they always have. Then they multiply that by the length of the film, and boom they get the total minutes viewed. 

But there is one more key: Nielsen estimates how many folks are watching a given minute of television at home. So if two folks are watching, that counts twice. (2 people watching 1 minute is 2 minutes viewed and so on.) (I reached out to Nielsen and they confirmed this analysis on background for this article.)

Combine these two and we have a way to estimate purchases. After we calculate the rating, we then estimate the completion percentage (which accounts for folks watching it multiple times or not finishing it) and then we estimate how many folks watched simultaneously. Here are my back of the envelope maths on it:

Read More

Most Important Story of the Week – 25 Sep 20: We’re Heading for the (Almost) Worst Case Scenario For Theaters

Last week was a big one for me as I tore through a lot of Mulan data to produce my soon-to-be-biggest article of all time, “1.2 million Folks Bought Mulan on Disney+”. (It looks like it will dethrone the previous champion, “Netflix is a Broadcast Channel”.)

It’s been four weeks since I checked in on the health of theaters, let’s make that the most important story of the week.

Most Important Story of the Week – We’re Heading for the (Almost) Worst Case Scenario For Theaters

I try to think about things probabilistically. As Nate Silver would recommend. The world has lots of randomness, so events and different outcomes have different probabilities.

When I made my forecast of Coronavirus’s impact on theaters for a consulting client, I had a median case of theaters reopening in August. And it almost happened, but for a summer surge in cases. The worst case was that theaters would stay closed through 2020. We’re not quite to that worst case, but we’re close.

We’re partially opened in America as 70% of theaters are allowed to be open, but the studios are pulling their tent poles until the biggest markets reopen. Given that the US still accounts for 30-50% of a film’s total box office, America’s uncertain situation is scaring off all the big studio releases.

Which is a shame, because the rest of the world is doing much better. They’ve opened and after a few weeks most customers returned. Yet the US uncertainty (combined with global piracy, which is another shame) has held all the big studios from releasing their true tentpoles. The news of the last few weeks is that studios waited to see what Tenet would do, and found it wanting. 

Thus, Wonder Woman: 1984 moved to the end of the year (Christmas Day) and Black Widow moved to 2021. Though not all of Disney’s slate, as Soul is still holding onto Thanksgiving. And Universal moved up a few kids films to try their new PVOD strategy.

So I wouldn’t say we’re in the darkest timeline for theaters, but we’re closing in on it. November and December will have a lot of weight to pull to bring studios and theaters through.

Other Contender for Story of the Week – The Tik Tok Deal and Global Entertainment

Every newsletter I follow has been tracking the ins-and-outs of this story. But I waited. Would it be Microsoft? Or Oracle? Or Walmart? Or none of the above?Twists, turns and…we’ve ended up in almost the exact same place?

It’s like that quote from the Red Queen: you can run all day and end up in the exact same place. (Hat tip to the The Lost World novel for writing about that and logging it in my head from (is this right?) 25 years ago.)

All that has really changed is that Byte Dance has a new 20% owner of Tik Tok (Oracle) and it gets to keep operating in the United States. But it keeps its algorithm and presumably spy software in China.

Does this have implications from global entertainment? Assuredly, though let’s not go too far.

Clearly, China and America are headed for a new “Cold War” or “Bipolar” economic landscape. I’m not breaking news telling you that. President Trump has also escalated the situation with his proposed bans on TikTok and WeChat.

Not that this economic nationalism is unprecedented. China has banned US apps and companies for years. The biggest challenge for both EU and US companies and their nation-state champions is that there really is an unfairness in the global business situation. Netflix, Amazon, Google and others can’t operate in China due to protection laws. Yet, the EU and USA (and most OECD nations) pride themselves on allowing free and open markets. Which lets in Chinese champions.

This makes a seemingly unfair balance of power. (Though I could defend why China does it, and that reason is because US firms have definitely exploited smaller economies over the years. China has now largely avoided that fate. But this isn’t a politics website, I’m merely trying to explain why China is doing what they do.)

Where do we go from here? It’s unclear. Both presidential candidates seem concerned about China, so presumably restrictive measures could remain in place, with a Biden administration administering them a little more fairly/objectively. Long term, this could really hurt global business strategies with prominent Chinese ties.

That’s Disney, primarily, but really all the studios. One of the changes to my film model I’ve been thinking of making is to update the box office to: US, China and Rest of World. Since China is so protective, it keeps an outsized amount of profits in that country. (Only 25 cents of every box office dollar goes back to the studios. And even those can be hard to pull out.) If companies need to increasingly make “non-China included” strategic plans, that has lower global upside everywhere.

Entertainment Strategy Guy Update – The MLB-Turner Extend Their Deal with a 7% Year-Over-Year Increase

What? 7%? You saw the 65% jump in value reported in the press, didn’t you? 

Well, the key is context and the Entertainment Strategy Guy is nothing but context. When I see big splashy deals, my first question is the time period. In this case, a seven year extension. Then I take the two numbers and plot the CAGR. I put the average deal value in the middle of the deal (since leagues like to have revenue increase on a flat rate). Then I make my chart:

Screen Shot 2020-09-25 at 9.30.17 AM

As for the strategy, the next deal that shows a decrease in prices will be the first deal to show a decrease. Sports continue to be the source of programming keeping the linear channels alive, and the remaining linear players are paying a lot for them. And the bubble with 5-10% average increases in price each year has stayed on track.

Data of the Week – A Few Data Points on Subscribers (Peacock, NY Times The Daily and Shudder)

If “apples-to-apples” is the theme of the week, then I need to put the context right up front for these numbers. One of the numbers is “US only”. One is “US plus”. And two are global. Do not confuse them, since it really does change the denominator. (330 million versus 7 billion!)

