Tag: Business

Most Important Story of the Week – 20 March 20: Coronavirus and Pay/Linear TV…Boom or Bust?

You can tell we’ve hit peak coronavirus coverage when you see the headline “Did Disney predict the virus?” Because the film Tangled features a “quarantined” character in a town called “Corona”. Yep.

In more serious coverage, the predictions that coronavirus is “no big deal” have shifted to “we’ll be in lock down for 9 months” and folks are as confident as ever. Meanwhile, everyone is quite confident in all their predictions. 

I’m not. So my public service is to try to separate what we know from what we don’t in the entertainment business in the age of Covid-19.

Most Important Story of the Week – Linear/Pay TV…Boom or Bust?

In case you missed it last week, I picked a few tools to use to try to figure out how the coronavirus is impacting various parts of the video value chain. Including:

– Ignoring Narratives vs building out scenarios
– Demand, Supply and Employment
– What we know vs what we don’t
– And “what will change” and “what will stay the same”.

If you want a good example of how narratives can take us in the age of Coronavirus, consider Pay TV. This could simultaneously be the end of Pay TV as we know it or a boom time for live TV.

Narratives

Let’s start with the most extreme narrative: This is the death of Pay TV. Lest you assume this is the type of hyperbole only left for social media, here’s a Bloomberg headline with itScreen Shot 2020-03-22 at 3.12.58 PM.png

Note the question mark, but this still captures the feeling. The narrative goes: as consumers cut spending due to the impending recession, it will hasten cord cutting. In short, less folks will subscribe to traditional linear TV bundles than before. 

Of course, this trend was going on before the Coronavirus pandemic came to American shores. So will a widespread “quarantine” and consequent recession accelerate, decelerate or not impact the rate of various cord trimmings? What do we know and not? What are we guessing and what are we confidently estimating?

Demand

TV content falls into five rough categories: Scripted. Reality. Sports. Kids. News. I’m not breaking new ground, but that’s how I’ve always thought about it. So how does coronavirus impact demand for those five areas? 

Well, it may cause demand to go up for the first three categories, scripted, kids and reality TV. There is some evidence to support the idea that folks stuck inside turn to more TV consumption to pass the time. This includes films and peak TV series and cheesy reality shows. It will all benefit. So the first few categories should benefit from quarantine.

Given that this is a natural response to be stuck indoors, this is where the “death of pay TV” thesis starts to look shaky for me. Or at least contradictory to the other big narrative “quarantine and chill”. Especially when many folks predict both narratives simulaneously. For both theories to be true requires folks to “watch more streaming” but simultaneously “watch less linear TV”. From a strictly demand perspective, it’s unclear how linear TV doesn’t benefit from increased consumption as much as streaming. In fact, the initial data says both streaming and linear TV are both up.

Notably, it’s not up as much as you’d expect. A healthy chunk of people are still working, just from home. Another chunk have likely added other distractions or hobbies to the mix. But overall TV viewing is up, along with streaming viewing. Demand-wise, they’ve both benefited in the short term. 

Will it last? I doubt it. This doesn’t feel like a permanent viewing behavior shift to me; simply a function of not being allowed to go outside one’s home. Same with kids content: if you force a bunch of kids to skip school, parents will have them watch more TV, especially if the park is closed. When folks go back to work and kids go back to school, it feels more likely that demand returns to normal, not some permanent shift.

Arguably, if supply constraints weren’t present, we’d see a ton of demand of the fourth category too. If sports were available (see supply), that’d be a huge amount of viewing right now. A “not cancelled” March Madness would have shattered records if they could have held it with all 300 million Americans stuck at home. In other words, demand for sports hasn’t abated, just been shifted to other topics. (And meanwhile, most streaming doesn’t have sports programming.) As it is, sports channels have seen ratings plummet:

(My big curiosity? Does some of the sports/demand for competition get shifted to pseudo-competition series as in reality game shows? Top Chef is coming back to the air. Survivor is in mid-season. Even MTV’s The Challenge is coming back in April. Maybe they grab some of that demand for competitive sports.)

As for news? Well, this is the big area that streamers just can’t compete. (For now.) If you want to hear the latest Los Angeles or New York City public announcement on Covid-19, you have to turn to a local station. Frankly, a cable subscription is the easiest way to do that. And the initial data suggests that folks are indeed watching more news content than before. (And I’d expect this too to revert back to “normal” after Coronavirus worries subside.)

Add it up? Well, on the demand side there seems to be plenty in favor of linear TV in “raw demand” terms. Obviously, though, actual sales are a function of price compared to demand. Does a pending recession obliviate pay TV?

Maybe. A recession crunches wallets, which in turn forces high priced luxuries to go by the way side. “High priced luxury” is a pretty good description of cable TV at this point compared to other digital options. So will folks continue to pay outrageously high cable and satellite bills as they get laid off? Maybe. Especially with the proliferation of other options. We know cord cutting is coming. The statistics back that up.

But to make this prediction implies a pretty substantial prediction about the impending recession. And how deep it will be. And whether the cable companies offer cheaper bundles in lieu of losing subscribers or stick to the current business model. In other words, a host of variables (that few folks can predict). 

(Not to mention cord cutting is a misnomer as many more folks “cord shift” or “cord shave”. Turns out cord trimming is complicated.)

I’d flag all this as a big “we don’t know.”  If the recession continues through the end of the year, absolutely that could accelerate cord cutting, though it may be taken up by cord shifting. If the recession is short? Well, the desire to keep things the same may not have the same impact.

Supply

Again, with coronavirus, the pandemic is unique in that it can wallop both demand and supply. 

Coronavirus started by hammering the TV production industry. If groups of more than 10 people can’t get together, well you can’t make a TV show. Period. Right now, nearly every television production is on hold.

The question is how this plays out over the next few months. An extended shut down means that TV will mostly go to reruns or shows—like many reality shows—that were mostly already recorded. However, by June, if production hasn’t resumed on some basis—I imagine at least reduced staffing for the foreseeable future—than linear channels may run out of content.

