Tag: Antitrust

How Fortnite vs Apple Could Impact The Streaming Wars: Imagining a “Maximalist” Scenario

The first thing to know about the streaming wars is that it is really multiple wars simultaneously. One war is between the streamers. They compete fiercely against each other, with Netflix in the lead. (This is by far the most covered battleground.) 

If those are the established powers, the upstarts are the free, ad-supported streamers are trying to take territory, er attention/mindspace/viewership, from both. Youtube leads here, but is followed by the hot new crowd of Pluto, Xumi, Tubo, Roku/IMDb Channels, and more.

Yet, those land armies’ power is dwarfed by that of the air forces of the world. Who in many cases set the terms of the streaming wars. And in this analogy, that’s the platforms that deliver the streamers, be they devices or operating systems or other bundlers have just as much, if not more, power. In a moment, a platform could blow up an entire business model, like dropping a nuclear bomb on an opponent’s army.

(The Game of Thrones analogy patented by Dylan Byers also explains this well: streamers are the traditional houses of Westeros, ad-supported streamers are Daenerys and the Dothraki, and the platforms are the White Walkers.)

If you want to understand the scope of Epic Games going to war with Apple, this is it. Epic Game’s army is fighting Apple’s air force, with the expected outcome that Apple nukes Epic’s business.

For those who don’t know, Epic Games (maker of the Fortnite game and Unreal video game engine) tried to implement in-app purchasing outside of Apple’s payments system. This resulted in them being kicked off the Apple app store, lawsuits and countersuits.

The Fortnite gambit will directly impact the streaming wars. The ability of platforms to dictate terms to the streamers directly hits streamers’ top, bottom and cash flow lines. If Fortnite wins, it is like taking away Apple’s (and Google, Roku and Amazon’s) ability to drop bombs. (Okay, I’ve taken this analogy about as far as it will go.) That’s what I’m going to explore today:

  •  First, explaining the relationship between aggregators, streamers, bundlers and platforms.
  •  Second, describing the “maximalist” scenario where platforms are heavily regulated.
  • Third, understanding the impact across the three forms of streaming business models: 

–  Transactions (Pay per usage)
– Subscriptions (Pay a recurring fee for access)
– Advertising (Free, but watch/listen to advertisements)

Putting this In Context

As I wrote last November, the key to understanding the streaming wars is to know that a huge amount of power is vested in what I call “Digital Video Bundlers”, the folks bundling multiple streamers into one experience. Here’s where they are on the map, yellow:

Image 1 Video Value Web copy

Fortnite would slot in where I put “aggregators”, though that term is more apt for streamers than gamers like Fortnite. Apple is the bundler, since they allow a user the opportunity to play multiple games on one device. Crucially, Fortnite—like many app makers—wants to be more. They want to sell additional things within its game to make more money. Epic Games also wants to set up an entire app store on its own. (Really, Epic Games has dreams of being a bundler as well.)

The conflict stems from those in-app purchases. Since Apple owns the operating system, it wants a piece of any money being exchanged on its platform. When you buy an application, you pay Apple 30% of that price. On some level this makes sense. Apple set up the platform so they should get paid for letting you on the platform.

This is a “platform tax” that Apple charges to have an application on its App Store. And Amazon and Google have similar taxes. (You could call it a “fee”, “rent”, or other term, but I like tax.) A tax for doing business on their platform. Apple says this is the price needed to run its App Store.

That’s what makes the terms of this court case so large. If Fortnite wins, they won’t just change their own terms, but alter the fundamental case law around platforms. The results could impact Apple, Microsoft, Sony, Google, Amazon, Roku and any other platform.

The Maximalist Scenario

That’s the world I want to imagine today. I’m calling this the “maximalist” scenario. It assumes a judge/judges/legislative bodies/regulatory agencies use the Fortnite case to legislate/regulate/litigate maximum concessions from an Apple, Amazon or Google on their platforms. Call this the “worst case” for platforms or the “best case” for streamers, applications and games. Say…

– A 3% cap on fees (or cap on fees up to a given maximum).
– Guaranteed carriage on non-business issues
– No tying disparate business unit negotiations together.

