Tag: Discovery

Discovery+ Is Almost As Big as the Warner Bros 2021 News – Most Important Story of the Week: 4 Dec 20

Well, after two and a half years of writing this column, I’ve finally come to a tie. Sure, the buzz is with Warner Bros and the decision to finally end the exclusivity part of the theatrical window. Every columnist from here to Timbuktu will feature that in their entertainment newsletter this week.

And yet, Discovery+ feels as big. I could even make some back of the envelope numbers work for it too. Discovery makes $11 billion in revenue every year, which is, funnily, the same size as the US box office. If Discovery+ is as big of a success as David Zaslav hopes, that feels as important as the $10 billion a year theatrical window. (And that’s assuming theaters die completely, which is unlikely as I’ll cover below.)

But sure, I hear you. You want thoughts on both. We’ll start with Discovery+, and move to Warner Bros big plans.

Most Important Story of the Week – Discovery Announces Discovery+

Maybe it’s just the contrarian in me, but I’m fine with Discovery’s late entry to the streaming wars and their general plan. Actually, “fine” probably doesn’t cover it. I think this could be a shockingly strong entrant, given how many folks have given Discovery up for dead.

Let’s start with Discovery’s biggest strength, which is owning its own content library. This is one of the first things that Discovery pointed to during their announcement of Discovery+ and it’s a great thing to point to. There’s the old saying that you don’t make money making movies, you make money owning a content library. Well, Discovery has that with, as they said, 55,000 episodes of reality TV to provide. Sure, this isn’t “buzzy” content like Disney or HBO’s libraries, but it is a lot of content. And it’s valuable to different demographics.

Discovery is late to the streaming game, but in this case, I don’t think that’s the worst outcome. As I’ve been writing a bit over the last few weeks, the name of the game is building streaming revenue while not obliterating the more valuable cable revenue. And don’t kid yourself, that revenue is valuable for Discovery. Here are their affiliate fees for their top four channels on linear TV:

Screen Shot 2020-12-04 at 11.41.09 AM

And that’s leaving out a few channels and all their advertising revenue. In other words, for every customer that leaves traditional cable for streaming, Discovery will lose money. So they waited as long as they could. Plus, Discovery probably figured that their customers are some of the laggards in cord cutting, so they could hold off as most of the early adopters of Netflix were hungry for prestige, scripted content, which isn’t Discovery’s forte anyways.

Discovery also flies under the buzzy radar. If you use linear viewing as a proxy for overall value, Discovery doesn’t have a presence in the top five channels. But after that? Yeah, Discovery is basically the channels to go to watch something pointless in the background, especially after the merger with Scripps:

Screen Shot 2020-12-04 at 11.41.37 AM

Even if you, the New York or Los Angeles Millennial/Gen-Xer, don’t watch those channels–and in some cases look down on those who do–tons of folks do watch. (Maybe even folks you know. We just don’t talk about it…) And since this isn’t buzzy content, those primetime ratings probably undersell Discovery’s content a bit.

To finish, this is also a great “zig while others zag” move. HBO Max and Disney+ went right at Netflix, Hulu and Prime Video with scripted content. Discovery is playing a different game and it will be interesting to see if it works. (To be fair to Disney+, it has its share of cheaper reality content too.)

What’s Next? A Merger with A&E Would Make Sense

The other distinctive part of Discovery’s plan is to include some A&E content in the lineup, specifically from their more reality/lifestyle brands. I haven’t heard anything specifically, but you’d have to wonder if Discovery has floated buying out Disney’s 50% ownership so that they could get a near stranglehold on cheap reality programming. Adding the buzzy A&E channels would also help Discovery brace for the reduced channel lineup world with even more channels to negotiate with MVPDs and vMVPDs.

The What If? Netflix Had Bought Discovery…

In a lot of ways, Netflix knows how valuable Discovery’s content is. That’s why so many of their shows are clearly in the mold of Discovery programming that has left the service or will leave as Discovery+ launches its own programming. Nature programming? Netflix is building that. Shows where folks buy houses? Sure. Shows where folks renovate houses? Check. Cooking shows? Check. Cooking shows that are just reality shows? Check that box too. 

The problem is Netflix has to buy or rent it all. And they can’t replace nearly that volume or for nearly that price. From scratch. Can you imagine if they had bought Discovery a few years back and could add 55,000 episodes to their catalogue? Heck, even the cash flow from Discovery would have made Netflix breakeven. I’m not a fan of M&A as a strategy in general, but this move would have made sense to me.

