Basketball, in my opinion, is a great testing ground for theories on strategy, valuing assets and data analysis. That’s why I developed my own “Value Over Replacement Executive” theory last fall. Or why I used the NBA to explain the ...
I’m a huge believer in “data”. I’ve noticed, though, that sometimes this bias towards data is interpreted as a sole focus on data in databases. Or it’s interpreted as a bias against case studies, or, more specifically, anecdotes.
Here’s the thing: anecdotes are both powerful and awful at the same time. On the “awful” side, a lot of anecdotes are used to refute rigorous data. Something like, “I know you have all this data, but Seinfeld tested poorly!” (It’s always that Seinfeld example.)
That said, anecdotes, or observations of human behavior (in simpler terms, “examples”) can be used as a starting point to form a hypothesis, which we can test with data. So starts with anecdotes, then move to data.
Take my personal behavior when I surf the web. Whenever I come across a new website, one of the first things I do is click on the “About Me” tab to find out, “Who is this person?” (If I’m being crude and I disagree with the person, it’d be more along the lines of “Who is this f-wording joker?”) If the website is poorly made or looks like Russian trolls made it, looking for the “About” page will usually reveal them to be a fraud.
This is an anecdote about personal behavior. But it gives a clue that some readers like to know who they are reading. If I pulled a lot of website data, I’d bet the “About Me” page on many websites top ten most visited pages. It could even be a success metric: getting lots to clicks on “About Me” as a sign people are new and want to learn more about what they are reading.
Since I don’t have the data to run the above experiment, I’m just going to make the hypothesis that I should have a better biography/“About Me” page than my current one, which is non-existent. Before today, I had two tabs, content and contact me. And even the contact me may not have worked before month three.
The challenge is providing a biography so you know my bonafides without giving the game away. If I give away enough hints, then surely someone will do enough Linked-In stalking and my identity will be revealed. (Or I’ll slip up. On the internet, no one knows if you’re a dog, but they’ll know you’re named Fido.)
So here goes. I posted this bio today, and I’m putting it up in an article today for everyone to read.
I’m an entertainment executive who has spent the last few years at the intersection of content, technology and business. I’ve spent the 2010s working in media and entertainment companies. Well, entertainment companies, both as an employee, intern and consultant. These companies have run the gamut from giant studio conglomerates to a streaming company (and one of the big ones) to independent production companies, in both television and film.
I’ve held roles ranging from strategic planning to business development. What does this mean? Well it’s different at every company, but I’ve drawn a lot of analysis from huge data sets and put these into PowerPoints for senior executives to pore over. And hopefully make decisions. I’ve also looked for “revenue generating” opportunities, which means building business plans, evaluating content plans/offering and negotiating deals. I enjoy making Excel spreadsheets too and poring over data for insights.
I’ve been fortunate to cover a lot of fun stuff touching on a bunch of different areas.
Before that I went to a top tier business school and specialized in the business of entertainment. I also took as many classes as possible where “numbers” were involved, only topped by the number of classes where “entertainment” was involved. I graduated at the top of my class. Not near the top, the very top. As a result, I was was asked by multiple professors to TA their classes for them and share my knowledge. I also one several other awards.
Well before that I went to UCLA as an undergraduate. I graduated and worked in a really demanding field that provided me the skills to go to business school. I also developed a love of writing and I’ve been published on many different websites and traditional newspapers under my actual name.
Ever think you published your weekly column, then realize you imagined it Friday afternoon? Bummer.
Well, these have been coming out on Monday’s pretty reliably anyways, so it’s all good. The theme of last week (and then some) is pretty clear: turnover and people movement! Usually, I’d call one or two hirings and firings “lots of news with no news” but so many happened in different parts of media & entertainment & communications, that I elevated to the top story this week:
The Most Important Story of the Week – All the Hirings, Firings, Departings and Renewings
The Instagram founders are out!
Kathleen Kennedy is staying!
Bob Greenblatt is out! Ben Sherwood will be out! (In addition to Moonves being ousted earlier this month.)
And in the firings cases, they all got replaced by another very qualified executive (or executives plural).
The question, for me, as always, is the impact of all of it. That’s tough to assess because it requires predicting the future and/or assessing track records, that I just don’t have enough data to do. (For now. I’m working on it.) Anyways, I’ll blast some quick (as in not even gut, just blink) thoughts out, in rough order of impact:
Instagram Founders – Departing
I don’t know anything about the two founders, and I’ve been debating if “social media” is really entertainment. Given the time it sucks up from users, I default to “yes” even though tech has more than enough strategy guys covering it. (One great one in particular who I recommend for his Instagram take here.) Here’s my quick take: it’s a shame Facebook owns Instagram and society would be better if it didn’t. As for Instagram, it’ll be fine.
Kathleen Kennedy – Renewing
Everyone has said this is a show of confidence in Kennedy, (The Hollywood Reporter broke the story.) It’s hard to disagree. That’s what an extension is. The question is, “Should they have?”
This little section could act as a mini-update on some of my old ideas. To take just one from last week, the question isn’t “Did Kennedy do well?” (She did.) but how much better did she do than the “replacement”? VORP, in other words.
If I did have a “VORCEO” focused on entertainment, it would track chaotic productions versus smooth ones. Kennedy wouldn’t do well there. But it would also track box office success. So three $1 billion films in a row? That’s tough to beat. On the other other hand, Star Wars is an amazing brand, meaning context-wise I think a lot of people could have launched 3 billion dollars films with Disney’s support. I mean, the prequels were widely reviled, and they did really well financially.
Put it all together, can I just say, “I don’t know”?
Really, we’ll judge this move when the movie after next comes out. Episode 9 will do just fine…but after that it is unclear what fans want/will support. I’ve written about Lucasfilm a lot (links here and here) and overall I think she’s done well, but it’s unclear how well above replacement.
