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

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

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

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

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

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

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

We could call this combined package “a bundle”.

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

The bundle lives!

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

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

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

Other Thoughts

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

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

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

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

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

Other Contenders for Most Important Story

Locast – The antenna non-profit gets sued

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

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

Other Earnings: Roku Passes 30 Million Users

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Read My Latest at Decider: “To Binge or Not to Binge: Who Won the Battle Between Game of Thrones and Stranger Things”?

I just had a guest article published at Decider, this time asking, “Should Netflix keep binge releasing all its series?” My conclusion: not all of them. Essentially, Netflix is leaving “awareness” on the table.

Take a read and share on social media. Also, shout out to Alan Wolk, who tackled this back in the spring with Game of Thrones. I’d been toying with this idea when I read his take, and tried to update his thesis with the Stranger Things data point.

Like all long articles I write, I had two ideas that didn’t fit in the main piece. Here they are.

Has Hulu’s Weekly Release Helped?

It’s tough to say. Here’s the brutal case against it:

Image 8 - G Trends with Handmaids

Frankly, The Handmaid’s Tale is their most popular series and it is clearly the lightweight to the Game of Thrones/Stranger Things heavyweights. So let’s drop those two, and throw it up against some similar competition.

Chart 7 - Google Trends TV.png

That’s better, and you can see the same weekly interest boost that Big Little Lies and Game of Thrones had, just on a different scale. Instead, I still think that Hulu is just much, much smaller than Netflix right now. (Which, yes, isn’t breaking news.) Or about where HBO is, given that the interest almost matches something like Big Little Lies.

The counter to the binge model, though, could also be this chart. If The Handmaid’s Tale had dropped on one weekend, would Hulu even have a chance to keep it in the conversation? I don’t think so. In this case, Hulu made the right decision. This naturally leads us to ask about not just the current streamers, but the future streamers.

What Should the DAWN (Disney, Apple, Warner and NBC) Streamers Do?

Well, it depends on who you are and what your business model is, but overall, I’d be flexible. If you have a show with tons of pent up demand—like the upcoming Lord of the Rings on Amazon—consider weekly releases for the first season. Ride the potential enthusiasm to help launch weeks worth of content.

For the rest, I’d consider what type of content you have. Disney has a lot of shows that will benefit from weekly releases. Star Wars or Marvel TV series are guaranteed to drive conversation on comics and sci-f (fanboy) websites and podcasts. Weekly releases will amplify their reach from season one. For other dramas? Maybe not.

For HBO Max, they know all about launching prestige television, but HBO is about to quickly run out of days to launch all their content. In that sense, having more binge releases may make sense. Though again many of their fantasy or superhero series are destined to be stars in recap culture. For NBC, I still know so little about their platform that I won’t even speculate.

Apple may benefit the most from the binge release model. They are buying a ton of content and needs lots of buzz right from launch. Moreover, they aren’t trying to build a streaming platform per se, but a TV platform of which the content serves a subsidiary purpose. They should probably consider an approach closer to launching all series on binge, then rolling out the hits weekly for season twos.

Fine, What About Netflix?

If I were Netflix, I think they are missing something essential about how the social conversation drives a show to new heights. Right now, they have one potential mega-hit in Stranger Things. Even if they want to keep binge releases for all ten thousand other releases, they should consider carving exceptions for their biggest hits. A Stranger Things weekly release likely would have brought in new customer which they, um, need nowadays.

The key boils down to flexibility and being innovative. Innovation is not saying “Never, never, never.” It’s about understanding your customers, your business models and the attention landscape to maximize your return on assets.

