Tag: Apple

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

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

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

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Most Important Story of the Week – Apple One, The Aggressively Moderate Case

Is Apple One that big of a deal? Sure. Maybe. We’ll see.

That lackluster of a response probably says a lot about my opinion. 

This move isn’t a bust, but probably isn’t the killer app/product Apple needed to win the 2020s the way it won the 2010s. (As a primer, I do recommend my articles on value creation and subscriptions from last year to understand my more skeptical take on subscriptions.)

Apple One – From a Value Creation Standpoint

Here’s the three versions of Apple One:

Screen Shot 2020-09-18 at 9.17.03 AM

The crazy part to me is that I would have bet anything that News would be bundled with Music, TV+ and Arcade. Because that’s really how you find multiple “somethings” for a customer in a bundle. If I was tempted by Apple News (free Wall Street Journal subscription is intriguing), then maybe Arcade is enough to swing me onto the subscription. Then Music and TV+ are the icing on the cake. Or for the many customers who already have Music, it just increases the odds that either news, games or TV+ entices them into the subscription.

Instead, the premium tier offers News–which most customers haven’t opted to buy–or Fitness+. (The most Microsoft in the 1990s move Apple has made yet.) As it stands, most customers don’t use all of these services, so the value creation feels fairly negligible. If you don’t have an Apple Watch, Fitness+ isn’t worth it at all. 

It’s also worth noting what else isn’t included in the bundle: insurance. 

Lots of folks thought Apple Care and/or the Apple phone replacement plan would come in this bundle. And someday they may. But my gut is Apple ran the customer surveys–they have a lot more data than I do!–and saw that adding in insurance for $15-20 bucks a month meant customers HATED the new bundle. Not to mention, for your $15 a month to Apple, the deductibles are still pretty steep:

Screen Shot 2020-09-18 at 8.54.32 AM

So let’s make a couple more “bundles” to understand the range Apple was playing with…

Screen Shot 2020-09-18 at 9.17.25 AM

The other killer app–which is still rumored–is that Apple will eventually add in both insurance and phone upgrades to this model. As the last bundle shows, though, this jacks up the price through the roof. Which maybe makes it worth it for customers, but it also takes a lot of folks out of the running for this type of plan. 

You can also see the media bundle and probably why Apple didn’t include News in the Individual or Family plans: it gives customers way too much value. Which sounds weird to say, but in this case it is a trade off. For every dollar in value you give the customer, Apple is likely losing that value. In fact, I think Apple is losing money on the bundle period. Here’s my back of the envelope value creation model:

Screen Shot 2020-09-18 at 9.16.51 AM

Moreover, I do think initially Apple is losing money on this bundle. Yes, I’m using per unit economics, but it seems clear to that Apple is losing money. Apple Music likely loses money or breaks even (if Spotify is the comp), Apple TV+ likely loses money (and customers only use it if they get it for free), News and Arcade have also both been described as troubled. Meaning the only service that breaks even is iCloud because frankly cloud storage is almost a commodity at this point.

Thus, the “Moderate” Case for Apple One

The upside/aggressive/positive case? Customers may like it! 

There is just enough “money losing” businesses to entice customers. Specifically, Apple Music and most likely in Apple TV. That said, the likeliest customers are current Apple customers who are relatively affluent and already have one or more Apple subscriptions. Upgrading Music to “TV+ and Music” seems like a simple decision.

That said, the “moderate/meh/blah” piece is that Apple has already discounted their own value on this bundle by giving TV+ away for free. Meaning at least one part of this bundle has been price discounted in customers minds. If a customer doesn’t like iPad games either, then basically the bundle isn’t worth it.

Further, Apple isn’t losing as much money as they could. They could have gone very aggressive a la Youtube TV and lost $20-30 per customer, but this plan isn’t that aggressive. However, that’s really how you add lots of subscribers quickly in digital media.

So the downside/pessimistic/negative case? Long term, to make money, Apple will need to either raise prices on the subscription or lower the quality of the product. 

Or, they could add insurance or utilities to the mix. Since those are the true cash cows of subscriptions. The risk is customers tend to hate insurance. (Apple’s current phone insurance by my look is a pretty terrible deal. Just save your money and buy a new phone.) But that’s how you make true money. Thus the tradeoff: make money off products or risk customer ire. In the 2010s, Apple made money while sucking up customer love, I don’t see that path via Apple One in the 2020s. 

Which is really what makes this a moderate take: this is a good subscription for Apple to make some money, lock some customers in for the longer term and diversify services revenue. But is it a game changer?

Eh. 

And that’s because I really am trying to look at this product in a vacuum, not with “Apple-tinged” glasses that says, “Hey, it’s Apple, it must be great!”. That’s why I’m so moderate on this. It isn’t an all-in bundle, or a really great value. But that means it’s also likelier to make money for Apple in the near term. 

Quick Hits on Apple One

  1. First, 2020 Apple is 1990 Microsoft. They have a dominant market position on a key platform, and instead of letting others compete and innovate with add-on services, they plan to make those themselves and drive others out of business. So if you remember how bad Internet Explorer was for years, get ready for those dark times to come back. (They’re also constantly tweaking default settings to prioritize their own apps. Which is so Microsoft as to make your head spin.)
  2. I still don’t know the “thesis” on Apple. I’ve seen articles saying that Apple’s multimedia push is to get more “services” revenue, but also seen articles saying these services will help “Apple sell more iPhones”. If you read my June articles, you know my take: the best business model would do both. (The flywheel should make money at each stop.) But then the question is, “Is Apple making money on these media services?” 
  3. The most compelling argument is the “lock in”, but even that overstates the case as I’d argue most iPhone users are already locked in. The bass diffusion curve is what it is, and with increasing prices, most folks are holding onto phones for longer and longer. I don’t see how this bundle really encourages folks to buy a phone that much faster. And if they lose money per subscriber, then services revenue wont’ go up either.
  4. Apple “services” revenue continues to confuse analysts as well. Part of “services” is revenue from the App Store. Including recurring payments from video games. Which as I noted last week are booming. And as Fortnite, WordPress, Hey, and others have made clear, Apple is increasingly grabbing in-app revenues as a fee for doing business.
  5. Really hard to find prices researching this article and Apple now offers lots of free trials. Basically, it’s a very 2000s cable company strategy. (The opposite of Netflix, by the way.)
  6. Apple News likely forced the Premium tier because it and Apple Fitness aren’t available globally. I think that’s a strategic mistake and it should have been included in the lower tier for a cheaper amount than $30. But this is a minor tactical quibble.
  7. The Twitter Takes. I asked folks for their takes on Apple, and here’s the top tweets.

Data of the Week – ???

I had a good one, but it went just long enough to need it’s own article. Check back in on Monday.

Other Contenders for Most Important Story

Peacock and Roku Come to an Agreement

See, that didn’t take very long. It looks like some NBC content will wind up on Roku’s free channel, which does show the power the distributors have. (Amazon did the same thing to Disney+.) Long term, this means Comcast can take their time with Amazon. (They have many more devices internationally, and I trust that Roku users tend to be stickier than Fire TV, which Amazon gave away to lots of folks for peanuts.) And in general you’d have to think HBO Max will have an easier time finding a deal with Roku.

Bloomberg TV New (Not Tik Tok) Streaming Plan

Bloomberg TV plans to relaunch it’s on-demand streaming news service that was previously named “Tic Toc”. (Clearly that name is out for the relaunch.) They’d previously partnered with Twitter, but this time will go it themselves. I share Dylan Byers skepticism that this move is as disruptive as Bloomberg thinks. In fact, that’s a good rule of thumb: the more a company touts themselves as disruptive, the more skeptical you should consider their plan.

Still, the competition for young, Millennial business eyeballs between them, Cheddar, Morning Brew, all the traditional players and more is fierce. 

More AT&T Plans!

This time, it’s AT&T planning to sell advertisements for cheaper cellular service. From an entertainment perspective, this could further confuse their offerings. For the broader public, though, clearly rising cell phone prices are pricing some segments out of the cellular market so this fills a need. You have to imagine they’d keep Xandr (their digital ad-sales unit), but then again, it’s AT&T so maybe not.

Entertainment Strategy Guy Update

Paramount+

This story almost made the “lots of news with no news” section. Well, CBS All-Access will be rebranded to “Paramount+” as ViacomCBS tries to bolster its streaming service. While I doubt the name change will really help in either direct, it’s interesting that Viacom is telling us that Paramount is the most trusted global brand. That does indicate they’re thinking globally with this move. (My take on CBS’s strategy here from last August.)

