Category: Weekly News Update

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.

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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:

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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.

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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.)

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Most Important Story of the Week – 21 Aug 20: The Apple/SuperCBS Bundle Arrives

The biggest story of the last two week’s is “Apple v Fortnite”. Yet, for the second week it hasn’t made this list. Like the AT&T-Warner Bros. merger or the Disney-Fox merger, this is a seismic event we can tell will change things in the moment. However, that “moment” will last months, not years. It is potentially the story of the year, and we’ll get to it. Just not today.

(As often happens, I wrote a couple thousand words on it. So I decided to save it for my “Intelligence Preparation of the Streaming Wars” series.)

In the meantime, let’s return to a favorite theme: bundles!

Most Important Story of the Week – The Viacom/CBS Bundle Launches on Apple

Apple is offering a new bundle of SuperCBS channels. (SuperCBS is my name for ViacomCBS.) Instead of paying $10 for CBS All-Access and $11 for Showtime, Apple is offering them together–if you subscribe to Apple TV+–for only $10. So get CBS All-Access and the tech giant will throw in Showtime for free.

(Apple is also exploring a “super-sized” bundle of TV, music, news, gaming and more, but will likely provide details in a few weeks.)

For those of us predicting a return to bundling (read me here, here or here), this move isn’t that surprising. The previous high point of bundling was Disney’s decision to bundle Disney+, Hulu and ESPN+ last fall in the United States. And then in their earnings call Disney announced plans to include Star/Hotstar as another bundle globally.

Let’s unpack the ramifications of the bundle. Why it exists. How this bundle happened. Why this bundle in particular. And why this bundle is NOT the future.

Why Bundle? Because The bundle is a Terrific Deal, for Customers and Companies.

That’s a controversial opinion, surely. (Especially on certain entertainment podcasts I listen to weekly.) 

But the math is fairly inescapable. For companies, getting into a maximum number of households is usually worth a slightly worse per subscriber cost. So if AMC–the channel–can be in 85% of households, each paying $1.50–that’s better than being in 10% of households each paying $10. Or take ESPN: right now nearly every cable household pays over $6 to get it. Yet, if everyone cut the cord, ESPN would struggle to get probably 25% of households for the same price, not to mention quadrupling the price. (Moreover, the additional subscriber has zero marginal costs, so maximizing it makes sense.)

Hence, bundles help companies maximize revenue. It’s a classic economics chart weighing prices to buyers and maximizing the value.

The lower prices also help customers. The criticism of the bundle was the simplistic complaint, “Everyone has 500 channels they can subscribe to, but they only watch 20.” The problem is no one watches the same 20 channels/shows/streamers. In cable times, a viewer might watch Friends on NBC, 60 Minutes on CBS, Sports Center on ESPN and NYPD Blues on ABC. But another viewer subs out History Channel for Sports Center. The bundle gives each customer the same low price. (In streaming, if you want to watch Stranger Things, The Handmaid’s Tale, The Mandalorian, The Marvelous Mrs. Maisel and Watchmen, you need a bundle of streamers.)

(What about how high prices are for the cable TV bundle? Well the problem there is the word “cable” not “bundle”. As local monopolies, cable providers for years had insurmountable barriers to entry, so they could raise prices without fear of cord cutting. Streaming is changing that.)

Thus, bundling is coming. But how?

How This Bundle Happened, Part 1: This is still a “Same-studio” bundle

This is fairly key, because it means the costs are fairly easy to allocate. The challenge comes when you try to get two different companies to bundle together. Then each has to ask the other who has the  more valuable channels and how they should split costs.

(Imagine a super bundle with Disney, Warner Media, Viacom CBS and NBC Universal in the same package. Now try to imagine the leadership of those companies trying to figure out how to allocate revenue. They’d probably kill each other before they settled. Ergo Hulu.)

That’s why Disney was the first “bundle”, because all the money ends up in the same place. Meaning it is up to Disney to decide how to allocate the value of the bundle and how to allocate investment and content and what not. The same thing is happening here, since CBS can decide how to attribute subscribe value between Showtime and CBS All-Access simply for accounting purposes.

How This Bundle Happened, Part 2: Apple is likely taking a big loss.

This math is fairly inescapable, and fascinating given that Apple is currently at loggerheads with Fortnite over the related issue of “platform tax”. Here’s the math for Apple offering Showtime and CBS All-Access separately:

Screen Shot 2020-08-21 at 10.18.02 AM

That’s a good deal for Apple, assuming lots of folks sign up for both. Now, here’s the same situation with the platform tax.

Screen Shot 2020-08-21 at 10.18.17 AM

Uh oh! Suddenly, this is a really bad deal for CBS All-Access. They lost half their revenue. So what’s the solution? Apple and ViacomCBS met somewhere in the middle. But a middle closer to ViacomCBS making money (since that’s their priority) and using customer acquisition into Apple TV+ to justify the costs.

Screen Shot 2020-08-21 at 10.18.36 AM

Notably, this is still a bad deal for Viacom CBS. They lose nearly a third of their value. So let’s run a final scenario, where Apple limits CBS losses to say 20%. 

Screen Shot 2020-08-21 at 10.18.44 AM

Now you could make a case for both sides. For Apple, they could tell themselves that losing $2 per month is worth it to bring people into the “Apple TV” ecosystem. (In this case, a device ecosystem. Terminology is important!) For Super CBS, they “only” need to add about 20% extra subscribers to make this deal worth it for a bundle. (Implying that the number of bundled subscribers exceeds the amount who subscribed to CBS All-Access and Showtime separately at the previous prices.)

However, there is even a world where Apple is paying the full-freight of $5 to CBS to keep them whole. Meaning they lose a whopping $60 per customer per year on this bundle. I don’t think that’s the case, but I can’t count it out either.

(The caveat that’s worth mentioning is that CBS has discounted CBS All-Access in lots of places. I get it free, for example, through a 24/7 sports subscription. So the $10 price may not be paid by anyone, sort of like how few folks pay full price for Hulu or Disney+.)

