Tag: Business

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

Why I Think Netflix Will End Up with 70 Million US Subscribers: Applying Bass Diffusion To The Streaming Wars

(Before we start, I launched a newsletter! It’s weekly and it’s short, and I explained my logic here. Sign up here.)

My goal is to try, as best I can, to explain the complicated parts of the entertainment biz, trying to walk readers through what I’m doing and how I’m doing it. Unfortunately, even when I’ve tried to simplify things, I’ve gotten comments that my articles are pretty dense. That’s what happens when you don’t have an editor. 

With that preamble, today’s article is math-y.

This is about as math-y as I can get. I’ll be slinging terms like linear programming and mean absolute percentage error. To help out, I’m going to start with a BLUF (bottom line up front) so you can read my findings even if you don’t want to read my process to learn how I pulled it off.

Today is the “Bass Diffusion Model” in action. In layman’s terms, the Bass Diffusion Model is a way to calculate a “total addressable market” (TAM or “market size” in non-jargon terms) for various new products or innovations. As the headline suggests, today we’re turning our gaze towards Netflix as a stand-in for the streaming world.

BLUF – Netflix’s Market Size in the US is closer to 70 million than 90 million

When you apply the Bass Diffusion Model to Netflix’s US operations, the model which fits best has a market size in the United States of around 70-72 million subscribers. In other words, a saturated US market is much closer to the low end of Netflix’s projected outcome (60 million) than the high end (90 million). 

The Bass Diffusion model fits the data pretty well. My average “error” fitting the Bass Model to Netflix is 1 million for streaming only and 600K for all subscribers.

That said, applying the Bass model to Netflix isn’t perfect. First, Netflix transitioned from a DVD company to a streaming company, which is arguably two different product innovations. Second, Netflix isn’t alone in the streaming world, and we only have current Netflix subscribers in any period, and don’t know how many folks are still streaming, but no longer Netflix subscribers. Third, this is a US only model. In the future, I plan to apply the projections to the international markets (which has its own problems) and for all streamers.

The Origin Story – Seeing Bass Diffusion Applied in the early 2010s.

Going to b-school during the Qwikster debacle of 2013 made for interesting class discussions. Overnight, Netflix became a laughing stock. Yet, even with that debacle the year before, they had kept adding streaming customers. They were the growth story already—23%!—leading some early analysts to throw out huge potential market sizes. How long would this double digit growth continue for?

That’s when my professor—a marketing professor, naturally—trotted out the Bass Diffusion Model. We’d all learned this model in marketing the year before; I’d never considered applying it here. He did, and out popped a total market size: about 60 million US subscribers. The model fit really well. 

That 60 million has stuck in my head and influenced my thinking ever since. It’s why I launched this series and why I kept my annual subscriber projections a bit lower than most observers last January. Seriously, look at this chart I made back for an article on Hulu at DeciderBass doesn’t leap off as strongly as it did for Fortnite, but you can see it for Netflix and especially see it for Hulu.

Image 1 - NFLX StartFrankly, because of that one application, the 60 million subscribers point in the US felt like the point where we’d see Netflix slow down. Then, in Q2 of this year…that reality finally happened.

The good news for Netflix is the last few years have had better subscriber growth for Netflix than that old Bass model. (For those keeping score, my projection last year was probably too low.) The bad news? Well, 90 million subscribers is looking MUCH harder to reach. But instead of relying on old estimates, today is about making new ones.

The Task – Forecast Netflix Subscriber Growth in the United States

Just to be clear, my goal today is to apply the Bass Diffusion Model to Netflix’s US subscriber count. Why US only? Well, it has a few more data points which will make it a bit more accurate. More over, the recent slow down point gives me a bit more confidence that we’re seeing the inflection, which I’m not sure we’ve seen internationally yet. 

I’ll be building two models, though, because Netflix has actually had two products: the DVD delivery and streaming video. Unfortunately, Netflix has been a bit tricky when it releases subscriber counts, which means I needed to make some assumptions. Let’s explain those.

The Data – Netflix Subscriber Counts Over Time

To really make the Bass model work, I needed to do a lot of cleaning of my Netflix subscriber data to make sure everything I was calculating was apples-to-apples. Wait, doesn’t Netflix provide this? They do, every year. Here’s a Statista table summarizing that. Can’t we just use that?