First, Peacock, while explaining the increasing centralization of all NBC-Universal decisions under Peacock, Comcast let slip to the Wall Street Journal that they have gotten up to “15 million sign-ups” from the 10 million they announced in their July earnings report.

Next, Shudder, which is available in the United States, UK and some other territories, has reached the 1 million subscriber milestone.

Third, the New York Times “The Daily” podcast now reaches 4 million folks. Which is a huge number, but again don’t assume they’re all Americans.

The Athletic has also purportedly reached 1 million subscribers. While this is technically a global number, odds are it is driven much more by US customers. The caveat is that The Athletic has so aggressively discounted its business model that we don’t know what a subscriber’s actual ARPU is.

Other Contenders for Most Important Story

Disneyland (and Friends in California) Wants to Reopen

If you’ve been reading the EntStrategyGuy for any length of time, you’ll know that theme parks are a big part of Disney’s revenue stream. (Even more so than toys, which often get the credit.)

Hence, each week and month that Covid-19 keeps theme parks shuttered in California is a significant hit do Disney’s top and bottom lines. This week Disneyland, Knott’s Berry Farm and others publicly called on Governor Gavin Newsom to allow them to reopen. They noted that the reopenings in Florida and Europe haven’t seen accompanying surges in transmission, which surprised me. (Disneyland Hong Kong, however, was shut after reopening for having an outbreak.) 

Notably, some theme park-adjacent businesses are opening, like the Los Angeles Zoo. So curious to see when Newsom changes on this. 

DC Comics/DC Universe Staff Sees Layoffs

This is a few weeks old, but it is important enough news that I didn’t want to skip it. Warner Media is cutting staff at DC. If comic books can be the “R&D” department of a movie studio–and look at Disney, they are–then why would you cut the staff?

Of course, layoffs are complicated. Sometimes organizations really do have bloat. Sometimes they really do have redundant capabilities. But this seems like some creative executives were swept up in this part of the Warner Media reorganization. Meaning long term the cost cutting now could hurt the creative output of the future. Comic books will never be the cash cow that turns around AT&T’s fortunes, but having a strong DC could help grow HBO Max.

M&A Updates – Ion Networks is Acquired by EW Scripps

Some more merger action! This time Ion Networks is getting acquired by EW Scripps. I’ve long appreciated Ion Network’s business model. Ion Networks realized that if they owned a broadcast channel, cable and satellite providers must carry their programming. They bought up broadcast stations, and then ran cheap reruns. It’s been surprisingly successful for them:

image-1-estimates

Lots of News with No News – The Emmys!!!

I put less emphasis on The Emmy’s than anyone else. From a business perspective, I just don’t think they tell us much about what customers want or how businesses are doing. (They mostly tell you who spends the most on Emmy campaigning, as brutal as that sounds.)

The story was Schitt’s Creek, which went from nothing to something with a run on Netflix. Using the “Netflix is a Broadcast Channel” thinking, though, this makes sense. It’s like a show went from a small cable channel to running on NBC. Since it was good, naturally it had a boom in viewers.

Most Important Story of the Week – 18 Sep 20: Apple One, The Aggressively Moderate Take

Whenever a big tech company sneezes, the entire techno-entertainment industrial complex catches a case of “they’re taking over the world”. Such is my read of the latest announcement that Apple is launching a multimedia bundle called Apple One. For months, CWSMF (Celebrity Wall Street Media Futurists) had speculated and salivated over the idea that Apple would launch a multi-media bundle.

So let’s make that the most important story of the week.

(Enjoy my takes? Sign up for my newsletter to ensure every article hits your inbox. I publish every two weeks and next issue is due next week.)

Most Important Story of the Week – Apple One, The Aggressively Moderate Case

Is Apple One that big of a deal? Sure. Maybe. We’ll see.

That lackluster of a response probably says a lot about my opinion. 

This move isn’t a bust, but probably isn’t the killer app/product Apple needed to win the 2020s the way it won the 2010s. (As a primer, I do recommend my articles on value creation and subscriptions from last year to understand my more skeptical take on subscriptions.)

Apple One – From a Value Creation Standpoint

Here’s the three versions of Apple One:

Screen Shot 2020-09-18 at 9.17.03 AM

The crazy part to me is that I would have bet anything that News would be bundled with Music, TV+ and Arcade. Because that’s really how you find multiple “somethings” for a customer in a bundle. If I was tempted by Apple News (free Wall Street Journal subscription is intriguing), then maybe Arcade is enough to swing me onto the subscription. Then Music and TV+ are the icing on the cake. Or for the many customers who already have Music, it just increases the odds that either news, games or TV+ entices them into the subscription.

Instead, the premium tier offers News–which most customers haven’t opted to buy–or Fitness+. (The most Microsoft in the 1990s move Apple has made yet.) As it stands, most customers don’t use all of these services, so the value creation feels fairly negligible. If you don’t have an Apple Watch, Fitness+ isn’t worth it at all. 

It’s also worth noting what else isn’t included in the bundle: insurance. 

Lots of folks thought Apple Care and/or the Apple phone replacement plan would come in this bundle. And someday they may. But my gut is Apple ran the customer surveys–they have a lot more data than I do!–and saw that adding in insurance for $15-20 bucks a month meant customers HATED the new bundle. Not to mention, for your $15 a month to Apple, the deductibles are still pretty steep:

Screen Shot 2020-09-18 at 8.54.32 AM

So let’s make a couple more “bundles” to understand the range Apple was playing with…

Screen Shot 2020-09-18 at 9.17.25 AM

The other killer app–which is still rumored–is that Apple will eventually add in both insurance and phone upgrades to this model. As the last bundle shows, though, this jacks up the price through the roof. Which maybe makes it worth it for customers, but it also takes a lot of folks out of the running for this type of plan. 