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

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

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

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

Help: AT&T and Verizon

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

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

Help: Dish (and its new mobile provider)

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

Help: Softbank

Read Bloomberg’s Tara Lachappelle for this one:

Image 2 - Softbank

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

Hold: 5G Implementation

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

IMAGE 3 Vox Quote

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

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

Hinder: Antitrust Enforcement

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

Hinder: Giant Tech Companies

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

Hinder: Regulatory Certainty

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

Hurt: Either Hulu or Netflix

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

Hurt: The Unaffiliated Streamers

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

Hurt: Customers

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

Other Contenders for Most Important Story

BritBox Plans to Launch in UK

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

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

CBS All-Access Surging in Dish Carriage Dispute

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Most Important Story of the Week and Other Good Reads – 26 July 2019: NBCU TBD Launches in April…with The Office

Thanks Department of Justice for dropping your Sprint/T-Mobile merger approval on a Friday, when I was already rushing to get a column out this week due to other commitments. (Which I didn’t do to family obligations in the form of children’s theater.) I don’t have time to tackle you in-depth this week, so read this quick thread for my thoughts. (Also, with state Attorneys General lawsuits looming, this isn’t settled yet.)

Meanwhile–even with multiple earnings reports and TCAs starting up–this week felt light on entertainment business news that mattered. Which means even a small announcement can get the top spot.

The Most Important Story of the Week – NBC-Universal Reveals A Pinch More

Here’s the news on the content side (NBC-Universal and Sky) from Comcast:

– NBC-Universal’s streaming platform will launch in April 2020, with The Office as a tentpole.
– NBC-Universal will use Sky’s streaming platform as a base.
– Sky will make more originals.
– NBC-Universal’s streaming platform will rely on licensed series too at launch.

That’s it?

As small as this news is, I haven’t written about NBC-Universal since January, so let’s do a quick check-in on how they’ve evolved since then. 

Rereading my thoughts in January, I was surprised how positive I sounded, even a positivity with many caveats. I appreciated that NBC-Universal saw a way to offer customers something different than other streamers. Three cheers for creativity! And Comcast seems to be advertising that difference in their last earnings report, with Universal head Steve Burke saying the approach is “innovative”.

In a way, NBC-Universal could be launching the best FAST on the market…as long as you subscribe to one of their MVPDs. The FASTs are clearly growing, offering a new option for cord cutters. Couldn’t a conglomerate as big as NBCU make a “super-FAST” if they put their mind to it? If NBC-Universal leaned all-in on that, that could make a compelling offering. 

Since then, though, well NBC-Universal and Comcast still don’t seem to have gotten it right. First, they’ll be the last out of the gate in the next wave of streamers to launch. That’s sub-optimal. Second, this isn’t really a FAST. It’s free if you pay for cable, otherwise you have to pay a monthly fee, and even then it isn’t clear if that product will have ads or not. I don’t think customers will want to pay for this.

Third, the content is a huge variable. NBCU plans to make The Office a tentpole of their new platform. Obviously, if The Office leaving Netflix hurt that platform, then the new service getting has to be a win, right? Well, not necessarily. The Office is leaving amongst a host of other content; the cumulative impact of those departures is what will hurt Netflix. (If subscriber growth stays stalled, so will their stock price.) But it’s not like The Office is the type of content that attracts new subscribers. It just keeps them using your platform. And besides The Office, all we know is that AP Bio will also be included. 

Fourth, we still don’t have a name. Fifth, or know anything about the product itself.

To be slightly positive, Comcast is using Sky TV’s technology platform to launch their streaming service. One of my big questions was who would be creating their technology, since NBC-Universal had previously mostly outsourced their technology development. In a way, part of the Sky acquisition will benefit Comcast the way BAMTech benefitted Disney. Just at a much higher price for much less proven technology.

Other Contenders for Most Important Story – Cinemax Loses Subs; HBO Gets The Blame

This week, AT&T announced that they lost HBO subscribers. This sent everyone into a tizzy trying to ask the question, “How did you lose subscribers if Game of Freaking Thrones came out this quarter?!?!?” and then Casey Bloys calmly clarified that Comcast dropped Cinemax earlier in the year. Since Time-Warner and now AT&T have always released HBO and Cinemax subs together, it looked like HBO lost subscribers. Some quick thoughts:

– If you’re a devoted reader of my extensive musings on the business of Game of Thrones, you already knew that HBO & Cinemax subs get reported together. I’ve written on how that made my life more difficult when valuing Game of Thrones.

– I forgot to include the Cinemax carriage dispute in my list of carriage disputes in last week’s article. Just another data point that carriage wars are real.

