Tag: Disney

Is Disney Is Throwing Away Its Money Generating Machine? Thinking Critically About Deficit-Financed Business Units

(Welcome to my series on an “Intelligence Preparation of the “Streaming Wars” Battlefield”. Combining my experience as a former Army intelligence officer and streaming video strategy planner, I’m applying a military planning framework to the “streaming wars” to explain where entertainment is right now, and where I think it is going. Read the rest of the series through these links:

An Introduction
Part I – Define the Battlefield
Defining the Area of Operations, Interest and Influence in the Streaming Wars
Unrolling the Map – The Video Value Web…Explained
Aggreggedon: The Key Terrain of the Streaming Wars is Bundlin
The Flywheel Is a Lie! Distinguishing Between Ecosystems, Business Models, & Network Effects and How They All Impact the Streaming Wars

If Disney+ has done nothing else, it has given the Disneyphiles tons of extra documentaries to consume. Making of Disneyland here. Insights into props here. More behind the scenes here.

My wife and I have watched some of “The Imagineering Story” documentary and there was a tidbit in the first episode about Disneyland’s launch which has stuck with me:

Disneyland was profitable by the end of the first year.

To compare Disney to the company that led the introduction to last week’s article, if Amazon opens a “BezosLand” in Seattle, do you think it would make money in its first year? 

Heck no!

It would probably never make money. It would be created as a unique bonus for Prime subscribers who could attend for free. We would never find out how much money they make and if there were rumors BezosLand was losing billions every year, they’d leak to a few favorite journalists that the “data” makes it all up for them in selling more socks.

It feels quaint what Walt Disney did in the 1960s: He saw a way to create value—have amusement parks that were clean and cutting edge that emphasized decades old beloved characters—and when he launched it, he was quickly proven right. This is capitalism at its finest: for his bet he earned lots and lots of money. Shareholders still are benefitting from his foresight.

Far from being quaint, Walt Disney was actually on to something. For most companies making money is key. This is true even in the streaming wars. But we’ve lost sight of that fact because so many companies entering the streaming wars with plans to lose oodles of money doing so. 

This is part II of my three part exploration of “flywheels” in the streaming wars. Last time I defined my terms. Next time, I’ll use the principles of this article to look at a few other new streamers. Today, the lesson is all about why making money still matters, even in streaming. And Disney’s future is the case study.

Summary

– The best way to evaluate any business is still Net Present Value.
– Even in flywheels and deficit-financed business units, the goal is still the same: to invest money in net present value positive endeavors.
– The risk of a “flywheel” with a deficit-financed component is that you simply lose money, not start the flywheel spinning.
– Disney provides the case study in this: if streaming can’t/won’t make money, their flywheel of toys, parks and resorts won’t make up for it.
– Thesis: The best business model makes money at every point, not “flywheels” that lose money in one area to make money in others. This is actually the forgotten lesson of Walt Disney.

A Reminder about Net Present Value

Fortunately, the key to evaluating flywheels is the same as the key to evaluating all businesses: 

Net Present Value

Or NPV. The short hand for calculating “net present value of the discounted future cash flows”. That’s a finance-y way of saying that a company should invest in businesses that promise to make money. Again, we’re talking Finance 101 here. But it’s worth repeating because I’ve seen many businesses or ventures praised in the streaming world who likely won’t make money, even on a net present value basis. (They use narratives, not numbers. And strategy is numbers.)

Read my explainer for this concept here. (And no website can do it justice, you really should read your finance textbook to understand the details.) But for a reminder, since I use it a lot, 90% of NPV decisions look like this:

– You invest a lot of money at the start. (Capital expenditure)
– You slowly start to make some money. (Revenue)
– You still have some ongoing costs. (Cost of goods sold.)
– You subtract the two, and keep the remaining. (Profit)
– You take those future sums and account for the time value of money. (Discounting)

Since we’re talking Disney, here’s a look at my big series on how much they made from Star Wars toys:

IMAGE 2 - Discounted Star WarsThe problem I keep running into with streaming video is folks seem very willing to ignore these two core principles when evaluating the streaming wars. Most money losing/unknown streaming or digital video ventures are excused because frankly we don’t know. Since we don’t have the numbers—and it’s hard to calculate them—we use narratives instead.