Why This Bundle Happened, Part 1: ViacomCBS Still Isn’t Owning the Customer Relationship.

The other big theme of both May and June has been that certain traditional studios have decided that owning the end-to-end customer relationship is very important. Which is absolutely correct! The rise of “direct-to-consumer” implies you’re going direct to the consumer. Which is what Disney, AT&T and Comcast now understand.

SuperCBS hasn’t learned that lesson yet. Clearly.

Instead of insisting that customers pay them directly, they’re letting Apple handle that. Instead of owning the user experience to collect data, they’re letting Apple collect that. Instead of controlling the customer relationship for marketing purposes, Apple gets that. This isn’t too surprising for CBS; they already let Amazon do all of that too! And Roku too!

Why This Bundle Happened, Part 2: CBS Can Offer a Good Bundle

Of the best content streamers, then, CBS was the best that also hasn’t learned the lesson of DTC. Seriously, check out Mike Raab’s lay out of the major players and look how much good stuff CBS owns:

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Thus, if Disney, HBO, Netflix and Peacock won’t play ball, then CBS is the best suitor available. Hence, it’s the first bundle on another digital video bundler. (DVB, explained here.)

The Future: More Deals, But Not Like This (vMVPD 2.0)

Do you remember the halcyon days when Youtube TV first launched? It was the most disruptive of disruptors in TV. Instead of paying $80 or $100 dollars for a cable subscription, Youtube only cost $35! That’s how you become a low cost distributor. 

That was only 3 years ago. Now the price has almost doubled to $65 per month.

What happened? Well, again, when customers buy a bundle, they want all the channels. (Again, no one watches the same 20 channels.) So Youtube had to keep adding channels to keep adding subscribers. Moreover, Youtube TV wasn’t going to offer old-fashioned “low entry price that later raises”, so they just pretended the price was very low.

Importantly, Youtube had zero cost advantage. Youtube was losing money on every subscriber to grab market share. This is why, when I saw plenty of analysts praise Youtube TV, I thought they were bonkers. If you let me lose $5 per subscriber, I can grab lots of market share. But I haven’t solved any problems. Or created any value.

I think some of that is definitely at play here. Apple hasn’t solved any pricing issues, they’re sacrificing short term revenue for long term subscriber acquisition. Which could be a good strategy–though anticompetitive–but it isn’t sustainable. It won’t be sustainable until Apple can prove that the sheer volume of customers it brings to the table exceeds the profits the streamers are losing. 

Hence, this current bundle is the “vMVPD 2.0” scenario. It’s a bundle, but we won’t know if it will work until Apple and CBS are pricing at cost. That will happen eventually, just not soon.

Other Contenders for Most Important Story

Fortnite v Apple – The Fight Escalates

This week, in an effort to prove they aren’t using their size to crush smaller competitors, Apple is threatening to destroy Fortnite’s second business of making game engines in addition to destroying its current video game business. (The Unreal video game engine powers many, many video games.) In other words, if you don’t buy our coal, we’ll keep you off our train tracks. It’s a tactic pioneered by Carnegie, Rockefeller, Morgan and Gates. Now Tim Cook is employing it too.

As I said above, the ramifications for this fight will definitely impact the streaming business. But since we’ll have to follow this saga for years, I’ll save longer thoughts for a future article.

Theaters are Finally Reopening (and Some Films Too)

AMC Theaters is reopening this week at reduced capacity (30% I saw reported) and reduced prices on opening day (15 cents per ticket!). I actually think theaters will be able to match demand to supply since they’re at reduced capacity for the near term. The wild card, as always, is how the disease/containment progresses.

The other wild card is content, and we seem to have hit the moment where studios have decided to release movies regardless of theaters. So Unhinged made it to theaters. Bill and Ted is following. And then Tenet. Some will have PVOD/TVOD components.

Frankly, this makes sense and I think for a film like Tenet, folks would be willing to see it in theaters even if it’s weeks after its “release”. My logic is that Covid-19 has temporarily changed what it means to “release” a film. It’s not like consumer demand will decay if customers who want to see Tenet in theaters literally can’t because their home town theaters are closed. (And some will wait and avoid PVOD.) The studios will make less money than before, but more than if they had waited indefinitely. (And probably more than Disney will on Mulan.)

Boom in Video Games?

Video games are definitely having a lock down moment, though as things reopen, this will likely revert to lower levels, though probably not to the same level.

The question I can’t answer is this: How much of this is due to children?

It seems fairly key. Mainly because the “day job” of children has been the most disrupted. Instead of going to school, they spent April to June at home. Hence, a boom in video games and Netflix. (The latest Nielsen Audience report said Netflix had a rise in viewership that I partially attribute to kids.) Even with schools reopening, classes can run only from 1 to 3 hours, if the programs work at all. Which leaves a lot of time for kids to spend on entertainment.

I’ve seen some speculation that this will create a new generation of video game addicts. But will it? It’s not like kids just discovered gaming because they’re playing on their phones. Nintendos, Segas, Playstations and X-Boxes have always sucked down hours and hours of kids time. Usually it competed with school filling 6-8 hours a day. We’ll see.

Data of the Week – Amazon is “Doubling” Everywhere

If you go by the news, Amazon has “doubled’ their video performance. First, Amazon Video streaming doubled according to Amazon CFO Brian Olafsky. Then they leaked that their AVOD audience reach, through IMDb TV, has doubled as well to 40 million users.

Caveats abound. 

For Amazon Video, the good news is Olafsky said it was total hours that doubled. The bad news is we don’t know what it doubled to. 100% growth during lockdown is great, but what does that bring us to? Also, the caveat is this is global, not US, so it’s even harder to track where the growth came from.

The AVOD audience is even more suspect. When Amazon Advertising says “reach” is up, that could mean a dedicated video viewer, or an ad running on the background of some Amazon page the user can’t even see. (We call that “Facebooking” given their epic misdirection on the performance of their videos.) Moreover, Amazon was touting “integrations” which means partners are expanding Amazon’s reach, not IMDb TV by itself, which was the story I saw most reported. 