Most Important Story of the Week – Warner Bros. Sends Their 2021 Slate “Straight” to HBO Max

If AT&T was reading my advice, they’d have seen a few pieces urging them not to release films straight to streaming. Like here. Or here. Or here. If anyone on the Internet writes about how valuable the theatrical window is to traditional movie studios more than I do, I’d love to see it.

My thesis is simple: skipping multiple windows decreases the overall revenue of a given film. Even today I was tweeting that:

Yet, multiple big studios seem to have said by their actions that I’m wrong:

– Disney’s Studio chief speculated that that several live-action adaptions would be headed for Disney+.
– Warner Bros. moved Wonder Woman 1984 straight to HBO Max on Christmas.
– Universal launched a new partnership with theaters for a new 3-week premium window for their films.
– Then, the big move, Warner Media moving its entire 2021 slate to a “day-and-date” HBO Max window with theaters.
– (Plus, there has been a lot of speculation, including hints from Disney, that on their investor day next week they’ll announce an expansion of their premium plan.) 

Who are you gonna trust, some guy on the internet or all the studio heads? Taken together, this seems like a clear indictment of my belief that studios will make more money by keeping theaters around then going straight-to-streaming. 

So how do I explain this discrepancy? Well, I did that over at Decider. And I have four reasons:

            – Clearly subscribers are the only metric that matters to Wall Street.

            – If you’re in the growth phase, losing money to gain subscribers makes some sense.

            – Covid-19. Covid-19. Covid-19.

            – The calendar is going to be jammed in 2021 anyways for box office.

For the details, head over to Decider. 

Yet, while I explained why this move happened, I didn’t explain what happens next. Because I don’t know. Because I can’t predict the future. Still, that’s the fun part, right? And there is one key tradeoff that will impact all the players. 

The Big The Tradeoff (Defined)

The best article I’ve read this year is from Doug Shapiro’s “One Casualty of the Streaming Wars: Profit”. Shaprio focuses on TV in that article, roughly arriving at the idea that TV in the United States is something like a $110 billion dollar industry. And one with some of the highest profit margins around.

Well, theaters are an extra $10 billion piece of that pie in the United States, of which the studios take home about 50%. Moreover, that leads into a fairly lucrative window of purchasing, whether formerly of physical discs, but now mostly digital sales. Which is billions more. 

As Shapiro quantifies, this streaming window just doesn’t have the same margins or volume as the old theater to home entertainment to premium to secondary windows model had. There are lots of folks who insist this isn’t the case, and they usually base their view on rosy customer lifetime value scenarios. But the math is the math. (Even if Celebrity Wall Street Media Futurists insist it is the case.)

This is why studios held off from going straight-to-streaming for so long. They don’t want to add $10 billion more in lost revenue to the huge potential lost revenue coming too. As I wrote in Decider, though, they may have finally been forced by this once in a century pandemic. 

This also explains why the studios all have different plans. No one quite knows what the right new distribution plan, but straight-to-streaming by itself likely won’t cut it. Here’s my landscape of the current situation:

IMAGE 1 - Approaches to Theaterical

Or this septet chart: 

Screen Shot 2020-12-03 at 2.57.33 PM

 What does this mean for all the parts of the value chain? Let’s explore. 

Theaters

One of the big questions is whether Warner Bros. had a plan for the theaters. The answer? No.

As of now, the theaters won’t get an extra piece of the theatrical pie. I expect this to change and both sides will keep negotiating, but if theaters don’t get on board, then a lot of extra revenue is at risk. 

Let’s assume Warner Bros (and Disney if they follow a similar course with “Premium Access”) eventually come to terms with theaters as Comcast did. What does this mean for the future of theaters?

Well, I don’t know. Here’s a range I’d give you: theatrical revenue could drop to $0, or stay the same ($10-11 billion per year) or even grow. And that’s in the United States. In China, where the streamers aren’t allowed, there will be much less change. 

If I had to bet, I’d guess theaters definitely lose some theatrical window revenue. How could they not when subscribers could watch the films for free? On the other hand, Comcast’s plan may not change things very much. And Disney hasn’t committed to this path for all films. 