More Agency Pain and then CAA’s Agency Confusion

The agency dramas with Covid-19 and the WGA stand-off are worth staying on top of. The latest updates are that Paradigm is doing more permanent layoffs and that CAA tried to fake-sign the WGA deal. Yes, fake-sign, as it refuse to sign a key demand but try to bluff the WGA into agreeing. If agents have one job, its winning negotiations, and this gambit seemed to have misfired. So yeah, not great negotiating.

PS5 Will Cost $500 too

Now that X-Box revealed their price points and timing, Sony followed suit with the Playstation 5. It too will cost $500. To share a different take from Tae Kim’s skeptical look I shared last week, Rob Fahey thinks the X-Box S could change the console paradigm.

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:

Read More

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thus, bundling is coming. But how?

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

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

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

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

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

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

Screen Shot 2020-08-21 at 10.18.02 AM

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

Screen Shot 2020-08-21 at 10.18.17 AM

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

Screen Shot 2020-08-21 at 10.18.36 AM

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

Screen Shot 2020-08-21 at 10.18.44 AM

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

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

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

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

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

SuperCBS hasn’t learned that lesson yet. Clearly.

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

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

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

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

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

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

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

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

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

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

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

Other Contenders for Most Important Story

Fortnite v Apple – The Fight Escalates

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

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

Theaters are Finally Reopening (and Some Films Too)

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

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

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

Boom in Video Games?

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

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

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

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

Data of the Week – Amazon is “Doubling” Everywhere

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

Caveats abound. 

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

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

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

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

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

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

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

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

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

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

Continued Lax Antitrust Enforcement

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

That leaves these key facts: 

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

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

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

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

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

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

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

Renewed Strict Enforcement

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

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

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

M&A and Antitrust Updates

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

Sumner Redstone Passing Away Means More M&A around ViacomCBS

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

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

Epic Games Sues Apple for Anti-Competitive Practices

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

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

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

AT&T Wants $1.5 billion for CrunchyRoll

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

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

Data of the Week – BBC Global Audience

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

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

Other Contenders for Most Important Story

No College Football

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

NCAA Alston Case: Supreme Court Helps College Athletes

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

Sky World News shuttering

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

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

Oh yeah, this happened.

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

Best Case: The strategy is more focused.

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

Worst Case: He’s eviscerated his content side.

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

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

Most Important Story of the Week – 29 May 20: All the Complications of the AT&T and Amazon Show Down

Since May kicked off, I’ve been back to writing two articles per week and have had my highest traffic month since launch. So thank you to all the readers and supporters. If you want to stay on top of all my writings, the best method is to either subscribe to my newsletter (at Substack) or through the WordPress application.

Meanwhile, onto one of the more fascinating stories of the year…

Most Important Story of the Week – HBO Max and Amazon Stare Down

Well, HBO Max launched.

If you’re comparing hype, it feels way less substantial than Disney+. Or even Apple TV+. But that’s to be expected. Disney+ was a brand new thing by one of the most powerful brands in America; HBO Max is a retread of a brand most people already know. Meanwhile, while Warner Bros has always had big films and series, but they aren’t associated with their parent company.

Since the HBO Max that launched this week is mostly the service promised last fall, I’m going to focus on the issue we’re all obsessed with: 

HBO Max didn’t launch on Amazon’s devices.

Technically, Roku devices too. But Amazon is the fascinating topic to me, since their negotiating position isn’t just about devices, it’s also about operating systems, content rights, and profit sharing. Let’s try to explain why this negotiating is too contentious, and so critical for AT&T to get right.

The Issue: Operating System vs Device

The core issue of the streaming wars is who gets to aggregate content and who gets to bundle that aggregated content. The aggregators are the streamers, in this case. Think Disney+. HBO Max. Netflix. Prime Video. Previously, they were the linear channels. And formerly ESPN, Disney Channel and HBO.

Bundlers figure out a way to offer access to streamers. In some cases, this is via device. Fire TV. Roku. Apple TV. Sometimes this is via an operating system. Like Apple Channels and Prime Video Channels. Maybe Hulu and Youtube in the future. Formerly, this was the MVPDs like Comcast, DirecTV and Spectrum.

Notice that Amazon has both a device and an operating system.

The trouble is their operating system is a lot like their streaming service. Specifically, if you subscribe to HBO through Prime Video channels, you can access your content via the Prime Video application. This way a customer using Amazon Channels can seamlessly go from Prime Video shows like The Marvelous Mrs. Maisel to Game of Thrones and The Sopranos. Honestly, you couldn’t tell the difference between where the content comes from.

From Amazon’s perspective, if HBO is already included in channels, then so should HBO Max. They signed a deal several years back to make this happen, so why not continue since every other HBO customer (mostly) gets HBO Max with HBO?

Because AT&T learned enough over the last few years to know what matters when launching a streamer. When HBO was mostly a cash play, Amazon was found money. Since HBO was also a key piece to Amazon Channels–clearly their biggest seller– Warner Bro negotiated fairly beneficial deal terms. The partnership worked, as Amazon felt free to leak that 5 million folks subscribe to HBO through their Channels program.

The difference between distributing on Fire TV devices and within Amazon Channels–and the fact that Amazon bundled those discussions together–basically shows how much AT&T stands to lose.

The Key Negotiating Deal Points

  1. User Experience – This issue more than any is what AT&T wants to control. Prime Video has been around for years, and it still gets the most “blah” reviews as a streaming platform. When AT&T sends its content to Prime Video–as it has to for the Channels program–it essentially gives up control for how it will be branded and leveraged. Try as you might to negotiate this, it’s really hard to manage as a third party. Especially a deal point like, “Make your service more user friendly.”

I would add, the other piece is building value in the eyes of customers. If a customer has to go to HBO Max’s application every day, they learn to value the content on that experience. In someone else’s streaming service that just doesn’t happen. It devalues the HBO brand overall. 

  1. Pricing – I haven’t negotiated these type of deals in a few years, but if terms are roughly similar to then, which I believe they are, there is a big monetary difference between a channels revenue split–which is a monthly recurring payment–and a device “bounty” where the device owner gets a one-time payment for signing up new customers. The latter is an enticement to have the device owner market your platform; the former is a deal tax primarily. But they work out to dramatically different financial outcomes for a streamer. A 30% fee in perpetuity can be awfully expensive.

But that’s not all the revenue Amazon wants…

  1. Advertising – This issue came up with Disney+’s negotiations as Amazon wants a cut of advertising revenue from the apps on its platform. On the one hand, this is bonkers as Amazon will have very little to do with creating value from those ads. On the other hand, in the old MVPD world, cable channels shared advertising time with MVPD operators. (That’s how local ads made it on old school cable networks.) Given that AT&T has dreams to launch an ad-supported version of HBO Max, this is likely a huge sticking point.
  2. Content – Andrew Rosen thinks a big hold up is that Amazon wants Warner Media content for IMDb TV’s FAST service. I’m not sure AT&T would ever consent to this, but not long after Disney+’s deal was closed the same group licensed Disney-owned shows to IMDb TV. Consider the market power that when AT&T is trying to negotiate for a device deal for its streamer, Amazon is essentially demanding that some of the content for that service wind up on a competing streamer. Such is Amazon’s market power, that a deal term could be forcing a studio to sell it content. (As I wrote on Twitter, the echoes to Standard Oil are remarkable.)

 

  1. Data – AT&T also wants the customer data. If you don’t control the user experience, you don’t control the data either. They basically go hand in hand. For as much as I love data–look, it was the first theme of this website–I do think “data” has been a bit overhyped in the business sphere. Data is an asset, but it isn’t actually cash. It is something that can generate more cash, but only if you use it properly. Still since it goes hand-in-hand with user experience, they’re tied together.

The Major Streamers Don’t Allow Bundling

That’s really the issue for AT&T. Netflix, Hulu/Disney+ and now HBO Max see themselves as bigger than just content in someone else’s streaming application. Heck, even Prime Video content isn’t available in Apple Channels!

And when you think about it, the ask by Amazon is kind of crazy. It’s not just asking to sell rights to HBO’s content, it’s asking for that content to essentially be bundled with the rest of its content. Which seems a lot more like a retransmission issue than simply allowing an application on your operating system. The best tweet which summarized this for me came from The Verge’s Julia Alexander:

Screen Shot 2020-05-29 at 12.18.15 PM

Exactly. Thus, the whole debate is fairly simple: AT&T considers itself a major player. And won’t allow itself to be bundled. 

Who is right?

First off, no one is right or wrong. The worst thing in the world is to pretend like negotiations between two businesses are about fairness or justice. Or that the needs/wants of customers matter. (If you want the needs of customers taken into account, government regulation is your only hope. And entertainment should be heavily regulated!)