– AT&T and Comcast seem set to do battle like this repeatedly going into the future. AT&T can retaliate with some of Comcast’s key cable networks and they’ll both have to agree on issues related to their new streaming platforms.

ICYMI – Athletic Director U – “Key Entertainment Developments & The Impact To College Athletics”

I published a new article at Athletic Director University, trying to summarize the last two months of entertainment news into one column. While geared towards college athletics, I enjoyed trying to summarize the biggest stories of the last two months. I also called out more good reads for the future. My favorite quote concerns why carriage wars are increasing:

Screen Shot 2019-07-26 at 9.55.40 AM.png

Lots of News with No News

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“Neverflix” – What Netflix’s Q2 Earnings Says About Their Future Strategy

This sub-bullet in CNBC’s “prepare you for the earnings report” article caught my attention:

QUOTE 11 - Wont catch p soonOn the surface, it’s clearly true. One bad earnings report won’t power Disney+ or HBO Max to 150 million subscribers. But as I reflected on it, the key variable is “when is soon?” By the end of the year, sure, Netflix is safe. But what about the end of 2020? Or 2021? If someone does catch up to Netflix, then the streaming wars will have a new champion.

Let’s see if the earnings report sheds any light on that question.

Strategy

Most earnings reports don’t reveal monumental shifts in strategy. This report would mostly qualify, except that Netflix did rule out a key potential revenue stream in fairly definitive terms.

“Neverflix”

At the end of last year, when it came to a Netflix show airing on a linear channel, I called Netflix the “company of Never”:

QUOTE 12 Neverflix

This earnings report doubled down on the fact that Netflix will NOT roll out advertising any time soon. I believe them and agree with this position. Adding advertisements will concretely change the user experience, likely leading to higher subscriber churn than the ad wizards begging for it expect.

I have softened on the position of “never” recently. I do appreciate Netflix’s relentless focus. A good strategy is a focused strategy, and saying “No” to efforts that divide your energy can be a wise tactic. But let’s not go overboard. For example, releasing episodes weekly.

I’d argue that decision is not material to the Netflix customer experience. Instead, binge releasing is a decision they made, and now cling to unnecessarily. Why isn’t, for example, Stranger Things 3 being released weekly? Having one series go weekly won’t lead to customer churn. There may be a 10,000 angry fans on the internet who want the binge, but again that’s noise, not signal. (I like this issue so much, I wrote an article for another publication coming out soon.)

Oh, and one other “never” that should really worry Reed Hastings.

The Never That Terrifies Me: Aggregation

If I understand the Netflix bulls correctly, the sky-high stock price—if it isn’t based on past performance being sky-high—is due to the fact that at some point, Netflix will be TV. Netflix isn’t just “another streamer”, it’s the future of TV. But is that future already in the rear view mirror?

Currently, many people get their HBO, Showtime and Starz through Amazon Channels. More will get Disney+, HBO and Showtime through Hulu. Apple will have another set of channels. Already, people experience streaming through Roku, and they added the ability to buy channels too. 

In other words, as Ben Thompson coined, the streamers are getting aggregated.

Eventually, the aggregators will offer bundles or discounts. Netflix, though, won’t be included because they have started pushing everyone to subscribe through the internet, instead of through those platforms. They did this because all those aggregators charge fees to sell the channels. I see two sub-optimal outcomes for Netflix as a result:

1. Eventually they get aggregated, which means they are “just” HBO.

2. They struggle to get awareness and presence outside the bundled aggregators.

Either choice is bad, and the sooner Netflix realizes it the better. (Hopefully more to come on this topic.)

Distribution: The good news

If avoiding digital bundlers is the downside case for Netflix, the upside case is integration with MVPD providers. Netflix announced that they will now be on AT&T’s devices that enable streaming integration. I’ve seen this work on Cox’s (via Comcast) Contour system, and it really does complement the cable bundle. Amazon Prime/Video is right behind them, and both are well ahead of the new streamers to catch up to their head start.

Competition: This is the low water mark for digital streaming.