If you take nothing away from this article, remember that even a flywheel can be evaluated on NPV terms. It’s components can, nee MUST!, be evaluated on NPV positive terms as well. Otherwise, companies run a huge risk.

“A License to Lose Money”: Explaining Deficit-Financed Business Units

Consider:

– Prime Video (money made unknown) isn’t around to make money, but to sell more socks, thus spoke Jeff Bezos.
– Apple TV+ (will spend $6 billion on content) isn’t around to make money, but to sell Apple devices and Apple Channels.
– AT&T (will spend at least $3 billion on HBO Max) isn’t around to make money, but to sell more cellular subscriptions.

In these cases, the explanation is that video is a means to an end. At extremes, defenders of the “lose money in media to make money elsewhere” even call it a “marketing expense”. 

It’s worth dwelling on the concept of “marketing expense” more. Because in the previous world—the old fashioned/traditional business world—it wasn’t like you could just label something as marketing and spend as much as you wanted on it. Indeed, marketing was always taken out of your operating profit. So the more you could trim marketing while keeping sales the same, the more you trimmed! That’s what advertising is the first thing to go in an economic downturn.

Despite the branding as marketing expenses, there is real money being spent on video. These are real products from real business units. Not simply “marketing”. We need a new name, which is why I’ve come up with:

Deficit-Financed Business Units.

DFBUs. Yes, I was in the Army so I acronymize everything. It’s worth unpacking the phrases to see why these definition makes so much sense. 

First, a venture is “deficit-financed” if the plan is to never make money on it. Or to make money, but so far in the future that current financing is still net present value negative. Thinking about this abstractly explains why. Say I offered you a billion dollars a year starting in 2050. The key is you have to pay me $20 billion now. Should you do it? Heck no! You could just invest that $20 billion and probably double it multiple times before 2050, making more than enough to pay yourself $1 billion per year.

That same scenario is a microcosm of “net present value”. Should Apple invest $20 billion right now to make $1 billion a year in 2050? Heck no! Just keep it in cash or cash equivalents. No matter if it is marketing.

Second, I like business unit because it really distinguishes between streaming video companies  and a marketing expense. Plopping down several million dollars for a Super Bowl ad could be a net present value negative decision. (And should be evaluated in those terms.) But we should distinguish from genuine efforts at marketing versus creating brand news businesses, that in most other contexts would need to make money. 

The Riskiness of DFBUs: You Don’t Make Actually Make Money on the Flywheel 

My worry for companies and investors is that they don’t insist on looking at these business ventures with an NPV lens. As a result, DFBUs become a license to lose money for big tech companies. They may even grab market share—that’s certainly the case with all of them—but that doesn’t mean they actually make money.

That license usually has a justifciation, though. If we lose money on this part of a flywheel, can it make more money elsewhere? In other words, the key question is:

Can Deficit-Financed Business Units Turn a Flywheel?

This is really the supposition that has fueled the rise of streaming video. If you have a true flywheel or ecosystem, getting more customers in will help cause it to spin. That’s expressly Jeff Bezos’ logic. Apple’s too. AT&T even.

The answer? Maybe. It depends on the flywheel.

My thesis is that they can, but they are risky and hence rare. Losing money is easy for a business to do. Allowing someone to lose money means they will. It makes their thinking sloppy. Moreover, it’s easy to get the tradeoffs slightly wrong, and you deficit-financed business unit just becomes a money losing hole.

And I think I can illustrate this with Disney. If you’ve been following me on social, you’ll know that my household has been into Disney’s Inside Out recently. Which is appropriate to call back to, for this scene:

That’s how I’d describe DFBUs, they’re shortcuts that should be labeled danger. The current danger-disguised-shortcut facing Disney is losing money on streaming (Disney+, ESPN+ and Hulu.) to make it on extra toy sales. The rationales I’ve seen justifying Disney’s move into streaming reinforce this money losing narrative. I’ve seen the same arguments used by the tech conglomerates trotted out for the House of Mouse. For example, I’ve seen Disney’s streaming efforts explained as…

– They’ll lose money on streaming to get folks into the “ecosystem” of theme parks and toys.
– Disney has a flywheel and streaming video will bring more subscribers into the flywheel.
– Disney should disrupt the theatrical business model to own the customer relationship in streaming. 