Unfortunately, it’s a bit unreliable. When I use data, I pull it myself so I can vet it. For example, with those Statista numbers, are those numbers paid subscribers or free? Streaming only? Or all subscribers? Many tables and charts for Netflix actually mix up those categories in the same chart.

In fact, even in my chart above—the one for Decider—I did a bit of that.

So I updated all my Netflix subscriber numbers, calculating streaming and all subscribers for Netflix from the beginning of time. This took me SO long—and I had some insights into Netflix’s history from it—that I’m going to write it up as its own, probably too-in-the-weeds, article. In the meantime, just know these colors are the six different ways Netflix has revealed subscribers to investors:

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Most Important Story of the Week and Other Good Reads – 30 August 2019: The Rain in Spain is Streaming

My weekly column this week was initially about Disney+ library content. And surely, you saw how that turned into 5,000+ words of speculation. As a result, I’m going to go a bit quicker of an update this week. I kept returning to one article that inspired several ideas, so let’s make that the story of the week. (And since that came off, run a bit shorter today.)

Most Important Story of the Week (and Long Read) – The Rain in Spain is Streaming

The long read is this THR article by Jennifer Green, “How Spain Became a Case Study for the Global Streaming Wars.”

Well, you had me at “Case Study”! In seriousness, the “streaming wars” may be a true world war, fought territory by territory, country by country. Meaning this Spain case study is a pretty good stand-in for many countries to come. Here are some other insights or random thoughts I had.

Insight 1: The Value of Local Content/Employees

One of the aspects of the streaming wars I’m really curious about is how local streamers fare against their global rivals. In the Spanish case, it’s Movistar. Honestly, what is more American than an American company (or four) believing that they can launch global media companies that can simultaneously reflect the value of every local country?

As a result, studios need to rely on local content, but existing networks and streamers may understand the market dynamics better, putting the new streamers at a disadvantage. This is a tension I’m curious to see how it plays out. (This also pairs well with this article also in THR about European Networks from July.)

Insight 2: Everyone is coming simultaneously.

Sure, Netflix beat all the streamers to market. But they’re all coming simultaneously from Disney to Amazon to Viacom even. And again this will be replicated country-by-country around the world. 

This makes me more optimistic for local streamers. Instead of fighting a global battle for dominance, they can focus on winning in their region with their unique understanding of the market. Of course, there is the counter about global size, but wait two insights for my thoughts on that.

Insight 3: It isn’t “hits”, it’s portfolio performance.

Let’s say I’m running your mutual fund. (Wait, those are out now? Then, let’s say I’m running your hedge fund.) Back in 2007, I put a bunch of money into Disney and Apple. (True story.) Guess what? We made lots of money together.

Wait, you want to know how the rest of the fund did? Why? I had two hits. That’s all that matters.

“No, it’s not!” You say. “How were the rest of your picks?” Well, I put money into Chipotle a few years back…guess that wasn’t smart? The point is when it comes to investing, you analyze the entire portfolio.

The exact same thing applies to content portfolios. So congratulations to Netflix on having a hit in Money Heist (La Casa de Papel) as foreign-language, specifically Spanish-language series. The key question for all analysts and business types is: What was the hit rate? Without the denominator (total produced/acquired) the numerator (the hits) doesn’t matter. The article says Netflix has 20 Spanish originals in production, how many have they bought to date?

Take this article from WAY back I’ve been holding onto. Netflix is making 50 (50!) productions is Mexico. I guarantee when one becomes a moderate hit in the US, it’ll get hyped as “proving” Netflix is making money in Mexico. But without repeating the hit rate, we really don’t know. (And go here for my controversial take on Netflix’s hit rate.)

Insight 4: We do NOT know if Netflix overpaying for international originals is paying off.

Besides hit rate, it also depends how Netflix allocates content. Right now, Netflix and Amazon overpay in every market to get global rights. Which is strange: it isn’t often you can pay the most for eveyrthing and generate a good return. The key is how Netflix both allocates costs and then that pesky hit rate I just mentioned. If they assume a Spanish-language original generates half its money from North America, and it isn’t popular here, that may not be a good call. If they keep allocating most of the cost to the country of origin, then how can they possible make the money back?

All to say that the streaming wars will have multiple battlefields and it will be fun to see how they play out. To conclude, two random thoughts.

Random Thought 1: A new datecdote!