So Amazon Video–in all its forms–is doubling. But we should be pretty skeptical for what that means.

Lots of News with No News – Ron Meyer Leaves NBC Universal

The strange part of this sordid saga, as I see it, is that Meyer was still employed by NBC-Universal. The ultimate survivors, he transitioned through countless leadership changes as NBC/Universal was passed from GE to Vivendi to Comcast. Yet, the news of the last few months has barely included Meyer since all the energy is in streaming.

Most Important Story of the Week – 14 Aug 20: What Comes Next As The Paramount Consent Decrees End?

The theme of the week is “antitrust”. It didn’t start out that way, as Friday night’s leadership change at AT&T would have been the story of the week most weeks. (Though, I consider it less of a big deal than most, and that’s why it’s at the bottom of this column.) So which M&A story wins the crown?

Most Important Story of the Week – Ending the Paramount Dissent Decrees

Ending the decades old Paramount Consent Decrees isn’t simple to explain. Because it was also the core trend in regulation over the last 30 years, it took me about 1,700 words. Which I’ll put up early next week. (Just too much news this week.)

In this column, I’ll just focus on the question on everyone’s mind is what comes next. To guess at that requires answering the key trend in government regulation: will antitrust enforcement become more lax or strict over the next few years? Let’s try both scenarios.

Continued Lax Antitrust Enforcement

Starting with the likelier outcome: nothing changes. If there are any economic headwinds in January–and there probably will be!–industry leaders will tell President Biden that breaking up companies will hurt growth. (It won’t; it will hurt industry profit and those are two different things.) That will scare him from enforcing current law and thus, things stay the same.

That leaves these key facts: 

– There are three big studios with lots of cash/success (Disney, Warner Bros, Universal)
– Three smaller studios with less cash (Sony, Paramount, Lionsgate)
– Lots of smaller distributors (A24, STX, Annapurna, etc)
– And the new digital titans with mountains of cash that make Smaug the dragon jealous (Netflix, Amazon, Apple, etc). 

– There are only really three major theater chains: Regal, Cinemark and AMC Theaters.

If the big players with lots of money can buy a studio chain–and honestly the prices are so low in the Covid-19 economy, for some it’s a drop in their debt bucket–I think they will. Sure, theaters are a dying industry (kidding), but being able to collect all the theatrical rentals and own the entire relationship will be too big of an opportunity for at least one of these entertainment/tech giants to pass up. 

Even if it isn’t a great business opportunity, when Comcast announces it is buying AMC Theaters, hypothetically, that will leave Warner Bros and Disney staring at only two remaining chains in the US. If Amazon or Apple sounds interested, then suddenly the land grab is on. If the remaining theaters get purchased by other studios, the remaining studios will be terrified their movies won’t get played. That’s their worry. Sure, Disney will probably be fine with its blockbusters, but would Paramount make that bet? Or Lionsgate?

Thus, tentatively, I think we see the theater chains get snapped up. When? That’s tougher to say, given that everyone’s cash flows are a mess right now. But once the race starts, it will end with all the theater chains under new ownership. I know I’m the outlier on this –the smart take is, “No Disney won’t buy a theater!”–but the logic feels inescapable: if there are three chains, and 10 potential buyers, they’re gonna get bought up.

In the meantime, you’ll see lots of block booking, licensing of films to theater chains and other practices previously held in check by the decrees. They were held in check because the big studios know they can extract rents from theaters with them. Since these practices benefit the bigger studios with blockbuster films, the independent distributors will definitely be hurt. Of course, the judge deciding the case said she didn’t see this happening, but judges tend to be shockingly bad predictors of future corporate behavior. 

(Judge Richard Leon who approved the AT&T deal and, I believe, the Sprint/T-Mobile mergers takes the cake in this. He consistently believes that companies won’t raise prices after a merger, and then they always do! Funny how that happens.)

Renewed Strict Enforcement

On the unlikely side of the coin, potentially a President Biden and Attorney General Warren come out swinging at consolidation. In that scenario, everyone will be scared to start an M&A process. Potentially, the theaters could be candidates to get broken up! (Arguably, this would be great for the industry. With dozens of smaller theater chains, they would be more innovative and focused on their strategy.)

Moreover, an AG Warren would look at harmful vertical integration practices across the spectrum of entertainment. Everything from how licensing deals harm talent to price collusion by the entertainment conglomerates to platforms extracting rents as monopolists to, and this is is crazy, how price gouging by big tech to seize market share. 

That said, I’m skeptical strict enforcement is coming. Guess what? Wall Street agrees. Which I’ll explain next week.

M&A and Antitrust Updates

Wow, what started as a quiet week in M&A news got fairly busy. 

Sumner Redstone Passing Away Means More M&A around ViacomCBS

First, Sumner Redstone passing away is the end of an era, an era with old-fashioned media tycoons. He assembled his media empire by buying, buying, buying in an age that was just beginning to allow media consolidation. That’s sharp insight into the landscape. Of course, he also was described generously as a “brawler” and negatively as “thuggish”, so it’s not all a positive story for old-fashioned tycoons. He was also notoriously litigious, which again is less business acumen and more brute force.

What comes next for ViacomCBS? The scuttlebutt is something, but what we don’t know what. Both ViacomCBS finally being sold (Current market cap is around $16 billion.) is an option and so is ViacomCBS buying more (MGM? Discovery?) to then be sold to a bigger buyer. Or it holds the course as it tries to boost its stock price. 

Epic Games Sues Apple for Anti-Competitive Practices

In a week that doesn’t see the end of the Paramount Consent Decrees, this is the clear number one story of the week. So important that I’ll save it for next week in case we have a slow news week. The story is that Epic Games–maker of Fortnite–is upset at having to pay Apple’s 30% pass-through tax/fee/rent on in-app purchases. So they just stopped, Apple kicked them off the app store, and now they’ve gone to court. Google then followed suit. (That last part is good news, since it means this story is far from over.)

This will have ramifications for video games, technology and entertainment. Consider Disney+: Right now, they’d have to pay Apple $9 for every $30 rental of Mulan (unless they negotiated another split). If in-app purchases go away, Disney gets to keep that for themselves.