So all the buzz words. Of course, since strategy is numbers, the question isn’t what narrative you employ to justify losing money, but whether or not the investment will make it up in the long run. So let’s quantify—for what I think is the first time on the internet—the actual numbers behind those narratives.

The Messy Financials of Disney

One of the first explanations for Disney’s push into streaming was so it could “sell more toys”, just like Jeff Bezos sells more socks. But take a gander at this Hollywood Reporter image I love trotting out:

IMAGE 3 - THR Disney 2018

Toys—from here on “consumer products”—is a small, small part of Disney’s overall operating margin, isn’t it?

Let’s dig deeper. I approach a company’s financials like a hostile witness on the stand. What are they trying to hide? What don’t they want me to know?

For Disney, I looked at their financials going back to 2009. And a huge red flag jumps out, which should be a clue for the quality of the toy business:

Read More

Most Important Story of the Week – 26 June 20: How The Card Game Uno Explains Spongebob Squarepants (Release Plan)

After a few weeks without a lot of news, we finally got a week with some stories to sink our teeth into. But how to choose? The late breaking story that Disney is ending it’s Disney Channel in the UK is a pretty big deal, but then what about Microsoft ceding the livestreaming battleground to Twitch? Or a whole set of TV series moving from traditional TV to streamers. Surely I could oversell the narrative that this is the end of TV?

When in doubt, ballpark the financial size of each story and compare them. Sure, Mixer is a big deal, but how much is Microsoft really spending on that per year? A couple hundred million? We know Twitch is only earning $300-500 million per year in revenue, and Mixer is multiples smaller. What about the TV shows? Well, assuming $3-5 million per episode, we’re still talking max about $100 million in costs. Even the UK Disney channels aren’t worth that much considering they have about 15 million subscribers in the UK

What does that leave us with? The potential end of theatrical filmgoing as we know it. Given that’s a $10-12 billion dollar industry in the United States alone, it’s our story of the week.

(By the way, if you aren’t a subscriber, I have a newsletter. It’s fairly simple and provides links to my latest articles and the best reads/socials/listens on the business of entertainment I come across. It’s published every two weeks and next issue is Monday. Subscribe here.)

Most Important Story of the Week – How Uno and Blockbusters Explain Why Spongebob is Skipping Theaters

The latest studio to take an animated film destined for theaters straight to video-on-demand is Paramount. And in the all too common twist, it will then transition to their streaming service, CBS All-Access. On the one hand, this is another potential tentpole abandoning 2020 for greener digital pastures. Surely, Entertainment Strategy Guy, if anything portends the death of theatrical films, it’s Spongebob too leaving theaters.

Eh. 

I’m still less pessimistic on theaters surviving. And I write this as cases are noticeably ticking upwards in the US and deaths (my preferred metric) remain plateaued. I’d explain this latest move as less of a portend of the future disruption of all theaters then as the logical extension of coronavirus keeping theaters shut. 

Let’s explain that.

(After this column was written, news that Tenet had moved back an additional two weeks broke, which only reinforces the point of this column. You’ll see.)

Two Ideas. First, blockbuster strategy.

The big trend in feature films over the last four decades has been the move towards larger and larger blockbusters, and the hollowing out of the “middle-class” of films. The mid-tier, if you will. The magnum opus on this trend is Anita Elberse’s book, but everyone has written something about it. I wrote about mid-tier films in a column back in February, and one of my first deep dives explains the economics of blockbusters.

But there’s a related concept that is key to understanding this pressure. As more blockbusters have come to theaters, the number of weekends a film has “to itself” has shrunk. Which makes it even more important for a blockbuster to win the opening weekend. In some cases, the goal is to make most of your money on this opening weekend. 

Second Idea: Uno Strategy

The second idea I’ve been tossing around is what I’ve decided to call Uno strategy. For those not familiar with the card game, you deal out cards, then toss them on the pile to match the color or number of the recently tossed out card.

The game doesn’t have a whole lot of strategy to it. Most of the time you can only play one or two cards, so it’s not like you have a whole lot of choice. If it’s a “blue 8”, and I only have a “red 8” and the rest are green or yellow, I’m playing that blue 8.