I missed that Money Heist had 34 million viewers during its first week. A new datecdote for the tracker. It doesn’t really change the distribution of hits for Netflix.

Random Thought 2: Bundle by Rich Greenfield

This isn’t an insight from me, but this Rich Greenfield tweet gets at how competitive it is in Spain too. And how the bundle always makes a come back.

Listen of the Week – NPR’s Planet Money on the “Modal American”

I love a good walkthrough on how to do data analysis well. So thank you Planet Money team for providing it! In their quest to find the “average American”, they turn to the mode to find the most “common” American you are likely to run into.

Of particular interest to long time readers is the mention of distributions as an example for why averages can be so misleading. Take age: America has two humps in our age distribution, the Boomers and Echo Boomers (nee Millennials). Thus, the median average that is somewhere between those two group (in the Gen Xers) is wildly misleading.

How can you use this? Well, do you use advertising to target your entertainment customers? Do you use overly broad groups like “ages 18-50”. Why? Some smaller demographics may be much easier to target.

More relevant is how you use data in the first place.  I’ve seen so many presentations, reports, analyses but especially news articles that give you the average. It’s always the average. But the average tells you nothing! The distribution is everything. If you run a business–and some of my readers do–don’t accept averages from your teams. Demand distributions. (My writings on distributions here.)

ICYMI – Entertainment Strategy Guy at The Ankler

If somehow you don’t subscribe to it, I was fortunate to be featured in last week’s Ankler newsletter by Richard Rushfield. I write about the “coming” M&A tsunami, which I’ve been harping on for a year. If you are an Ankler fan, I can say that we’ve been talking about combining our talents for a few projects so stay tuned.

Other Contenders for Most Important Story

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Is Disney Bringing Back the Vault? My Analysis on the Strategic Implications of Disney+ Content Library

If the streaming wars were a medieval war, original content are the mounted knights. Especially the pricey TV series. Like knights of the medieval ages, these extremely expensive weapons will likely win the war for one side or the other. This would make the siege engines the tech stack and distribution infrastructure. The logistics supplying and feeding the armies is the hordes of lawyers and finance folks in the bowels of each studio.

But an army is much more than aristocrats in suits of armor. It needs masses of peasants clinging to sticks and spears, ready to be mowed down by mounted knights or crushed under hails of artillery. Who is that in the streaming wars?

Well, library content, of course. 

Over the last few weeks, we’ve gotten quite a bit of news about the size of the various infantry nee “library content” that a few of the new streaming services are rolling out. Let’s run down the news of the last few weeks:

– First, Disney reveals the number of films and episodes for Disney+ in its earnings call.

– Second, Bloomberg reveals Apple won’t have a content library.

– Third, Disney reveals not just the count of its library, but the specific films and TV series.

Altogether, we now know quite about Disney’s plans for Disney+. As a result, I’m going to dig MUCH too deep into it trying to draw out strategic implications and meaning from Disney+’s future content library. Today, my goal is to focus on the strategic dimensions of Disney’s content plan. Its strengths. Its weaknesses. What it says about Disney’s future plans (and constraints to those plans). 

I have two reasons for doing this. First, since Disney+ is fairly small of a library, we can draw a bit more conclusions than we could about some other streaming services—like Netflix or Amazon—which have thousands of movies that change constantly. 

Second, library content really is important. To continue the martial analogy, infantry won’t win the war on its own—smaller armies often best bigger ones—but having a bigger army sure can help. Having the best library content is a tremendous head start. 

Both those points collide in Disney+’s future catalogue. Despite its smaller library, Disney+ may launch with the most valuable content library in streaming. Pound for pound, this will be the strongest film slate on a streaming platform, with a decent TV slate. But I’ll be honest: it may not be as strong as you think. I’m about as bullish as they come on Disney+, but running through the actual numbers has sobered me up.

Let’s dig in to explain why.

What We Know about Disney+

One of the secretly important parts of the last Disney earnings call was their description of their upcoming content slate. Here’s a screen grab of Variety’s coverage, that quote Disney CEO Bob Iger directly:

IMAGE 1 - Variety Quote

If you’re like me, as you pondered this for a later Twitter thread, you captured the pieces in Excel. Like this:

IMAGE 2 My Capture

Unfortunately, we still had a lot of questions. Marvel films? Which ones? Star Wars films? Which ones? And which animated films? Then, before D23—Disney’s annual convention for super fans—Disney provided the answers to some news outlets, like the LA Times, which had had a huge list of confirmed films. So I dug in. 