How long does this last? Well, I’ve seen predictions from 6 weeks to 9 months of shut down. That’s a huge range.

Moreover, it violates the most common mistake in economic forecasting, which is that actors adapt to their surroundings. Productions are shut down because they can’t film in groups of more than 10. But at a certain point, you’d have to imagine that studios and production companies will get creative with how they shoot TV shows or ask for exemptions. Or figure out ways to screen employees. Yes, it may be a while before things are back to “normal”, but shows could return faster than you think. 

I’d apply this to the other big supply constraint, the lack of live sports. Honestly, sports could have the quickest rebound of all TV content. Yes, while it’s unlikely that 10,000 people will get together to watch a game in the next couple of months, to film a basketball game all you need is 12 players on each side, two coaches and the referees. And camera crews. Yes, that’s a lot of people, but way less than 10,000. Could the NBA ask for exemptions with strong testing to get games in front of folks? I imagine so.

Will they? Will TV productions get creative? Maybe. Maybe not.

There is one other huge supply constraint that is honestly the biggest threat to linear TV, and it’s usually the area that soothsayers predicting the demise of Pay TV ignore: advertising. If a recession comes in and comes hard, one of the first areas every business cuts is the promotion and advertising budgets. This could hurt everyone from social media to Google to linear TV.

Yet, linear TV also has all those eyeballs and an election on the way. Still, its the biggest “supply” constraint to watch for TV. How do linear advertising payments shift? I don’t know which way it will go, but it will likely have the biggest impact on the future of this industry.

Employment

In some ways, linear TV will have less employment impacts than theaters. Theaters have a mass of low wage employees out there every day. Networks have a lots of people, but not like that. 

Still, the economic impact on the below-the-line workers will likely have the biggest impact. They are the economically most vulnerable and will stay so in a recession.

I’d add: I can see remote productions have even more trouble in the future, which could help Hollywood. If actors don’t feel like boarding airplanes for film/TV shoots, the natural location is old-fashioned Hollywood.

Strategic Recommendations

1. Begin quarantines for sports and talk show staffs, if possible. If folks are quarantined together, they can’t share the disease, but they can generate content. “Getting creative” is always my go to advice for companies. And there are ways to get SNL, the Late Shows and other comedies back on the air in an age of “reduced quarantine”. It requires thinking how to do it and figuring out creative ways to house employees early.

2. If I’m cable, get more aggressive with skinny bundles. Cut the fat, and blame it on coronavirus. Folks will still want news and sports. Fortunately for the cable/satellite bundles, the streamers don’t have any real sports or news capability. So skinny linear bundles can fill that need.

3. I see an edge for vMPVDs too. Really, those are just the nu-cable bundles. (vMVPDs like Hulu Live TV or Youtube TV). They can also offer the sheer tonnage of scripted/reality shows that folks want along with sports and news. So price discounts for those will make a lot of sense. 

4. Lean in to reality when the quarantine ends. That’s the quickest way to get lots of content back on the air, while getting scripted series back on the air.

Other Contenders for Most Important Story

Quibi!!!

It’s no secret I’m hugely skeptical of Quibi. At the core, it’s because they are avoiding an entire method of distribution, which is living room TV. For all the growth in mobile, I just don’t think you can be viable without TV sets in your arsenal. The latest news is that Quibi is offering a 90 day free trial, which will the longest in the industry. We’ll see if it works. I’m still more bullish on HBO Max and Peacock with their huge libraries. Especially in an age of quarantine.

Crowded VOD

Last week, Universal was moving some films to VOD early. This week it became a flood with Onward joining Rise of Skywalker joining Emma (and then Lovebird went straight to Netflix via Paramount). On the one hand this shouldn’t be too surprising, since these films weren’t going anywhere in theaters. (Variety has a good list of how everything has moved.)

But part of me thinks this is still pretty shortsighted. If we are in for a long lock-down, come May a studio could really benefit by having these VOD launch weekends all to themselves. Crowded weekends aren’t good for film, TV or VOD. In the long run, will this be a huge impact? No, but I think some of the studios are rushing.

Most Important Story of the Week – 13 Mar 20: Love (Films) in the Time of Coronavirus

The most important thing in this time of crisis is to focus on staying healthy and being good citizens. So don’t hoard food, avoid public gatherings, and try to donate blood.

Still, the economic consequences will quickly become as real as the pandemic ones. This is really what we pay CEOs for; not how you govern in times of booming stock prices, but times of crisis. 

For the next few weeks, since Coronavirus will dominate the news coverage, it will dominate this column too. I plan to run through how all the parts of the traditional and digital video value chain could be impacted. 

Image 7 Video Value WEb

Emphasis on the “could”, because in times of crisis there is a lot more we don’t know then do.

Most Important Story of the Week – Hollywood Pauses Production; Theaters Begin to Close

In my last weekly column, I speculated that the Coronavirus Pandemic had finally reached the “economic consequences” stage. Arguably, I was too late to make this warning very useful. But if any doubters remained, last weekend cinched it. Every big film moved out of the Q2 time period and nearly every major sporting event was cancelled. This week—I’m dating this for the 13th of March, but posting on the 17th—most major theater chains have closed.

Still, I hedged. Especially about predicting what would happen to entertainment companies.

Indeed, I tried to commit to the position that I wasn’t going to forecast the future. Why? Well, it’s impossible.

Which hasn’t stopped folks of course. Within the swarm of actual news came the opinions you’d expect, usually verging on the apocalyptic. “This is the death of theaters” being a typical example.

How do movie studios banking on theatrical releases handle that uncertainty? Well, they have quite a few strategic options. Given that theaters are the most visible part of the video value chain, we’ll start this mini-series there.

Before that, though, a rant…

Probabilistic Scenarios vs Narratives

The biggest “narrative” impacting actual stock prices goes like this…

…the impending quarantine will leave Americans (and the globe) stuck at home.
…Americans (and the globe) like Netflix.
…Therefore, they will binge a lot of Netflix.
…So Netflix wins the coronavirus sweepstakes.