You can also see the media bundle and probably why Apple didn’t include News in the Individual or Family plans: it gives customers way too much value. Which sounds weird to say, but in this case it is a trade off. For every dollar in value you give the customer, Apple is likely losing that value. In fact, I think Apple is losing money on the bundle period. Here’s my back of the envelope value creation model:

Screen Shot 2020-09-18 at 9.16.51 AM

Moreover, I do think initially Apple is losing money on this bundle. Yes, I’m using per unit economics, but it seems clear to that Apple is losing money. Apple Music likely loses money or breaks even (if Spotify is the comp), Apple TV+ likely loses money (and customers only use it if they get it for free), News and Arcade have also both been described as troubled. Meaning the only service that breaks even is iCloud because frankly cloud storage is almost a commodity at this point.

Thus, the “Moderate” Case for Apple One

The upside/aggressive/positive case? Customers may like it! 

There is just enough “money losing” businesses to entice customers. Specifically, Apple Music and most likely in Apple TV. That said, the likeliest customers are current Apple customers who are relatively affluent and already have one or more Apple subscriptions. Upgrading Music to “TV+ and Music” seems like a simple decision.

That said, the “moderate/meh/blah” piece is that Apple has already discounted their own value on this bundle by giving TV+ away for free. Meaning at least one part of this bundle has been price discounted in customers minds. If a customer doesn’t like iPad games either, then basically the bundle isn’t worth it.

Further, Apple isn’t losing as much money as they could. They could have gone very aggressive a la Youtube TV and lost $20-30 per customer, but this plan isn’t that aggressive. However, that’s really how you add lots of subscribers quickly in digital media.

So the downside/pessimistic/negative case? Long term, to make money, Apple will need to either raise prices on the subscription or lower the quality of the product. 

Or, they could add insurance or utilities to the mix. Since those are the true cash cows of subscriptions. The risk is customers tend to hate insurance. (Apple’s current phone insurance by my look is a pretty terrible deal. Just save your money and buy a new phone.) But that’s how you make true money. Thus the tradeoff: make money off products or risk customer ire. In the 2010s, Apple made money while sucking up customer love, I don’t see that path via Apple One in the 2020s. 

Which is really what makes this a moderate take: this is a good subscription for Apple to make some money, lock some customers in for the longer term and diversify services revenue. But is it a game changer?

Eh. 

And that’s because I really am trying to look at this product in a vacuum, not with “Apple-tinged” glasses that says, “Hey, it’s Apple, it must be great!”. That’s why I’m so moderate on this. It isn’t an all-in bundle, or a really great value. But that means it’s also likelier to make money for Apple in the near term. 

Quick Hits on Apple One

  1. First, 2020 Apple is 1990 Microsoft. They have a dominant market position on a key platform, and instead of letting others compete and innovate with add-on services, they plan to make those themselves and drive others out of business. So if you remember how bad Internet Explorer was for years, get ready for those dark times to come back. (They’re also constantly tweaking default settings to prioritize their own apps. Which is so Microsoft as to make your head spin.)
  2. I still don’t know the “thesis” on Apple. I’ve seen articles saying that Apple’s multimedia push is to get more “services” revenue, but also seen articles saying these services will help “Apple sell more iPhones”. If you read my June articles, you know my take: the best business model would do both. (The flywheel should make money at each stop.) But then the question is, “Is Apple making money on these media services?” 
  3. The most compelling argument is the “lock in”, but even that overstates the case as I’d argue most iPhone users are already locked in. The bass diffusion curve is what it is, and with increasing prices, most folks are holding onto phones for longer and longer. I don’t see how this bundle really encourages folks to buy a phone that much faster. And if they lose money per subscriber, then services revenue wont’ go up either.
  4. Apple “services” revenue continues to confuse analysts as well. Part of “services” is revenue from the App Store. Including recurring payments from video games. Which as I noted last week are booming. And as Fortnite, WordPress, Hey, and others have made clear, Apple is increasingly grabbing in-app revenues as a fee for doing business.
  5. Really hard to find prices researching this article and Apple now offers lots of free trials. Basically, it’s a very 2000s cable company strategy. (The opposite of Netflix, by the way.)
  6. Apple News likely forced the Premium tier because it and Apple Fitness aren’t available globally. I think that’s a strategic mistake and it should have been included in the lower tier for a cheaper amount than $30. But this is a minor tactical quibble.
  7. The Twitter Takes. I asked folks for their takes on Apple, and here’s the top tweets.

Data of the Week – ???

I had a good one, but it went just long enough to need it’s own article. Check back in on Monday.

Other Contenders for Most Important Story

Peacock and Roku Come to an Agreement

See, that didn’t take very long. It looks like some NBC content will wind up on Roku’s free channel, which does show the power the distributors have. (Amazon did the same thing to Disney+.) Long term, this means Comcast can take their time with Amazon. (They have many more devices internationally, and I trust that Roku users tend to be stickier than Fire TV, which Amazon gave away to lots of folks for peanuts.) And in general you’d have to think HBO Max will have an easier time finding a deal with Roku.

Bloomberg TV New (Not Tik Tok) Streaming Plan

Bloomberg TV plans to relaunch it’s on-demand streaming news service that was previously named “Tic Toc”. (Clearly that name is out for the relaunch.) They’d previously partnered with Twitter, but this time will go it themselves. I share Dylan Byers skepticism that this move is as disruptive as Bloomberg thinks. In fact, that’s a good rule of thumb: the more a company touts themselves as disruptive, the more skeptical you should consider their plan.