Still, who is more right in holding to their position in this negotiation? AT&T.

When in doubt, ask who is creating value. AT&T has decades of valuable content, is spending billions making more and will have to spend hundreds of millions more to market that content. In other words, they’re doing all the work to launch a streamer. Amazon is a gatekeeper asking for a fee/toll/rent to allow it’s application on its platform. 

Not to mention AT&T bears most of the risk, unlike Amazon. To maximize that investment, they need to distribute and own that customer relationship. So they’re right to hold, and it will be fascinating to see who blinks first. 

Other Contenders for Most Important Story

A few other stories filtered in over the last week that competed for the top spot. A few were generally interesting, but just couldn’t compete with the HBO Max drama.

DAZN Shops Itself

A report from the Financial Times says that sports streamer DAZN is looking to raise money, which could mean anything from selling itself to finding a strategic partner to simply selling equity. Of all the newly launched streamers, DAZN has the toughest road to travel. Sports rights are extremely expensive, meaning they cost almost as much as the value they bring in. As much as I’d like an “indie” sports streamer to survive, DAZN needs cash to compete with the tech giants of the world.

Quibi Programming Strategy Reset

Less than two months in and Quibi is already revamping its programming line up. The plan is to focus more on what is working, which is apparently content that appeals to older, female viewers

Is this too aggressive of a pivot? Maybe. This is the perennial problem with data driving content decisions. Quibi is looking at what is working on their platform, and using that to make future content decisions.

But does that make sense? If your two best shows happened to appeal to that demographic, then it will make it look like that’s your best customer demographic. If you use that data to make more decisions, then you’ll no doubt appeal more and more to older, female viewers.

Do you see how this is a self-reinforcing algorithm? And how that can limit your potential audience.

Want to see how this applies to Netflix? Well, they too made originals, but they also put originals on the top of their home screen. This drove usage, because anything on the top screen gets clicks. But then Netflix made more originals using that data, in a self-reinforcing loop. Hence, why some of Netflix’s content feels so similar or appealing to the same demographics.

Disney World and Universal Studios Plan Summer Openings

July 15th is the planned date for Disney World to reopen at half capacity with tons of restrictions. Universal presented plans as well. This is both expected and seemingly on track for the next stage. My tentative prediction is that as thinks open up, folks will return to old habits and behaviors quicker than currently anticipated. If testing continues to ramp up, we could find this surprisingly normal looking.

Peacock Originals Slate on July 15th

When NBC released their plans for Peacock, my initial reaction was Peacock wants to be the most broadcast network of the streamers. This review of Peacock on Bloomberg essentially describes that as the mission statement. And this made me happy because, in full disclosure, I think broadly popular content has mostly been missing from the streaming wold.

As Peacock prepares its first set of originals for July 15th launch, are we getting a broadly appealing set of shows, or are we getting another rebound of peak-TV/prestige content? Looking at the list of shows–a Brave New World remake, a David Schwimmer comedy and an international thriller–I’m worried it’s more of the latter. However, they do have Psych 2 special. So we’ll see.

Data of the Week – Nielsen Top 100 Broadcast TV Shows

Twice a year, Michael Schneider uses Nielsen data to look at the top shows and then networks for the previous TV season or year. Here’s the 2019 season edition, which feels so bizarre in today’s coronavirus times. I’m mainly looking at it for the next set of shows to come to streaming channels. Look for 9-1-1 to one day get a pay day on streaming.

Entertainment Strategy Guy Update – Apple Content Moves

Apple Snags the New Scorsese Film from Paramount…

This could have been my story of the week, but for HBO Max launching. Dollar wise, it’s relatively small. Just $200 million or so among friends. 

But not with Netflix? What went wrong!!!

Likely the price tag and performance of The Irishman scared off Netflix. As I wrote in multiple outlets last December, Netflix doesn’t have the monetization methods to get a return on $300 million budget films. (That’s what I expect Netflix ended up paying for The Irishman.) Toss in all the controversy about theaters, maybe some DiCaprio nervousness about back end, and I think Apple TV+ with Paramount theatrical was the logical choice.

Is this good for Apple TV+? Sure. It will get a ton of new subscribers to check them out. Without a library, though, how long will they stay? Speaking of…

…and Fraggle Rock from Henson Company

Bloomberg reported last week that Apple was looking at licensing library content. Well, their first “big” purchase is Fraggle Rock’s library to complement an upcoming reboot. Then there was controversy in the entertainment journalism press about whether Apple had changed strategies or not. (Which would directly contradict my column from last week.) Apple PR went to multiple outlets to leak that “No, no, nothing has changed.”

My guess is both scenarios are true. If Apple can’t find a library to buy, they’ll say their strategy hasn’t changed. If they do? Then they’ll happily announce it.

Meanwhile, is Fraggle Rock a game changer? I doubt it. Kids need lots of content to go through. Almost more so than adults. Frankly, Apple TV+ doesn’t have it.

Most Important Story of the Week – 22 May 20: Apple Caves and Buys a Library

Some weeks, you barely have any news to cover. Then, other weeks the deluge comes. Buzzy stories. Executive movement stories. Sneaky scoops. And then Barstool drama.

To help settle the issue, I polled the audience. Everyone wants to talk about Joe Rogan at Spotify. But that’s a $100 million dollar deal. When I look for big moves, I mean big. For new followers, that often means adding up the potential dollar figures involved (and if they’re long term/speculative, discounting them for the cost of entertainment capital, about 8%). So a big streamer potentially dropping billions fits that bill.

If this week’s column has a theme, it’s that many of the biggest moves in entertainment are NOT about adding value for customers. I see that with two big tech titans in particular. That contrasts with a third, Netflix, who is doing right by customers. 

This is good for me, since I’m going to praise Netflix repeatedly. I’m a Netflix bear because the stock price makes no sense. Strategically, though, they do a TON right, with a few key mistakes. The world isn’t black and white and neither should be my Netflix coverage. On to the analysis.

Most Important Story of the Week – Apple (Almost) Caves and Buys a Library

I should bust out my Nikki Finke “Toldja” air horn. (Are there new folks to entertainment who don’t get this reference anymore? Showing my age.)

Anyways, my consistent strategic complaint with Apple has been the lack of library content. To just quote myself:

My theory of the case is pretty simple:

It is BANANAS to launch a streaming platform–and charge $10 a month for it–without library content.

It might be unprecedented. We’ve had subscription services launch without original content. (Netflix, Hulu and Prime Video in the early days; some movie platforms too.) But we’ve never had a service launch the opposite way. All originals–and not even that many–but no library? Truly, Apple is zagging while others zig.

Besides the rumored $10 price point, that was dropped to $5/free with purchase, the rest of that column from last August is spot on. Here’s right after they announced the price and most journalists went nuts on the hype:

The counter is that customers value a discount, so a stated price gives it a stated value. Maybe. But the content offering is so sparse—and could be such a dud at launch—that a discount of nothing is still nothing. If you really have no plans to add a library to make this a business that can stand on its own, and it truly is a loss-leading business, just make all the losses explicit and don’t charge for it.

Want another one? Here’s my take in Decider just that last month after Tim Cook told us that for sure they wouldn’t get licensed content:

Screen Shot 2020-05-22 at 8.58.49 AM

The news this week out of the Bloomberg leak machine is that Apple is in serious conversations to acquire a licensed content. And maybe a library. (How could Tim Cook lie to us like that back in February? Remember, executives lie ALL THE TIME!) 

Apple is finally on the licensed content train. What do we make of this?

M&A May Not Solve This Problem

At least not this year. Most libraries worth owning are locked up in multi-year deals. The time to buy MGM/Sony was in 2016. Then, when they launched Apple TV+, all the licensed content would be ready. Now, if they buy one of those two studios, they either have to buy out all the current licensing deals–which is what Disney+ did–which could skyrocket the costs or they have to wait a few years. Hence, the licensing deals to get whatever is there onto the service quickly.

There is Always a Lot of Content Available, but…

We’re not going to run out of content. That said, the top content is still the top content and more and more of it is locked up into multi-year deals at the soon to launch streamers of Peacock and HBO Max, or Hulu. For a good look, this article by Mike Raab uses a few categories to determine a pretty good list of the top shows of the last few decades.

Apple basically has to pick from the last column on the “Potential Libraries”. And already South Park and Seinfeld are off the list. (For a look at quick value, here’s my article talking about FBOSS top series here.)

Screen Shot 2020-05-22 at 9.11.41 AM

Source: Mike Raab on Medium

Does Apple stay prestige and get Mad Men? Broad with That 70s Show? I don’t know, but I doubt it stands up to the potential Hulu, Peacock or HBO Max licensed juggernauts. 