Disney+ Film – By The Numbers

The obvious takeaway is that Disney+ won’t come close to the volume of films that other film services will have. To calculate this, I’ll be honest I simply googled “film library count” and looked up Amazon, Netflix and so on. I found a few sources for Netflix and fellow streamers. After that sleuthing, here’s my projections for the biggest streaming services.

IMAGE 3 - Est 2020 Film Smales

Here are the key sources I used: ReelGood (Netflix 2014, 2016), Flixable (Netflix 2010, 2018), HBO (current), Variety (Amazon and Hulu 2016) and Streaming Observer (Amazon, Netflix, Hulu and HBO, 2019). The caution is that I’m not sure the Amazon numbers are accurate and that some of the sources aren’t also counting films available for TVOD/EST. But these numbers were reported in Variety and Streaming Observer, so I’m inclined to trust them.

(Also, these were US numbers only. Other countries complicates it, but from what I can tell library sizes tend to be correlated over time.)

As has been reported constantly, Netflix is losing content. Specifically, it can’t license as much content for as cheaply. This showed up in the data: 

IMAGE 4 - 2010 to 2020 Film Slates

As studio launches their own streaming service, they take their films from fellow streamers. While Netflix has suffered the worst, Amazon isn’t immune. Meanwhile, HBO has stayed at the same, small level for most of the last decade. (Some estimates had HBO at 800 films, but counting the available films on their site gives me about 300.) Hulu has been shrinking like the others too. 

You may ask, “Where did the CBS All-Access numbers come from?” Well, that’s Paramount’s library of films, which CBS bragged about in the merger announcement. Obviously most of those films are in licensing deals already, but if SuperCBS really wanted to, they could try to get them back. That is the potential library for CBS All-Access. (And it isn’t as bad as the last ten years suggest. The Godfather? Titanic? Mission Impossible? Those have value.)

The Value of those Disney+ Films

The challenge is to take those raw numbers and try to convert them into actual values. If you’re a streamer, you can build a large data set—and I mean big—with streaming performance, Nielsen ratings, IMDb and other metrics, and judge the value of various content catalogues. While that gets you a very accurate number, at the end of the day we don’t need those extra bells and whistles becasuee we have box office performance.

Box office captures about 90% the value of a movie for a streamer. In other words, if you wanted to know if people like a movie (and will rewatch it), box office explains probably 90% of that behavior. 

So I pulled the last ten years of films, looking for how many Disney films ended up in the top 5, ten and 25. The results are, well impressive. Especially recently. (An additional, very safe assumption: that films released in the last year are more valuable than films released two years ago, and films in the last five years are more valuable than films from ten years ago, and so on.) If Disney can put all those films on its streaming service, in comes the money. So take a look at this table, with the top ten films by US box office, with Disney releases highlighted:

IMAGE 5 Disney Last Five YearsBy my reckoning, that’s 18 of the top 5 films of the last five years, 22 of the top 10 films and 32 of the top 25. Incredible. And I realize I’m not breaking any news here.

So here is some new news. As I mentioned above, Disney released to the LA Times a list of films confirmed for Disney+, and well, it’s quite a bit few films. Here’s the last ten years of top 10 box office films, with the films actually making it on to Disney+ highlighted in blue:

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Most Important Story of the Week and Other Good Reads – 23 August 2019: Apple+ and The Case of the Missing Content Library

Last week, I tried to solve the mystery of who killed Game of Thrones. Well, throw on the trenchcoat and Fedora because I have another mystery. This time a missing person, er, library.

The Most Important Story of the Week – Apple’s Non-Existent Library

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.

But as much of a fan as I am of zagging, sometimes you can zag off a cliff. To explain, let’s retell the history of why companies have used library content.

Historical Reasons for Content Libraries

Going back to the dawn of television–we’re talking broadcast here–you had to have something on your channel at all times. Especially in the hours after work. If people turned on the TV, they expected to see something. As the medium matured, the broadcast networks controlled the primetime hours, but the local stations controlled the other hours. Local news was a cheap way to add value, but even then you couldn’t do all local news. So you bought old TV programs and reran them. This was cheaper than making your own shows, but still kept people on your channel.