Still, the competition for young, Millennial business eyeballs between them, Cheddar, Morning Brew, all the traditional players and more is fierce. 

More AT&T Plans!

This time, it’s AT&T planning to sell advertisements for cheaper cellular service. From an entertainment perspective, this could further confuse their offerings. For the broader public, though, clearly rising cell phone prices are pricing some segments out of the cellular market so this fills a need. You have to imagine they’d keep Xandr (their digital ad-sales unit), but then again, it’s AT&T so maybe not.

Entertainment Strategy Guy Update

Paramount+

This story almost made the “lots of news with no news” section. Well, CBS All-Access will be rebranded to “Paramount+” as ViacomCBS tries to bolster its streaming service. While I doubt the name change will really help in either direct, it’s interesting that Viacom is telling us that Paramount is the most trusted global brand. That does indicate they’re thinking globally with this move. (My take on CBS’s strategy here from last August.)

More Agency Pain and then CAA’s Agency Confusion

The agency dramas with Covid-19 and the WGA stand-off are worth staying on top of. The latest updates are that Paradigm is doing more permanent layoffs and that CAA tried to fake-sign the WGA deal. Yes, fake-sign, as it refuse to sign a key demand but try to bluff the WGA into agreeing. If agents have one job, its winning negotiations, and this gambit seemed to have misfired. So yeah, not great negotiating.

PS5 Will Cost $500 too

Now that X-Box revealed their price points and timing, Sony followed suit with the Playstation 5. It too will cost $500. To share a different take from Tae Kim’s skeptical look I shared last week, Rob Fahey thinks the X-Box S could change the console paradigm.

Most Important Story of the Week – 11 Sep 20: How X-Box Could Impact Entertainment

Reed Hastings is famous for declaring his competitors to be anyone that isn’t a fellow streamer. Famously, he said a couple of years back that Fortnite is bigger competition than other streamers. (He’s previously mentioned sleep.)

If you think about competition using Porter’s Five Forces, then Hastings is obviously right, and obviously wrong. Competition amongst streamers can exist alongside substitutions (like video games and sleep). Since the biggest news of the week seemed to be from a video game maker, let’s explore that.

Most Important Story of the Week – Microsoft’s Big X-Box Decision

As well as streaming has done during quarantine in America and around the globe, video games may have had an even better time. According to most measures, video game usage has ballooned during the pandemic.

Into that environment, Microsoft announced some details about the next generation of its X-Box console.  There will be two versions, one low priced ($300) and the other high-priced ($500). Video games themselves are likely to increase in price too, to $70

How will this impact the streaming wars? And the entertainment landscape? I see a few ways.

First, for gamers, the PS5 and X-Box Series X will be the center of the home.

As folks cut the cord, they can opt for Roku, Amazon…or one of these video game consoles. My brother already does this and I plan to whenever we finally cut the cord. For gamers, this is incredible value compared to a streaming device. 

They’re absolutely more expensive–the hardware is much more complicated than a streaming stick–but offer the ability to play games. My hunch, though, is that video game consoles are stickier than many streaming devices. For example, Amazon was basically giving away Fire Sticks for many holiday shopping seasons. How many are sitting in a drawer somewhere? If you plop down $500 for a console, you’re going to play it or use it.

Indeed, from the data, about 20% of streaming usage comes from video game consoles in the U.S. This puts it firmly in the “small but significant”.  For all the focus on Roku/Amazon battling with HBO Max/Peacock, we’ve seen less coverage of Apple TV not being available on X-Box. Which still cuts out a lot of potential viewers.

Second, consumers will have another subscription in their media bundle…video games.

I hadn’t checked in on Sony Playstation subscriptions in a while, and the numbers surprised me. Across the globe, Sony has 45 million “Playstation Plus” subscribers. Sure, that’s 150 million less than Netflix, but not bad either!

While games are getting more expensive, both the video game companies (and all the tech giants) desperately want recurring subscription revenue. I think we’ll see them lean more and more into subscriptions to make that CLV math work. X-Box also offers a $10 subscription for online play. Meanwhile, all the big tech companies are trying to add subscription video game offerings.

Third, streamers will copy the gamers.

In two ways. First, the gamification aspect. Netflix is the furthest along with their “choose your own adventure” style TV shows and the general respect Hastings has for video games. I could see streamers continue to add various “gamifying” pieces to video, though I don’t know quite what they’ll be.

Second, the social aspect. As many have pointed out, video games are sticky not just for the fun, but for the engagement with friends online. That’s why even this week there are rumors that Disney is adding a watch feature to Disney+. That stickiness will keep folks locked in to their favorite video game system and sending cash to the video game companies. 

Last question: Can Playstation “win”?

I don’t study the video game wars close enough to judge X-Box’s release strategy, but it’s worth noting they are very far behind Playstation. (Nintendo competes for a different demographic.) As such, I’ll defer to Tae Kim from Bloomberg who makes a compelling case that with a “two pronged” device strategy X-Box will be the worst of both worlds: the lower quality product will hurt the high-end offering, while failing to attract casual gamers. 

I’d add that another interesting question is whether or not $500 is expensive or not anymore. Which seems crazy to say, but on the other hand, a new iPhone is twice that amount. Though the X-Box does a lot more, the phone is obviously mobile. (And X-Box is offering a payment plan, just like cell phone providers.)

Data of the Week – How Did Mulan Do?

Everyone is trying to guess at how well Mulan did on Disney+ last weekend. Given that multiple outlets are asking if this is the future of moviegoing, it would help to know! So I’ll summarize what I’ve seen.