A lot of business strategy–for all our high-minded discussion of it–is usually obvious moves like this. Here’s an example for Disney+. Despite this article I wrote for them, if pushed there is really one move that would have the biggest impact on their year: finish Falcon and Winter Soldier and trust that Kevin Feige will make it great. That’s not innovative advice, but the obvious “Uno strategy” move.

So let’s apply these two ideas.

The Situation

It seems clear to me that theaters will reopen soon. In some fashion. The current rise in cases delayed the July time frame, but at some point theaters will reopen. Especially if deaths don’t rise at the same rate as past outbreaks. I see calls on Twitter to cancel all theaters until a vaccine is developed, but frankly I doubt that happens. I think the theater going experience can actually be safer than a lot of other activities, especially with a few appropriate precautions.

(It’s unlikely to happen, but the current cases are definitely skewing younger. The converse is that hospitalizations have increased, but not as quickly as the first few montsh. Meanwhile, some treatments are emerging, including better diagnosis of severe cases and some moderate therapeutics. Meanwhile, better knowledge about the threat to institutional facilities like nursing homes and retirement communities has helped protect the most vulnerable. But this isn’t a Covid-19 column.)

Moreover, these trends have us headed directly for the “median case” I had forecast back in April. My best case was films releasing by July 4th and my median case was August for releases. Still, July is gone, which has implications.

Implication One: A Limited Number of Weekends Cause the Cascade

The biggest impact of Covid-19 has been to compress the back half off the release calendar. Nearly every week will have a blockbuster vying to win that weekend. Just doing the simple math, if theaters had reopened in the beginning of July, that’s 26 weekends left in the year. Meaning 26 potential blockbuster releases. If that moves to August first, that’s four more weekends gone. 22 movies for those slots. 

We were already in one of the most condensed calendars for a second half of a movie year. 

Every weekend lost just makes it tighter.

In comes Uno strategy. The studios know where their films fit on the hierarchy of potential blockbusters. Spongebob is much smaller than Top Gun 2. Or Mulan. Or Tenet. Or A Quiet Place Part II. Hence, as the number of weekends to win shrinks, it gets pushed around the most.

Implication Two: Release or Delay?

In a way, this where the decision-making for each executive comes in. Once your film is bumped, you could move it back in the calendar, or accept that the production costs are in a lot of ways sunk. Same for a lot of the marketing costs. And since a lot of films for 2021 are already in some state of production, you can keep delaying your 2021 slate–which would cost money–or you can get what you can.

But this is where blockbuster strategy comes in. It’s not like Spongebob is “as blockbuster-y” as Mulan. It doesn’t surprise me that so many of the “straight to VOD” films are kids films. A true blockbuster is a “four quadrant film”, meaning old, young, men and women. (Yes, crude, but that’s still how studio’s look at it.) Is Spongebob four quadrants? Absolutely not. No couples are going to it for date night. Same with Trolls: World Tour.

The one strange caveat to me is the timing. Spongebob won’t hit VOD until 2021, with a premiere on CBS All-Access later that year. In this case, the studios also have the added incentive that theatrical films on streaming are going to have their biggest “bang for the buck” when streaming services are small. Hence Disney seeing huge value for putting Hamilton and Artemis Fowl on Disney+ right away. 

So does the latest move mean the end of theaters? No.

Theaters will have a downright awful year. And AMC Theaters has a lot of debt that will hurt their growth prospects in the near term. But the current moves are tweaks to the schedule, not major disruptions. The biggest sign is that even though Warner Bros keeps moving back Tenet two weeks at a time, they aren’t moving it all the way to December.

(Fun bonus: Steven Spielberg is crushing the box office, which is mostly drive-in theaters. The shame is that theaters should open cautiously with more of this library fare, but they are waiting for the blockbusters.)

Entertainment Strategy Guy Update – Microsoft Shutters Mixer

I’ve never written about Microsoft’s Mixer before this, and won’t after, but I have written about livestreaming before

Before we get to Mixer specifically, let’s start with understanding the livestreaming landscape. And correcting the most common misunderstandings I see. Take this chart from Evolution Media Capital (a good newsletter subscription by the way):

Screen Shot 2020-06-26 at 9.08.30 AM.png

Now, your eye is drawn to the shiny object of the growth during coronavirus. But remember my magician analogy from last week. Or the Kansas City Shuffle from Lucky Number Slevin. While everyone is looking at the shiny object, the con man/magician is doing the real work where you can’t see.