As the cable bundle turned out to be really valuable, everyone wanted their own cable channels. These channels started as a low-cost proposition of buying old movies and TV series. It was only after years of programming like this that the cable channels eventually turned to premium scripted fare. AMC is the classic example here. Start with classic movies–which are dirt cheap–then move up the value chain. As Jack Donaghy said about another channel, “I remember when Bravo used to air operas.

In a weird twist, in the last two decades new broadcasters have emerged. Same low cost business plan. Leveraging must carry rules, broadcasters like Ion TV (launched 1998, rebranded 2007) and MeTV (launched 2005), are basically all old TV series and some films. Again, the goal is to just get some tune in in the cheapest way possible. (For the TV series, their syndication costs are super low after many previous runs.)

The streamers basically repeated this plan. Netflix and Amazon Prime Video started with old TV series and movies. Then they moved to newer movies and newer TV series and eventually started making their own. But in the beginning, the goal was eyeballs cheaply. Which meant library content. 

In each case, the logic is the same. You have the “bangers”–to steal from the British EDM scene–to get people in the door. That’s Pay 1 movies and new TV series. But to keep people watching, you need a huge volume of cheap content people already like. In short, library content provides “bang for buck”. 

So what could Apple be thinking? If they weren’t charging for these shows, I’d understand. But they may charge $10 a month for it. (More on that number later.) So I have a ton of conjectures.

Theory 1: Customers have to have a subscription to get channels.

This would be my guess if I knew it weren’t already false. Essentially, Apple+ will be a “tax” folks pay to use Apple Channels. This would resemble Amazon’s approach. You can’t use Amazon Channels if you aren’t already a Prime member. So Prime Video acts as a basis of content to the Amazon Channels line up. (Of course, Prime is 94% about free shipping, but don’t tell them that.) Looking at Apple’s website, this doesn’t seem to be the case. Moving on.

Theory 2: The Apple Bundle

Everyone seems to be assuming that Apple will offer a new bundle where the Apple+ is just added on. If you already pay for Apple Music at $10 a month and Apple News for another $10, well add on Apple+ for the whole thing for $5. Except, $5 is still too much if you don’t watch any of the new shows. Again, library content would help the bundle too. So this doesn’t explain why they don’t have any library content either. Next option.

Theory 3: They needed a library right when it got expensive.

Things escalated quickly–to quote Ron Burgundy–in the streaming wars. 

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I think at the start of 2018, a streamer could have assumed that content libraries would still be available for the right price in 2019. And Apple has been planning this launch since at least then. But then the Friends kerfluffle happened and Disney pulled all its content from Netflix and NBC is pulling all of its content. Yikes! All the content is gone, right when Apple needed a content library,. If you can’t buy a content library, well the other option is…

Theory 4: M&A is expensive, AND they don’t want it.

…buying a studio. If you bought Sony, they’d have to give you their content library. MGM or Lionsgate would be other options. Why make your number 2 a deal guy if you don’t plan to do more M&A? So why haven’t they?

Despite breathless proclamations about tech behemoths buying studios like Sony or Fox or Lionsgate or whoever, most of those tech executives have seen the history of studio acquisitions. You buy a studio to get content (cough Sony cough) and regret it within the year. AT&T and Disney may have both just overpaid to buy studios too. Why buy a studio with all the baggage and extra headcount when you can just build your own studio? Apple made it’s number a deal guy, but yet we haven’t seen any M&A. Maybe they planned to, but just couldn’t find the right deal at the right price.

And they likely said, “You know what, we can just do it ourselves!” Amazon and Netflix are.

I don’t quite buy the “buying a studio” is a worse deal than “building it”. And I have a bias towards building where possible. The challenge is speed. It turns out making TV shows is tough. Especially to do it well, on time and on budget. I’ve heard Apple has had trouble doing all three. And then going from zero shows to hundreds is even harder. So the “building a studio from scratch” plan seems much harder to execute in real life than on paper. (I should write more on this right?)

Really, the two numbers don’t make sense.

At the end of the day, the two numbers released this week don’t make sense. You can either launch a free TV service to bring people in, but then you can’t afford $6 billion in content spend. Or you can spend $6 billion on content, but you desperately need a library. One explanation is that both these numbers are wrong–which to credit reporting press–I’ve seen several arguments for that. Dylan Byers, for example, threw cold water on both numbers. So as long as we’re doubting all the anonymous numbers, let’s doubt teh whole thing.