I won’t even bother to forecast how this ends, but we’ll be paying attention.

AT&T Wants $1.5 billion for CrunchyRoll

This is a bananas story–that’s a technical term–in The Information, the outlet that seems to get all the scoops. AT&T thinks CrunchyRoll is worth 10% of all of ViacomCBS? My how things have changed.

If I were Sony, I’d point out just how low the barriers to entry are to buy anime content. Every streamer has their M&A vertical from Netflix to Amazon to Hulu. It’s just not a point of differentiation, and definitely not a $1.5 billion point of differentiation.

Data of the Week – BBC Global Audience

I’m a sucker for global data numbers, so the number of the week is BBC reaching 486.2 million folks around the globe, an increase over last year’s record of 438 million. Of course, like any number defining reach is always tricky. This seems to include folks who simply visited any BBC website over the last year, which is valuable, but not quite the same as regularly watching BBC News.

Still, the 400 million reach number is a good stand in as well for global English language total attributable market. Meaning, if you were Netflix, you could point to that as the upside scenario.

Other Contenders for Most Important Story

No College Football

This is bad news for ESPN, Fox, Fox Sports, ABC, NBC and CBS. Less live sports means less lucrative revenue for the traditional businesses. That’s a pretty simple case. And in other weeks could have been the story of the week. (Though its impact is lessened by the chance the season moves to the spring and that other sports are going full bore.) Rick Porter has the good read this week. Anthony Crupi too.

NCAA Alston Case: Supreme Court Helps College Athletes

The Supreme Court refused to allow an injunction in the Alston Case, the ruling that says NCAA players can get paid to play. While this isn’t the final word, it makes it much more likely to actually go into effect. If, of course, there are sports to be played.

Sky World News shuttering

Comcast bought Sky from Fox during the Disney merger time, and one of their big initiatives was to launch a global news service. Well, those plans are on hold. 

Lots of News with No News – AT&T Friday Night Change in Leadership

Oh yeah, this happened.

Notably, this isn’t a “massacre”. Let’s save such extreme language for bigger changes. Instead, Jason Kilar is consolidating control at AT&T’s Warner-Media, with the narrative that this will allow him to focus on streaming, streaming, streaming. Let’s go best case/worst case.

Best Case: The strategy is more focused.

A good strategy is a focused one. Arguably, Kilar is eliminating his direct reports who don’t share that focus. So if you were wondering if AT&T would “burn the boats” for HBO-Max, Kilar has forced them to. A simpler org chart should help drive HBO Max growth.

Worst Case: He’s eviscerated his content side.

Not completely, he had five creative types before, he’s down to three now. Did he pick the right ones? We don’t know. (I don’t have enough data to prove it.) But none of them are guaranteed hit-pickers like a Les Moonves at his peak. The further worry is that Kilar is NOT a content guy and “content is king”. When he was at Hulu, Kilar was was more focused on the algorithm than the content, right as Netflix went all in on the content. Vessel was Quibi before Quibi was Quibi, with the same lack of detail for content.

Meanwhile, my sympathies go out to the hundreds of folks losing their jobs at Warner Media in this consolidation. That’s never good to hear.

Most Important Story of the Week – 31 July 20: CAA Fires Some Agents…What Does it Mean?

Let’s zig while everyone else is zagging, shall we?

Sure, PVOD is officially a thing for one theater chain and one studio. But we knew a compromise was coming eventually. Meanwhile, I’m looking at the power brokers of entertainment for my story of the week.

Most Important Story of the Week – CAA Finally Lays Off Agents

When Covid-19 began it’s spread, everyone was impacted. Lots of companies had to furlough workers, cut hours, start work from home and begin to plan for a pandemic-impacted future.

The challenge is trying to figure out which impacts are temporary, and which could be permanent. (Which I’ve tried to do a few times.) 

In film and TV specifically, studios were hit with both supply and demand shocks: they couldn’t release films in theaters and had to stop production. The logical next step was for studios to severely curtailing deal making. Why spend money if you’re not making money? 

Unfortunately for Los Angeles–and similar regions around the globe–the Hollywood economy is like an ecosystem in the natural sense of the word. The studios are the plankton that feeds all the animals in the sea from theaters to cable channels to cable distributors to home entertainment video producers to independent PR shops to swaths of entertainment lawyers to unknown hordes of marketing consultancies to…agencies/managers.

I highlight that last group because of all the support groups it’s not clear that they have to exist. They do serve roles in the system and one could (maybe) make the case they even add value. But most industries work just fine without dedicated third parties hoarding/managing talent. (Head hunters exist, but are much less prominent in other industries.) 

Moreover, as time has passed and agencies have consolidated, their business model–being blunt–is much more about being gatekeepers who charge rents to reach talent than connecting the right people with the right projects. Gatekeepers then extract rents, which exceed their value and you can tell they’re succeeding because they build lavish offices and have enormous expense accounts. See CAA and WME.

Thus the news this week feels bigger than just “industry being impacted by Coronavirus”. Theaters are being impacted too, but most have reduced costs and will survive until a therapeutic or vaccine is developed. Cable TV made it through. Theme parks are reopening, though limited. Sports will see revenue cut in maybe half, but everyone will cut salaries and continue on.

At first, I would have said the same thing about agencies. The agencies matched other businesses by cutting hours and expense accounts. (Though honestly, who had meals to go to under quarantine?)

Now the agencies are laying off agents. Specifically, CAA is last to the party. “Laying off” is a step more dire than “furlough”. Agents could be furloughed if there is no work to do. Laying them off means, generally, that they can’t come back. While lots of businesses are laying off workers, an agency is literally only its workers! They don’t make or produce anything; without agents, an agency isn’t an agency!

This change is potentially seismic. 

If you have fewer people to make deals, it means you anticipate fewer deals to make in the future. One explanation could be that studios will pull back from making new shows. I don’t buy that at all, especially with the boom in streaming services.