All the Broadcast TV people – Hirings, Firings and Departings
I will have more to say on development execs (my stand in term for studio heads) coming in future articles, but honestly, besides CBS, every network is constantly battling with other networks for ratings leader. That’s why I assessed this impact as a giant “Eh”. So Bob Greenblatt and Ben Sherwood are out. Okay, we’ll see what happens. New people are in. Okay. On the whole, probably nothing much will change, by which I don’t mean a vote of confidence. I enjoyed Joy Press’ coverage in Vanity Fair, though it is probably a bit too pessimistic.
Long Read of the Week – Apple News Gets Eyeballs, not Money
As a struggling independent write/publisher–trying to launch my own website in this day and age, can you believe it?–I really enjoyed this read by Will Oremus on Slate about how little revenue Apple News delivers to content creators. (He links to an earlier article on how Facebook’s changes to the news feed has crushed pageviews of websites. Both are good reads)
Not to make a second “anti-trust” argument in the same update, but giant “aggregator” apps like Google News, Facebook and Apples News may make the world worse for news consumers. Not, of course, in the simple world of Chicago School economics, where antitrust folks just ask, “Hey is it free?”. And reply with, “Well, if it is then the world is better.” In that world, we’re great with giant tech companies.
In the real, complex world where you ask, “Is the amount and quality and variety of content increasing or decreasing?” Then you have a more complicated answer. In that complicated answer, a lot of Apple, Facebook and Google’s behavior seems potentially beneficial to customers, potentially destructive to content creators and obviously monopolistic. It’s complicated.
The key quote in Slate–and like all things it ties back to “value creation”–is here:
Slate makes more money from a single article that gets 50,000 page views on its site than it does from the 6 million page views it receives on Apple News in an average month.
If true–and I’m always skeptical of all numbers always–then you’re seeing value capture in action. Slate can’t stay in business with this model; if it disappears than Apple captured all the revenue by modestly improving the customer experience in the short term. But customers are worse off and Slate is definitely worse off.
Another Long Read of the Week – Advertising on Broadcast and Streaming
I’ve been sitting on this article for months now, waiting for a slow news week. As long as I’m writing about advertising above, we might as well continue the trend, but applied to TV and streaming.
First up is an article about how NBC won the ratings game in 2017-2018. This is one of those great perspectives that ignore the week to week ratings game, and look at the larger trend. It seems even more appropriate to remind everyone of this as Bob Greenblatt leaves, while also noting a lot of it was “sports” even as we focus ont he creative. That trend is that across networks, the average among viewers 18-49 is 1.5 rating, and NBC had a 2.2, which was a huge lead. As this article explains, that lead was driven mainly by a lot of sports (Sunday NFL, the Super Bowl and the Olympics) along with some other good performers like This is Us and Will and Grace. That said, CBS remains on top with the most viewers total, at around 9 million.
Second up, I’ve been sitting on this article for months about how NBC-Universal wants to decrease the number of ads in primetime, specifically by making one minute ad breaks for certain shows. With a few months hindsight, did this happen? I think it did as I’ve noticed on some DVR’ed shows you can’t fast forward becasue the one minute ad breaks go too quickly. If so, bravo for changing. I appreciate the effort at innovation. As always, though, the economics are really tough; as both this Ad Age article and this Variety article points out, the math is not in NBC’s favor.
Third up, well, what are streaming platforms doing for advertising? It turns out a lot, or in Netflix’ case, still nothing. A report Hub Research from a few weeks back said that if Netflix added advertising, a lot of people would drop the platform. (Hat tip to IndiWire.) Maybe. But advertising is a seductive mistress. When you build a business model with ads, it gets really easy to increase revenue by just increasing the number of ads delivered. If Netflix ever experiences a cash crunch, be prepared for that trade off. That’s why Hulu offers ads now.
Listen of the Week – NPR’s Planet Money with Little Tweaks
For a just great economics in action podcast, take a listen to NPR’s Planet Money episode on “Tweak This”, where they ask economists for little proposals to improve the world. Their first idea is one I love: make all businesses put all taxes and fees up front in prices. This would overall tend to lower prices for consumers. (It would also decrease the information asymmetry in most business transactions.)
I have two proposed tweaks. One, which isn’t entertainment related is that on airplanes people in window seats should wait for the airplane to clear before getting up. Don’t make people wait for you to get your baggage, in other words.
My second tweak is for entertainment. Basically, I wish we had a common measurement system for all video that was open to all. So linear, DVR, Youtube, streaming, social: all videos are measured under one system with the same metrics and shared to all. Totally impossible; would be awesome though. (Again, it would drastically decrease information asymmetry in negotiations.)
Think about your team right now. Either the people reporting to you or your peers. The people sitting around you in your cubicle or open office desk farm. The ones who should be working, but are probably reading the internet, like you are right now.
How many of them could you “replace” and see your team improve?
How many are just average?
How many are delivering LeBron James-esque over-performance?
Yesterday, I explained “value over replacement player”, a concept from sports that compares all all players to the average to determine how much value they add to the organization. And how rare they are, hence how much compensation they can demand. Unfortunately, as I also wrote yesterday, VORP isn’t commonly used in business. Most managers don’t look around at their peers and direct reports and judge them in “value over replacement” terms. They especially don’t measure performance that concretely.
That should change!
Today I’ll explain why. I’ll even provide some principles that lay the out basics for how to apply this to your team. And then I’ll provide some examples. From the entertainment business.
Before we get to the good stuff, we have to explain the difficulty with this whole enterprise.
VORP: Why not business?
Let’s start with one very simple answer, and then dig into the details:
Value Over Replacement is hard!
That’s it. It takes a lot of work, requires a lot of numbers to do it well, which requires a lot of thinking and analyzing, and then a lot of feelings could get hurt. But let’s get into some specifics.
First, there is a goal or “value” problem.
Teams applying advance metrics start with “value”. Ideally every part of every organization would know right off the top of their heads how they create value. In value based terms. But while most people could speak generally about value, very few could define it in concrete terms. Even fewer could tell you how well they did last year. To put this in sports terms, most teams (and even companies) couldn’t tell you their record from last year.