Um, maybe?

Like most things “Netflix” when it comes to the narratives the only thing larger than the impact of the narrative is the stridency of the belief. Once the “Quarantine and chill” narrative started, it quickly went from “hypothesis’ to “thesis” to “inevitable outcome”. 

But consider this: if all the studios have to freeze productions, and Netflix is a studio, then they will have to freeze productions. While that could definitely help Netflix’s near term cash flow, it also would kill the new content used to bring in new customers. Speaking of cash flow, if credit markets freeze up, then getting new high yield debt could be tricky. 

Or consider this. With the impending budget cuts, cable MVPDs may aggressively cut prices to keep customers around in a pandemic-cause recession. They know folks are stuck at home; don’t let the recession kill your business.

Or this. Free, ad-supported streaming TV service (FASTs) may actually take up viewing. They have the same volume as Netflix for a better price: free. Or Twitch. Or Youtube. Both free too.

Which one of those scenarios will happen? I don’t know. Maybe all of them. Or none of them. We’ll need to set up good metrics to measure the signal of what’s actually happening with customers, not the noise of social media.

Which is my point. While narratives feel good, they don’t tend to make good strategy, since they tend to reinforce stereotypes and biases instead of generate insights and understanding. We need a more systematic approach. Which is what I’ll try to provide. (And I’ll get to Netflix in the streaming article.)

My Tools for Understanding Coronavirus Impacts

To try to think about Coronavirus strategically, I ended up pulling out three tools that I’ll use together.

– Supply, demand, and employment: The impacts of the coranavirus are unique in that they impact both supply and demand, making this a unique crisis.

– What we know; what we don’t: In times of crisis, it’s often good to separate what you know from what you don’t and what you believe from what you assume. Otherwise, you’re likely just building a narrative that reinforces existing and preconceived biases.

– What could change permanently versus what is temporary. This ties back to my “question of the year” I speculated before we started. The question was, “With streaming, what is the same and what is different?” This same question applies to the Coronavirus: what is a temporary change in circumstances, and what could lead to a permanent change in how we consume content and entertain ourselves?

Along the way, I’ll try to call out the biggest narratives I see emerging and I’ll conclude with my tentative strategic recommendations. These are the strategies I’d pitch to CEOs if I worked at a theater or a film studio.

Theatrical Film Going – The Narratives

Theaters hold a special place in the entertainment industry’s heart. For as much as it is being displaced by streaming it still has that “je ne sais quoi” embodied by the Oscars every year. That experience of going to a theater to see a film with a bunch of strangers on opening weekend. And for my money, big budget epics just look better on the big screen.

But how will the industry fare in the Covid-19 times?

I’ve seen a few narratives. Most prominently, is the “This is the death of theaters” theory. Theaters had merged for several years, then spent significantly to upgrade the experience (better seats; alcohol). Meanwhile, theaters have always been a low margin business even in the best of times. While those are true facts financially, the narrative piece seems to be the prediction that somehow customers will turn against theaters as an experience. 

Will being stuck inside for 8 weeks really prove to Americans how little they enjoyed going to theaters in the first place?

Let’s dig in. 

Supply

What we know: Supply gets hit in two ways. First, theaters themselves are now closed in Los Angeles and New York. This will likely spread to other states and cities. Obviously, if folks can’t go to theaters, they can’t see films in those theaters. As of this writing, most major chains have gone dark and most films scheduled for Q2 have been postponed or moved to VOD.

As for release calendars, we know that studios are now getting creative. Some films have moved back to later in the year, some to 2020, some up to VOD and some indefinitely. As a result, we can say that the end of 2020 and start of 2021 will likely be fairly crowded release calendars.

What we don’t know: How long theaters will have to stay closed. As of two weeks ago, it looked like April was gone. Then last week, most would have predicted though the end of May. Now June and July and beyond are on the table. But this crisis is moving quickly, so if by the end of April cases start declining, who knows? Maybe June is available.

The bigger unknown is what happens to the release window now. While Universal has “broken” the theatrical window with Trolls and The Hunt, they have a pretty damn good explanation: theaters are literally shuttered. It’s not breaking a window that doesn’t exist. Some studio chiefs likely would like to experiment with smaller theatrical windows like NBC, while others, especially Disney, like things the way they are. I personally wouldn’t be confident predicting the future of the window in either direction.

As for release calendars, even these are pretty unknown. A few weeks back Richard Rushfield wondered aloud if any big budget films would venture to streaming. There are big financial differences between VOD—which has great unit ecnomics—and straight-to-streaming, which doesn’t. But more than anything none of these moves sets a precedence. 

Meanwhile, studios will be desperate to get films in theaters. Especially blockbusters. Studios make roughly $5 billion from domestic releases alone. You can’t remove $5 billion and expect the same level of production. Globally tosses in another $15-20 billion. And remember, the economics are much better in theaters than even VOD.

Demand

What we know: Honestly? That folks like going to big budget movies. But we also know that America is afraid and as a result no one is going to the theaters. 

What we don’t: How folks will feel about movies in the future. This is a classic narrative you can build to support both sides. Maybe the Coronavirus creates a new normal where Americans decide to permanently live sheltered in their homes. Streaming satisfies all their filmgoing needs.

Or maybe after a two month quarantine, stir crazy Americans flood back into theaters to escape their home. Maybe the theater experience really does have something to it. (Most theater attendees have Netflix right now!) That feels more likely to me. But when and how and if this can happen we don’t know. And how theater attendance fares in a potential extended slump is another unknown.

Meanwhile, if theaters do go bankrupt in the quarantine, the impact on demand could be felt in the death of super hero films. Frankly, without home entertainment and theatrical releases powering billion dollar grosses, major studios will have to cut special effects driven films. What type of content will replace those films, if anything? Will folks miss super hero content when the next round of streaming series don’t have quite the same budgets?