Speaking of new SVODs, the other looming cloud over Netflix is the impending launch of the DAWNs: Disney, Apple, Warner-Media, and NBC-Universal. (Hat tip to Variety for coining.) Obviously, this will put pressure on Netflix to keep prices low to stay competitive—they are just below HBO in cost—and keep spending high to produce original content—they lap everyone when it comes to spending.

More interesting is how this will impact subscribers. While the launch of these streamers may inspire more cord cutting, which would benefit Netflix, the launch could also lead people to “cutflix” and trim the number of streaming options. But let’s move to our next section to discuss those implications.

Subscribers

How Many Subscribers Will Disney+ Grab?

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Netflix Q2 Earnings Report – A Lot Less for The Bulls

Back in the halcyon days of April, Netflix had just crushed another quarterly earnings report and it was riding high. In Decider, I said their report had something for both sides—for the haters and the lovers, skeptics and the supporters, bears and the bulls.

Well, Netflix finally had a bad earnings report.

The most fascinating thought, to me, was this one by Gene Munster:

“As much as I love the company, I just think its best days, unfortunately, are in fact behind it…I think we’re going to look back at this quarter as one of the pivotal moments in the Netflix story.”

If the laws of entropy are indeed correct, well at some point, every company’s best days are behind it. Unfortunately, we hardly ever realize this in the moment. This doesn’t mean the companies go out of business a la Blockbuster—IBM is well past it’s high water mark, but it’s still around and publicly traded—and it doesn’t even mean the stock price will decline—since stocks in general have gone up in general even faster than inflation. But at some point everything declines.

So is this the moment of Netflix’s high water market? Honestly, it may be. But we won’t know for sure until years from now.

To figure it out, I’m going to dig through Netflix’s last earnings report for the strategic insights I can find. As a reminder: I’m not here to give you stock advice. I’m here to critique strategy and Netflix’s quarterly reports are the best time to update my priors/data on Netflix’s strategy. Today, let’s discuss meta thoughts and content strategy; tomorrow I’ll go over strategy, subscriber and financial thoughts.

Meta Thoughts

At Least Netflix Gives Us Financial Data to Parse.

Let’s praise Netflix for one thing to start: producing this document in the first place. 

If Apple had bought Netflix in 2015, Netflix would have become an operating segment, which means that Apple could pick and choose selected numbers to release about their performance.  Likely they would have hidden as much as possible, they way they now hide iPhone sales. So I’d have much less data to judge them on.

To get a feel for this, take a gander at AT&T. We used to get a lot of HBO data every quarter—even as part of Warner-Media—but since AT&T acquired them, they went back to not reporting on HBO specifically. Meanwhile, if HBO were a standalone company, we’d have even more data than both previous reporting situations. The current situation leaves us guessing about their revenue, operating income and subscriber totals. We only get little tidbits if AT&T deigns to give it to us.

If we had to power rank the streaming platforms based on data released, right now it looks like this:

1. Youtube
2. Netflix
3. HBO
4. CBS All-Access
5. Hulu
6. Amazon Prime/Video/Studios

And all of them pale compared to the networks and TV channels of old who had TV ratings released every day and provided us financials. To Netflix’s credit, they give us their financials to make columns like this possible.

What is a “Netflix Killer” Anways?

Alan Wolk had a good article at TVRev clarifying that Netflix won’t actually disappear anytime soon, which is a statement I wholeheartedly agree with. Why, then, do so many headlines have “Netflix Killer” in them? 

Well, fuzziness in definitions. For a lot of folks, Netflix is one of the most over-priced companies in the world. They’re usually reacting to folks who think that Netflix is destined to conquer all of television. So you could reasonably say that any of the following end states is the “death of Netflix”, depending on your point of view:

1. Netflix suffers a few bad quarters and ends up with a price-to-earnings ratio around 20-25. (To show the gap, Netflix is currently at 123; most media firms trade between 15-20; Disney is currently a 20.5.)
2. Netflix is acquired by another larger digital company. (I recommend Facebook in this article.)
3. Netflix becomes the 3rd or 4th most subscribed OTT platform in America and/or the world.
4. Netflix goes out of business.