Essentially, in this scenario digital market places like app stores are governed as utilities. The government would be saying, “Since you have de facto monopoly power over app stores, we have to regulate your business to ensure you don’t abuse your power.” I’m not assuming this happens, but exploring the “what if” scenario where it does. 

Impact on Transactional Business Models

The impacts on the transactional video-on-demand (TVOD) market would probably be the starkest of any of the business models.

Fundamentally, the platform tax makes any external TVOD business unworkable on any mobile device. The math is fairly simple. If you’re Apple, and you own your own TVOD business in iTunes, your gross margins look like this:

Image 2 - Apple TVOD

Now compare that to an independent service trying to run a TVOD business on iTunes:

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Is Antitrust the New Deregulation?: The Strategic Implications of Ending the Paramount Consent Decrees…and What Comes Next

In his very good book Good Strategy/Bad Strategy, professor and globe trotting strategy consultant Richard Rumelt makes a key point about how evolving industry trends impact strategy. After describing why military strategy is obsessed with “the high ground”, and how companies often focus on the technological high ground, he makes this point:

The other way to grab the high ground…is to exploit a wave of change. Such waves of change are are largely exogenous–they are beyond the control of any one organization. No one person organization creates these changes…Important waves of change are like an earthquake, creating new high ground and leveling what had been high ground. Such changes can upset the existing structures of competitive positions, erasing old advantages and enabling new ones…They can enable wholly new strategies.

The first example he trots out is router technology. AT&T, Apple, Microsoft and other computing companies would have seemed like the obvious contenders to develop routers for the boom in internet traffic in the 1990s. Instead, it was small–now big–Cisco Systems. That’s because Cisco understood that the value they could add was in software, and updating it regularly, whereas AT&T, Apple and Microsoft were hardware companies. They didn’t see how underlying technology trends would upset the industry.

That’s technological high ground in a nut shell. But sometimes changes in government regulation can have even bigger impacts. 

For this, Rumelt takes us to airlines. When airlines were a heavily regulated industry, wild profits could be made on long haul flights, since the Civil Aviation Board set rates at essentially “cost plus”. When deregulation happened, many airlines continued to operate as if pricing would remain at that fixed level. Instead, prices plummeted for long haul flights and profits went with them. Of course, one airline developed a strategy to thrive in deregulation and thrived, Southwest.

My read on the “entertainment business” coverage–roughly the trades, the full-time entertainment business reporters, the analysts at some sell side firms, and in particular the “techno-futurists” touting their wares online–are obsessed with the former (technology disruption) and largely ignore the latter (government regulation).

This is unfortunate and largely to our strategic detriment.

The big story of the month is that a Federal (unelected) judge allowed the “Paramount Consent Decrees” to expire, based on a decision from the Department of Justice last fall. In my weekly column, I tried to explain what could come next. But really, understanding what comes next requires understanding what came before. And that’s today’s long article. I’ll explain why regulation is such a big deal in media and entertainment. Then, I’ll try to figure out what comes next. In particular, setting the potential shape of the future so clever strategists can seize the advantage.

(Yes, this is an “American-focused” issue, and I have more and more international readers.  I don’t hate you Europe, but don’t know your regulatory landscape nearly as well.)

Government Regulation is Hugely Important in Entertainment/Media

Just go back to George Orwell’s 1984 to understand why government regulates media so tightly. He who controls the news, controls the present. And so on. As a result, as soon as mass broadcasting technology was invented, it was regulated. In America by the FCC, FTC and others; in Europe and the rest of the globe, each country regulates their media in some fashion. (The furthest extreme is China.)

Many strategic tools take this into account. The best framework for this look is the McKinsey-originated SCP framework, “Structure Conduct and Performance”. SCP stands in contrast to Porter’s Five Forces, as the conduct and structure focus on a lot of the structure and regulation of an industry can impact profits and strategy.