First up, Disney themselves. Disney CFO Christine McCarthy gave us this nugget. They are:

“Very pleased with the result.”

Since I don’t know how to translate CFO speak, we’ll move on.

Second, we have Sensor Tower. I generally like their data for directional purposes. Their news is that Mulan helped drive a 68% increase in app downloads compared to normal. Hamilton, the big winner from July, helped drive a 79% increase in downloads. Further, Mulan drove a surge in spending on the platform, which is to be expected since it’s Disney’s first transaction on the device.

Now, caveats abound. Sensor Tower can’t actually track who watched Mulan. Further, they only track recent download data, so the ability to attract new subscribers according to the baseline. So we don’t know if the data was trending up or down before the weekend anyways.

Third, analytics firm Samba TV estimated that 1.1 million homes purchased Mulan. I’ve never used Samba, so I can’t speak to their accuracy, and the caveat is they only track Smart TVs, and extrapolate from there.

Fourth, Reelgood reported that Mulan led the weekend in streaming. Here’s their chart:

EhlUB9CXcAAvvGX

More caveats here as well. I asked Reelgood if they had data going back to Trolls: World Tour, and they saw a surge in sign ups after coronavirus lockdowns. However, they did compare to Hamiltonwhich I saw reported in Indiewire too–and they estimate Mulan outpaced Hamilton in streaming.

This is where I tend to be the most skeptical of Reelgood’s data, though I like their numbers in general. Mainly because the barriers to entry are so much lower for Hamilton that I’d assume it had higher viewership.

Fifth, Google Trends!

Screen Shot 2020-09-10 at 1.20.13 PM

Almost tied with Trolls World Tour, but way behind Hamilton. Caveats abound again, since Google Trends only measures search, but not actual engagement.

Add it all up and do I know what Mulan did? Nope. Sorry.

I will say, though, this reinforces my gut that Mulan is on track for $100 million in US VOD revenue. If Samba TV  is close, then we’ll see a decay each weekend from now until its free launch in December. Given that Trolls: World Tour had about the same interest–and maybe higher sell through because of kids–this seems the most likely scenario. Toss in the difference in price ($20 versus $30), and I think they offset. 

Mulan may outpace Trolls in total revenue, but I still think it ends up around $100 million.

(With the caveat that I’d quickly change my mind with better data.)

Entertainment Strategy Guy Update – Box Office Results for Tenet

What about the other side of the coin? Well, Tenet didn’t have blockbuster box office in the United States because most of the major markets remain closed. As Disney CFO McCarthy pointed out, 68% of theaters are closed, leading Disney to expect reduced ticket sales of about 40%. 

Thus you get this nifty math: Folks expected Tenet to get around $50 million opening weekend, and it got about 40% of that to net $20 million.

I remain more bullish on the legs (the staying power of the box office) for Tenet given that it will have some bump whenever California and New York reopen theaters. Will it be monumental? Surely not, but it will get something. I mean, unlike other films, when Tenet opens in California presumably some folks will go to see it?

Does this scare off other films? As of yesterday, the answer was no. As I was writing this, Warner Bros moved Wonder Woman 1984 to Christmas Day. So yes. The biggest driver really just is the lack of open theaters in California and New York. As long as they stay closed, there is little incentive to open new films.

Other Contenders for Most Important Story

HBO Max: Promotions and Ads?

HBO MAX, I keep trying to defend you. But you make it so hard.

Having a focused offering is a good strategy in general. And recent leaks and stories show that HBO Max still doesn’t get that. First, they’re offering another 20% promotion. Meaning, like Hulu of the last few years, they will be stuck on the “promotional” treadmill, unable to get off without losing customers. (Netflix has done the opposite to their credit, sticking to one “everyday low price”.)

There are also rumors about their ad-supported tier. It should come next year and further confuse customers. Meanwhile, they may sell Xandr–their advertising technology business–as I wrote about last week, asking the obvious question: why do you need an ad-supported tier?

Keeping Up with The Kardashians Ending

My guess is the Kardashian clan is running the “Judge Judy” playbook. They’re leaving their current show to sign a more lucrative overall deal with a streamer. Still, the historical impact of this show on the fortunes of E!, NBC-Universal and reality television can’t be understated, even if the Kardashians are wont of overstating their importance.

Lots of News with No News – Executive Shuffling

Some folks wanted this as the most important story this week. Unfortunately, I just can’t put executive transitions into the top spot, since I don’t know who is good at what. Still, so you don’t miss anything…

NBC Universal Appoints Susan Rovner to Programming; Pearlena Igbokwe to Chief of Content

NBC Universal had a big opening to fill, and Susan Rovner from Warner Bros TV has taken the overall programming job at revamped NBCU. Overall, I still think NBC-Universal has a confusing executive structure (too many cooks in the kitchen), but this will help slightly. Meanwhile, Bonnie Hammer promoted a key lieutenant to chief of content at the production side of the house.

Netflix Gives all of TV to Bela Bajaria; Cindy Holland is Out

Meanwhile, Ted Sarandos simplified his org chart to two people: one for film and one for TV. The question though is whether or not he picked the right person for the TV role, and I have no way of judging that. Sarandos picked Bajaria, who was head of international content. Part of me would note that US productions still outperform international titles, but international is the future. Like always, I don’t know.

However, I will note that Ted Sarandos has eliminated one of the more senior folks at Netflix. Meaning if Reed Hastings ever steps down, no one can match Sarandos for tenure or even come close, given that the CFO, CMOs and now content heads were all hired in the last few years. For other studios that would be a red flag but at Netflix…

Bonus: Netflix wins the Narrative (Again)

Because of their well publicized hiring guidelines–”the keeper test”–when Netflix fires a senior executive, they get applause from the community. When a Disney, Warners or NBC does likewise, it’s always questions about what went/is going wrong. Just interesting how the narratives get shaped.

