Category: Weekly News Update

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

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

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

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

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

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

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

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

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

Thought 1: The Theatrical Distribution Industry is NOT Theater Businesses

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

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

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

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

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

Thought 3: This is Disruption We’ve Never Seen

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

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

Thesis: The Theatrical Industry will Survive.

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

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

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

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

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

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

What Comes Next for Theater Companies?

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

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

This Process Won’t Be Pleasant

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

Data of the Week – Sports Ratings Are…?

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

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

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

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

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

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

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

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

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

Devices Are Key…

Thanks, Captain Obvious. 

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

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

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

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

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

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

Will Folks Criticize Netflix for Getting Cheap Subscribers?

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

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

From Parqor: This is the Search Engine Interface

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

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

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

Because one detail in particular shocked me:

Mulan made the top ten list!

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

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

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

Yikes!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Screen Shot 2020-09-25 at 9.30.17 AM

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

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

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

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

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

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

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

Other Contenders for Most Important Story

Disneyland (and Friends in California) Wants to Reopen

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

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

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

DC Comics/DC Universe Staff Sees Layoffs

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

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

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

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

image-1-estimates

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

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

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

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

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

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

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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.

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusions

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

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

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

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

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

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

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

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

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

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

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

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

Unless…

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

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

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

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

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

Other ESG Update: Cobra Kai’s Migration to Netflix

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

Other Contenders for Most Important Story

AT&T Is Selling Some Assets, but Not Others

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

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

Walmart’s New Subscription

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

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

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

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

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

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

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

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

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

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

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

Lots of News with No News

Another Netflix Producing Deal

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

Sound Issues in Tenet

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

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

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

Most Important Story of the Week – Are Theaters Back?

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

The Optimistic Case

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

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

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

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

The Pessimistic Case

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

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

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

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

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

In Summary

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

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

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

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

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

What happened?

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

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

Screen Shot 2020-08-27 at 11.42.51 AM

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

Read More

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

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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.