My eye ignores the shiny growth and looks at the numbers preceding it. From December 2018 to December 2019, Twitch saw year-over-year growth of…1.7%!

Honestly, what unicorn has 1% growth?

Sure, the lockdown has been great for live-streaming. But in the future we’re going to call this time the “ Asterisk Extraordinaire” in every chart or graph. Meaning, things will return back to normal-ish and any analysis will have to caveat these last four months. My guess is Twitch sees a big decline in the fall when schools reopen, but not as far down as they were. In other words, they brought forward say 2-3 years of real growth due to lockdown.

Meanwhile, note too that Twitch also tends to be compared only to other gaming sites. This chart is specifically comparing all of Twitch to only Youtube Gaming. When I’m watching a live stream of an EDM show on Youtube, that doesn’t make it in this data set. Which is why I remain tentatively bullish on Youtube on livestreams long term. If the biggest network wins, they have it (and the ability to save videos forever).

Which brings us to Mixer, the story another M-FAANG practicing “innovation”, which in today’s context means shamelessly copying other business models in search of another way to spend down their huge pile of cash. (Except Netflix, which doesn’t have the free cash flow.) Meanwhile, it turns out paying for high profile talent doesn’t matter if your video service is more of a network with demand-side increased returns (see my article for an explanation) than a true channel. 

Other Contenders for Most Important Story

Let’s run through some smaller stories that caught my interest.

Streamers Grab a Lot of Content

It’s hard not to see a story in the stream of news that happened in rapid succession this week…

Youtube Original Cobra Kai Moves to Netflix
Y: Last Man and American Horror Story move to Hulu (permanently)
AT&T Original Kingdom Moves to Netflix too.

These moves are notable, for sure, but at least two are from dead or dying platforms (AT&T and Youtube Originals). Even Y: The Last Man is more notable for being stuck in development hell for ever than anything else. The point is that streamers will continue rescuing sub-par projects in the near term.

Disney Shutters Their Pay TV Channels in UK

As I said in the introduction, this is a big move to get rid of a cable channel, but it’s not as big as the United States. Whereas Pay-TV has pretty widespread adoption in the US, in the UK the Disney Channel was only on Sky and Virgin, which amounted to about 15 million households. Given that Sky also offers–from what I understand–Disney+ access, this move makes a bit more sense.

(Side story for Disney+ that could be a bigger deal: Apparently customers do in fact love it. My caveat with any brand survey like this is that I think they’re fairly noisy. When you read past the headlines, you see that Disney+ has a rating of 80, and Netflix has a rating of 78. And Prime Video is a 76. Does that seem within the “margin of error” for a survey like this? Absolutely. So the most accurate conclusion is Disney+ has matched Netflix.)

Charter Seeks to Charge Net Non-Neutrality Fees to Video Streamers

Charter is calling these “interconnectivity fees” but I like “Non-Net Neutrality” fees better. A lot of folks are worried about this move, but I’m a pinch more sanguine. Who occupies the White House next January will have a lot more to say about the future of net neutrality.

The Netflix Effect Again

Netflix’s global top ten lists have been a welcome oasis of data in a desert of silence. I wish I were tracking them by country daily, but I don’t have the time, and others like Flix Patrol are on it.

For those who do have time to track, some interesting tidbits are emerging, like Josef Adalian spotting the latest “Netflix Effect”. The “Netflix Effect”–which I think Kasey Moore of Whats-On-Netflix has coined, or at least pointed out a bunch–is that when a show goes global on Netflix it gets a renewed boost in popularity. Adalian pointed this out for Avatar: The Last Airbender, which has trended in Netflix’s top ten since it premiered. Moore pointed this out using IMDb data for Community.

The only small amount of cold water I can splash on this–and this is like tapping water in the bathtub, not a cannonball into the deep end amount of splashing–is that I’m still wondering if some of the ability for Space Force, Avatar or Community to stay on Netflix’s top ten list isn’t a function of the fact that their content quality is decaying somewhat with the coronavirus. I don’t have the data yet to prove this, but my thesis is that Netflix has slowed the pace of US original releases globally, but haven’t admitted it yet. To be seen.