Employment

What we know: Well, theaters employ lots and lots of people. From staff taking tickets to contractors cleaning the theaters. If there are no show times, there are no jobs to be had. And unlike sports teams which could choose to keep salaries going for the foreseeable future, theaters run much tighter margins.  

What we don’t know: What happens to these workers in an extended slowdown. 

My strategic recommendations

Since I started writing this column last Friday, things have already changed. The headline of headlines being that Universal broke the theatrical window.

1. Get creative. The Troll World Tour move to VOD makes a lot of sense. (I’m honestly surprised the price isn’t higher.) I’d recommend this for lots of films that are in this window; triage for what can go to theaters later, what can go to streaming now, and then theaters later and what will go to VOD never to emerge.

2. Be prepared for a “summer snap back”. If the virus is under control, I think August could shatter records as folks desperate for distraction seek entertainment out doors. This requires a lot of things going right, but seems on the table.

3. Assume a government intervention. Or reach out directly. Part of the reason I don’t think the window is irrevocably broken is that thousands of theaters going out of business would put tens of thousands of folks out of work, which would exacerbate the impending recession. If you can get a bail out for lost blockbuster revenue, VOD seems more attractive. 

Other Stories

Well that was the big story, but some other new stories were there too.

Netflix Biz Model Keeps Evolving

First, Netflix ended 30 day free trials in Australia. If I had to speculate? Well, churn is the name of the game. Second, Netflix is expanding their very cheap $3 plan to new territories. If I had to speculate? Subscribers are the name of the game.

Pixar’s Onward Stumble

If I’d gotten this column out on time last week, I would have noted the soft weekend opening of Onward. The most obvious explanation? It was Covid-19 worries. But the film felt like it had soft buzz even before it came out. Why is this big news? Well, I’m monitoring Disney Animation/Pixar for the first sign of stumble post-Lasseter exit and that was Onward. One is a data point, so we’ll look to Soul for a trend.

Fox Sports Brings Back Written Content

The “pivot to video” may be the worst strategic decision universally adopted by media since the dawn of the internet. And no surprise Fox has slowly reversed itself. Now if only ESPN would make their website more functional to read their great writers.

 

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 – 21 February 20: Youtube Offers HBO Max…and an “All Update” Column

As I stared at the list of stories I wanted to put in my weekly column last week, I couldn’t help but notice that they all connected back to some previous article I’ve written before. So here’s an “All Update” column, starting with a distribution story that hits on the most important trend of the streaming wars.

Most Important Story of the Week – Youtube TV Will Offer an HBO Max Add-On

A contrarian may see this as just another minor move in the distribution landscape. Equivalent to Disney+ finally getting distribution on Fire TV devices. And I didn’t make a big deal about that. 

Well, this is bigger. 

Google/Youtube is moving its troops onto the “key terrain” of the streaming wars. As I wrote back in November, the rise of “digital video bundlers” (or DVBs) is the trend to monitor when looking for who will “win” the streaming wars. The bundlers will, potentially, control the fates of the streamers. And hence have the best chance to capture the most value in the digital video value chain. The Youtube partnership with HBO Max could cause a cascade of strategy moves.

First, this is Youtube getting into the “streaming bundling game” versus just the “vMVPD” game. The distinction is subtle, but important. In the “virtual multichannel video programming distributor” game, the vMVPDs are mostly mimicking traditional cable bunde\le. So Youtube, Hulu, Sony Vue (rest in peace), DirecTV and Sling are mostly offering a bundle of traditional channels in a new package. This has only worked out so-so well so far.

Now that Youtube TV is going to offer HBO Max, they aren’t just about linear channels. While this isn’t their first streaming service they offered—they have the AMC owned niche streamers like Sundance Now, Shudder, and Urban Movie Channel—this will be their biggest streamer add-on. And the broadest offering so far. Likely this won’t be their last move either. Could CBS All-Access be next? Or even Disney+?

If so, then the line between vMVPDs and “channels” businesses will blur further. Here’s my quick take on how the potential DVBs are shaping up:

Screen Shot 2020-02-24 at 2.14.25 PMYoutube also needs this since right now Google is lagging on the device front. While the Chromecast works very, very well, Google can’t monetize it. You can’t download apps to it, just stream from another device. This will mean they need to lean on Youtube/Youtube TV even more to bundle their offerings.

Second, this is a smart move for HBO Max. May is rapidly approaching and scanning the other Live TV services and Channels, I haven’t seen a lot of announcements about where/who will distribute HBO Max. On the one hand, AT&T claimed that if you subscribe to HBO you’ll get HBO Max. But how that will work in practice remains to be seen. Does that just include linear offerings? Or only AT&T owned offerings? Does it include Amazon and Apple? That’s being negotiated right now.

AT&T’s goal, like Disney+, is to get HBO Max out via as many distribution channels as possible. Frankly, to make your money back, this makes sense. (Though it also shows that the power is mostly with the distributors, not the streamers.) Youtube is the first step.

Third, this impacts how the other vMVPDs will respond to HBO Max. Does Hulu—which offers HBO—automatically offer HBO Max as well? It would make sense, but that would then be a game changer for Hulu, which doesn’t offer any other streamers yet. And if it’s offering access to HBO’s streamer, why not sell Disney+ subscriptions and/or access right along side?

So Youtube could be the domino that starts a chain of OTT offerings.

Fourth, Netflix. 

(Legally I have to mention them every week) 

There is a careful balance for each streamer between reach—being on the most devices—and controlling the customer relationship—in both user experience, data and owning the credit card data. Netflix is on the extreme of one end; as the most successful streamer, they don’t care about reach and want to own everything about the customer relationship. 

HBO Max is clearly willing to give up some of that with Youtube TV for the reach. Disney, with Amazon for example, gave up some data to get Disney+ on Fire devices. Disney+ though, is NOT in Amazon’s channel business. Because they don’t want Amazon to own that relationship.