Does Licensed Content Matter Compared to Originals?

Yes. This comes up on Twitter. It absolutely matters. I don’t have time to prove it, but trust me.

Apple TV+ Still Doesn’t Solve Any Problems for Customers

I said this was the theme of the week, and I’ll start with Apple. It’s still tough for me to figure out what Apple is really doing that adds value for customers. Especially with Apple TV+. They’ve just launched another streamer that does mostly what every other streamer does. And they’re losing mountains of money simply to seize market share.

Some of you, will offer this I’m sure: But EntStrategyGuy, it’s free!

Remember, offering something free isn’t the same thing as creating value. Instead, it’s capturing value via predatory marketing pricing. It’s the sign of a non-functioning market. (My primer on value creation is here.)

Contrast this to Netflix. When Netflix started streaming, it really was creating value. Library TV was undervalued, so it streamed it on-demand whenever customers wanted. That is a huge value add. Then in 2012, they started losing money to grab market share. But at the start, Netflix clearly solved problems for customers.

Other Contender for Most Important Story – Joe Rogan Moves to Spotify

To understand the importance of Joe Rogan moving to Spotify, I have two analogies, each with a current story. And I’d call it the “malevolent” versus “benevolent” views.

The “Benevolent View” Talent Gets Paid: Joe Rogan to Spotify; “Call Her Daddy” Deal Terms

The analogy for this is Howard Stern in 2005. In that year, he moved to Sirius XM for a whopping $500 million deal that he subsequently renewed.

In a lot of ways, this current story is no different. Spotify is launching a new product, and is signing up top, top talent for it. Rogan is the 2010s Howard Stern. And note the difference: Stern got $100 million per year whereas Joe Rogan got $100 for 3 to 5 years. (It’s unclear the length.) Earlier this year, Spotify paid $250 million for all of Bill Simmons’ company in perpetuity.

That’s what I also see in the other big podcast story of the week, which is the “Call Her Daddy” drama. For those not familiar, the two hosts of a podcast on Barstool called “Call Her Daddy”–Sofia Franklyn and Alexandra Cooper–started negotiating a renewal. It didn’t go well. The shocking part is that the head of Barstool went public with the dispute, revealing deal terms in the process. Some of them are eye popping for podcasts, in the millions of dollars for two podcast hosts. So Barstool is doing well.

All these cases have something in common, which is they show just how much power talent has in entertainment. What Andrew Rosen has been calling the “curse of the mogul” from the book by the same name. In other words, when cash flow is mostly due to specific talent, the benefits flow to that talent who can help you capture them. (It’s worse when the financials are more apparent, like advertising driven content.)

This is the “benevolent” view. Spotify wants to make money from podcasting, so it’s hiring people to get it there. I don’t complain about studios or networks paying for top talent. That happens all the time in the TV industry. HBO wouldn’t pay John Oliver his millions if he show also went up simultaneously on every other channel. Some exclusivity is needed to justify owning channels and producing content in the first place.

But…

The “Malevolent” View

Let’s stick with the radio example, and compare it to the current situation. In the case of top talent for FM/AM radio, all the providers are competing with each other in the same distribution format. So if one radio channel pays it’s top talent more to woo them to its station, they’re simply taking market share from someone else, who can pay likewise.

That’s the Barstool/Call Her Daddy kerfluffle too. In this case, the talent just wants to get paid more. The option, though, is to go to another podcasting service. But they’d still be distributed in all the same places, just taking more of the revenue.

Not so for the Stern example. Sirius XM’s goal wasn’t just to get ear balls on its service, it was to take over radio. (Indeed, it merged with XM in part because they couldn’t replace all terrestrial radio.) They didn’t succeed, but if they had, the goal would have been to use that newfound power to crush suppliers.

Spotify isn’t just trying to get podcasters to help it make money. It wants exclusive podcasts. Why? So that it can take over the podcasting market. And then when it does, it can use that power to crush suppliers. How do you beat the “curse of the mogul”? Be a monopoly. Then talent has no other choice.

Some of you don’t believe me, so I encourage you to read Matt Stoller’s latest newsletter on this. (He’d written about Spotify before.) The example he uses brilliantly is what Google and Facebook did to local news. Before, if you wanted to advertise on The New York Times, you had to pay the Times. Now, you can advertise to NY Times readers when they leave the site. For cheaper.

That’s essentially the Spotify playbook here. (Once I read Stoller’s take, I couldn’t get it out of my head.) Now if you want to advertise to Bill Simmons or Joe Rogan’s audience, you had to do that on their podcast. In the future, Spotify can serve those ads to anyone else when they are listening to something else. Is that good for podcasts individually? Obviously not. You lose your “exclusivity” value when Spotify can sell your customers elsewhere. Ask local newspapers and their massive extinction event how much dynamic advertising via Google/Facebook has helped their businesses.

By the way the New York Times example is very telling. This week they stopped allowing third party data because they know how bad it is for them overall. Owning the data is the key to monetization. Spotify knows that and that’s their goal. Except…

The Reality: Spotify’s Quest to Take Over Podcasting Is Not Guaranteed

If your goal is to become the monopolist of podcasting, getting Simmons and Rogan is a great start. 

That said, the theme of the week is customers. What is Spotify doing that helps customers? I keep hearing about “dynamic ad targeting”, but I skip ads all the time. If I can’t skip ads on Spotify, and I can on iTunes, I’ll use iTunes. Especially if only a handful of podcasts are exclusive to Spotify. Meanwhile, will Spotify police ad reads for podcasts that premiere on its platform? How could it even do that?

So the problem is that Spotify isn’t solving for any customer pain points. Maybe their UX is better than iTunes, but it’s worse than many other podcast applications. 

Worse, they’ll likely cause pain for their suppliers. Meanwhile, there are enough big media companies that will never go exclusive to Spotify. It just won’t be worth it at one third or less of the audience. So if ESPN, NPR, WNYC, Wondery, etc are all on every other platform, the edge just isn’t there for Spotify. That’s my gut thinking.

(Last point, Luminary is also continuing to prove that subscriptions won’t work for podcasts. It also proves that having a parent in private equity/finance is great at funding news business ventures.)

Other Contenders for Most Important Story

We have more stories. Let’s go quick to wrap things up.

Kevin Mayer Moves to Tik Tok; Rebecca Campbell Takes over Disney Streaming

Say it with me, “We can’t judge executive hires in the moment.”

That doesn’t mean we don’t try. We do all the time. But we’re pretty rough at forecasting executive hit rates.

Still, I want to give a moment of credit to Kevin Mayer and what he can do. His skill set is dealmaking. And that’s what Disney+ needed to launch. Yes, the Mandalorian was a huge hit, and credit to the creative team for that. But Disney+ needed to launch on every potential device. And it did. And Disney needed to claw back rights for all of Star Wars and Marvel and Disney and Pixar movies, which it did! Mayer was the driving force behind these deals. 

Will that skill set help at Tik Tok? Maybe. We’ll see what they acquire. It’s an interesting hire for sure.

As for his replacement? I won’t pretend like the coverage in the trades gives me a clue. Campbell has lots of TV and international experience, but not a lot of development experience. I can’t guess either way.

Netflix Is Helping to Cancel Inactive Accounts

Which really is the right thing to do by customers. It can definitely engender good will. And I’ve long praised Netflix for making it very, very easy to cancel.

That said, some credit goes to Wall Street. Every so often, Wall Street decides they like free cash flow negative business propositions with huge growth. Like Netflix. If Comcast could lose $3 billion a year in pursuit of growth, can you imagine what it could build? Same for Disney. 

If Wall Street collectively changes its mind that losing money is a bad thing–say when subscriber growth stalls–we may see different behavior at Netflix if it isn’t reward.

M&A – STX mergers with Eros

Since STX launched, their goal has always been global. (This New Yorker read is a case study in a confused business model, which even then talks about getting China money.) In total dollars, this is small, but it reflects who in a global buying market even US studios need global power.

Fake Data of The Week – Datecdotes Spread!

Thanks to Andrew Wallenstein for flagging our latest datecdotes. On Hulu, Solar Opposites is huge! On Apple TV+, Defending Jacob is huge! How big?

Screen Shot 2020-05-22 at 9.37.19 AM

Some quick takes on that:

– Damn, Outer Banks is crushing this quarantine in America.
– Sorry, Mythic Quest fans. That show is not. Still.
– Rick and Morty is doing worse than I thought.
– Sure, Solar Opposites is probably doing well. For Hulu. And when I’ve looked at THe Handmaid’s Tale before, it does worse than you’d guess.
– Defending Jacob is probably Apple’s best launch since their premiere, but they have a long road to haul still.