Instead, the reality may be that we don’t really need agents, and the pandemic threw that into sharp relief. At least one group of talent proved that it doesn’t really need agents. (Or not agents from the two major firms.) The writers fired all their agents last year and still film and TV development continued. If agents are a vital cog in the machine, what to make of the fact that when that cog was removed for writers…nothing changed?

Let’s not overreact too much. It’s *only* 5% of the workforce that is being laid off and likely none of the top agents. (Furloughs are temporary so I’m less likely to consider that a permanent change.) Every other agency has already let go of their staff. Maybe this was as inevitable as AMC Theaters and Comcast coming to a deal. Or maybe I’m not going far enough: WME is a debt burdened goliath that failed to IPO and doesn’t actually have a strategy for the future.

If I’m a studio or production company, I’d look to a post-agent future. In addition to being gatekeepers, agents in a lot of ways are bad talent spotters. They send the same writers and same directors and same actors to development executives. This makes for so much of the dross that comes to screens. Worse, because they do all the packaging, many development execs have lost the ability to find great talent and great projects. (A role producers used to play more prominently in the system.) 

If a studio can re-develop the skill at developing projects–a role the agencies were happy to do for them for a fee–it could pay dividends.

The Next Most Important Story of the Week – Comcast-AMC Theaters Truce

It’s still a big deal! But in a change, I was asked to write my thoughts for Decider.  It’s a good one and may change how you look at this big news. (When that article goes up, I’ll provide a link.

Data of the Week – ESPN’s Huge Baseball Ratings

We have our first test of the thesis that Covid-19 changed everything. First up, sports. With everyone stuck at home, and experimenting with TikToks, Fortnites, and Twitches, maybe they’ve moved past live sports?

Well, not really

Screen Shot 2020-07-30 at 11.24.14 AM

My prediction is that when Lebron and the Lakers take on Kawhi and the Clippers last night for the NBA’s return it will set similar ratings. (This article was written before it happened.) 

Long term what are the impacts? Well, if sports dominate linear TV, they’ll become even more important to the cable bundle’s survival. Meanwhile, if sports really do grab the attention of 1/3rd to 1/2 of viewers, we could see viewership decline on the streamers, new channels and scripted cable/broadcast proportionally. Sports news websites should see a spike in traffic too. If the streaming wars are really the “attention wars”, then a new battleground of attention is returning.

M&A Updates

Antitrust hearings

There wasn’t a lot of news out of the antitrust hearings on capitol hill, besides headlines speculating this is a “Big Tobacco” moment. My overall takeaway is only one of two things can be true:

  1. The lead executives for major tech companies are surprisingly uninformed about large parts of their businesses. As such, they should be fired for incompetence and poor leadership. Tank their stocks!
  2. The executives were lying when they said they “couldn’t recall” many details about their companies.

Obviously, number 2 is true.

Don’t sleep on antitrust as the defining business issue of the 2020s. If breaking up conglomerates of all shapes and sizes becomes a trend, that will have ramifications up and down every value chain. Smart business leaders can strategize around that. But that’s a big “if”. 

M&A is Down for 2020 (duh)

One of my favorite corners was predicting in 2018 that M&A wouldn’t “explode” following the approval of the AT&T/Time-Warner merger. And indeed it remained mostly flat, and then got walloped by Covid-19. (Which does not count as something I predicted!) Here’s the table from PwC, recreated by Axios:

Screen Shot 2020-07-29 at 9.06.35 PM

While PwC provides the best in class data for M&A–I used it extensively back in 2018–their headline is straight boiler plate “this changes everything” unexplored assertion. Yawn.

Other Contenders for Most Important Story

HBO Max Got “4 Million” New Subscribers

On last week’s The Business Kim Masters pointed out that it’s unclear if 4 million additional HBO Max/HBO subscribers is good or bad news for AT&T. She’s totally right: if you don’t set expectations ahead of time, when you do get a data point, you end up fitting it into your pre-existing narrative. That’s bad.

Unfortunately, I didn’t follow this advice myself. I didn’t expect HBO Max to give us subscriber numbers so I didn’t plop down a forecast.

I do have a tentative prediction. For new services with brands like this, I’m beginning to see a curve I’m calling the “substack” curve. I call it that because I first saw it when a substack author showed their subscriber growth. If someone has a preexisting brand, then they sign up lots of people at first. Then it slows down, but often it picks up momentum later on. (My curve has done something similar, though my “brand” was still small at launch.) If you’re familiar with the typical S-curve/bass diffusion curve, this is almost the opposite: start out big, slow down, then accelerate later.

We’ve already seen this with Disney+, which added huge numbers in November–the brand!–and then slowly added folks and has likely seen a pick up with Hamilton, and will see more acquisitions with the big Marvel shows. HBO Max is on a similar path. Four million was the branding launch, and then it will slow down and they hope to add more later when the next Game of Thrones prequel comes out. 

In other words, we could read this as the HBO Max to Disney+ is about 40% of the value. My caveat? Most of HBO Max is just HBO, and 30 million folks already have that. Plus, Covid-19 killed any chance at a good, buzzy original series, which Disney+ had.

(The best read I came across this week was this Variety VIP article in front of their pay wall. Also, after I published this Peacock announced it had 10 million sign-ups. I’ll tackle that next week.)

Hulu Redesign

Folks seem to like Hulu’s redesign. Others have said it mirrors Netflix, which begs the question, “Do you like Netflix’s interface?” I think half of customers do and half don’t. Meanwhile, I just long for the streamer with the play list feature that most closely mirrors my current DVR. The DVR is the best UX period.

Tenet’s Latest Plan

Open worldwide end of August, and then Labor Day weekend where possible in the United States. Given this is fairly convoluted, it’s probably the most likely to stick. Also, Disney moved Mulan again, date unknown. It also pushed Star Wars and Avatar, but that has more to do with production being paused than theaters not being open.

Tom Cruise “Space” Movie Plans for a Theatrical Launch

Not the biggest story of the week, but it did cause me to pause. Cruise may just be risk averse for streaming, or maybe he knows he’ll get much bigger paychecks in theaters. I opt for the latter. (With the caveat that my favorite line in any story is “The movie is also said to not yet have a script.”)