If I were Netflix—and I don’t think they quite understand this—I’d be worried that the distributors are going to offer increasingly compelling user experiences sans Netflix. Be it Youtube or Roku or Hulu or Amazon Channels or Apple Channels, customers are going to increasingly find themselves using one ecosystem. While switching between Disney+ and HBO Max and Netflix isn’t that difficult, it’s still a small barrier to entry. 

But little things can add up. And if folks only use Youtube TV to get 60% of their TV viewing, then that could rise to 70%. Then 80%. And Netflix could be the piece on the outside looking in. (Alternatively, some streamers like CBS All-Access and Peacock could never even get a look.)

Is it guaranteed to happen? Obviously not. But if Youtube TV “becomes TV”, then Netflix can’t. And only one of those two companies is banking on “becoming TV” to support its stock price.

Last note: Youtube TV’s price point is still uncompetitive. It is somehow the only remaining Live TV bundle offered at $50. As a result, it’s boosted it’s subscribers from 1 million last year to roughly 2 million this year, as it announced in its latest earnings. The key question is how much they lose every month. $1? $5? More? The higher the number, then the more Google is using revenue from one business to enter another using predatory pricing. That’s not good business necessarily, but market power. It stifles innovation in the long run and should worry us.

Entertainment Strategy Guy Update – ViacomCBS’ House of Brands 

So did CBS let us know what their strategy is? Scanning their last earnings report, not really.

They could be a content arms dealer. Mentioned it. They could lean into streaming. Mentioned it. They could lean into live TV. Mentioned it. They could be a leader in advertising. Mentioned it too. They want to be all things to all people

So that’s the downside case. They still don’t have one strategy. But if we’re looking for bright spots, at least they are making some smart moves. They plan to expand their streaming offering. Here’s their pitch:

Screen Shot 2020-02-24 at 10.45.03 AM

Ignoring the misuse of the term “ecosystem”, if they execute the “House of Brands” strategy it may provide a better user experience than some other streamers. And it will work better than trying to launch BET+ on its own and Smithsonian on its own and so on. In general, broad services have the advantage over niche platforms, and CBS already has a “broad” advantage like their fellow legacy media conglomerates. As I wrote in August, you could imagine a version of Disney+’s brands…

disney-plus-layout

..with ViacomCBS brands like BET, Paramount, MTV, Comedy Central and Paramount instead. (If I were better at Photoshop, I’d have done it.) Is that better than Disney? No. But it’s a clearer offering than if Netflix tried to offer something similar for its library of Babel offering. (Still probably behind HBO Max and Peacock though.)

I said back in August that trying to offer “the perfect bundle” is their best strategy. I happen to like their three tiers: Free is a great entry price; CBS-All Access can compete with Disney+, Peacock and HBO Max while Showtime goes for HBO and Netflix. That seems to be our three tiers right now. 

Notably, though, I don’t think they can be a streamer and a “content arms dealer”. If you sell genuine hits like South Park, Sponge Bob and Yellowstone to competitors, there won’t be enough left for your service. Given that they can’t survive without a viable streamer, they need to focus on that strategy. 

(For my past articles on SuperCBS, click here, here or here.)

M&A Update – Apple Looks for a Library/MGM on the Sales Block

After it’s nine original TV series—plus or minus 2—there isn’t a lot else to watch on Apple TV+. Which is why I thought it was bonkers launch without a content library for customers. The biggest library on the block is MGM’s and a few months back the Wall Street Journal reported Apple was indeed in talks to acquire the former major studio (and its library).

Yet it didn’t happen then. Still, as Alex Sherman comments in his look at M&A in 2020, it’s probably more likely that MGM gets sold than not. It’s long been rumored that its private equity owners are looking for an exit. So why hasn’t it happened? My gut is that between the PE folks desire for a sizable return and the strings attached to their library—most of it is rented out for the next few years—it gets hard to find the right deal.

(Related note: In the Wall Street Journal article, the Pac-12 was also in negotiations with Apple that apparently didn’t go anywhere. I remain skeptical that going to one distributor like an Apple will be worth it for the Pac-12, but we’ll see. Here are my big articles on the Pac-12 and what that implies about the future of sports here.)

Entertainment Strategy Guy Update – What about the Oscars?

Are the Oscars just an increasingly unpopular TV event or a portent of the eventual declines all feature cinema? Probably just the former. The global box office hit an all time high last year. Instead, as I’ve long suggested, the Academy needs to nominate more popular films to bring in a bigger audience. (And not just via a popular film category.) Here’s an updated table on how unpopular the nominated films were in general:

Screen Shot 2020-02-24 at 2.15.17 PM

Screen Shot 2020-02-24 at 2.14.55 PM

So while there was a slight rise in “unadjusted box office”, the trend is still downward from the 2010 recent peak. (Adjusting box office for inflation shows an even worse decline.) Hence, the ratings were down again.

A related question is whether this push for Oscar nominated films makes sense for those producing the films, such as the streamers. As two recent articles show, Oscar nominations lead to box office revenue. And presumably Netflix viewership. The only caution? Well, the cost of those increasingly expensive awards campaigns may not pay back even that amount of Oscar revenue.

(For my articles on Oscars and popularity, click here, here or here.)

Entertainment Strategy Guy Update – Netflix Originals Aren’t Permanent

Over in the United Kingdom, the Netflix “Original” Happy Valley  is going to be departing the platform soon. This shouldn’t be a huge surprise for business watchers, but I have the feeling that customers won’t quite understand it. If originals are original, then how can they leave? Well, it depends more on how Netflix paid for it (rent it, lease it or buy it) then whether they call it an original. What’s On Netflix has a good article on this here.

(For my articles on what an original is, read my definitions from back in May. Or read my article at Decider from last month which also explains the difference.)

Most Important Story of the Week – 24 January 20: Why is Facebook Unfriending Scripted Originals?