This is how I can think that Munster may be right—Netflix’s best days are behind them—and that Alan Wolk is right—there is a no “Netflix killer”. It depends on the definition. My personal opinion is that option 3 above is exceedingly likely, which means Netflix should valued like HBO, not like Amazon. Netflix is here to stay, but maybe not one of the most highly valued companies in the world, which may be death depending on how much stock you hold.

Content

How do you evaluate the biggest spender in Hollywood’s performance when they dole out so little data? By my count, they’ve released 17 “datecdotes” going back to the Q3 2018 earnings report. They’ve doled out a few more to news outlets over time, like this one to Reuters, this one to Variety or this tweet for Stranger Things last week. 

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Most Important Story of the Week and Other Good Reads – 19 July 2019: Carriage Wars! (with Some Netflix Data)

I love Netflix earnings report day. It’s the one day of the year where Netflix has to go “off-background”–read this Columbia Journalism Review article by Brian Merchant on the insidiousness of that practice–and has to give real numbers. That doesn’t, though, make it the most important story of the week. That honor instead belongs to a different battlefield in the streaming wars…

Most Important Story of the Week – Carriage Wars Heat Up!

The “long read” of this belongs to Alex Sherman who last week wrote late in the week about Disney’s renegotiation with Charter and the implications for streaming. Multiple people asked for my thoughts on it, so it was already lodged in my brain as a potential topic when I saw the news that CBS is renegotiating with AT&T for DirecTV carriage. It’s getting ugly. Combine that with…

Viacom and AT&T had already gone toe-to-toe earlier this year.

Meredith stations going dark for Dish customers.

Univision was blacked out on Dish until earlier this year.

Dish dropped HBO and still hasn’t brought it back, even when Game of Thrones aired.

It feels like retransmission battles are increasing. But are they? What does this mean? And what are the future “retransmission” battlefields?

Are Retransmission Battles Increasing?

Skeptically, you could look at my list above and genuinely ask if this is just a Dish problem, given that 3 of my 5 examples involve Dish. And another 2 involve DirecTV. Are satellites the problem then?

I looked it up and it does seem like the retrans battles are increasing in frequency. The best data I could find comes from SNL Kagan via Bloomberg/Tara Lachappelle.

Screen Shot 2019-07-19 at 11.47.26 AM

Source: S&P Global and American Television Alliance via Bloomberg.

Their data only goes back to 2010, but seems to tell the tale that carriage wars are indeed increasing. Without pulling my own data, I think it is safe to say that indeed these carriage fights are increasing and as the bundle gets pressured, will likely continue. They won’t be linear, but are trending upwards. It’s always good when the common narrative is backed up by actual data.

Is the Charter & Disney Negotiation Different?

Yes, and no. 

Sherman got it right in his initial coverage that the key sticking point now is less about retransmission fees and more about the ability for Disney to put it’s content on streaming too. Of course, the idea of re-airing content on digital platforms has been around since Hulu launched and the “rolling five” compromise was adopted. The tradeoff between retransmission fees going up versus exclusivity to “linear” has been a point of contention since 2008.

But, yes, this is different because Disney has already launched ESPN+ and plans to launch Disney+. Being able to flex content between all its platforms would lower it’s content costs dramatically, while directly improving those streaming platforms’ offering. Since this is the last renegotiation before Disney+ launches, it will help set the terms for all future carriage deals.

What should Disney give away? What should they keep?

According to Sherman, Disney wants to keep current seasons of shows on Disney Channel or Junior, with the first window going to Disney+. For ESPN, Disney wants some of their tremendously valuable sports programming to move over to ESPN+. Meanwhile, the MVPDs (cable and satellite companies) want lower fees. Or at least lower increases in fees. 

My gut recommendation–without running the numbers–is to relent on lower fees for the cable channels if it gets you the content on the streaming. I’m reading Good Strategy, Bad Strategy by Richard Rumelt right now, and the part that keeps sticking with me is his emphasis on focus. Good strategy is focused strategy. Disney’s focused strategy–which is a sound one–is built around Hulu, ESPN+ and Disney+. Relenting a bit on carriage fees is the smarter long term strategy to get those streaming platforms established.