Theory 5: There will be library content, they just haven’t announced it yet since it isn’t buzzy.

That’s actually a pretty reasonable theory, at which point just ignore this column. 

M&A Updates – Hasbro Buys Entertainment One

Hey there! Last week CBS and Viacom; this week Hasbro buys Entertainment One! The M&A tidal wave truly is rolling into town. Though, to show again how wrong those predictions about the M&A tidal wave were, here’s ANOTHER look into how M&A in entertainment peaked, if anything, four or five years ago.

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Source: Bloomberg

On to this deal specifically. It probably says more about the toy industry than it does the film or TV industry. Toys have been squeezed for a couple of different reasons–not all technological, though that hasn’t helped–and the safe harbor under pressure has been licensed toys, which sell better with brand recognition. As a result, all the toy companies have been trying to launch their own IP, to varying levels of success. Hasbro basically bought the best free agent available. What comes next? Probably not too much. Despite rumors every so often, I don’t think Disney wants or can afford to buy a toy company. Mattel neither.

Other Contenders for Most Important Story

The Big Bang Theory and Two and a Half Men Going to HBO Max; Seinfeld is Next

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On Content Arms Dealers, Aggregation and the Perfect Bundle: What Is/Should Be ViacomCBS’ Competitive Advantage?

Let’s get right into Part II of my a quest to find SuperCBS’ competitive advantage. (Reminder: SuperCBS is my nickname for ViacomCBS.)

Competitive Advantage: Become a Content Arm’s Dealer

Why?

I’ll be honest, I didn’t come up with this on my own. I first read it on Twitter by Rich Greenfield. Then I heard it from Matt Belloni and Kim Masters on The Business. The logic goes, with 140,000 episodes of television and 3,600 movies, the combined ViacomCBS has the content people already need for their libraries. Moreover, they’ve been making TV and film for decades. So as new entrants like Amazon and Apple struggle to make good shows, CBS already knows how to do that. They boast 750 shows currently in production or ordered. 

Reading their press release announcing the merger makes one even more inclined to consider this position. They clearly think their advantage is content production. Most of the facts from above came from that announcement.

Upside?

Quantifying the upside here is fairly difficult because you need to separate how many shows SuperCBS will sell to its linear channels, its digital outlets and then other folks. Or what happens to their movie output deals. (For instance, Paramount is already making some films for Netflix.) Instead, the main opportunity is feeding the hunger for content from people like Apple, Amazon and Netflix. They’re buying lots of shows to air globally. It’s a sellers market. You should be able to make money off that.

However, as they grow, Netflix has pioneered the trend of controlling more and more of a show’s distribution. In return, the streamers like Netflix pay something like 130% of the production budget of a show to have its rights for 5-10 years. Except that Netflix then takes a 30% distribution fee, and can cancel a show at anytime, while keeping the rights in the near term. This means you essentially are selling your content for exactly what you make it for, which is a zero margin business.

Skepticism?

The reason that there is even a debate between “distribution versus content” (content is king!), is that everyone wants to be a distributor. The way you make money, the conventional wisdom goes, isn’t to be a content producer, but a distributor. As soon as the FCC relaxed rules on the amount of owned content aired on broadcast channels, all the broadcast channels went to majority self-produced content. As a result, many independent TV producers went out of business by the end of the 1990s

TV Value Chain

In the TV or movie value chain, the worst place to be (besides being a customer?) Is to be the producer in the middle. They’re squeezed on both ends. The creatives demand increasingly higher payments to work on the shows or films. (Creatives like JJ Abrams, Shonda Rhimes, Ryan Murphy or Benioff & Weiss are the rare commodities in this market.) Meanwhile, the distributors insist on huge margins for simply putting out your content. (The traditional film distribution “fee”, for example is 25-30%. The streamers have similar fees.)

Sure, the TV producer “owns” the content, but if they can’t sell it anywhere else, where does the extra money come from to pay for overhead, studio lots and, eventually, shareholders?

Worse, the biggest upside TV producers had is potentially disappearing. That was syndication revenue, which was a monster. Shows like Friends, The Simpsons and, now, The Big Bang Theory are worth billion dollar pay days. But it required making hundreds of shows to get those handful of hits that could be sold into syndication. (Netflix doesn’t let a lot of shows get that far anymore.) If the bundle falls apart, syndication goes too. Will streaming be as valuable as syndication? I’m skeptical long term.