The Los Angeles region, and the entire basketball universe, is reeling from the death of Kobe Bryant, the legendary Lakers basketball player. If you’re looking for the “Hollywood” connection, I have two. First, the Lakers and “showtime” basketball have always been an influential part of the entertainment ecosystem in Los Angeles. A place to go to see and be seen. Second, Kobe was an emerging film producer who won an Oscar. His contribution to his passion for film was tragically cut short.

As a long time Lakers fan–read here for some insight on this–this death is shocking and hurts.

Most Important Story of the Week – Facebook Watch Decreases Investment on Scripted Originals

This news is two-fold for Facebook Watch. First, two big series–Limetown and Sorry For Your Loss–were not renewed for subsequent seasons by Facebook. Still, cancellations happen. When you pair that news with reporting from Deadline that Facebook is generally pulling back from scripted original content, well you have a new story. 

Mostly, though, this story seemed to pass by in the night. But it’s the perfect story for my column because the significant doesn’t seem to match the coverage. 

So let’s try to explain why Facebook may be pulling back on scripted originals. And we have to start with the fact that Facebook is a tech behemoth. Facebook resembles the cash rich fellow M-GAFA titans (Microsoft, Google, Apple, and Amazon) that throw off billions in free cash each year. Really, companies minting free cash have three options to do with it:

Option 1: Give it back to shareholders.
Option 2: Invest it in new businesses.
Option 3: Light it on fire.

Well, as Matt Levine would note, Option 3 is securities fraud so don’t do that. Of course, we could just change it to…

Option 1: Give it back to shareholders.
Option 2: Invest it in new businesses.
Option 3: Enter the original content business!

They’re the same thing anyways. Companies come in with grand ambitions, realize the cash flows in don’t match the cash flows out, and they leave the originals business (or dial back their investment). Facebook follows on the heels of Microsoft and Youtube in this regard. Heck, even MoviePass had started making original content at some point. 

The key is how the original content supports the core business model and value proposition. With that in mind, let’s explore why Facebook Watch is leaving the original scripted business, floating some theories, discarding others and looking for lessons for other entertainment and tech companies. Since I’m not a big believer in single causes, I’ll proportion my judgement out too.

Theory 1: Ad-supported video just can’t scripted content.

If this theory were true, woe be to the giant cable company launching a new ad-supported business!

Let’s make the best case for this take. The working theory is that folks just don’t want to watch advertising anymore, so they just can’t get behind a video service like Facebook Watch that is only supported by ads. With the launch of Peacock, I saw this hot take a bit on social media. 

Of the theories, I’d give this the least likelihood of being true. From AVOD to FAST to combos (Hulu, Peacock, etc), advertising is alive and well in entertainment. Despite what customers say about hating advertising, they end up putting up with quite a bit. It’s not like Youtube is struggling with viewership, is it?

Judgement: 0% responsible.

Theory 2: Scripted content is too expensive (or doesn’t have the ROI).

If this theory is true, woe be to the traditional studios getting into the scripted TV originals game.

This is the flip side of the above theory. It’s not about the monetization (ads versus subscriptions) but about the costs of goods sold (the cost to make and market content). What I like about this theory is, if you’re honestly looking at monetization, it’s not like entertainment has seen booming revenue in the US. If anything, folks pay about what they always have.

So what’s fueling the boom in original content? Deficit financing and super high earnings multiples.

Worse, deficits are financing a boom in production costs as everyone is fighting over the same relatively limited supple (top end talent) so paying increasingly more. Consider this: in 2004, ABC spent $5 million per hour on it’s Lost pilot, up to that point the historical highpoint. Most dramas cost in the low seven figures.  Now, word on the street is that Lord of the Rings, The Falcon and Winter Soldier and Game of Thrones could cost 5 times that amount. Meanwhile, each of the streamers, I’d estimate, would have double digit shows that cost $10 million plus. Did revenues increase five times over the last fifteen years? Nope. 

Thus, Facebook may just be on the cutting edge–with Youtube–of realizing that scripted originals aren’t the golden goose Netflix and Amazon make them out to be. It’s not that they can’t make some money on them, just not nearly enough to support the skyrocketing budgets.

Judgement: 25% responsible.

Theory 3: Facebook Watch needed more library content.

If this theory is true, woe be to the giant device company that launched a streaming platform sans library.

The best case for this is that after you come to watch a prestige original, you need to find something else to occupy your time until the next original comes. That’s library content. While I josh on Netflix for lots of things, I do absolutely believe that Reed Hastings is right when he says he’s in a battle for folks’ time. But I’d rephrase it slightly in that you’re also battling for space in people’s mental headspace. When they decide to watch TV, they then pick a service to watch. Library content’s purpose is to keep permanent space in people’s mental headspace. Having loads of library content makes it more likely that you’re folks’ first choice to find something.

The problem is Facebook Watch doesn’t have this. Fellow ad-supported titan Youtube clearly does. It’s purpose was videos first and foremost, so there is always something else to watch. Netflix has it. Even Amazon has it. Facebook has socially generated videos, which aren’t the same ballpark as scripted video.

Judgement: 20% responsible.

Theory 4: Social video can’t support scripted content. 

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A Netflix Data Dive: What does their “annual” top ten lists reveal about their biz model?

Last December, I unveiled my theory for how big organizations use PR. Big entities—be they corporations, governments, non-profits, even news outlets—share their good information and actively hide bad information. It’s like the iceberg principle on steroids. Especially with digital companies like Netflix:

Slide2

(By the way, in government, the CIA is the absolute best at this. They have feature films like Argo win best picture, then have the gall to go on cable news and say, “You never hear about the good things the CIA does.”)

With this in mind, let’s draw some insights on Netflix’s (kinda) annual tradition to release a top ten “something”. In 2018, they released their top “binged” things. Now they’ve released for both film and TV across three lists in their most prominent territories. Sure, Netflix doesn’t give us much to work with, but I’ll interrogate these numbers to death in the meantime.