Most Important Story of the Week – 4 Sep 20: The Fall of Fall (TV Advertising Revenue)

I’ve been too positive about the entertainment industry recently. Especially the traditional players. I think theaters by the end of 2021 will be fine. I think the traditional entertainment streamers can compete with Netflix (and Amazon). And I even think Disney will see a thriving theme park business sooner rather than later.

So let’s get negative. Really inspire some fear. Of course, that means broadcast TV.

(As always, if you’d like the Entertainment Strategy Guy delivered to your inbox, sign up over at Substack. My newsletter is free and goes out every two weeks.)

Most Important Story of the Week – TV Network Ad-Revenue is at Risk

While it may be “dying”, the linear TV business is still good money for traditional media conglomerates (Disney, Comcast/NBCU, AT&T/Warner Media). I like to tell this story via this chart via Disney’s revenue:

In addition to the total revenue, media networks also make tons of operating profit. As I laid out in one of my most popular articles of the year, if you imagine a world where, in complete disruption, they lose all their “media networks” operating profit, and streaming still isn’t profitable, they aren’t just losing $3 billion per year like Netflix, they’d have lost $10.5 billion in operating profit on net! 

Thus, as they pivot from linear to streaming, the traditional players need to be careful. They need to find out how to make streaming profitable and not destroy their cash cows that quickly. It’s unclear if anyone can do the former, and the Coronavirus may have pushed the latter from their control.

Advertising revenue will be the first part of the traditional linear pie to feel the pain. (And actually has been suffering in the last few years.) It’s not a majority of the revenue–that honor belongs to subscriber fees–but it’s a big portion of the puzzle. Across broadcast and cable, it’s a $44 billion dollar piece! Depending on the channel, it can be 20-50% of total revenue.

And the biggest piece of advertising revenue comes from the broadcasters, which are still the biggest channels in the linear bundle. The threats to advertising come from both the demand and supply sides, which is what makes the Covid-19 inspired recession particularly challenging. (Past articles on Covid-19’s impact on entertainment here, here, here, here or here.)

On the demand side, advertisers love to advertise on sports because live sports still get great ratings and viewers don’t usually skip the ads. And when I say sports, I mean football. Both college and NFL, but particularly the NFL, which dominates annual ratings. While the NFL is still scheduled for this season, it could disappear in a moment’s notice if Covid-19 rates skyrocket again. Thus, the Wall Street Journal reports that advertisers are seeking to claw back proposed ad spending if NFL games don’t happen.

(As for college football, a majority of college football games have been cancelled, but some leagues–the SEC, Big 12 and ACC–are trying anyways.)

If the broadcast networks lose NFL games, it’s doubly-brutal since the rest of their primetime schedule is fairly “meh”. The same force that could cancel NFL games caused studios to shut down all of production for new TV shows. Reruns don’t do as well as new TV shows. Thus, the linear channels will have fairly weak lineups this fall, even as customers have more free time than ever to watch.

There is one bright spot in the demand-side: out-of-home viewership. For years Nielsen didn’t mention viewership in bars or restaurants or anywhere that wasn’t in someone’s home. But obviously sports bars only exist to show sports and serve beer. After years of promise, and some last minute waffling, Nielsen plans to roll this out this fall. It should boost the role of sports/ESPN even further in the ratings. (And 24/7 news networks.) That said, if the NFL doesn’t happen, no amount of out-of-home viewing will help.

The supply side of ads is arguably in an even worse state than the demand. When you’re in a recession, the first thing that goes is marketing expenses, and that’s precisely what happened in this recession. Some of the biggest drivers of ads are under as much threat as the broadcasters, like car companies, airlines, or hotels. And they’ve pulled back on advertising. Meanwhile, digital advertising beckons with its “targeted” ads, since Google, Apple, Amazon and Facebook hoover up all your data to sell.

And one of the biggest advertisers, Hollywood itself, will probably spend the least on linear advertising in recent memory. Since, theaters have been shuttered in large parts of the country, there is no big opening weekend to push customers towards. Digital advertising can take up that slack. That’s the take in this Variety story.

Conclusions

That’s the doom and gloom for the near term. Will it last? 

Again, when everything is tied to Covid-19, there is as much a chance that things snap mostly back when the pandemic passes as it is that they are permanently altered. (For the record, I expected/will expect double digit drops in linear viewership since cord-cutting adoption is following an S-curve.) For example, if theaters are back to “normal” in the mid-point of 2021, the focus on opening weekends will return, and with it linear advertising.

If I had to point to one wildcard, though, it’s football. Which is really the issue suffusing the conversation above. (Even feature films are really talking about advertising against football.) As long as football wants to reach every household in America, it needs linear TV as much as digital. And that should support this ecosystem for another 5-10 years.

Still, we’ve likely seen a high watermark in linear advertising revenue. Which isn’t too surprising, since advertising revenue has been under pressure for years. It just means that, even if it bounces back, between cord cutting and reduced quality content, broadcast advertising will never regain its past heights.

Entertainment Strategy Guy Story Updates – Licensing Is Still Very Important for Streamers

This story is really a combination of three stories that all competed for my top slot this week. 

Combine the three and the story is fairly inescapable: for all their tens of billions in content spend each year, Netflix cannot give up on licensed content. This shouldn’t be that surprising, but it does contradict the story Netflix projects to Wall Street. 