Data(s) of the Week

HBO Max Had 1.6 million Downloads over First Two Weeks – Sensor Tower

This data is the best corrective I saw to the narrative that HBO Max *only* had 90,000 downloads on day 1. Sure, that was probably accurate, but they also had months to add customers. And they indeed still bested previous HBO Now download records.

Prime Video Leads on Most High Quality TV Shows – Reel Good

Reelgood has a simple yet effective way to measure quality for streaming services, by just tracking which services have which number of films and series with a given IMDb rating. This method is fairly simple, but sometimes simple is pretty accurate. I’ll admit, Prime Video did better than I would have guessed on high quality movies, with the caveat that they still have the most “things” in general, which means a clunky interface problem. (And in full disclosure, Reel Good PR folks reached out to me to point out this article.)

M&A Updates – It’s as Down as You Thought It Was

If you’re right for the wrong reasons, to be clear, it doesn’t count. So I’m not taking a victory lap over my series from two years ago–wow is that date right? Two years?–where I predicted that M&A wasn’t accelerating in media and entertainment, but progressing at the same rate if not slower. (Read the whole series here, for the introduction, or here, for the conclusion.)

As I just wrote, coronavirus is the big “Asterisk Extraordinaire” for the future. Every time series graph will have a giant asterisk for this time period saying, “And then covid-19 happened.” Meaning the lessons we draw will be less confident, because coronavirus is the categorical variable that will screw up our models.

Same for mergers and acquisitions. We’ll go back to normal eventually, which means mergers and acquisitions will continue as they have for the last two decades.

The Flywheel Is a Lie! Distinguishing Between Ecosystems, Business Models, & Network Effects and How They All Impact the Streaming Wars

(Welcome to my series on an “Intelligence Preparation of the “Streaming Wars” Battlefield”. Combining my experience as a former Army intelligence officer and streaming video strategy planner, I’m applying a military planning framework to the “streaming wars” to explain where entertainment is right now, and where I think it is going. Read the rest of the series through these links:

An Introduction
Part I – Define the Battlefield
Defining the Area of Operations, Interest and Influence in the Streaming Wars
Unrolling the Map – The Video Value Web…Explained
Aggreggedon: The Key Terrain of the Streaming Wars is Bundling

This is probably the most popular image for business school students about Amazon. Heck, anyone describing Amazon has probably used this image. 

Amazon FlywheelIf we’re supposed to be neutral observers of businesses, you can’t help but notice after a moment of reflection how insanely positive this take is. Man, Jeff Bezos can really sell his positive vision and have it repeated universally.

If you were really cynical—hey, I am—what would the pessimistic version of this flywheel look like? The “Flywheel of Evil” if you will…

Screen Shot 2020-06-24 at 9.21.08 AM

What changed? Well, first, the idea that you “sell more things” is great, but if you lose money on every transaction, that’s “sub-optimal” in business speak. Or bad in human speak. And Amazon does in many cases. 

To fund these losses, you need to start a really successful company that is totally unrelated to your retail business or its membership program, which is where Amazon Web Services comes in. There’s an alternate history where an Amazon without AWS (cloud computing) doesn’t take over retail because it doesn’t have a cash flow engine driving its growth. (In that timeline, Ebay becomes our overlords.)

Even more potent, though, is combining already low prices with Amazon’s decades long refusal to pay local taxes. Could you point to the continued imprisonment of poor Americans to online companies not paying local taxes? Maybe! (As local tax bases erode, some communities turned to police forces to extract rents, like in Ferguson, Missouri. Seem relevant to our current times?) Amazon does pay some local taxes—now—but only after it became an advantage to them in furthering their monopoly power.

Now that it has this “flywheel” rolling, Amazon uses its size to both crush new entrants who want to compete and to punish suppliers, capturing all the value from their product creations.

Which flywheel is “right”, then? Well, both actually. Both describe valuable methods for how Amazon grew to the size it did. Some of those methods were good for customers; some were bad for society. You can’t tell their story without both.