Most Important Story of the Week – 21 February 20: Rumors! Bob Iger and Apple TV+ Edition

Sometimes, you really don’t need to overthink your weekly column. Thank you, Disney, and really Bob Iger, for making this easy.

Most Important Story of the Week – Bob Iger Steps Down

Bob Iger stepped down from his role as CEO of Disney on Tuesday, but will remain as the company’s chairman of the board. What else do we know for sure?

– Iger said he’ll stay on in an active role to guide and manage content.
– His replacement, Bob Chapek, has had roles throughout Disney, from studios to merchandise to theme parks.
– Iger has long been speculated to want to retire, but kept staying on, first to see the 21st Century Fox Acquisition, and then to see the Disney+ launch.

Everything else is speculation. And there was plenty in the aftermath of this genuinely surprising news. The question for this column isn’t what happened or why or what fun rumor to promote, but what it means for the strategic landscape

The Entertainment CEO Hype Cycle

I occasionally write about CEO departures, but usually not as the most important story of the week. Why not? Well, frankly, most CEOs are “average”. Their company is moving along before they get there, and will mostly continue after they leavd. (Unless, of course, you’re a CEO reading this. I think you’re above average. Definitely. This is about all those other CEOs.)

This is especially true for lower level executives. For example, Discovery hired a new DTC boss from Hulu, Hulu promoted a new president, and CBS rearranged programming execs at All-Access, but neither will get a mention in my “other contenders” section down below. (Again, unless you’re a lower lever exec. You’re above average. Definitely. It’s all the other ones I’m talking about.)

To be clear, this isn’t because CEOs aren’t important. It’s more a comment that I don’t think anyone is really good at accurately judging who is good or not. Especially via the Hollywood trades. When a new head of a studio is hired, one or multiple trades/important papers (roughly, Variety, Hollywood Reporter, Deadline, NY Times, LA Times, Bloomberg and Wall Street Journal) writes a long in-depth article based around an interview with the executive. Their strengths are highlighted; their weaknesses minimized.

This makes sense. If you want to get Jen Salke to join your executive roundtable, you better talk her up right after she takes the job.

Then comes the downfall. Kevin Drum mentioned this on his blog a few weeks back and I’d call it the “candidate hype cycles”. UCLA political scientists have called this process in elections the “discover, scrutiny and decline” cycle. 

Image 1 - Hype Cycle

Well, the same thing happens with CEOs. They start, get tons of hype, and inevitably either fail or retire quietly. We could call it “hype, status quo and departure”. Like a politician, they have two paths at the end: If they get fired, you bury them; if they retire you celebrate their run.

Meanwhile, we never hear the bad things until they get fired or leave. For example, The Information revealed that Amazon hired Mike Hopkins was hired due to concerns about shows being late, over budget and, presumably, not that popular. Which would speak poorly of Salke, but again I’ve never seen a trade report that.

Every so often a CEO comes along though, who never loses the hype cycle. 

Value Over Replacement CEO

In the knowledge economy, the best workers aren’t just a little more valuable than their peers, but multiples better. The returns aren’t linear, but logarithmic. This applies to CEOs too; the best CEO isn’t just a little better than their peers, they are miles and miles better in terms of return on investment.

The best way to think about this, as I’ve written before, is the “Value over Replacement” concept from baseball and basketball. In basketball, this is LeBron James. His dominance is so much that singlehandedly he gave Miami and Cleveland championships and may do the same for the Lakers. As a result, he’s worth much more than any other player.

Let’s put this in a chart. Imagine every executive is ranked on a zero to 100 point scale. A fifty is the “average” employee or student or basketball player or CEO. The top is the 99th percentile employees, the one delivering outsized returns. The 1% are the folks who don’t just do average work, but actively damage your organization.

(And by the way, this is how I categorize every person I work/worked/could work with. At business school, since we did so many group projects, I was constantly scouting for who would help deliver outsized returns. Which made getting good grades easy. And yes this doesn’t apply to you if I worked with you. You were way above average. It’s about everyone else.)

This is how the chart would look. The percentiles are on the right; the returns on the left.

IMAGE 2 - VORCEO Chart

The question for Disney is…where is Bob Iger on that chart? Where is Bob Chapek?

The Disney Challenge

As I said above, I’m pretty brutally honest about where executives are on that “value over” chart and so often I’ve seen that when one executives gets replaced, despite all the internal worry, it usually ends up being about the same. So 95% of the time, say, if a CEO leaves a big company, since they were probably average, and their replacement will be average, everything will go on just the same. (Just usually paid more. See next section.)

Iger, was, though, firmly planted in the top 99%. Here’s Disney’s performance the last 20 years compared to the S&P 500. (He took over four years in to this chart.)

Image 3b DIS vs SP with Label

That’s an elite performance. And if like me you think stock performance isn’t the be-all-end-all, well, all the other narrative stuff from the acquisitions to the box office dominance to the pivot to streaming reinforces this. Iger was an elite CEO, which is a statement. Being top 1% of CEOs is supremely rare and valuable.

The challenge for Chapek is that no matter how good he is or isn’t, odds are he isn’t a 99% CEO. Just run the numbers: if we can’t predict how a CEO will turn out, then we have a “uniform distribution” meaning each outcome is equally likely. Therefore, Chapek has about a 1 in hundred chance matching or exceeding Iger’s performance. (That’s obviously why the board tried to cling to Iger for as long as possible.)

The Disney Nightmare Scenario

Does this mean the “end of Disney’s run”? Absolutely not. The situation Chapek is walking into is about as strong as you can get. Just being average means the company will be fine. If he’s slightly above average they’ll keep growing.

But every company has upside scenarios and downside scenarios, and the downside scenario feels a little more likely for me. If Chapek turns out to be worse than “average”, and there’s a fifty percent chance of that, then the company could regress.

But it could pair with four other potential risks:

– First, Lasseter turns out to be have been crucial for animation. (Like Frank G Wells was in the 1980s.) Arguably, since Iger moved Lasseter to Disney Animation, that side of the business rebounded. (Why might this not be true? Read Kim Master’s take here.) We’ll find out in about 1 to 2 years if this is true.
– Second, something happens to Kevin Feige. He runs the Marvel golden goose, If another company poached him, that would be “sub-optimal”.
– Third, streaming ins’t profitable and cord cutting accelerates. This your regular reminder that for all the value in parks and merchandise, uh, networks (specifically ESPN) actually powered Iger’s rise.

Screen Shot 2019-07-15 at 12.46.29 PM

– Fourth, the studios run out of creative energy on all the non-Marvel, Star Wars and animated films, having mostly coasted on remakes of classic Disney films. 

Those five risks could, to be clear, could not happen. And probably not all together.

But if I’m a Disney competitor, I’m happy with this news. I’d be optimistic that my studio/network/streamer has a chance to catch up to Disney. It’ll still be tough, but the chance is there.

Other Thoughts

– Is there another shoe to drop?
I have no idea. And based on all the reporting and speculation either way, I don’t think anyone knows anything. So your guess is as good as mine, so I’d guess status quo.

– What about the dual bosses structure?
I’m a little more concerned about this. Dual CEO structures are tricky. Sometimes a minor change like this can actually muck things up, more than the previous boss retiring and just exiting stage left. But we’ll see.

– Was Iger really that good?
Yes. I love hot takes as much as anyone. I’m one of the few folks who think that Plepler leaving HBO and then joining Apple could be the most overhyped stories of the year. But even I can’t with good conscious argue against Iger’s run.

That said, the context was also tremendous. While we rightfully praise Iger for his acquisitions, we sometimes forget that the real income driver in the 2000s was ESPN and it’s sky high sub-fee. (Look that chart just above!) Take that revenue/operating income from Iger and arguably he doesn’t have the cash for Marvel or Star Wars.

– If so many CEOs are average why do they get paid so much?
Bad oversight. Most corporate boards are fairly poor at actually identifying the value their CEOs generate. This is mostly to do with institutional structures. Even though they have average CEOs, they don’t realize it and pay them above average.

Data (?) of the Week – Apple TV+ Ratings?

In a few different conversations, I’ve been hearing that Apple TV+ is underperforming expectations. Honestly, even that isn’t strong enough. The ratings, the rumors imply, are so low that most observers wouldn’t actually believe it.

The challenge is to separate out the rumors that end up being completely false from those based on a nugget of truth. And fortunately, I spent some time doing this in a completely different field: military intelligence.

In intelligence, the hardest part is to manage “human intelligence”, meaning people. Specifically people who are usually betraying their country or allies and providing you information. The goal is to run a “source” who is well placed, so that they can provide a track record of accurate information. That builds trust.