Yet there is a large range from “lose some” revenue to “wiped out to zero”. (Which I saw headlines touting the “death knell” for theaters. Death knell implies zero.) It’s very rare for an industry to go to zero overnight, and even if theaters are losing some revenue, like DVDs it will likely take decades to truly, if ever, disappear. 

Plus, if the losses mount without driving huge subscribers growth, or tapping out at some level, theater only windows could subtly creep back into our lives.               

Smaller Studios

Meanwhile, without streamers boosting the bottom line, it’s tough to see what Sony and Lionsgate do from here. In some ways, theaters may appreciate their films even more since they are—for now—exclusive to theaters. You could also expect some “arms dealing” as some of the streamers vie for their films as they’ll need inventory. (Amazon and Netflix)

Still, if the overall theatrical pie shrinks (say some theaters go out of business), that’s bad for the smaller studios overall, especially as streaming will eventually pay less for films. (See below.) 

Other Streamers    

For Warner Bros in particular, this move will be great for HBO Max adoption. Though how great, sort of like for theaters above, remains to be seen. It’s not like HBO didn’t have a supply of top tier theatrical films. They’ve always had a steady selection of Warner Bros, Universal and Lionsgate films in the first window after home entertainment. It’s unclear how much bringing films 3-6 months early will boost the perceived value.

Still, even more than buzzy TV shows, theatrical films are great at acquiring new subscribers. This is the dirty secret of most straight-to-streaming films by Netflix and Prime Video. Yes, they’ve had some “hits”, but nothing compares to true box office blockbusters like Avengers, Star Wars or animated kids films. The key question though is what drives that: is it the films themselves, or the marketing of the films which builds anticipation? If HBO Max drastically cuts marketing budgets with less theatrical revenue coming in, then maybe these films don’t play as theatrical releases on streaming.

I’d be willing to wager that Netflix’s films will keep doing well on their platform, but the HBO Max slate in 2021 will likely beat it overall in terms of minutes viewed (in the United States).

As for Apple TV+, they have the biggest opportunity here. If they committed to theatrical and big back end, they could easily become a go to spot for filmmakers. Plus, Richard Plepler has the cachet to make this work.

Production Budgets

Right now, HBO Max, Comcast and Disney are making a lot of release decisions for films that are already made. Those are sunk costs. Meaning they are just trying to maximize what they can going forward.

However, with these new models, films that are greenlit going forward are in this new reality. And if the new, streaming only reality really does have less upside than the old model, then something has to give.

Doesn’t it?

That’s why, when I first heard about Disney+ floating the idea of some of their live-action films going to Disney+, my response was “Oh, they’ll lower the budgets.” Even Alan Horn mentioned that going straight to Disney+ would save on marketing costs. But that was fine because no one cares about cutting costs on marketing. 

Folks do care, though, if you skimp on production budgets. (And talent cares about their pay!) Making a film that could cost $80 million for $20 million feels cheap. But it’s also inevitable. Again, Disney Channel, HBO and even Lifetime have made movies for years for TV. But they know that a movie going straight to TV has a limited upside, so the budgets are similarly limited.

That’s something to watch in 2021. If films really aren’t marking as much going forward, something has to give.

Talent and Backend

This is the biggest wildcard for me. Right now, the current workaround to go straight to streaming is to just guarantee more payment to top talent up front. This has its own risks, though. Mainly that instead of shifting the risk of backend to only guaranteed hits, you essentially make every film a “hit” in terms of talent costs. That hurts the bottom line.

So again, something will have to give. Either talent will make less money or the studios will.

Data of the Week – Daytime TV Viewing Is Up

I just wanted to point out this fun article from Nielsen because it is the worst indictment of working from home imaginable, and I think more managers should be aware of it. If your employees have time to watch TV, you need less employees. (And probably fewer Zoom meetings, not more.)

Most Important Story of the Week – 27 Sep 19: Discovery Enters the Niche Streaming Business

Well, we got more Spider-Man news. He’s back at Disney! Hurray! Get ready for 2,000 words on superheroes and…

…I can’t do it. Thankfully, another conglomerate launched another streaming network. As buzzy as Spidey is, he really only moves the needle so much. Let’s talk niche streaming. 

(And apologies for the slight delay. Had some data intensive articles last week so it took the weekend to digest the news.)

The Most Important Story of the Week – Food Network Launches Another Niche App

Right off the bat, I both love and hate this new streaming service from Food Network. Before we start, let’s summarize what I know about the company to set our terms.