Each team’s goals should be aligned with the company’s mission. Since most businesses are pretty awful with goal setting (and accountability) you have a problem from the start. At its core, it’s really easy to account for “value over replacement” when you have objective numbers like runs scored and assists generated like in sports; it’s much harder when it is about running a team with an undefined goal.
(This is why most companies and analysts default to stock price, since it is arguably the goal, but mainly it is the easiest thing to track. Even profits/cash flow require digging into financial statements.)
I could pick on numerous traditional teams in movie studios. I’ll try to stick with just one for these examples: business affairs (BA). (For those who don’t know, the BA folks are responsible for negotiating with agents and managers for the deals that make up TV shows or films. All the deals too, including actors, writers, directors, producers and sometimes production staff. Sometimes they also do “Legal Affairs” making them BALAs!) I don’t mean to pick on BA, but they make a great example, because they usually have a clear mission and they have a defined skill set/experience (law school).
A BA team adds value in one of two ways: they either negotiate cost effective deals, or they close a lot of deals quickly. The balance between these two can change per company. Some companies—like Netflix and other streamers that aren’t constrained by budgets—care more about getting all the deals they want or the speed to close a deal. Other studios could pinch pennies, like say Viacom or Lionsgate.
But many (most?) studios never clearly define the goals for this team. Sometimes they want deals closed quickly, sometimes they want to save money, sometimes they want to get projects. The heads of BA usually don’t push on this either, since not having goals makes it easier to succeed. Overall, they definitely don’t define how the BA teams add value. In the gap, the BA teams just work really hard.
Second there is a data problem.
Or problems. Take the fact that even if teams do have clear goals, they have way fewer metrics measuring their progress towards these goals.
Do sports provide good examples or case studies for the oft discussed topic of “leadership”? If we want to excel at leadership, should we study coaches?
On the surface, it would seem so. We cite coaches in particular for leadership all the time in the press. Having gone to UCLA, I was indoctrinated early on to believe in Coach John Wooden, and his pyramid of success, as the touchstones for good leadership. You can find books doing this. So many books. (At least five by my count.)
You can even hire current coaches to speak to your executive team or corporate board about leadership. Nick Saban charges $50-100K to provide this service.
Honestly, isn’t that all kind of nonsense?
Coaches have one of the easiest leadership roles of all leadership roles. All management/leadership is tough, including coaching, but there is a scale, and coaches have it a lot easier than others. They have players who rely—literally are utterly dependent—on their coach for their very future. Sure, a lot of coaches fail—most in fact; sometimes spectacularly—but that’s because sports is a zero sum game: the number of wins equals the number of losses each year.
Yet, I love studying sports for lessons. Love it. There are tons of principles and tactics ane best practics that apply to business in general. It’s just that the most beneficial parts are probably the hardest to figure out and apply.
To take just one example, I think many, many knowledge industries could benefit from the type of discipline embodied by the concept of “practice”. Consider this: college football coaches “only” have their players for 20 hours every week. The goal is to not waste a minute of that time to maximize their training, and hence output on the field on Saturdays. Do you as a manager have the same discipline with your team? Or do you have almost no idea how your team spends their time? (Except when they’re in a meetings with you, of course.)
If this sounds dictatorial, I get it. Imagine your manager tracking every minute of every day you spend in the office. If you chafe at the idea of planning your schedule down to the minute, then don’t bring Nick Saban to your board meeting to talk leadership. Read this article and you understand this is EXACTLY what he does.
So if you won’t use Saban’s single best tool to manage his players, why do you care what he has to say about “leadership”? John Wooden practiced a similar level of control. Coaches are great leaders, but they also control their players with a level of tyranny unheard of in most of corporate America.
(The article in Fortune I quote above cites “leadership” in the title, while again never noting that no CEO would manage his executives with this level of control. I’d add, most knowledge workers would loathe this type of control over their own schedules, but recommend it often for minimum wage factory, retail or warehouse workers, who don’t have a say. Sigh.)
Today, isn’t about complaining about misapplied lessons in sports, though I loved getting that rant off my chest. Instead, it’s celebrating something from sports that would be tremendous if we applied it to office work and corporations broadly. The single biggest insight, in my opinion, from sports statistics (I hate the term “advanced analytics”, since I don’t know what simple analytics are) that most managers should use is:
Value Over Replacement Player
VORP and its cousin WAR (wins above replacement)—from basketball and baseball respectively—are two holistic measurements that take multiple statistical variables and combine them into one measurement. The goal is to get a single measurement that is best correlated with predicting future performance. The value comes from applying that single number to evaluate all potential players against each other; hence, it directly compares everyone to the average.
Today, I want to explain what “value over replacement” is, how it works, and the principles behind it. Tomorrow, I’ll try to apply it to everyone’s favorite industry, entertainment.
The Origins of “Value Over”
In Hollywood, there are really two camps when it comes to sports: either you follow sports super closely, or you hate it, with little in between. For those who hate it, here’s a brief summary on how analytics started in sports, which birthed us WAR/VORP.
Analytics started in baseball in the 1980s by many people, but was popularized by arguably one man, Bill James. He wrote an influential publication that created new statistics for baseball that he believed better captured the influence of various players and strategies. For instance, they tried to downplay the role of batting average. He called this sabermetrics after the organization he founded. James was followed by some other people, notably Billy Beane, general manager of the Oakland As (popularized by Michael Lewis in Moneyball) and Nate Silver, now of the election website FiveThirtyEight.com.
This deeper dive into statistics started in baseball for arguably two reasons. First, baseball is the most “statistical” sport. It has a huge amount of data and a lot of people poring over that data to compare current players to the past. By playing 180 games and tracking most everything that happens during every play, your sample size goes way up. Second, a lot of people play fantasy baseball, which is taking all that data and trying to apply it to fake sports. This was how Silver entered the analytics movement.