When you analyze entertainment as an industry, one must take the heightened scrutiny of media/entertainment into account. Take America. It’s still against the rules for foreign ownership of domestic broadcast and cable channels. Hence, Rupert Murdoch had to get American citizenship to launch Fox/Fox News and Sony is the only conglomerate without cable channels.

Two Regulatory Forces of Entertainment Media: Vertical Integration and Concentration

The Paramount Consent Decrees—and their ilk—were born from this heightened scrutiny. Going back to the dawn of film, the concern was always that giant players would box out the little guy if they controlled both the production and distribution of content. And they did! Thus, the government sued the major studios in the 1940s and the “Paramount Consent Decrees” were born. They regulated that movie studios couldn’t own theaters, with the goal that theaters should show films from all the studios/distributors. (Did this contribute to the “golden age” rise of independent films in the 1970s? Maybe.)

This impetus to avoid vertical integration extended to broadcast television and through the 1980s broadcasters had limits on how many of their own shows they could buy.

(Why are so many NBC shows on HBO Max, not Peacock? Because of those regulations.)

These specific regulations were more aimed at preventing vertical integration. And the media/entertainment conglomerates have shown that if they are allowed to vertically integrate, they will. The idea that if a firm can control everything from production to distribution, they can maximize their revenue. Indeed, AT&T was explicit that its goal in acquiring Warner Media was this level of integration.

A related issue is general industry consolidation. Notably, the American government never passed a law or bill rescinding the Sherman Antitrust Act. That bill is still the law of the land. However, since the 1980s, it’s power has dwindled and actual enforcement since the government case against Microsoft has been weak to non-existent.

While we haven’t seen this in movie studios (we’re still at six and have been for some time, maybe more counting the new entrants of the last decade), we’ve seen it in music, movie theaters, cable companies, TV channel conglomerates, general entertainment conglomerates, cellular communications and more. 

This tends to be great for the surviving conglomerates, since they can use pricing and monopsony power to boost profits. (The losers are consumers.)

The question is what comes next. The government’s logic in ending the Paramount Consent Decrees was that it no longer made sense to keep one particular distribution method separate when every other part of the chain is vertically integrated. I can see that logic. But will it continue? And what about general concentration?

Predicting Antitrust Enforcement: It’s Hard!

Let’s start with the obvious: predicting the future is really hard!

Not for some analysts, as I sarcastically write and subtweet regularly. They know who they are and they can predict with fairly precise certainty that some things will happen on vague timelines. (Usually the bigger the platform, the bigger the confidence.)

Of course, this is foolish. As of September 2016, we all knew who was going to be President. Yet, we were wrong. (Don’t worry for the folks who can predict the future knew both that Clinton would win and Trump would win, and can usually point to examples where that support both predictions.) Has the regulatory landscape altered between a President Trump regime and a potential President Clinton campaign? Absolutely. Likely, the Paramount Consent Decrees would still be in place. How different would everything else be?

Probably not as different as it could be. Likely there would be some more antitrust enforcement, but remember the Obama administration approved the Comcast-NBC Universal distribution, which was a much bigger blow to vertical integration than losing the Paramount Consent Decrees. Frankly, I don’t think a Clinton administration would have worked to aggressively break up Big Tech or Big Entertainment. (Would they have tried to stop either the Disney-Fox merger or the AT&T-Warner Media merger? Probably not, actually.)

The lesson? Be very, very, very cautious predicting the future.

If a Democratic Presidency Happens, What comes next for Antitrust?

Yet, we have to make predictions to make strategy. So let’s answer the key question for antitrust and entertainment: 

Are the Democrats in a different place with regards to antitrust enforcement now? 

Maybe. A very tentative maybe.

Between the antitrust subcommittee hearings on Capitol Hill, the broadening discontent with big tech, the rise of the New Brandeisians (and their increasingly visible boosters like Tim Wu and Matt Stoller), and the continued scholarship showing that increasing inequality and stagnant GDP growth are tied to economic concentration, a Democratic administration could maybe just finally start reversing the trends of increasing consolidation across industries in America.