Let’s start with why licensing is still crucial: because it moves the needle! When you look at the Pay-1 movies–films in their first linear TV or streaming window after theaters, usually in the first year–you can see that every streamer is desperate to get Universal’s output. This is because new Fast and the Furious, Minions, and Jurassic Park films move the subscriber needle. Just take a gander at VIP’s August report:

(Go to Variety VIP to read. Full disclosure: I’m on a free trial from Variety.)

That’s a lot of licensed film content in Netflix’s Top Ten! The story is the same on Nielsen (hat tip Alex Zalben) when it comes to top TV series on Netflix in the last week:

That top ten list is almost all licensed content. (Which contradicts Netflix’s daily Top Ten lists, a point I’ll explore in a future article/Tweets.) 

On the whole, the fact that Netflix needs licensed content should be the least surprising story in media. TV has always been about renting content. Syndication built up numerous channels from Fox to USA to AMC to you name it. Even HBO was built off Pay 1 films. So renting content to enter a market is a tried and true strategy.. 

Unless…

…your stock price involves “building a moat” of original content. Which Netflix’s does. Specifically, making a moat with original content that will bring “pricing power”.

Licensed content’s current and continuing importance to Netflix will determine if this strategy works or blows up. If it turns out that Netflix still needs licensed content, after spending billions on originals, then one of two things happen. First, if Netflix loses the content, then they will likely see higher churn among customers. That both lowers the average revenue per user and raises acquisition costs. So they keep losing money. Or Netflix keeps licensed content, but has to pay more and more for it in a competitive bidding environment. That raises their costs. So they keep losing money. 

In short, Netflix desperately wants to decrease its reliance on licensed content. But so far the data doesn’t show that strategy is working.

Over the last few months, I’ve softened on how important licensed content was for Netflix. It seemed like their original films were finally breaking through. And the top ten lists were filled with originals, especially on TV. But the combined FlixPatrol/Nielsen data contradicts that. Even as the licensed content changes–farewell Friends, The Office, and Disney blockbusters–the importance of licensed content remains. (My guess is Hulu and Prime Video are in the exact same boat, by the way.)

(Bonus update: it seems increasingly clear that the future will be measured, as I wrote way back in December of 2018 and October of 2019. Between top ten lists, Nielsen and others, we’ll have some sort of standard to judge which shows are doing well in the ratings.)

Other ESG Update: Cobra Kai’s Migration to Netflix

To quote Marshall McCluhan, the medium is the message. So for Youtube, the medium is ad-supported music videos, box openings and alt-right/alt-left commentariat. Not prestige originals. Clearly Youtube had a good show in Cobra Kai, but after that they didn’t know what to do with it. (Read my past writings on Youtube Originals for more.)

Other Contenders for Most Important Story

AT&T Is Selling Some Assets, but Not Others

The story over the last few weeks has been that AT&T is looking to sell tertiary businesses to reduce debt. On the table are Xandr (their ad-sales unit), DirecTV and CrunchyRoll; not on the table are Warner Media’s video game unit. As some folks have pointed out, though, we shouldn’t read too much into any specific business unit sale or story since these talks are ongoing. And the rumor mill is vicious.

Still, it seems clear based on the volume of rumors that AT&T is looking to sell some assets to help their balance sheet. The management lesson should be clear: M&A is not a strategy. Strategy is strategy. That’s the story of AT&T in the 2010s: buying size mostly to accumulate assets. The investment bankers got paid; the shareholders haven’t yet.

Walmart’s New Subscription

On the surface, Walmart offering “Walmart+” isn’t entertainment related. It’s an ecommerce story, about a battle between two monopolistic giants. Except for the fact that nearly every article had to mention that Walmart+ doesn’t offer any free entertainment streaming. So…

Prime Video = $120 a year, with Prime video and Prime Music
Walmart+ = $98, with no entertainment.

Therefore, Prime Video and Prime Music are worth $22 a year?

Listen, that math isn’t totally correct. There are tons of unaccounted for variables. But generally does it match consumer demand? It probably isn’t that far off either. 

Data of the Week – What is the U.S. Addressable Market for Streaming?

In a lot of ways, isn’t that the question of the streaming wars?

A few weeks back, Leichtman Research group updated their estimate for the number of broadband homes in America. In 2019, America reached 101 million broadband homes. On the bass diffusion curve, clearly broadband adoption is slowing. This could be a good proxy for cord-cutting homes, since if you don’t have broadband you can’t stream.

Meanwhile, Nielsen still counts about 121 million homes as “TV watching” homes. Meaning about 20 million homes are still cut off from cord cutting in general.

So, the natural question is do Netflix, Hulu, Prime Video, HBO Max and Disney+ all have aspiration of 100 million household penetration in the future? Probably not. As my past research has shown, Netflix will likely tap out at around 70 million US subscribers. Meaning we have a gap of about 30 million households.

While overall streaming could end up reaching 100 million homes–similar to cable at its peak–there won’t be one service that every household subscribes to. Either from keeping skinny bundles, sharing passwords or what not, I don’t think we end up with one service as the “universally owned” streamer.  This data from Reelgood shows that while Netflix is the closest to a universal streamer, many streamers have bundles which don’t include it.

And if Netfllix can’t do it, I don’t see anyone else doing it either.

Lots of News with No News

Another Netflix Producing Deal

With royalty no less. Or not, since I believe they renounced their titles? Listen, I’m not an expert on British nobility. And while I can understand the interest from a general entertainment perspective, from a business standpoint this doesn’t move the needle.