The critical challenge for these sabermetricians was to move beyond simple counting statistics and try determine, holistically, how much each stat at the end of they contributed to wins. This led to statistics in baseball like “win shares”—from Bill James—and the one I mentioned above “wins above replacement player”—author unknown, as far as I can find.
As I wrote in my post on “Has Hollywood been Moneyballed?”, baseball is a team sport that cares about winning. Like all team sports. The best way to do this is to have the best players, in general. With more and more people scouring data and drawing conclusions, eventually the baseball teams realized these people could help them win more games. This arguably started with the Oakland A’s and their manager Billy Beane, which was immortalized in the early 2000s, by Michael Lewis in Moneyball, and the idea of using data in sports took off like a rocket. (And people like me wrote articles about it then and now.)
Oh, I guess there is a third reason that explains the explosion of “analytics” in sports. Computing power and storage has increased exponentially from the 1980s to 2010s, making statistics easier for everyone. This has caused the amount of statistics in general just to increase.
The next most data heavy sport is basketball, so the next “holistic” metric popped up there, Value Over Replacement Player, or VORP. (The timing of this little history may be slightly off, but that’s fine. It’s close enough for the internet.) That said, the “democratization” of sports data—and the fact that a lot of geeks/nerds also love sports and fantasy sports—meant that basketball doesn’t just have one “holistic measurement” but several, all of which get to the same point, including PER, VORP, Win Shares, Real Plus/Minus and Box Plus/Minus. All are attempts to summarize a player’s value in one number that can be compared to every other player.
So that’s where it comes from—a single statistic in multiple sports to define value—what is it?
Value Over: How it Works
Let use an example to show how the concept works. I’m going to stick to basketball, because it’s the sport I know best.
Let’s say Player X scores 8 points per game. The key question for a team looking to acquire him is, “Well, how valuable is that?” Let’s go to the numbers. In the NBA last season, 540 players played at least a minute of NBA game time. (I’m using Basketball Reference for my statistics here.) Here’s how many points they scored per game:
You’ll notice it isn’t quite logarithmically distributed, and as I’ll hopefully finish next week, everything in media and entertainment is logarithmically distributed. That includes sports. The trouble here is that “per game” statistics technically combine two metrics: games played with points scored. If you just focus on points scored…
That’s better. Logarithmic distribution rules the day again!
Let’s try to understand these two charts. A player scoring 8 points per game is roughly right in the middle of the NBA. The mean average of points per game is 6.6 and the median is 8. In this case, the median gets closer to what we mean by “average” when it comes to points per game.
But you know I hate averages, which is why I put the distribution charts up first. The distributions are arguably the most useful way to look at this since we can quickly see how many players score how many points in various buckets. Combining players who score 6-8 points per game and 8-10 points, we see that about 150 players are in this range, or roughly a quarter of all players who played in the NBA last year.
So now we ask: is scoring 8 points per game valuable? Not really. Or in other words, it is about exactly average, which is how we should compensate Player X. Basically, scoring 8 points per game is very common. Even if a player played all 82 games averaging 8 points, he’d only move up to the 65 percentile in scoring, meaning 35% of players scored more than him. In other words we can find a replacement for that player easily.
What about Player Y—who I’ll call LeBron for short—who scores 27.5 points per game? Well, only two other players score more than that per game. In other words, this hypothetical LeBron fellow is extremely rare and hence extremely valuable. (Welcome to Los Angeles!)
LeBron is a good example, because he doesn’t just score points: he passes and rebounds too. If we’re trying to capture value, we need to value those activities too. In basketball you can count rebounds, assists, steals and the shooting percentage on a variety of shots. Add all this up—with a lot of other calculations and adjustments—and get closer to calculating the “value over replacement” for any individual player.
I’d add, even if you aren’t using a specific metric like WAR or VORP, Moneyball or analytics-minded or sabermetrics-minded general managers like Daryl Morey or Billy Beane think about players in these terms. You either take points, runs, wins or “value” and think, “how much higher is this player’s performance than the average player, who I can find easily?”
Value over Replacement: Complications
That’s the concept, but it quickly gets complicated.
The first part is the challenge to gather all the data. This seems easy (grab all the box score) but even the box score only captures so much. In recent years, teams have begun collecting “movement data” on the basketball court, baseball diamond and football field. This means tracking the movement of the ball and players, which is a lot of data, but allows you to track speed of players, yards run, where shots occurred and how far baseballs traveled. Lots and lots and lots of data.
The downside with this new data is the sample size is limited in years. Take blocks in basketball. We didn’t track blocks in the 1970s, so we don’t know how many times Kareem Abdul-Jabbar blocked his opponents. Same with sacks in the NFL. This means our data sets are limited by the years we collected the data. Moreover, in basketball, for example, a lot of the box score statistics are weighted to the offensive end (points, rebounds, assists, shooting percentages) versus the defense (mainly steals, blocks). This applies to baseball too. This is an example of how what we measure—which is sometimes what is easiest to collect—could could skew our perspective.
Then, once we have the data we have to judge how to weight it. I really like “box plus/minus” as a tool to judge players, and Basketball Reference has a great explainer for how they developed it. Read that explainer and you’ll discover it’s really complicated. It involved a lot of regression analysis and a large sample size. Then using that analysis to weight each statistic. Then testing its predictive power on another half of the data set. That’s a process that requires a lot of art and a lot of science.
Finally, one piece of data that is particularly tough to assess is the context of the data. In sports, this can mean the performance of the entire team and teammates. Going back to my player named “LeBron”, being on a team with a guy who can score 27 points a game and dish out 8 assists is extremely beneficial. It could be the case in basketball—and it is—that playing with fellow all star players makes your numbers go up as a result. This is just one example of how “situation” can improve your position.
If being on a good team is valuable with good players, this could apply to what “league” you play in. It’s easier to be great in college football than professional football. It’s easier to be great in the triple A baseball than the major leagues. So applying the statistics of one level to the next can be difficult. Context matters, and you have to account for that.