Still, you only trust them so far. Even if one source tells you something, you always want to confirm it. Multiple sources is always better than one source. And ideally from multiple types of intelligence. So a good analyst pairs signals intelligence (tapping phones) with human intelligence (people telling you what is happening) with imagery and other analysis.

I trust the rumor mill in this case. And I wouldn’t pass this rumor on if I only had one source. Like I said, I’ve heard this in a few conversations and from folks I really trust. I know they’re hearing this from folks on the inside. (None of my sources come from Apple directly, in full disclosure.)

Still, that’s just human intelligence. Can we triangulate this? Sure. Take this “open source” intelligence from Bernstein Research via Bloomberg. According to their research, via analyzing Apple’s earnings report, fewer than 10% of eligible Apple customers signed up for Apple TV+, or about 10 million folks.

My rumor is about viewership specifically, but the two are correlated. If you only get 10 million folks to sign up in the first place, the available folks to watch the shows is just smaller. Similarly, if the content isn’t resonating or buzzy, then you won’t get folks to sign up. 

Moreover, the rumors I’m hearing are about recent viewership. As in since the new year started. The key driver there is, of the folks who signed up, how many hung around? Well, when in doubt, Google Trends…

IMAGE 5 -GTrend NFLX vs Dis vs ATV

In other words, this look at Google Trends implies that Apple TV+ has never quite had the brand resonance as either Netflix or Disney. Notably, this is just using search terms, which tells a slightly different story than this Google Trends look, by topic, which shows a Disney+ decline. Google Trends is just one measurement I use, and it can have some quirks that don’t capture the true underlying awareness.

For Apple TV+, I still think the name is clunky. Which may hurt it in Google searches. So let’s look for specific shows instead. In the rumors, I’m hearing that Apple is seeing a big decline since the launch. So look at this chart:

IMAGE 6 - G Trend without Mando

In other words, the decay is real. It’s a little slower than Netflix or Amazon series, because the weekly release still generates news stories when the series concludes, which you see in The Morning Show, but the decay is there. Worse, the new shows aren’t launching nearly as well as the initial batch and accompanying marketing spend.

And how do the Apple shows do compared to, say, The Mandalorian?

IMAGE 7 - G Trend with Mando

They disappear entirely.

This matches other metrics that are publicly available. Say what you will about IMDb and Rotten Tomatoes, but the volume of reviews actually is fairly predictive of viewership. Not everyone leaves a review, but more viewed shows tend to have more reviews. Which makes sense. You can see the decline in popularity in Apple shows recently in reviews too:

IMAGE 8 - Ratings Data

Here’s my whole table if you want to see the by show look:

IMAGE 9 Ratings TableMaybe Amazing Stories comes out in April and completely arrests this slide. But Apple will have to rely almost entirely on paid marketing to get the word out since usage of their app seems to be low. Moreover, the biggest challenge is just that Apple TV+ won’t have a lot of shows for the rest of the year, if the lack of announced shows is to be believed. Here’s that table converted to chart form:

IMAGE 9 Count of Shows by Year

And that’s assuming a lot of the renewed shows make it by the end of 2020, which I bet doesn’t happen.

What Does this Mean for Apple’s Plans?

This week Tim Cook repeated that he’s not in the business of renting content. Apple TV+ is originals. That’s the brand.

This strategy doesn’t make sense. Netflix and Amazon had tons of licensed content to keep folks engaged while they built out originals. Disney+, HBO Max and Peacock will have loads of library content as originals ramp. Apple TV+ has none of that. So Apple needs to either ramp originals much more quickly than they are…or they need to rent some TV shows.

Here’s the analogy I’d use. Say about 25,000 people per night tune into Apple TV+. Using Michael Schneider’s annual look at cable channels, that means Apple TV+ is the El Rey Network. Which is bad. 

Would you buy a phone for the El Rey Network? Probably not.

Other Contenders for Most Important Story

A+E Networks signs a big licensing deal with Peacock

The definition of a conglomerate should be any firm so big you forget they own half of another big company. In this case, A&E Networks is a legitimate cable business, but Disney quietly owns half. Instead of licensing their highly viewed unscripted originals for Hulu, Peacock got the rights. This is another bold move for Peacock. They are leaning into broad content, which I respect. (The History content pairs well with Law and Order and Chicago series.) Meanwhile, Hulu seems increasingly falling into the prestige lane. This leaves a gap for Disney: they need a streaming service that’s broad, but not genre like Disney+. It should be Hulu, but they’re not making the moves for that.

Discovery May Launch a Streamer

Discovery had their earnings, which were overwhelmed by the surge of news about stock market declines. On the streaming side, they’re contemplating launching a streamer in the US later this year, while happy with their other efforts. So continue to monitor for now.

Most Important Story of the Week – 15 November 19: Disney+ “Sparks Joy” in Customers. What Are the Business Ramifications?

Is content is king?

After this week, how could anyone doubt it? Disney+ showed what having the biggest movies of the last few decades can do for a streaming launch.

But that’s not all! Apple landed one of the biggest free agent producers in former HBO chief Richard Plepler, for a deal whose terms aren’t disclosed. Nor even his role. But we can’t look past Disney can we? Nope. In fact, we’re giving a triple shot of Disney: first, the strategic implications; second, the competitive ramificaitons; third, the numbers.

[Programming note: Starting next week, I’ll be on paternity leave for the birth of my child. I have some articles mostly finished to keep posting, but the weekly column will be on hold until December.]

Most Important Story of the Week – Disney+ and Its Customer Value Proposition

When in doubt, we should default back to the “value creation” model for every business. Is a company capturing value or creating it? 

Disney+ Value Creation Model

I’m going to use my personal example to get at where I see the customer value proposition here. Specifically why me—and apparently 10 million other folks—rushed to sign-up or log-in on day one. Marie Kondo—the famed personal organizer—has a simple test for whether or not you keep something in your house. When you look at it, “Does it spark joy?”

That’s how I personally felt about Disney+.

For once, every Disney film my daughter loves was in one location. Every Marvel and Star Wars film I love was there too. Along with hidden joys like the Swiss Family Robinson or The Journey of Natty Gann. Or the X-Men Animated Series! And Gargoyles! Seeing those films brought visions of how I will binge TV for the next few weeks. 

As I was scrolling through the interface—I didn’t have any troubles—Kondo’s phrase hit me, “Spark joy”. 

It’s fairly incredible a streaming video service can evoke that level of emotion. But that’s the best way to describe the initial experience. Caveat galore that this is just my anecdote. But to judge by my texts and social feeds, the majority of the Disney conversation was celebrating all these films that were previously divvied up between FX, USA, TNT, Starz, Netflix and DVDs into one easy location. By a few reports, some folks even stayed home from work for the launch. That’s the type of devotion only major sporting events or, um, Marvel/Star Wars movies can evoke. 

(Yes, plenty of people gave it an “eh” online too.) 

To put this into the “value creation model”, if my price is $4 a month, the difference between the amount I would pay and $4 is the “consumer surplus”. Right now, I have to imagine that for hardcore fans like me, even an HBO level price would probably make sense, if the shows stay at the quality of The Mandalorian. 

Critically for this analysis, just because the price is so low now doesn’t mean it will stay that way. Disney—like Netflix, Hulu and likely every streamer—is definitely underwater from a pricing perspective. Lots of folks locked in at $4 a month, and to produce even the new content will likely be more expensive than that. The key for Disney is figuring out how quickly they can make the price exceed costs. (Yes, as my big series of the year goes on, “An IPB of the Streaming Wars”, I’ll try to quantify this more exactly.)

Then the question is: at profitability, is Disney capturing value (just pricing below costs) or truly creating it? Given that Disney boosted my WTP for a streaming service, I’m leaning towards the latter. Moreover, Disney+ as a platform may drive some value beyond the access to its incredibly popular films. In other words, the whole of Disney+ may be greater than the sum of its parts. And these are valuable parts. (The biggest driver of entertainment WTP is simply having hit shows and movies.) 

So let’s explore the upside theories for Disney+’s value-added future. Since I’m never satisfied, I have some concerns too about some of their strategy.

Upside Theory: The Simpler User Interface – Decluttered

Let’s stay on Marie Kondo idea for a moment. Mary McNamara wrote an article in the LA Times not too long ago making the case that Netflix needs a Marie Kondo-style clean up. She’s not wrong. The reason—as emphasized by AT&T in their recent inventor presentation—is that it takes customers 7 minutes to find a show to watch. (Using a DVR, conversely, takes about 30 seconds…) Netflix is filled with lots and lots of shows and films, many of them “sub-optimal” from a customer perspective. Which makes finding shows difficult.