Management Advice of the Week – Don’t Bring Your Laptop to Class (or Meeting)

One of the sections I’ve neglected in this newsletter is my management advice for entertainment professionals. Cleaning out links, I stumbled on this gem that still holds up.

Essentially, under experimental conditions, if you’re on a laptop you can’t pay attention as well to a lecture. Multiple studies back this experimental finding up and I’ve read studies extending it to smartphones.

So what can you do about it? Easy: don’t bring electronics to meetings. You’ll retain more information in the meeting and be more engaged. What about our coronavirus zoom world? Well, close every screen beside the open Zoom room and use a pad and paper to take notes/plan. 

Lots of News with No News – Emmy 2020 Edition

Every year the Emmys garner tons of news coverage and every year I tell you to ignore this shiny bauble. As nominations per category have generally increased, and studios compete in more and more categories, the odds that a studio sets a record for Emmy nominations increases, which Netflix did this year. However, this Variety chart was the most telling graph I saw:

Screen Shot 2020-07-30 at 9.07.13 AM

In other words, Netflix’s skill is buying shows in bulk; HBO’s and other traditional studios is making shows.

Most Important Story of the Week – 24 July 20: The Incredible Shrinking Libraries of Peacock and HBO Max

The initial draft of this weekly column went very long in the “data of the week” section. So long it’s going to be its own article next week. (It isn’t that time sensitive.)

Meanwhile, the biggest story is one of omission…

Most Important Story of the Week – The Incredible Shrinking Libraries of Peacock and HBO Max

While the entertainment press often stares at shiny objects–Tenet’s delayed again is the example this week–I still can’t quite believe my eyes on this one:

The Harry Potter films are leaving HBO Max in August!

I’ve been telling everyone that the streaming wars aren’t a sprint, they’re a marathon. Heck, they’re an ultramarathon. Just like (most) real wars. World War II wasn’t won on December 7th. (Fine, 26th of May 1940 for my UK readers.) It slogged on for half a decade more. The Vietnam War or Iraq War were twice as long at least. Historically, wars have gone even longer. (Like 30 or 100 year time spans!) Even the Galactic Civil War in Star Wars lasted ten years. 

Yet the newly launched streamers tried to win it on day 1. In addition to the departure of Harry Potter, we have…

– The Jurassic Park films are leaving Peacock this month for Netflix.
– The Hobbit films quietly left HBO Max sometime in July.
– The Matrix films are leaving Peacock along with some Fast and Furious films.
And more

As far as content planning goes, this is bad strategy. The thinking for the traditional streamers must have been that buzz would never be higher than launch, so the goal was to present the impression that there are tons of blockbuster movies. (Just like Disney+.)

Of course, when folks see tons of movies, they expect them to stay there. If they leave without similar high-powered replacements coming in, the result is disappointment. Traditional HBO knows this, which is why every Saturday they usually have a big new movie, but it leaves after a few months. (And why no defining films have left Disney+.)

Why haven’t they paid more to keep these buzzy films around? Traditional companies like making money. And Wall Street still expects them too. It’s cheaper to pay for a limited, non-exclusive streaming window measured in months (or even days) than to permanently end some of these lucrative exclusive linear deals in the United States. (TNT/TBS, USA Network/Syfy, and FX/FXX still pay handsomely for blockbuster films. So do Netflix, Hulu and Prime Video.)

Disney paid dearly to get nearly all their rights back and keep them. As a result, Disney streaming has lost lots of money so far. (It did have some films leave the service, such as Home Alone.) Meanwhile, it stays focused on the numbers that drive Netflix’s stock price: subscriber counts.

In defense of HBO Max and Peacock, I’m not sure losing any of these titles besides Harry Potter and Jurassic Park will really hurt the brand. If I were offering them advice, though, it would be to end these old habits of shifting films around constantly. Some library rotation will make sense; windows under a year do not. The key to the traditional streamers competing with Netflix is to offer consistent libraries of classic films. Their value proposition is that their films are better on average than Netflix. Rotating films in and out won’t provide that. 

This does mean, frighteningly, to ignore the money guys. At least for now. Since the economics are all in flux anyways, the cash now doesn’t actually exceed the potential cash later, but that’s a tough case to make.

M&A Update

IMG and Learfield’s merger was cleared last week, consolidating another industry, this time sports viewing rights, mainly college. This will likely be anti-competitive and Sports Business Daily has the details. (Hat tip to Matt Stoller for pointing me to it.)

Meanwhile, the tech giants can’t seem to help themselves. First the Wall Street Journal reports that Google specifically preferences Youtube for video searches. Second, the Wall Street Journal reports that Amazon explores buying start ups, then copies their business models. 

Other Contenders for Most Important Story

Let’s do quick hits on other stories that piqued my interest.

UTA Signs the WGA Code of Conduct

Whoa! Why did I spend so much time on Netflix last week when this story is a way bigger deal?

It doesn’t end everything with the writer’s-firing-their-agents-strike, but this is the first major agency to break ranks. Though the deal definitely will have compromises on the writer’s side. I have to imagine that we’ll see WME and CAA strike deals soon, but I could be wrong.

Amazon’s New Video Game is a Dud

Amazon released a big new “shooter” video game out of private beta testing into public beta testing, then put it back into private. In other words, Amazon’s quest to be the “everything store” isn’t going about as well as their quest to make movies/TV shows: it may take a decade to make a profit, if they ever do. 

AMC Wins Latest Profit Sharing Deal

It looks like the talent for The Walking Dead will lose their suit against AMC Networks over profit sharing. Of course, with these legal opinions you never know how it will actually end or if it ever will.

Entertainment Strategy Guy Updates – The Films Moving Backwards

My take on Disney moving the dates for some of its films for next year–and following Tenet by delaying Mulan–is that the production pause is finally starting to impact the 2021 calendar. Every month that you can’t be shooting is another delay to already tight production/effects calendars.