But if were Charter? Well, keep fighting for the content. And if you have to, fine, let the kids content go. Sports, though, is what is holding your bundle together. Fight tooth and nail to keep that.

Also, don’t forget length. In these deals, I’m coming to suspect this is the under-considered element. For Charter, longer is better. Lock in the rights. For Disney, shorter. Frees you to renegotiate sooner. This is the first number I’ll look for when the deal is finished.

What does this mean for the future of entertainment?

In the streaming wars, cable retransmission fees are the mounted cavalry of warfare. In the 10th century, mounted knights ruled the battlefield. Then slowly longbows, crossbows and gunpowder made them obsolete. Yet, cavalry was still involved in battles, but decreasingly so overtime. Instead, they mainly became scouting elements. (See the Civil War.) But to give you an idea of how long a legacy weapon can last, the British and French sent horse-mounted troops to fight World War I.

The analogy works so well because it gives the idea that legacy institutions–in this case, business models–can last for a long time before they fade away. Sure, people will cut the cord and cord shave, but the TV bundle won’t disappear in the next decade. And as long as broadband is still needed for the internet, than cable companies will keep their profit rolling in due to their local monopolies. (At least until 5G replaces it…)

The challenge is less for the cable companies and more for the conglomerates, whose content production will need to be sustained as they navigate the revenue losses from streaming. And this is where I think most observers saying, “Just launch it all on streaming” really undersell how much Disney makes from subscriber fees. Here’s a refresher from THR after Disney’s last earnings call:

Screen Shot 2019-07-15 at 12.46.29 PM

Disney still really needs the sub fees as they launch Disney+. Managing that tradeoff is why it took so long for old media to launch their own streaming sites.

What are the future retransmission battlefields?

Just because one type of retrans battle is ending doesn’t mean the battles over “carriage” will end too. Instead, they’re just going to change shape and form. Here are a few potential for the next retransmission battles: 

– Device carriage. This is the contemporary battlefield. For a long time, Youtube wasn’t on Amazon’s Fire Devices and Prime Video wasn’t on Google’s Chromecast, as just one example of this type of negotiation. What a lot of us don’t realize is that every time an app appears on a device it does so only at the approval of the device/operating system owner. These carriage disputes primarily revolve around how much money Apple, Amazon and others collect from streamers who allow people to subscribe or buy things in the app, who owns what data and placement (trying to be the first thing someone sees in the device). 

– Aggregator carriage. This is the new battlefield to watch. As Apple, Roku and Hulu mimic Amazon’s channel business, most streaming services will need to be distributed through these platforms. But whereas if you sign-up for HBO Now via HBO directly they get 100% of the payment, through an aggregator like Amazon, HBO splits that bill. While HBO can demand high margins to keep–and ESPN+ and Disney+ will likely have the same high customer demand/strong negotiating opinion; CBS All-Access/Showtime/Starz remains to be seen–other smaller services will feel the squeeze just like smaller cable networks of old.

The solution is to, of course, have multiple streaming services which strengthens your negotiating position, just like the carriage wars of old. Even more important than revenue splits may be data. Amazon and Apple will try to be as stingy as possible with sharing it, which should be a deal breaker. Without the data, the aggregators have an immense negotiating advantage.

– Data carriage. This the hypothetical battlefield of a post-net neutrality world. Which we don’t live in yet, but could. Make no mistake, if the pipes can charge for data usage, Youtube and Netflix will have some fierce negotiations ahead.

Data of the Week – Netflix Q2 Earnings Report

Don’t get mad, but I’m not going to dive  into the data of the earnings report this week. If you want my initial gut reaction, check out this thread, which I have kept putting thoughts into. The reason you shouldn’t get mad is because I had SO many thoughts on Netflix, trying to double/cross check their data, trying to find insights, that I’m writing an article for it on Monday. 

Still, you need some data to tide you over. Here’s my favorite insight from the earnings report so far. (Besides the constant monitoring of free cash flow, which is still pegged to hit $3.5 billion in losses this year.)

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