Applying to the Business of Entertainment
That seems like a simple proposal and concept. So why hasn’t this genius concept made it to business? Well, that will take another article to explain. Tune in tomorrow.
I got to work on a fun (and paid) consulting project last week and like all good consultations, it hoovered up a lot of time, eventually going into the weekend and into the nights. But it warmed my heart to know that I’d have a classic story to return to: Comcast buying something.
Ahhh. Good old fashioned M&A news. Truly this feature has returned to its roots. Let’s get into it.
The Most Important Story of the Week – Comcast wins bid over 21st Century Fox for Sky.
The prize? Sky TV in the UK, formerly called BSkyB, which sounds way cooler than just “Sky”. (I know the BSkyB terminology not because I lived in the UK, but because of a Harvard case study on it.) 21st Century Fox owns 39% of Sky, and was bidding to take a majority share. (They continued with merger talks even as the Disney takeover continued.) Instead of going quietly into the night, Comcast stepped into the breach to offer their own bid. This all happened months ago.
Fast forward to recent weeks and since both companies had submitted compelling bids that were approved by regulators, it went to a silent auction…and Comcast won. By paying a huge premium to do so too. It seems like it was only my last update that Comcast CEO Brian Roberts was saying that he didn’t think Comcast “was under pressure” to pursue M&A, they just, you know, keep doing it and wildly overbidding for it.
Let’s talk impact, since many of you knew what happened above. Ironically, the biggest winner may be Disney. Comcast may try to buy the rest of Sky from Disney, which could provide Disney with a huge cash inflow. (Disney would likely insist on the same price as their bid.) So instead of having to take on more debt to run Sky–and Disney doesn’t have MVPD experience–it gets cash. That’s a huge swing. (Comcast may then sell it’s share of Hulu to Disney. Dizzying the deals now.)
Does this invalidate my skepticism about the impending “M&A tidal wave”? Hardly, this negotiation was already in process as the June AT&T decision was being announced. Further, it involves one of the two major forces in M&A activity, which is Comcast. Comcast and AT&T have decided that size (with some content creation) is the key to success in the future, but both companies decided that years ago. I mean, a decade or more ago. With the Trump Administration looking kindly on companies that praise it in public, we can expect these trends to continue.
Size though isn’t a strategy, and we may have seen one of the few brakes on M&A…
M&A Update – Comcast Shares Lose Value in Reaction to Price
In a previous update, I mentioned the “winner’s curse” in auctions. Basically, at $50 billion, 21st Century Fox was probably a great deal for Disney. At $71 billion? Not as much. Comcast forced Disney to go higher in that deal, and Murdoch forced Comcast to likely overbid here. As a result, investors fled Comcast in early trading after the auction weekend. Investors think, initially at least, that this was an overbid.
Apparently, investors have felt the same way about AT&T buying DirecTV, which was likely overpriced. That didn’t stop AT&T from acquiring another large company for size’s sake. This could be one of the few brakes on M&A, thought it hasn’t yet: If investors crush stock prices after large acquisitions, then companies would presumably stop doing it.
Other Contender for Most Important Story: Telltale Games Goes Out of Business
I posted a couple of times on Twitter how interesting I found the fact that Telltale Games went out of business. And I won’t hide the analogy I’m making: I’d apply these lessons to any digital companies with questionable finances, especially for cash flow.
Honestly, as far as I knew, Telltale was a monster. It had games with high sales. It had tremendous critical acclaim. It claimed to have licensees pounding on their door to work with them (Game of Thrones, MineCraft, Walking Dead, Batman…) It had high sell-through of subscriptions. It had high ratings on the games by customers.
Yet, it ran out of cash and fired all its employees.
Some of the digital streaming platforms have the exact same stories: tons of subscribers, tons of critical acclaim, hints that tons of people watch their shows…and yet costs are way above revenue at this point. The difference is one of scale (streaming is mutliples larger) and backing: Hulu is backed by four huge entertainment conglomerates, Amazon is backed by Jeff Bezos’ Prime subscription and Netflix has stock market.
Oh, Another M&A Update – Sirius Buys Pandora for $3 billion
We finally have proof that the tidal wave is washing ashore. One distribution channel just paid $3 billion for a digital streaming company! Yeah, I’m being a bit sarcastic.
Though it is another sign that the scale of M&A has scaled up. As firms have consolidated, the new deals naturally get larger: a $3 billion dollar total price barely moves the news needle. My gut thinking is I see the point of the acquisition by Sirius–have a new way to reach customers using music you’ve already licensed–but this has all the hallmarks of a distribution company buying a digital company, and wondering where all the promised revenue went five years later. Though Pandora does have a lot of monthly active users, to its credit.
EntStratGuy Story Update – Verizon Offering 5G Wireless and impact on Subscriptions
Now that I have a pretty good run of articles, I’m coming across more and more news stories that update my thinking on old ideas. Here’s a perfect one for this week:
Coming to Los Angeles this fall: no more cable company, 5G broadband internet through Verizon, for your home! This story was big enough that it could change my mind on how I view “distribution”, the final piece of the “media, entertainment and communication” industry. If we no longer need “cables” going from house to house, a lot of opportunities are unlocked. It’s also an old story we’ve seen before.
The Power of the Subscription
The first thing I noticed about the descriptions of the 5G plans it he giveaways giveaways to get people to sign up to 5G broadband. This is just an echo of why I explained why companies love subscriptions. Who cares about giving away an Apple TV or Google Chromecast when you’re locked in to however many months as a broadband subscriber? Given the high switching costs, it’s just extremely lucrative. (Even if wireless companies don’t explicitly lock you into a long term contract, there are huge switching costs between broadband services. These are amplified by bundling multiple, multiple services.
Are consumers in a better place when you can bundle internet, TV and now wireless phone service, all with one provider? This is one of those questions that just depends on time frame. In the short term? Sure, it’s a good deal.