Really, this issue has been covered widely, but with theaters closed in California, Texas and Florida, it doesn’t make sense to release blockbusters in America. And throws off the entire calculus. 

The solution to break the logjam is for someone to just reopen with the library titles doing well in drive-thrus. Obviously this would have to be done safely, using the best procedures to keep everyone as safe as possible. And not in locations with spiking cases. And this seems to be what AMC is planning to do. Which could finally break the impasse.

Most Important Story of the Week – 17 July 20: Peacock Symbolizes the Battlegrounds of the Streaming Wars

We have a special treat today…an interview with Matt Strauss, head of Peacock’s launch.

Kidding!

I guess I’m the one entertainment outlet that didn’t get that interview. (Seriously, how many interviews did he do over the last month or so?) Like America in World War II, our last entrant joins the streaming wars and that’s our story of the week.

(As a reminder, if you want to connect on social media, try me on Twitter or Linked-In.)

Most Important Story of the Week – Peacock Launches!!!

The last entrant of a major streamer has landed for American distribution. Comcast’s NBC Universal’s streaming platform launched on Wednesday. In full-disclosure, I haven’t used it yet.

(Why? Because I find most “reviews” of UX/UI aren’t objective measures of quality but subjective repetition of preexisting positions. If you thought Peacock would be a bust at launch, you’ll likely hate it. If you’re bullish on traditional entertainment companies–like me–you’ll likely find positive elements.)

From what I hear, the service announced in January is the service we’ve gotten. Strategically, I think Peacock is a pretty smart play by Comcast. First, it’s free, which means it’s competing on price. Second, it’s a FAST on steroids, meaning it’s got a lineup that IMDb TV and Roku Channels (and Tumo/Xumi) can’t match. Third, live sports and news are differentiators. I summarized this is in a thread:

(For my longer-ish take, go back to January after their announcement.)

Instead of their strategy, then, let’s explore how Peacock really is the synthesis of many ideas impacting the streaming wars. (Many of which I’ve written about previously.)

Device/Distribution Wars are the Nu-Carriage Wars

Another streaming service, another holdout by Amazon and Roku against offering the app as a standalone on their devices. Last summer, all the news was about MVPD retransmission battles, such that it made my story of the week in July. But already, I could see the future battleground moving from retransmission to devices. (The Apple/Amazon distribution fight was particularly fierce, if not widely covered.) EMC Capital provided a good summary chart of the landscape:

Screen Shot 2020-07-17 at 9.22.07 AM

(This is one of those simple charts that I’m jealous I didn’t make myself. Click here to subscribe to EMC’s newsletter.)

It seems that the traditional entertainment companies have finally realized how valuable owning the customer relationship (and data) is for direct-to-consumer businesses. The challenge is that the device owners (Roku, Amazon, Apple and maybe Google) are in a better position. Because they control the user experience and potentially billing, they can offer better bundles and experience. More importantly, the key applications (Netflix, Prime Video, and Hulu) take the bulk of customer’s time, so as long as a device has those, it’s likely won’t offend customers by not having the newly launched entrants (not named Disney+).

As I wrote in June, it is in the interests of HBO Max and Peacock to hold out as long as possible. Amazon’s user experience has always been sub-par, and it devalues their content to be mixed in with who knows what content is on Prime Video. (Seriously, Amazon just added profiles to their interface…) Meanwhile, it’s one thing to pay a fee to be on a service; it’s another to let Roku or Amazon own the customer relationship. Or to take the bulk of your ad-inventory.

Can the dual absences of HBO Max and Peacock hurt Roku or Fire TV sales? That’s unclear. Clearly Amazon and Roku looked at Disney+ and saw an app they couldn’t say no to. But that set a precedent HBO Max and Peacock will cling to. 

Part of me thinks this will help Apple TV devices, but only for new customers. I myself may be purchasing a new streaming device this fall; the clear winner for me is Apple TV or X-Box since they have every service I want. (I’m not convinced I need Apple TV+ just yet.)

Comcast Is Powering It’s Flywheel

I kid! Obviously, I think flywheels are an overused concept in streaming video. And tech period. (See my two very, very long articles explaining this here and here.)

One can’t discuss Comcast’s business model without seeing the similarities to Apple or Amazon. Comcast is launching a potential Deficit-Financed Business Unit (DFBUs) in Peacock to increase revenue in another line of business, cable internet. They are bringing folks into their “cable ecosystem” via deficits because they offer Peacock’s $5 plan for free to existing Comcast and Cox subscribers. If you think it’s a good idea for Amazon to sell Prime Video at a loss to drive Prime memberships or Apple to offer Apple TV+ to sell more iPhones (both DFBUs into ecosystems), then you should be fine with Comcast selling streaming at a loss to keep cable subscribers. 

The difference? Apple and Amazon are supported by tech valuations, and Comcast has a lowly cable company valuation. That and my next point.

Comcast Really Does Everything in Digital Media

Now that Comcast has their ad-supported and subscription-supported service, to add to Vudu/Fandango’s TVOD business, and NBC’s broadcast business and Bravo/USA Network/et al’s cable business, and Universal’s movie business, man, Comcast does have it all!

I hold to my thesis from a few months back: Comcast wants to pivot into partially being a tech company. Hence the push to have a holistic digital offering very similar to Apple or Amazon. This will hopefully supplement and/or replace their declining cable and satellite businesses.

Of course, you can see the clash with the “flywheel” thought above. Whereas Apple and Amazon can afford to lose lots of money–though affording to does not mean they should–Comcast doesn’t have that luxury. Further, for anyone not in Comcast’s cable footprint, there is no ecosystem to bring customers into. Like Disney and AT&T, Comcast needs to make money in streaming.

One Thing to Watch: The Churn Hypothesis

A big theory of Netflix bears–those pessimistic on its stock price–is NOT that Netflix will die. There is no way that suddenly 63 million US subscribers abandon the service. That’s not the argument.

Instead, the argument is that with digital subscriptions the name of the game is “churn”. The number of folks leaving a service versus the number joining. 