Well, the Disney+ app is made for McNamara (assuming she likes Disney movies!). Disney+ has a fairly limited interface—reminiscent of the HBO Go application—organized by the various content families. Within each section are the cream of the crop movies at the top, with the rest down below. In other words, the service doesn’t overwhelm you, and what is left will will “spark joy”. This is the best case for Disney+.

Downside Theory: The Nostalgia Factor Wears Off

Credit for this one goes to a Twitter conversation about how quickly “nostalgia” will wear off from the devoted fans. My answer is that in some cases, it never will. Those are the hardcore fans who go to D23. They aren’t enough, though, to build a media business.

For the rest, this is the biggest risk. Sure, I’ve had joy sparked at launch. How long does that last? How much does my daughter actually use the application? (We actually don’t let her watch alone on the iPad.) Especially for the older TV shows. Do they need more TV series to drive adult viewership, as I speculated here? I may find it cool to watch Duck Tales (1980s version), but do I actually binge the entire thing? Nostalgia may get folks in the door but a compelling offering will need new content to keep folks engaged.

Upside Theory: I Was Wrong about The Vault (It’s All Here)

Disney proved my August theory about missing films completely wrong. In the 11th hour they went out and got them all. Which is probably pricey, but helped the value proposition. Since they have all these movies, Disney+ would has something like 20% of the box office demand of the last decade on its service. That’s incredible compared to rival services. I was wrong and they have the entire vault for the most part. Here’s the box office films from the last four years:

image-5-disney-last-five-years.png

But this isn’t all good news. They likely had to pay huge amounts to other distributors to facilitate bringing all these films over. Will this immediate launch help pay that off? Absolutely, but they are deficit spending to make it happen.

Downside Theory: Why Did Disney+ Launch with Avengers Endgame?

Read More

Most Important Story of the Week – 11 October 19: Evolving Feature Film Strategies By The Streamers

I’ll admit it: I have a key question on my brain this month:

Should you release your film in theaters or straight to streaming?

Obsessed with it. Trying to compare Netflix to Disney to Amazon to Apple and the rest of the traditional studios is tough enough, and each has a different answer to that question. How can we tell who is right? Well, I’ll try. But I can’t answer it in one column. Instead, this is the amuse bouche for that discussion…

The Most Important Story of the Week – Evolving Feature Film Strategies By The Streamers

The “fun” story of the week was about He-Man and his potential reboot at Sony moving over to Netflix. Whether or not this move specifically happens–this story falls into the category of “are exploring” which half the time means it won’t–it pairs well with this in-depth New York Times article about Amazon Prim-Video-Studios’ evolving theatrical release strategy. Essentially, they (Amazon) won’t. 

For today, though, instead of focusing on “how” they release their films, I’ve been thinking about “what” types of films the streamers are releasing. Especially with Amazon releasing the relatively expensive (for them) Aeronauts, Netflix releasing a probably pricey Breaking Bad spinoff film El Camino and Netflix about to release the supremely expensive Martin Scorcese The Irishman

As I started to explain this shift, I came up with a thesis, but it didn’t really work. But then I had an opposite explanation. An antithesis if you will. So with that start, you know what? We’re going “Hegelian” on this today.

Thesis – Introduce the Low Priced Option and Then Move Up Cost/Quality Frontier

On the surface, this looks like a great way to explain what Netflix and Amazon are doing in feature films. Essentially, the low-cost entry method is all about finding a way to make a product for much, much cheaper and competing with incumbents by offering this cheaper option. Then, once you’ve established a foothold, you start making more expensive options and competing with incumbents directly. Presumably with higher quality and hence better margins. 

Take cars. Japanese automakers started by making cars that are safer and cheaper (Toyota, Nissan) then they moved into luxury market (Lexus, Infiniti). 

On the surface, that looks like what Netflix and Amazon are both doing. They start by making “prestige”-type films. (I do a quick definition of this in my latest Linked-In article.) So the streamers head to film festivals and buy films for “only” $14 million or so. They buy a bunch though, and give these to their customers. After the prestige films, they move onto the mid-tier films–say $20-50 million dollar price tags–like romantic comedies or horror films. And now both are graduating to the top of the income bracket: big budget films like The Irishman or He-Man. (Besides Aeronauts, Amazon hasn’t shown a willingness to go much bigger budget, but facts are no reason to spoil a nice narrative.) (As for previous studios trying to do this, Lionsgate is the best example.)

The challenge? As a reader pointed out on Twitter quite a while back, it isn’t like Netflix or Amazon Studios really figured out a way to make the films for lower costs. Netflix did when it came to licensed content; they routinely got studios to license them library films and TV series for way below the market value because studios considered in “found money”. (Indeed, back in August, I described how cable channels launched with reruns as a low cost option, then moved up the value chain as Netflix did here.) (Lionsgate tended to sell international rights to fund production, then made money off US distribution.)

Indeed, the main “innovation” of Netflix and Amazon was to take films that previously sold for $5 million at Sundance and pay three times as much for them. Definitively, then, this is NOT a low cost strategy. So what is it?

Antithesis – Make Increasingly Popular Films

Maybe this is moving up the “popularity” value chain. I like this approach because it combines two of my old bailiwicks. First, as I repeat ad nauseam, is that popularity is logarithmically distributed:

chart-2-movies-again(More examples here.)

In other words, the most popular film in America–Avengers: Endgame–is as popular as the bottom 500 films released in America in 2018 put together. My second bailiwick is that something that is popular on one platform is popular everywhere it airs. (ie The Force Awakens was the most popular film in the US on theatrical, home entertainment and linear TV. And very, very probably streaming too, if Netflix would share the data.) With this knowledge, we could reframe the initial strategy of both Netflix and Amazon as: 

Start by making pretty unpopular films, then make slightly more popular films and finally start making very popular films.

Prestige films and documentaries are less popular than teen rom-coms, gross out comedies and horror films, which are less popular than superhero movies. Crucially, the popularity is still roughly the same whether it goes to theaters or straight-to-streaming; popularity is popularity.

Does this help explain the behavior of our streamers better? Probably. According to the article, Netflix wants to make one “quality tentpole” quarterly AND it needs international appeal. Presumably films getting 80 million subscribers like Bird Box and Murder Mystery show the value of moving up this popularity theshold. The Breaking Bad film El Camino likely fits this category as well, being the equivalent of a Downton Abbey-sized film, bigger than many Sundance acquisitions but smaller than superhero films. And Aeronauts will likely have more appeal than a lot of other Amazon Studios acquisitions that were geared for awards season only. 

Presumably, a well done He-Man could do even better. Specifically, whereas prestige dramas and TV spinoffs may have a limited appeal globally, we know superhero and big budget sci-fi/fantasy can travel. He-Man fits that bill.

Synthesis – Moving Up the “ROI Cost/Quality Frontier”

The problem with just focusing on popularity is that, yes if all things were equal, you want more popular films. But these films specifically aren’t equal in one key regard: while most Sundance acquisitions are at most $5-15 million, The Irishman and He-Man could easily be in the $150 to $250 million. You could buy all of Sundance for those prices. 

I bring this up because of another Netflix film I haven’t mentioned yet, which is Triple Frontier. A key report in The Information leaked news that even with 40 million customers, it wasn’t “profitable” (though they probably said cost effective) for Netflix. It cost $100 million to make this mid-tier actioner.

That’s because popularity and cost combine together for ROI, or return on investment. Just because something isn’t “popular” doesn’t mean it isn’t cost effective. Horror movies are the gold standard here. Many are nowhere near as popular as superhero films, but they cost so much less that even middling popularity gives great ROI. A few weeks back on Strictly Business the CEO of Walden Media bragged about their strong ROI on their family films, despite not making as much money as say the Disney tentpoles. He’s totally right. I’d add animation has been an ROI gold mine for studios too.

But…

The best ROI really is big four quadrant tentpoles, even with the huge costs. If you can create a franchise, the hit rate skyrockets. Even as it decays over time (see Lord of The Rings Hobbit films, Pirates of the Carribean or Transformers), the films still often make their money back. (See my “economics of blockbusters” here.) That’s more than can be said for most Sundance acquisitions or even mid-tier comedies and horror flicks. I’d add, given that they travel well, big budget tentpoles have even better ROI for a global streaming service.

Netlix knows this and knows that 40 million for $100 million isn’t enough. It needs 150 million global viewers for $200 million. Hence, He-Man. (If it works.) Amazon Studios in a way is already doing this too, just in TV, essentially turning Lord of the Rings into the most expensive TV series of all time. Now, it does require more cash to compete in this expensive arena, but Netflix and Amazon seem willing to do that.