In the long term, though, I wonder. As prices increase inexorably year after year, will the larger bundles just allow for larger price increases? It doesn’t seem like even with cord cutting prices are really getting that much cheaper, especially in wireless and internet access. (Man, that’s a great topic to research how prices have been increasing and I now have to write that down as a research article.)
The Power of the Competition?
Does this bring competition up in Los Angeles to three providers? Do we have a market now? With AT&T/DirecTV, Spectrum and now Verizon?
Yeah, probably not. Likely LA will be better than other markets, but still overall, this isn’t a “market” if traditional economics defines a market as “a place with many, many sellers and buyers”. This is just three, which is a far cry from “many, many”.
Was there a big awards show last week? There was! I should write a lot about that, right? Nope. My most important story of the week isn’t the Emmy, though it’s a story that is a few weeks old, so the “this week” part seems not quite right. But it’s a good story.
The Most Important Story of the Week – European Content Quotas Will Impact Streaming Services
Variety had an exclusive (that I saw via Engadget, to give them credit) about the proposed EU law/regulation requiring streamers to have 30% of their content to be local content. The news is that the head of the EU agency said, “Oh this will happen.” I’ve been following this story since my time at a streaming company, and seeing it in the news gave me a chance to write about it.
It’s the “most important” because it passes the “dollar amount” test: potentially Youtube, Amazon, Disney, CBS, HBO, Hulu (if it goes global) and Netflix will have to spend hundreds of millions (or more) in smaller countries to build out local content. The devil, of course, is in the details.
Depending how the regulations are specifically written will go a long way to determining how Netflix and other streamers will comply. If you do it by just number of shows, then Netflix will buy a lot of content very cheaply for volume. If you do it by hours, same thing. If you do it by dollars spent, then you could have a small number of shows that cost a lot. The best way would be to weight by “demand” but that gets really, really tricky for a regulation. My advice? Stick to money. That’s what “markets” are based on.
Also, is it “European” content or country specific? A place like Poland already imports a lot of content–from what I understand (I’m not the entertainment strategy guy for every country, to be honest)–so how much local content is available? If it is just “European content” there is already a lot available and the current big players (France, Germany and UK if it doesn’t leave) will benefit from this regulation.
(Side note: I tried to look for the text of this regulation, and honestly I couldn’t find it. I’d love to read the actual text if someone can find it.)
The US and other places with less restrictions could benefit from this in that more original productions with worldwide rights may be available in more places. That said, if every country passed these restrictions, then by definition Netflix would have a larger catalogue than is available to all customer, but with lots of restrictions by territory. Let’s see what happens.
Other Contenders for Most Important Story – Warner Bros. Reorganization in “Franchises”
I have a rule of thumb when debating the most impactful story of the week: when in doubt, just calculate the net profit impact of various decisions. Or cash flows. Whatever financial metric could move the most dollars. This is why most box office weekends don’t make my list, but Solo flopping did.
So I thought about being flippant or joking and putting the news that Warner Bros. elevated Pam Lifford to head of a new group handling “consumer products, DC comics, theme parks and global franchise teams” above the Les Moonves story last week. The logic being that if Warner Bros. can finally make DC successful than billions are to be had. Currently, they make a lot on licensing and merchandise, but as I’ve said before, not as much as you think.
Ultimately, I don’t know that Lifford will have control over the creative. Or even how much influence. Content is king, and franchise management is at best the bishop, more likely the knight. Overall, though, it is the “DC-ness” of this that made it a candidate. Next year, Warner Bros. will launch a DC-only streaming platform, for some reason. The DC digital platform will be interesting, but I don’t quite understand why Warner Bros. is narrowcasting all their streaming plans, with prices near what Netflix charges. I can’t wait to analyze Warner Bros. digital/streaming strategy in a future article.
Mergers & Acquisitions in Media & Entertainment Update – Comcast Says it Doesn’t Need M&A
Comcast CEO Brian Roberts said Comcast doesn’t need M&A to drive growth. We’ll talk about this in our next update. (Comcast just offered a huge bid on Sky TV in the UK.)
Lots of News with No News
The Emmys! And all awards shows
I put my thoughts on Twitter here, but the most important one for all the entertainment & media news consumers out there is to know this truth first: winning awards is statistically meaningless.
There were only what, 26 awards given out at the ceremony? A few other dozen at the Creative Arts Emmys? So if you’re trying to draw meaningful trends from such a small sample size, well good luck. Especially since most voters tend to “vote in a block” which really just means that in any given category one show was the most popular among Emmy voters.
I italicized that last point to double down on the fact that the body of Emmy voters does a terrible job overlapping with the American or global viewing public. Drawing conclusions about what is popular from an awards show is just several steps removed from accuracy. Draw conclusions about what is popular by measuring popularity.
That doesn’t mean I don’t enjoy the spectacle and have my own thoughts on the best shows. I think, for the most part, the Emmys got it right in a number of categories. (I’m fine with the drama list, because Better Call Saul wasn’t eligible, though GoT is clearly the best show on TV. Comedy should have had The Good Place and Top Chef should win one of these days.)
But don’t draw business conclusions. See my Twitter thread from Wednesday here.
Lebron and his new media company!
I’m a Lakers fan, so let’s put that on the table. Expect a lot of basketball references, especially as the season heats up in a month or so.
But here’s the thing: a super rich and super famous person starting a production company is just not that huge of news. Certainly not worthy a front page story, unless it’s more about selling copies than educating on the business impact.
Not to mention, does every famous NBA player have a production company now? How many documentaries were filmed for people’s “decisions” this off season? Including, the most famous Los Angeles Laker, Kobe Bryant? He has his own, Oscar winning production company. To be honest, I’d love to do an “analysis” piece on “Kobe vs Lebron: Whose Production Company is Winning?” but there isn’t enough publicly available information.