Making matters even worse, companies like Netflix are moving to owning more of their shows, so they can keep these margins low. (Netflix can say, “Don’t like our deal? Well, we have Benioff & Weiss, why do we need you?”)

Future M&A Needed?

MGM and/or Lionsgate. 

If you’re selling content, having valuable libraries will only help you deliver on that value proposition. To go with the arms dealer analogy specifically, MGM is like adding a lot of AK-47s while Lionsgate is a few additional heavy tanks. MGM can bring you Gone With the Wind and The Wizard of Oz while Lionsgate has Twilight and The Hunger Games. Those aren’t bad additions to a streaming library!

Competitive Advantage: Become a Distributor

Why?

If I could choose anyone to be in the streaming wars to come, it would be the folks who are distributing the content. My working theory is these distributors will be the best positioned companies to thrive. These distributors are stepping between the “pipes” to become the new multi-channel provider. The people not just selling their own subscription streamer services, but taking 30% off every subscription they sell.

The best way to make money in entertainment? Not even distributor, but distributor of distributors, taking a percentage without doing the hard work of making TV shows. So Amazon, Apple, and Disney won’t just be people owning streaming platforms like Prime Video, Apple Plus and Hulu, but also selling HBO, CBS All-Access and Starz. And taking 30% from each “channel” they sell you. (But not Netflix. No one gets to resell them.)

Upside

My quick math is that if you can get to 30 million US subscribers, with an $80 monthly bill, and take 30% of that, well that’s a $8.5 billion dollar business. Add an international business with 50 million subscribers at $40 a month, and you’ve added $15 billion to your top line. Not bad.

The non-monetary upside is considerable too. If my theorizing is correct, the new carriage wars are going to be about distribution on the new distributors. (Article on that here.) Say Disney and CBS are having a tough negotiation over CBS All-Access on Hulu. Well, CBS is in an even stronger position if they can also threaten to drop Disney+ from their distribution platform then if they have to argue just on the merits of CBS All-Access (and Showtime). So if you’re a streamer, owning distribution makes it easier to negotiate with other distributors.

Skepticism?

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What Is/Should Be SuperCBS’ Competitive Advantage?

Competitive advantage is tricky. In a nutshell, it’s a business’ unique attributes that give it an edge. If you don’t like that definition, here’s the Wikipedia article. I looked in my strategy textbook to find a simple definition—again, I’m standing on the shoulder of giant’s here—but couldn’t find a simple one sentence definition. Here’s the best quote, though it has some jargon:

IMAGE 1 - Strategy TextBook

Businesses have two challenges with this. First, having a “unique” capability is tough. Hence, most entertainment conglomerates for the last thirty years looked and operated mostly the same. (Start with a movie and TV studio, add a broadcast channel, then some cable channels, with failed forays into internet “stuff”.) Since it is tough, most companies don’t know or can’t express what their competitive advantage is.

In fact, one of my favorite “corporate America” stories is about competitive advantage and lack thereof. Fresh out of business school, I was participating in our business unit’s annual planning process. We were setting our plan for the upcoming year. When you learn using the “case study” method in b-school, well, 8 times out of ten it’s basically “competitive advantage” boot camp. You’re always studying the innovative companies who had a competitive advantage. Unless it’s the cautionary “failed business” case study, which meant they didn’t have a competitive advantage, and the company who did have one ran them out of business. (See Walmart and K-Mart.)

During this planning process, I foolishly asked, “Well, should we explain what our competitive advantage is?” The answer, was, “Uh, no. We don’t need to do that. We don’t need to have a competitive advantage to do our annual strategy.”

Fair enough! My boss was right. She didn’t really need a strategy to make an annual plan. We were going to spend lots of money making TV shows and movies regardless. What does strategy have to do with it? 

Not to mention, making annual plans is easy; doing strategy is really tough. It takes hard work and sometimes it requires admitting your strategy is either 1. bad or 2. non-existent. Moreover, even if you have a competitive advantage, it may not last, meaning you need to start all over again in a few years. Instead, most companies, leaders and groups just don’t talk about it. Maybe your corporate overlords or investors won’t notice you don’t actually have a strategy.

Keeping in mind most businesses don’t have a strategy, or they have a bad strategy, let’s ask:

What could be ViacomCBS’ competitive advantage?