Other Quick Thoughts

I had some other quick thoughts I couldn’t fit into the above narrative too:

– There are additional ramifications for Netflix’s spending. Because if you can make Triple Frontier for $40 million, maybe it is “profitable”. In other words, if costs matter–they do!–then freewheeling spending may not be sustainable. 

– This doesn’t quite explain why Amazon isn’t releasing films to theaters anymore, I’ll admit. Instead, I’d focus on the marketing spend. The mistake wasn’t acquiring Late Night per se, but spending $30 million (at least, maybe higher) to market it unsuccessfully. If the films aren’t even going to make back that marketing spend, well just release them straight to your platform.

– Apple spent a ton of money for a Will Ferrell and Ryan Reynolds Christmas musical. (Yes you read that right.) Does this explain that? Sure, they’re hopping to the middle tier after their first set of films are mostly awards bait. 

– But why the overspending from the streamers? Right now, my working theory is that the marginal benefits of new subs is so high that overspending makes sense financially. As you hit maturity, though, those benefits decline precipitously, so you can’t keep doing it. That’s Netflix’s world right now. (I need to write an article to flesh this out.)

– What about Sony? Well, essentially take my feature film model, and apply your own percentages to it. If you accurately account for all the potential revenue streams (including a successful franchise), and still Netflix will pay you more in a “cost plus 30%” model, then you make that sale.

That’s it for feature film on streaming musings. For now. We still haven’t gotten to the rationale (or lack of) for skipping the theatrical window, which will be a future article series.

Oh, one more thing.

Post-Script: Man, He-Man? Seriously?

Also, just rewatch this trailer:

Maybe that’s why Sony hasn’t been able to get a working script in 12 years.

Other Contenders for Most Important Story – NBCU Reshuffle

I read this Variety story twice to make sure I got everything. Wait a minute. Okay, just read it a third time. Then listened to TV’s Top Five.  

Honestly, I feel like I could read a powerpoint presentation of this and still not quite understand who controls what and who reports to who(m?). There are presidents and chairmen and vice-chairs and folks reporting to multiple bosses galore. (Cue the Office Space joke.) Basically, who will make what decisions on what? I don’t quite know.

I almost elevated this to my top story because I’ve long wanted to explore Bonnie Hammer’s role at NBC Universal. She’s right on the cusp of being a top development exec–meaning I put her in that Moonves/Burnett level–but she stops just short. Syfy has had just too many slip ups to make her track record spotless and she doesn’t get credit for Bravo’s success rate. Meanwhile, USA Network had a great 2000s (silently) but the 2010s have been…fine.

As for the final piece of this puzzle–Comcast veteran Matt Strauss moving to head Peacock–we don’t know. Strauss helped spearhead Xfinity’s operating system. That’s a great user experience. But streaming is much bigger and he won’t really have control over the content side. Hammer and the dozens of execs over there will determine what ends up on Peacock as originals and second runs. Which means that the internal turf wars at NBC Universal aren’t going anywhere anytime soon. Also, call me old fashioned but I still like it when one boss leads a business. Don’t divide, the technical and creative sides to keep execs happy; find a boss who can lead.

Data of the Week – TV Ratings Bump from 3 Days to 4 Weeks

What is your default for streaming video? Either you believe that customer behavior is truly different on Netflix or it’s basically the same. That’s my take for DVRs, and Rick Porter has fun details on how long folks wait to watch content on delay on traditional TV, which certainly matches my experience. (We’re currently watching season 3 of Mr. Robot in preparation for the new season. We recorded it two years ago, so yes those commercials are out of date.) Porter’s data gives a tiny glimpse into this phenomenon.

My only so-so hot take is that this shows that TV viewing across platforms is more similar (sometimes very delayed, but the majority within the first four weeks) than it is different.

Entertainment Strategy Guy Update

TV Ratings Updates!

We had a lot of data from last week. Batwoman came out strong in the ratings–for The CW–and the All American may be getting a “Netflix bump”. Lessons? Some combination of marketing, buzzy IP and easy catch-up help ratings. Meanwhile, the NFL ratings are still strong, which does hell for narratives and helps create narratives galore. (Maybe the NFL ratings were a politics thing? Or maybe folks got over their concussion fears? Is cord cutting dead?) Honestly, we don’t know.

Overall Deals

Jordan Peele re-upped his overall deal with Universal films. I didn’t see a price, but I like this fine for Universal. However, if I had a first look with him–cough Amazon cough–I’d be pretty mad. I mean, between these films, CBS’ Twilight Zone, HBO’s Lovecraft Country, when is he going to give you any attention to pitch?

Management Advice – Email

I’ve had this article by Cal Newport bookmarked for a while now. I absolutely love his (deep) work. In my mind, your team, division or business–yes, you right there–can drastically improve its effectiveness by limiting, controlling and managing work outside of email. Key quote here:

Cal Newport Quote

Most Important Story of the Week – 13 September 2019: Debunking Some Apple Myths

This is my third try writing this week’s column. Apple TV+ is clearly the “most important story” this week since it’s Apple’s entry into the streaming wars. That’s like the United States entering World War II. What did my first two takes look like?

Attempt 1: An article about “ecosystems”, since that was the explanation du jour of the week. I wrote too much for this column.

Attempt 2: Really calling folks out for not digging into Apple’s financials. But that required me to do them too, which took too long for this week’s column. That’s an analysis article.

Still, I had so many thoughts on Apple that we’ll have enough for thoughts on Apple TV+/Channels today and in the future. Don’t worry.

(Programming note: I’m traveling for a music festival—Kaaboo 2019, the film festival for the middle-aged. Seriously, that’s how the bill it—so if I make any mistakes, I was rushed. And I’ll have my newsletter next week! Sign up now!)

Most Important Story of the Week – Debunking Some Apple TV+ Myths

Reading the coverage of Apple TV+’s pricing announcement, the media ecosystem swung from “$10 is way too expensive” to “$5 wins the content wars” immediately. That sort of surprised me. Bit of an overreaction, wouldn’t you say? Along the way, too, I noticed a lot of observers leveraging a lot of the same explanations and even numbers to explain the news. 

Let’s debunk a couple of those. Plus, I’ll add in the strategic risks for Apple implied by these mistakes. First, though, a new product that actually does make sense.

Apple Arcade Solves a Customer Problem: No in-app purchases

I play a few more iPad games then I probably want to admit. I loath pay-to-play, though. Just not how I was brought up to play games and the best games don’t feature this mechanic, in my opinion. Apple Arcade, their subscription video game service, solves this problem. Potentially. Right now, they probably don’t have enough games to warrant a subscription, but like all new businesses it will grow. And I hate subscription biz models anyways (for customers). So we’ll see. 

However, compared to Apple TV+, at least Arcade solves a customer need. Now how many customers are like me–which is market sizing–is a future question. But at least it solves a problem; it isn’t clear that folks were clamoring for more TV to subscribe to.

Debunking One: Apple TV+ is free. 

This is kind of true, in that yes, if you buy an Apple device, the service is free. But I saw tons of folks saying this free first year meant that Apple made it essentially free. That’s too far.

After a year, customers will need to start paying. I assume some others assumed that if customers buy multiple devices, they can keep stacking on year long free trials, but that doesn’t sound like any free trial I’ve ever seen. Most likely, after a year, the device that logged the free 12 months will have to start paying. And that, my friends, is where the true test of a business starts.

Strategic Risk for Apple: The Promotional Carousel Is Hard to Get Off.

Ask DirecTV or Hulu how offering ridiculously low prices worked for customer churn. Even if Apple doesn’t report subscriber numbers—they probably won’t—we’ll be able to tell by the discounts Apple does or doesn’t offer whether or not churn is happening.

Debunking Two: Apple will have 250 million potential customers.

This number is in fact true. It’s roughly how many iOS devices Apple sells per year. Roughly. The implications are not.

But is number of devices really the potential market? Consider two things. First, many families are on Apple’ plans. Which means even if the family owns four devices, or bought four, they’re still only subscribing once. More critically, look at this chart from Business Insider on iPhone sales.

58d04a02112f701f008b57db-750-563

Huh. So the US portion is really 70 million phones per year, with another chunk of iPad and laptops, which I didn’t see reported anywhere. Everyone breathlessly went with the 250 million. Sure, Apple TV+ is launching in 100 countries, does that include China? It’s notoriously hard to launch content in China, and Netflix and Amazon aren’t there. So I’m skeptical. Overall, if you’re discussing Apple’s plans, be very careful about mixing up US-focused strategies and global numbers.

(Bonus chart. During research, I found this amazing chart at Asymco. It should look familiar.)

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