Sound Issues in Tenet

Since Tenet isn’t in theaters in the U.S., and won’t be in my neighborhood anytime soon, I can’t speak to this from first hand information. But apparently customers are having trouble hearing crucial pieces of dialogue in Tenet. That said, when it comes to most TV and films it can be hard to hear many of the lines. Sound mixing has a lot of trouble dealing with everyone’s different sound systems nowadays.

Most Important Story of the Week – 28 Aug 20: Are Theaters Back?

This week started off slow, but man what a finish. Kevin Mayer left TikTok? That’s buzzy. The NBA players boycotted their games? Wow, that’s a big deal. But neither are the most important story of the week. That honor belongs to the theaters slowly returning to business. This is a $42.5 billion dollar industry globally and its survival is the story we’ve been monitoring all spring and summer.

Most Important Story of the Week – Are Theaters Back?

Of all entertainment industry topics, this one deserves the most nuance. The doom-and-gloomers are being too pessimistic. The sunshine pumpers are too optimistic. The truth is somewhere in the middle. Where precisely? Well, I’ll present both cases and let you make up your mind. 

The Optimistic Case

First, China has reopened it’s theaters. That’s huge and more importantly, they’re doing well. Harry Potter set some records earlier in the month, then the epic film The 800 had a huge opening weekend. With Tenet due soon, and then Mulan, the Hollywood studios could see some real box office grosses soon.

Second, Canada opened just fine earlier this month. So did South Korea. Turns out customers are fine to return to theaters. As this random study from Odeon Theaters says, customers are hungry for the theatrical experience. (32% of those surveyed tried to recreate the theatrical experience.) As a result, studios are slowly ramping up their TV advertising spend.

The current underlying all this is that so far the theatrical experience doesn’t seem to be a huge driver of sources of transmission. This point is key and may go against initial forecasts, estimates and guidance. It turns out that wearing masks and not talking/shouting can limit exposure, especially if theaters are only partially filled. And if a country has its cases under control. (We should know by now if theaters are causing superspreading events in China, but we haven’t seen it.) This tweet from Derek Thompson shows that theaters, depending on capacity, are either low to moderate risk.

Moreover, the theaters have a unified plan that should protect them somewhat from political blowback. In all, theaters can see a road back to profitability.

The Pessimistic Case

The pessimistic case is that it will be a long road back.

The first weekend of new releases in the US was “decent” at best and maybe even disappointing. Even though Unhinged opened in 70% of theaters–though not major markets like New York and Los Angeles–it only earned $4 million at $2,200 per theater. As IndieWire pointed out, that means there is basically a 75% “Covid-19” tax on new film’s box office. More ominously, Warner Bros trotted out a re-release of Inception, but didn’t tell anyone the grosses. Lack of numbers is always suspicious.

Meanwhile the most important market–the United States–still has lots of closed theaters. New York and Los Angeles remain shutterted and, as a result, the theaters never actually tried out a “rerelease library titles” strategy to get customers used to going to theaters again before the blockbusters could return. (Though drive-ins have done well with library titles.)

Thus, the studios are still fleeing 2020. The latest casualty is The Kings Man in the US which just decamped to February. As Scott Mendelson points out, essentially only a handful of films are going to try to rescue the fall and winter in the US: Tenet, James Bond, Candyman, Soul, Black Widow, New Mutants and Wonder Woman. And any of them could still move if Tenet underperforms. In my optimistic cases, I thought quite a few films would try to prop up the calendar and that isn’t the case.

As this analysis from Bruce Nash shows, theaters will see a slow return, then speed up and then slow down again. That prediction seems to be describing the Canadian and US return to theaters. As a result, it could be until February until things are back to normal.

In Summary

The optimistic crowd can point to a hunger to go back to theaters by customers. The pessimistic crowd can rightfully retort that sure some customers will go back, but it will take at least 6 months or more to get back to full capacity. That’s billions of lost revenue in the meantime.

Overall, I lean towards the optimists. Because I think theaters will survive this crisis. (Plenty have predicted otherwise.) As the evidence rolls in, it seems clear to me that movie theaters and streaming aren’t direct substitutes. They can be–you are choosing how to use your time–but really the theatrical experience is an experience. This is frankly why PVOD can’t replace theatrical either. That is much more like a substitute.

Does this mean theaters can relax? Nope. I hear from plenty of folks who don’t like or even hate theaters. Theater chains have work to do to focus on the experience. (Breaking them up into smaller companies would help here.) But there is room for optimism.

Other Contender for Most Important Story: Joe Budden and the Downside of Exclusivity in Mass Markets

Joe Budden–a hip hop artist with one of the best pump up tracks of all time–has a wildly influential hip hop podcast. Thus, when Spotify decided to dive aggressively into podcasts, he was one of their first calls and got a major deal. (Though I still haven’t seen numbers. Note this.) This week Budden announced that he was (likely) not renewing his deal with Spotify.

What happened?

My guess is that Joe Budden is realizing the tradeoff of going all in on a single distribution platform. The subtle difference between mass distribution, selective distribution and exclusivity. Let’s talk about Budden’s situation in particular, then how his complaints can be extrapolated out to the rest of entertainment.

When it comes to Budden specifically, he appears to have two primary complaints. Here’s the key quote from Variety:

Screen Shot 2020-08-27 at 11.42.51 AM

Issue one, if you will, is that he wasn’t paid as well as other folks. He was one of the first Spotify deals, so likely didn’t have other deals to compare. Since then, Gimlet Media, Joe Rogan and Bill Simmons (via The Ringer) have all been acquired at huge pay days. (Joe Rogan, for example, knew what Simmons got paid.) Since Budden can directly compare his previous salary to the new deals, he knows if Spotify was paying him market rates. And clearly feels they weren’t. (And he was a top performer.)

Read More