Long Reads of the Week – Dueling Interviews Hinting at Streaming
For some reason, both of the interviews with Bob Greenblatt of NBC at Vulture (now formerly as I publish this) and Bob Iger of Disney at The Hollywood Reporter resonated with me. Both interviewer/interviewee can’t avoid talking about streaming and hinting at what the respective companies are or aren’t doing in response. That said, the idea that Disney will lose billions to move to streaming is the elephant in the distribution room. I’ve tweeted my skepticism before, and a deeper dive into streaming economics (by me) is definitely needed.
Bonus topic: The Iger interview sort of confirms the Star Wars slowdown, which reinforces my point from this article that economically making better movies is more valuable than making more of them.
And as always, be careful of executive speak in the interviews. It’s a PR jungle out there, kiddos.
A few years back, I was at a party—more like a family get together—and the subject turned to TV. Everyone at the party started raving about the latest The Big Bang Theory. Then raving about other CBS shows. As an effete, Millennial, west coast liberal, with New York values, I joked about it with my brother. We don’t watch any CBS shows!
Well, that’s not quite true. I currently watch Life in Pieces. I used to watch The Good Wife. My brother watches The Amazing Race.
I was stereotyping. I took some data points and anecdotes about CBS from my experience—both personal and professional—and drew broad, generalized conclusions. Like most people in my social circle, I don’t watch The Big Bang Theory. So I stereotype the people who do, along with the people who watch NCIS (formerly CSI). In fact, very few coastal liberals brag about watching CBS. TV has become a cultural identifier, especially peak TV. We judge other people by the TV shows they watch.
Critics do this too. Well, especially critics.
If it ended there, in judgy cultural wars, fine. But I work in entertainment and media in a business capacity. These stereotypes inevitably infect my thinking. They infect all of our thinking. I’m saying “our” in the “we work in the entertainment industry” sense.
In business, you make decisions. You do that based on data, both good and bad. Stereotypes are bad data, and they’re a lot more common than uncommon. If you use stereotypes to make decisions, you’re likely making bad—sorry, “sub-optimal”—decisions.
On Monday, recapping the end of the Moonves era, I laid out a series of stereotypes about CBS. Broadly, Moonves made shows for “middle America”—meaning rural, white and not coastal—that were popular, but not “good” in a critical sense. That’s the general consensus. Today, I’m going to look at the data today because I wanted an excuse to reexamine these stereotypes I’ve carried for so many years.
Caution 1: I’m going to primarily use Nielsen data for today’s post. I used Nielsen data in past research projects at my former company, but I don’t currently have a Nielsen subscription. This means I’m relying on websites that do, that also publish their results. This makes it tougher to interrogate the data. Further, I wasn’t a Nielsen ratings expert by any means. (I was focused on streaming data, you know?)
Caution 2: This is also going to be a lot of selective data pulling. I’m not setting out provide a definitive answer. Instead, I want to pull just enough data to make you question your own assumptions and stereotypes.
Myth 1: CBS was popular with middle America, meaning not the coasts or not the cities.
If you think middle America, you think the middle of the country, not New York and Los Angeles. Fortunately, New York and Los Angeles are large enough markets that Nielsen could tell us how well shows performed in those specific geographies. Unfortunately, as I mentioned above, I don’t have a Nielsen account.
Here’s what I did find. Joe Adalian of Vulture used Comcast Xfinity data to pull the most popular shows by city. Here are three cities as an example (but seriously read the whole article):
Source: Xfinity viewing data via Indiewire
The first lesson is that different cities do have different tastes, and likely these differ even further from rural tastes. America isn’t some uniform blob. Obviously. That’s what makes this a great country.
But…and here’s the huge but…notice that The Big Bang Theory is just popular. It made every city list except one (out of 16). Blue Bloods made a bunch more. (The data is from 2016.) My guess is CBS would do pretty well in the top 25 and top 50 lists.
The lesson is that sure CBS “over-indexes” in the middle of the country. But CBS still has a lot of fans in cities. And in all the states. That’s what blockbusters do. Besides Game of Thrones, The Walking Dead, and, I presume, Stranger Things, CBS is the closest thing to blockbusters in TV.
Myth 2: Middle America means old people.
CBS is an aging dinosaur and no one who is under 50 watches the channel.
That’s the stereotype. While it is true a lot of cord cutters are young people, a lot of cord cutters are also older people. Another stereotype for another article. But just because CBS over-indexes on older viewers, which it does, doesn’t mean that no young people watch the network. That’s a fallacy. For this data point, I used Michael Schneider’s summary of TV network performance from 2017. Here’s the broadcast channels:
Source: Nielsen via Indiewire
It isn’t that CBS under-indexes on younger viewers—it has roughly the same as ABC and Fox—but that it has such an over-index on older viewers. More young people watch CBS than watch any cable channel on average.
Again the lesson isn’t that CBS doesn’t favor older viewers or favor rural areas versus cities. But it’s much too simplistic to say CBS is only older viewers, which is the stereotype. We need to be careful moving from a “trend” to to “no one” or “never”. That’s when evaluating data turns into stereotypes. (And bad decisions.) A lot of young people still watch CBS, not zero.
Myth 3: Middle America means white people.
Don’t get me wrong: I’m not setting out to prove that CBS is the most popular TV network for viewers of diverse backgrounds such as African-Americans or Latinos. I don’t think I could prove that because it isn’t true. But is the converse true, that no African-Americans watch CBS, which is the stereotype?
Do you see differences in viewing habits? Yep. Only four shows overlap between the two lists. That said, a CBS show makes the cut for African-Americans, and I bet if we saw the top 25 or top 50 we’d see some other CBS shows make the list. Yes, CBS skews older and whiter, but it isn’t a monolithic blob. It’s heterogeneous, like America.
Myth 4: CBS has underperformed financially.