Historically, Netflix has had astoundingly low churn. Some have estimated it at 3% per month, though I’ve speculated it’s higher. Since Disney+ launched, we’ve seen evidence that churn is up. And while the data is super noisy–and part of the “asterisk extraordinaire” coronavirus times–that churn has picked up during Covid-19.

This has matched a thesis I’ve supported, but discovered through conversations with Hedgeye’s Andrew Freedman and Twitterzen MasaSonCapital. The thesis isn’t that anyone will “kill” Netflix. Instead, the launch of new streamers powered by the three best studios for content (Disney, then Warner Bros, then NBC-Universal) will make life more expensive for Netflix. That will show up in churn. 

Between HBO Max and Peacock, I think there are bundles that are increasingly viable that don’t have Netflix in them. Obviously, this isn’t for everyone! Some folks will always have Netflix. But other folks will start to use Netflix in chunks watching for a period, disconnecting and coming back.

Either way, this is what I’m watching as Peacock launches and all the streamers begin to compete.

Entertainment Strategy Guy Update – Apple’s Services Business Model Weaknesses

Over the last month or so, Apple’s seen a string of bad news stories that add up to a trend. That trend being that they aren’t very good at launching entertainment subscription services.

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Most Important Story of the Week – 10 July 20: Sports Streaming Price Hikes

I hope everyone–and this probably just applies to the Americans–enjoyed the long weekend. The only thing missing really was America’s pastime of baseball. Or any sports really.

But all that has changed. Sports are back! Which is really the story of the week. But I’ll tackle that next week in the next installment of “Coronavirus and Entertainment”. In the meantime, let’s look at another sports-adjacent story.

Most Important Story of the Week – Sports Streaming Price Hikes

Everyone is raising prices, from Youtube TV to ESPN+ to Fubo TV

While all these services are sports based, it’s also important to note the differences between them. Youtube TV is a vMVPD, meaning they’re trying to replicate the cable bundle via streaming. ESPN+ is a streaming service that only offers sports. Fubo TV is a hybrid: it’s a vMVPD, but focused on sports.

The least shocking price raise should be Youtube TV. Of all the services, it was the most clearly trying to offer a $65 product for $45. Despite the bells and whistles, the vMVPD model is essentially the traditional cable model: the vMVPDs pay each channel a given rate per subscriber who receives it. The only difference is that instead of a cable box it goes through a streaming TV, device or iPad. So if you see the rates for various channels–for example this chart in this article by Dan Rayburn–you see how expensive it is to own all those channels. (Especially ESPN.)

Add all them up, and you quickly see that the reason cable is so expensive is because cable channels are expensive. Hence, virtual cable is expensive because virtual channels are expensive. The core economics aren’t different.

How did Youtube TV last this long without a price increase? Because they were losing money on it! 

Frankly, that’s why any articles or tweets I saw praising Youtube TV always baffled me. Of course they were beating everyone on price! Google subsidized the losses! But they hadn’t actually created any value, they were simply capturing market share. (They had created some value with a good UX, but that value is easily superseded by selling at a loss.) 

Losses in cable can add up really quickly, and even Google couldn’t stomach the Youtube TV losses. If they were losing $15 per customer per month, at 2 million customers, that’s $360 million a year. Adding customers would just make the situation worse. You can’t make up these losses on volume. Hence the price increase.

The challenge is what happens next. Since there are no natural digital monopolies, I wouldn’t be shocked to see either the FASTs or new vMVPDs rise up to offer “skinny bundles” again. Clearly customers want lots and lots of channels–hence why MVPDs and vMVPDs exist–but don’t want to pay as much as the local monopolies charge. Since the barriers to entry are relatively low, a new skinny bundle can easily enter. The actual solution is to have the cable channels finally start lowering their affiliate fees, but that’s a tough pill for a business unit to swallow.

On to ESPN+. If you look at Disney’s earnings report, you know that Disney is losing money on streaming. How much they are losing on ESPN+ in particular is unknown. ESPN+ doesn’t really have a lot of in-demand live sports, so it’s not like they can increase prices too much before folks will unsubscribe. This could portend some additional sports deals, or just Disney shoring up the bottom line in a world without theme parks and movie theaters. Either way, I expect both to keep happening: Disney will try to get better rights for ESPN+ (think NBA or NFL) while raising prices..

Other Contenders for Most Important Story

WGA Puts Their Strike on Hold?

This happened over a week ago and I missed it, so shame on me. (Thanks to KCRW’s The Business podcast for shouting it out.) The caveat is nothing has been officially announced as of yet. So the deal could still fall apart. From reports, the deal is inline with the gains of the most recent DGA deal.

The headline is that the deal prevents a strike because the WGA can’t add a third tsunami to the twin waves of firing all their agents and coronavirus. Really, this is a victory for the pandemic. 

The other victor–as Kim Masters noted–is for the studios and streamers, and I tend to agree. The current deal hurts younger and lower level writers that are caught between exclusively writing on one show at a time, but also the reduced episode commitments of the streamers. Not changing that really hurts writers. But they didn’t have a choice.

Disney World on Track to Reopen this weekend

Theme parks are on track to reopen in Florida, with all eyes on Disney World. (As of this writing.) Depending on how cases, hospitalizations and deaths trend over the next few weeks, this will be a story to monitor. On the one hand, people could end up being too scared to go. On the other, theme parks may not end up being a huge source of transmission if they’re at reduced capacity with lots of effective countermeasures.

I remain bullish for theme parks. Unlike sports stadiums, they have more control over keeping folks outdoors and hence controlling transmission. The analogy is the return to restaurants and bars in June. As soon as lock down was lifted, folks returned to their old behaviors relatively rapidly, with just facemasks and spacing as the key differences. Of course, it wasn’t the same volume as previously, but enough to make the business models work.

If theme parks prove safe, I could see the same thing happening: folks come back as before. That said, America’s outbreaks are surging across the southern states whose temperatures have increased in recent weeks. It’s one thing to open a theme park when cases are plummeting; another when they’re surging. That will have to tamp down some demand.

The Landing Spot of Mad Men is…Everywhere?

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