This was the angle into SuperCBS that got me really excited last week. (Since ViacomCBS hurts my eyes to read, I’ve nicknamed them SuperCBS.) After digging deep into what “size” meant for my weekly column, I started musing on SuperCBS’ potential strategy. Mostly, I was dunking on their lack of a strategy. But as I reread the words, it felt a bit hollow.

It’s really easy to point at a company, find a bunch of different problems with their plans, and point out the flaws. If the company fails, I look smart, and can point at the column with a smug satisfaction. Even if they don’t fail, but merely fail to become the undisputed market leader than the column looks smart.

It’s much harder to look at that same company and imagine them as a beautiful strategic butterfly ready to emerge from the Porter’s Five Forces cocoon and fly into the world with a new competitive strategy that will help them acquire customers, grow marketshare and become an in class leader in entertainment. 

If I had to bet, I’d argue that 9 out of 10 entertainment companies–from telecoms to media to entertainment to tech–don’t really have a strategy. (The GAFA’s do, but subordinate business units may not.) This is the best bet to make for SuperCBS. But let’s pretend for the day that they really do have a strategy. I’ll start by listing the potential competitive advantages I see. I ended up with five. I’ll discuss the logic behind them, the potential upside and the skeptical viewpoint. As a bonus, I’ll recommend a merger or acquisition that could be needed to complete the strategy.

(Two cautions before we start. First, this is my “gut” analysis. I haven’t actually stacked all the options up with proposed financials, so I haven’t finished my thinking yet. And to that point since “strategy is numbers”, I’m going to throw a few in for every option, but these are pretty high level numbers. If I were doing an actual strategy, I’d demand a lot more rigor.)

Competitive Advantage: TV Advertising Oligopolist

Why? 

A fact in Brian Steinberg’s recent article really stuck with me: A combined CBS and Viacom could control up to 20% of TV advertising. This got me thinking that “advertising”  could be a capability that lays the basis of a new competitive advantage. This would pair well with Viacom’s recent acquisition of PlutoTV, an ad-supported video service. (Call that either an AVOD or FAST.) The logic here is, if you’re already great at selling advertising, lean into that capability and build it out. Become the ad-supported behemoth of the new TV landscape.

Upside? 

Well, if you’ve seen all the news articles where ad executives beg, plead and beseech Netflix to sell ads, you can tell they want to deliver Millennials advertising. Can CBS step into that role instead? Maybe. (Again, it’s a myth that CBS is only old people. It’s really popular with Millennials too. Even on the coasts!) So there is customer demand, and that will translate to advertising. Here are eMarketer’s estimates for digital and traditional TV advertising revenue:

In other words, SuperCBS currently has 20% of a $70 billion pie. (I found other similar estimates to eMarketers too.) But 40% would be even better! (Again, when thinking competitive, the goal isn’t a small slice, but the biggest slice.) And 40% of a $140 billion pie is even better. Of course, you know where this is going…

Skepticism?

Is the future of advertising digital or linear? Pretty clearly digital, and Google and Facebook have a tremendous head start, with Amazon as a third. Even if you just wanted digital video, Youtube is much farther ahead. (I’ve seen estimates ranging from Youtube owned $4 billion of digital video market in 2014 to $15 billion now, which is the highest estimate I saw. Though, I’m pretty skeptical they’re $15 billion of an alleged $17 billion pie…) 

I’d add even the ad-supported sphere will be extremely crowded and competitive. Roku is a well-placed competitor here. Or Hulu and ESPN+, depending on how many ads they keep selling. Plus, Amazon is getting into the game with IMDb TV and there are a bunch of other FASTs following them. 

Not to mention, you don’t start with ads, you start with customers, who you then sell ads against. The advantage of Netflix—and the reason Madison Avenue wants to work with them—is they already have 60 million subscribers in the US watching tons of TV. CBS All-Access hasn’t show it can deliver that yet. (Though PlutoTV is allegedly growing.)

Also, this is is a fairly US-centric approach, which limits the overall upside. Let’s pause on this last point. Does the strategy of entertainment conglomerates have to be global? Clearly Netflix and Amazon see global domination as a competitive advantage, but maybe by focusing on one country/region, smaller distributors can carve their own niches. I don’t know that I’d buy that, but I could see it.

Future M&A Needed?

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