Again, maybe.

If you ranked every Democratic candidate for President by their emphasis on antitrust enforcement–guess what? I did. I’m a single issue voter now on antitrust enforcement–the bottom two would have been Joe Biden and Kamala Harris. Joe Biden is a force for moderation, and he’ll likely hire traditional Democrat power brokers in Washington. In antitrust, this means lawyers trained that mergers are a good thing. Meanwhile Kamala Harris has been supporting Big Tech since she first ran for DA in San Francisco. She’s not advocating to break up those companies. From Dealbook:

Screen Shot 2020-08-13 at 2.42.04 PMScreen Shot 2020-08-13 at 2.46.25 PM

Thus, predicting the future, two key variables will determine if antitrust enforcement (with potential new rules on vertical integration in media/entertainment) changes. First, does a Democratic administration take control in November? If Trump or another Republican is in office, antitrust enforcement will stay lax. (Nate Silver’s model gives Trump the same probability right now as it did on the eve of election night last year.)

Second, when in power, do Democrats fundamentally change enforcement? For this question, look to Biden’s hiring. If Elizabeth Warren takes either Attorney General or Treasury Secretary, it’s an antitrust game-on, Donkey Kong. (Congress could also take a stand, but that’s only if Democrats control both houses.)

Third, does renewed antitrust include regulation on vertical integration? Or just industry consolidation? Or maybe regulations on platforms like iTunes, Amazon and Apple? How regulation happens is just as influential as whether or not it happens.

My Big Idea: Antitrust is the New Deregulation

Taking Professor Rumelt’s advice, I’ve been scanning the landscape more over the last couple of months to look at the future. And the “blue ocean” space in the entertainment strategy landscape for me isn’t technology–again, the futurists have it covered–but how regulation could change business models.

And this is a hypothesis I’m monitoring: 

Could antitrust enforcement could become the new deregulation?

Deregulation was arguably the biggest driver of disruption in the 1970s and 1980s. Deregulating industries across the globe from airlines to energy to telecommunications repeatedly enabled smart firms to seize new advantages. That airlines example above is a perfect example; Southwest likely doesn’t become Southwest without deregulation.

Generally, everything has been deregulated. So what comes next? My guess is a reversal of antitrust. 

Essentially, since the Borkians seized control of antitrust via the courts, nearly every merger has gone through. It’s how we went from a dozen cell phone companies to three. Notably, private equity noticed this trend in the 2000s, and their buying sprees were often to deliberately create monopolies. And no on stopped them. This trend didn’t occur in a big legal decision, but accreted over time. Its reversal would likely take the same course.

If Democrats embrace the “antitrust enforcement mantle”, it would have “deregulation-sized” implications. For example, if Congress wisely (in my opinion) passed a rule that streamers had to own 10% of their own content, I’d invest in an original production company. Letting the 90/10 rule lapse is what essentially killed independent production in the 1980s. Reviving it would be great for independent producers and talent in America.

(This is why in Europe I’d invest in original production right now. Given the requirements for local content on the streamers, independents could thrive.)

My Recommendation? Monitor Which Way the Antitrust Winds are Blowing

Thus, leaders should carefully monitor the landscape. As long as deals keep getting approved with little to no scrutiny, I’d be in an acquisition mode.

Meanwhile, if more enforcement is coming, be prepared to divest quickly and smartly. If you’re private equity, be prepared to buy either independent production companies or other pieces of talent to take advantage of more competition.

Yes, that’s a lot of hypotheticals. But it’s how I’m thinking about this. When it comes to the future, most folks are obsessed with everything digital and technology. Not boring things like contract law and economic consolidation. That’s a miss. Antitrust could be huge in the 2020s. Potentially the defining economic change in the next decade. Especially in media, entertainment and communications. Or maybe not.