The Facts

Before the analysis, though, some facts to keep in mind. Whenever you see data, you should ask the “5Ws” of journalism. Most problems with data come from folks measuring it differently. (If you’re curious, I’ve tried to explain how to understand digital video metrics, and the distinctions, in this big article, which is one of my more popular.) If a news outlet buries these details, you should be skpetical.

– Who: Subscribers
– What: Watching 2 minutes of a given title
– When: During the first 28 days of release
– Where: Country-by-country. I’ll focus on the US, but they released it for a few major territories.
– How: Separated into content types, with all releases, by film/TV, scripted vs documentary.

Here’s a chart, with some additional details of the Top 10 Movies:

Top 10 tablesThat just leaves the why…

Thought 1: If this is the best “datecdote” Netflix could offer, that’s not great

Really, that’s what you think when you see a list that specifically changes the criteria from their previously announced metrics. Netflix had spent all of 2019 giving investors the “70% completion” metric for all their datecdotes. For this release, they dropped it down to “2 minutes of viewing completion”metric.

Using our iceberg principal above, what would the 70% threshold have told us that Netflix didn’t want to know? There’s clearly a narrative they’re deliberately trying to avoid.

Further, why not give us the “most binged” shows again as they did in 2018? Whenever someone changes the data goal posts, you should be very cautious. Yes, you see this all the time in Hollywood when development execs want to greenlight a project. If the numbers don’t look good, they change the measurements to get their greenlight. And yes, this happens all the time in business too. If leaders don’t like the numbers, change the measurements.

But it’s a bad habit.

Thought 2: This new metric doesn’t tie to Netflix’s self-stated goal for monetization.

If you’re looking for more red flags, this is it. In the last earnings call, CEO Reed Hastings said they care more about time on site than anything else. So why not give us that? They have the hours viewed data…they even could have limited it to new releases. (Which would have excluded Avengers: Infinity War, Black Panther, Friends and The Office.) What does the hours viewed tell us that customer counts don’t?

Or take the emphasis on acquiring and retaining subscribers. When Netflix execs speak at conferences, they downplay traditional viewership to focus on how well films bring subscribers to the platform, or keep them there. Clearly completed films would correlate more with sign-ups than only 2 minutes of viewing. (This also jives with my personal experience.)

Thought 3: Netflix Avoided Total Hours Because of Kids Content

I think Netflix avoided “total hours” for two reasons. Let’s start with kids content. Kids rewatch the most content. They don’t watch The Incredibles 2 once, they watch it a dozen times. That gives kids films an edge on viewership hours. Narratively, you don’t want to emphasize how valuable kids content is right after Disney+ launched. As Richard Rushfield has written, something like 60-70% of Netflix viewing may be on “family titles”. That’s a huge win for Disney+ if true.

It also means that if hours on site are the key metric—again as Hastings said in the last earnings call—then kids content seems even more valuable.

Insight 4: Licensed content still made it on.

Netflix also likely avoided the 70% completion metric because they wanted to downplay licensed content as much as possible. Netflix films have a dramatic marketing edge because when new seasons premiere, they get home page, search engine tinkering and top of screen treatment. This doesn’t necessarily drive completions—if shows aren’t good people don’t finish them—but it does drive 2 minute sampling. 

Still some licensed content made the list, even as it was deliberately curated out. Specifically, three of the top ten films and one of the top ten series. I’d argue this is bad for Netflix; even as they tried to weed out licensed titles a few prominent Disney films made the list.

This is more impressive than it seems because the biggest Disney films weren’t even released in 2019. Specifically, Black Panther and Avengers: Infinity War were 2018 releases. Meanwhile, Netflix was stuck with The Ant-Man and the Wasp—one of the lower grossing recent MCU films—and Solo: A Star War Story. Then the rest of the incredible Disney 2019 slate didn’t make it onto Netflix. 

Thought 5: Focusing on 28 days ignores films and shows with longer legs.

Licensed titles, especially big blockbuster films, also have longer legs than new releases. Don’t you think Avengers: Infinity War had some rewatching going on in the run up to Avengers: Endgame’s release? Absolutely. By focusing on 28 days as the time period, it narrows the window for licensed films to rack up viewership. (They also had a fairly crowded January 2019, with three Disney feature films being released in the same month.)

Thought 6: International Originals Still don’t play in the United States.

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Should You Release Your Movie Straight to Netflix? Part I: The basic maths

Since 2019 started, there has been a debate among the entertainment biz literati (you know who they are):

Should you keep releasing your films in theaters, or go straight to streaming?

I first saw this in January when some folks on Twitter argued Disney should release Star Wars films straight-to-streaming now that Disney+ was coming. (My rebuttal here.) Then, when Booksmart flopped, I saw this debate take over Twitter. In short, why bother looking bad releasing in theaters, when you can go to Netflix and get 40 million views?

The Booksmart-esque examples kept coming. Late Night’s flop brought Amazon to the debate. Then Brittany Runs a Marathon. It got so bad, Amazon got out of the theatrical release business altogether. (So the big-for-Amazon Aeronauts abandoned traditional theatrical in exchange for a “four wall” strategy like Netflix.)

Meanwhile, this question is on every company’s mind. Netflix doesn’t do theatrical runs; Amazon just left the business; Apple is figuring out what it wants to do; Disney, Warner Bros and Universal are leaning into theatrical, except when they aren’t as Disney did with Lady and the Tramp. Paramount is an arms dealer at its finest. Let’s not sugar coat how important this question is. It’s literally a billion dollar question, per company! 

Getting this question right is business strategy at it’s finest: so who’s making the right call?

Judging by the online narrative, the Netflix supporters say Netflix. Most “arguments” for going straight-to-streaming seem to rely on personal experience, first, and Netflix’s stock price, second. Hardly ever do I see the piece of information I love most: numbers. (Strategy is numbers!)

Before I finished my series on The Great Irishman Challenge, I would have had trouble relying on anything more than qualitative/narrative explanations too. Without a model, testing assumptions or quantifying the financial impact of these strategic implications would have been little more than guesswork. But since I have it, I think I can try to quantify some aspects of this debate better than I’ve seen before. 