Okay, this isn’t a widely repeated myth, but it is the analysis I read in two critiques of Moonves, one by Richard Rushfield in Vanity Fair (which I said you should read on Monday) and one by Joe Nocera in Bloomberg. Both articles cited CBS stock price lack of stock growth as evidence of Moonves’ failure as a CEO. Nocera used a pretty blunt headline for this, “Moonves was not a good CEO”. Here’s their evidence in two charts:
I have two responses to this. First, yes, the stock price has been flat. That said, if you have faith that the stock market is a good predictor of future performance in particular (meaning for individual stocks) then you have a lot more faith in the market than I do. (Also, if you pick and choose dates on the stock market, you can rig the outcome.)
Moreover, when judging firms, I hate just using one metric. This comes from my unwavering belief in “the balanced scorecard” approach to most problems. If you just focus on stock price, you’ll get executives focused on inflating that. If I had to pick one metric above all else, though, I’d pick cash instead of stock price. Specifically free cash flow. So here’s a comparison of the CBS Corporation and, oh say, Netflix in the terms of free cash flow:
Source: MarketWatch.com and Annual Reports
I’d love to include other broadcast channels such as Fox, NBC and ABC, but they’re so encumbered by their large conglomerates it would be too tough to untangle. (And I didn’t do this analysis, I relied on others, either the company’s own annual reports or MarketWatch.) Either way, to call CBS a financial disaster is disingenuous at best and flat wrong at worst. It generated at least $3 billion for shareholders in the last three years, whereas the main tech giant in tech lost at least $4 billion, and plans to potentially double that number this year.
But this myth isn’t really about the numbers, but the narrative. Let’s get to that.
Myth 5: CBS is old broadcast, not new tech.
This accusation was leveled by Rushfield, Nocera, and I’d add most importantly, by Rich Greenfield, the most quoted analyst in entertainment. Here’s the money paragraph from the Nocera article, citing Greenfield:
There were no larger ideas — no sense that Moonves had a plan for competing in a future where Netflix has size CBS can’t match (130 million subscribers), HBO has content it can’t match (“Game of Thrones”), and AT&T-Time Warner has revenue it can’t match ($158 billion vs. $14 billion). Nor was there any inkling that he might invest for the future if it meant taking a short-term hit to earnings, something Netflix does as a matter of course. Rich Greenfield, the BTIG analyst who has been a rare Wall Street voice critical of the CBS chief executive, says that Moonves has long preferred to “focus on short-term cheerleading actions versus real long-term strategy.” Greenfield is right.
First, saying CBS didn’t have a strategy is my pet peeve. Clearly they had a strategy to generate about a billion in cash each year. You may not like it; you may not be able to define it, but they had a strategy. If you want to criticize someone’s strategy, define it first, then criticize it. Otherwise you’re building a straw-man.
Second, wait, it doesn’t have the content? That’s Nocera’s second point, but honestly, CBS makes more popular series than HBO, so that’s just not factually accurate. Both NCIS and The Big Bang Theory have viewership comparable to Game of Thrones. It also took a huge swing with Star Trek: Discovery.
Third, size isn’t a strategy. Ask GE. Conglomeration goes in waves, as I predict this wave of consolidation will do. (Also, I hate industry consolidation. Bad for consumers, good for stock prices. More in future articles.)
Fourth, it’s all moot because of the broadcast channels, CBS was the most forward looking. Alone among the broadcast channels, CBS had an independent streaming platform.
Disney still doesn’t have a plan for ABC with streaming, NBC has been trying to figure out a digital strategy since Comcast acquired them—and they have so many stakeholders they still haven’t figured it out, though they are hinting in recent interviews they have—and who knows what Fox’ plan is now that Disney is buying almost all of 21st Century Fox except for the broadcast.
So it can’t be about the tech. What really bugs Nocera/Greenfield about CBS?
That CBS won’t burn cash to grab market share.
Really, that’s what separates CBS from Netflix. They could have taken the $1 billion in free cash flow and made say 40 additional shows and put them on their streaming service, and poof cash gone. (Or ten shows at Netflix/Amazon Prime/Video/Studios prices.) Amortize over long enough it may not even hit the net profit line.
But Wall Street would have crushed them with that approach. Only Netflix gets away with that in today’s stock market. If you’re criticizing CBS for having a flat stock price, what would you have done if the stock price had tanked?
To sum up, was CBS the best streaming platform? No. Was it the most dinosaur-ish of the broadcast channels? No. It was somewhere in the middle, in that it was actually small enough to be able to launch CBS All-Access, even if it was late to the streaming party compared to Netflix, Hulu and Amazon.
Myth 6: CBS makes bad TV shows
Listen, I’d love to find an absolute ton of links with critics saying this, but I think this sentiment is, if anything, more popular in quiet discussions at entertainment shindigs than it is something said out loud. In the entertainment press you don’t want to burn too many bridges or future places of employment. The best summations were Todd Van der Werff’s three articles on the subject from 2015–2017, recapping each year’s upfront.
The problem is “bad” is just so darn subjective. So we need to find a way to prove this. I have two definitions that get semi-objective: awards and critical acclaim (which is usually the forerunner to awards). For the last time, and fifteenth time this article, I’m not setting out to prove that CBS is the best at making award winning shows—it clearly is not—but that it hasn’t completely struck out. (This is probably the most “accurate” myth.)
Reviewing the Emmy nominees for drama and comedy (the Golden Globes aren’t a real award show) since Moonves took over in 1995, CBS popped up regularly. Not the most, but not the least. In comedies, Everybody Loves Raymond won twice, Two and a Half Men was nominated, along with How I met Your Mother and The Big Bang Theory. The Good Wife was one of the few broadcast dramas nominated for several years.
In smaller categories, David Letterman won for talk show until Jon Stewart took a stranglehold. (Colbert and James Corben have both been nominated recently.) The Amazing Race, though, had a similar stranglehold on the reality-competition award for years.
Okay, I’m not going to fight this battle. Most critics hated everything on CBS. This stereotype is accurate that critics just hate on CBS.