– Distribution: iOS, Android and FireTV. Of the latter, it will have an “exclusive” voice partnership.

– What: A cooking app, with live cooking shows and other on-demand recipes. Eventually it will have a live call-in help service.

– Price: $7

– Other Tidbits: You can order recipes directly from the app using Amazon Fresh, Instacart and others. 

– The “pitch”: The Peloton of food

In short, I love the focus on customers and the attempt at a new experience. What I hate is that this plan relies on a few economic mistakes. 

The “love” part comes from a few things. To start, having a target segment is always right, even if you eventually need to expand to all consumers. (And you do if you can’t price discriminate in content.) Does Food Network Kitchen know who their audience is? With this application it’s people who like to cook. As the streaming wars start in earnest, niche services will have a tougher time than broadly appealing service, but if you are niche, at least have a clearly defined audience. Both Food Network Kitchen and BET+, for example, do that. That’s good.

Next, while they clearly have a strong partnership with Amazon, it isn’t exclusive when it comes to distribution. (Except for “voice interactivity”.) When I first read the headlines, I thought this wasn’t the case, and honestly if your streaming service is exclusive to any device/OS, well that’s the end of your service. (Microsoft Studios is the case study here.) This new app will be distributed on all the tablets that matter (Apple and Android) and the ones that may in the future (Amazon). 

What’s not to love? Well, the economics. In this case, it’s pricing models. Frankly, Netflix has set the perception of the value of a streaming video service at rock bottom. (Even as their prices have surreptitiously raised over time.) More importantly, they did this with a “library” of content that is broadly appealing. It’s still a bundle, it’s just their bundle. And that even includes cooking shows!

The inclusion of cooking shows on Netflix makes sense. No single cooking show or channel is worth it on it’s own, but they make the bundle as a whole more valuable. For years, I wasn’t watching anything on Food Network, but now I’m back on the Alton Brown Good Eats train. Would I subscribe to this service just for that by itself? Probably not, but it keeps from any bundle that doesn’t have cooking shows.

But that’s like, “Just your opinion, man”. Sure. To put this in context this, look at the landscape of recent subscriptions across a range of categories. Essentially, $5 is the new barrier to entry to get into streaming anything…

Table 1

Besides Luminary–another biz model I’m skeptical on–Food Network Kitchen has the most niche, smallest library in comparison. If you’re looking at all these things that cost about the same, why would you add Food Network Kitchen, if it seems like a much worse value?  If I needed another data point, I’d point to the subscription fees.

According to Dan Rayburn’s website, Food Network is a $1.75 proposition right now. On say 80 million households. If you quadruple the price, you need the audience to only decay to 25% (20 million people). Worse, what if the $7 launch price needs to go up to truly sustain the model? It only makes it harder to justify the economics. 

The counter is that this is the “premium add-on” to the Food Network experience that the truly devoted fans will sign up for. This is a compelling case; it’s a way to partially “price discriminate” for Food Network viewers. Regular fans will watch Food Network on cable or vMVPD. For the hardcore fans, they can get a ton of new content. The challenge is defining “hardcore”. If hardcore is 1% of your audience–and Food Network reaches 90 million poeple, but doesn’t have nearly that many watching–than that’s not a lot of people. 

Then you ask, “Does this premium segment even exist?” Food Network is barely about cooking anymore. It’s cooking competition shows. And baking competition shows. And diners? It turns out that entertainment is the important part, not cooking. 

Maybe I’m looking at this all wrong. Trust me, at this point I can hear those of you touting a hidden business model:

Licensed merchandise, right?

I’ve written on this twice before, the entertainment press and commentariat tends to drastically overstate the value of licensed merchandise. (Here and here.) First, the actual revenue a studio/network partner makes is pretty small. It’s about 5% of the total revenue of a product. If you hear projections of a firm doing $1 billion in total licensed merchandise sales, they only get $50 million of that. Which is great! And what Star Wars, Marvel and Mickey Mouse do. But is Food Network Kitchen going to generate $1 billion in total retail sales to get $50 million to run everything?

Probably not.

I’d call licensed merchandise the world’s narrowest content funnel. Especially for adults. Even more for household goods. Frankly, for all the Game of Thrones fans, only a few ever plopped down their credit card and bought things. Honestly, it’s probably 2-10% of fans. Say those numbers apply to Food Network Kitchen: 

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