This debate has so many components, arguments and counter-arguments, that as I wrote my response, it was fairly jumbled. To organize my thinking, I’m deploying a “question and answer” format. Which I think helps. Still, before I get to that here’s my…

Bottom Line, Up Front

While very small films or historically poor performing theatrical films—think documentaries or foreign language films—may benefit from going straight-to-streaming, the vast majority of “studio films”—larger than $5 million production budgets, will make much more money for their producers by having theatrical distribution. (On average.) The “strategic” benefits of skipping the theatrical window don’t exist in practice as much as theory. So much so I call it the “straight-to-streaming trap”. 

Question: If you only had two words, why should movies avoid the “straight-to-streaming” trap?

Avengers: Endgame.

Q: Okay, explain.

Well, it made $2.7 billion (with a b) dollars in theatrical box office. Of course, Disney doesn’t keep all of that in revenue. Depending if it is US or international, Disney keeps 35-50%, and less in China. Still, I’d estimate Disney kept about $1.1 billion (and even that is low considering how powerful Disney’s bargaining power is with studios).

Assuming a $350 million production budget and a $200 million marketing budget, after just theatrical distribution, Disney has $550 million in gross profit to split with talent. In just one window! That doesn’t factor in toys, DVDs, electronic rentals or future streaming/cable value. Just one window netted over half a billion dollars. 

I honestly can’t fathom a scenario where Disney would have made more money by ignoring theatrical. (Again, that was my thesis back in January about Star Wars, but these are equivalent franchises.) That’s like having a barrel of oil and not refining the entire thing.

Q: Excuse me, oil?

Oil. Every year, one of the best things I read is The Economist’s Christmas Double Issue. Two years ago, they had a graphic about how a barrel of oil is refined into its component parts. Here’s the link for subscribers, but they had the whole thing on Google Images:

Image 1 - Economist Oil 20171223_XMC600_weblarge.png

In short, a barrel of oil is sort of like the not-quite-true aphorism that the Native American’s used every part of the buffalo. (Which was taken to another extreme by American meat packing at the turn of the century, who used every part of the pig/cow. Read Upton Sinclair’s The Jungle for details.)

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(Source: The Far Side cartoon. How is that not a piece of IP up for sale?)

As oil companies heat a barrel of oil, the raw material separates into different types of chemicals that are then used for everything from gasoline to diesel fuel to sulphur to countless other compounds. This is necessary because different size oil molecules have different uses. The goal for the oil company when refining oil is to extract as much value as possible from the oil they spent real money bringing out of the ground.

I love this analogy for theaters. Each window is a heavier as in greater gross margin type of oil. Netflix is essentially skipping the heaviest molecules (theaters, home entertainment) for the lightest (digital streaming). Long term, that means a lot of lost potential revenue.

Q: And can we quantify that?

Yes, and that’s what I spent a chunk of November doing. Here’s the “financial revenue” waterfall I’ve been using for theatrical films. Actually, here’s how it’s looked historically:

Image 2 - Financial Waterfall Historically

And here are my recent assumptions:

IMAGE 3 - Financial Waterfall Now

In other words, if you skip theaters, there goes 35-40% of your revenue. (While box office isn’t rising, as a percentage of feature film revenue, it is increasing because home entertainment is shrinking. By next year, it may be 40% of a film’s take.) If you skip home entertainment, that’s another big chunk of revenue. And frankly, it makes sense that theaters make so much money because it’s more expensive to go.

Q: The gross margins are higher for theaters than streaming? Do you have numbers for that?

Frankly, these are the numbers that any discussion about Netflix and Amazon have to start with. You can end up where you want, but if you ignore these numbers you’re likely using fuzzy math to justify your preexisting conclusions.

So let’s take each window into rough “per person per film hour” revenue in the United States. Just to make it explicit. Theaters have an average ticket price of call it $10. (It’s slightly lower, but I like to round my numbers.) Since each person pays that to see a film, it’s a $5 per person per film hour for the average two hour film.

Now, compare that Netflix, where the average subscription watches 40 hours of content per month. (According to past leaks/surveys.) Since a US customer pays $12, that’s $0.30 per hour. But since more than one person can watch, we can assume 1.5 customers share that viewership. Which takes it down to $0.20 per film. Which leads to this crucial note on potential revenue:

The streaming window is 8% of the total revenue of the theatrical window per person.

As I said above, theatrical is much, much more lucrative for studios than streaming. (The specific way to calculate the value to Netflix of a film is different than the usage version above—see here for those—but this is to show the potential size difference for different windows.)

Q: So let’s ask the obvious: have you quantified how much Netflix could have made releasing films in theaters this year?

Rightey-oh I have. Let’s talk upside. I took a selection of Netflix’s most noteworthy/expensive films, and asked Twitter for ideas for some quick and dirty “upside” comps for them. (I focused on the most recent films as possible, and matching rating/genre primarily.) Here’s the list I settled on:

IMAGE 4 - Netflix Film Comps

There’s your headline/nut graph/lede at the end of the article: if Netflix released its 10 (arguably) most valuable films from December 2019 to December 2020 (with Bird Box sneaking in), it could have made $750 in additional cash flow to the bottom line in just theatrical box office. If Netflix had to throw in $50 million per film on this list in additional marketing (which feels high), that’s still $250 extra million.

I’d add this list isn’t a ridiculous list of comps. A Quiet Place is definitely the same sized hit that Netflix is portraying Bird Box, so that number is reasonable. Meanwhile, I put in a couple of films well under $100 million in total gross and a lot of other solid doubles. 

So why hasn’t Netflix looked at this revenue and jumped? I’d argue sloppy financial thinking. And changing their strategy has PR implications. Others, though, would argue it’s about exclusivity for their platform. (Presumably some folks would see it in theaters, but not on Netflix.) 

To keep this article from going too long, I’m going to continue the Q&A in my next article. Essentially, I’ll lay out and debate the pro-straight-to-streaming arguments in their own place.