Screen Shot 2020-06-24 at 9.21.39 AMWhat’s the lesson? Flywheels are simple whereas reality is complicated. As tools, flywheels are fairly inexact. They’re not even really tools, but narrative devices we use to help make sense of a complicated world. In other words, a “heuristic”. As behavioral economists like Kahneman and Tversky taught us, heuristics are useful, but can carry pitfalls if we aren’t careful.

What’s the point for the streaming wars? Well video has become a spoke on multiple company’s supposed “flywheels”. Everyone from Disney to Amazon, but most critically Apple last fall. Whether or not these were actual flywheels was less important than merely invoking the term and using it to justify nearly any amount of spending. 

Let’s call this another key piece of “terrain” in the streaming wars. The “Forest of Flywheels” if you will. The problem is the business and entertainment press has been fairly sloppy with our language when it comes these types of endeavors. Due to this sloppiness, we’ve allowed a lot of companies to launch video because they’ll “lose money on video to make money on X”. 

Today, I’ll explain the key terms. In my next article I’ll critique deficit-financing in particular. And then I’ll finish it off with an analysis of some of these business models to show their potential strengths and weaknesses. 

Summary

– Flywheels are the most overused term in business, and it’s important to know what different terms mean.
– Ecosystem is probably the most commonly confused term with flywheel. Ecosystems are also rare.
– A true flywheel is a self-perpetuating cycle of growth that is incredibly rare in practice.
– As such, in pursuit of flywheels, we’ve seen many digital players launch money-losing video efforts. I call these “deficit-financed business units”. And they’re one of the biggest factors in the streaming wars.

Defining Traditional Business Strategy Terms

You’ve read articles bemoaning jargon in the workplace. (This New York Magazine piece is the latest in hundreds on the subject.) Even I just denigrated “sub-optimal” above, a term I really don’t like. Still, I don’t take that extreme of a position on business nomenclature. Often, jargon really does have a role in explaining new concepts.

The problem comes in overuse. That’s what is currently happening with “flywheel”. It’s almost become synonymous with “successful business”. But it’s much more specific than that.

So let’s define our terms, so we can better understand what is and is not a flywheel.

Business Model 

It turns out if you want to stymie business school students, just ask them “what is a business model?” Indeed, they’re taking classes called “Strategy and Business Models”, but answering, “What is a business model?” can stump them. I’ve seen it.

At its most basic, a business model is a plan or process to make a good or service and sell it for more than it costs to make. Make a widget for $1, market it for $1 and sell it for $3. Or replace widget with service. The model is how you make money. On a financial statement, this is usually called the income statement. When I build a “model” for this website, that’s usually what I’m building. 

How do business models relate to flywheels? Well, you can have a successful business model that isn’t a flywheel! It’s just a good business. In the olden days, you would have probably described the dividend producing stocks as just good businesses. They don’t have huge growth prospects, but they still generate a return on investment. Cable companies in the 2000s fit this bill. They had good business models, but were absolutely not flywheels.

Where it gets complicated is usually a given company is actually a collection of many business models. Arguably for every product they sell. Or you have distinct models for different business units in the same conglomerate. Which is actually a good transition to our next definition.

Business Unit

Most companies on the S&P 500 aren’t just one business, but multiple types of businesses lumped together. This is the reality for most conglomerated businesses. When analyzing a compnay, it’s key to differentiate between its overall success and the success of its various pieces.

Amazon is a perfect example here. Retail is one business unit. But then it also has media businesses from live streaming to streaming to music. Then it also sells devices like Amazon Echo. Oh, and it has Whole Foods groceries too.

And then there is the cloud computing (AWS). Which I called out above. And it’s worth noting just how distinct that wildly financially successful enterprise is from the rest of Amazon’s consumer-focused retail efforts. It’s a business-to-business service that is powered by lots of fixed capital expenditure data warehouses. It barely relates. Yet, it’s part of Amazon.

How do business units relate to flywheels? Well, flywheels often fail to take into account entire business units. Take the Amazon flywheel of success…it totally ignores AWS! For years Amazon survived because it had an incredibly high margin business in cloud computing that could provide necessary capital that enabled Amazon to continue building its retail business. This also kept Wall Street happy.

That makes the Bezos flywheel not just wrong, but almost negligently wrong. 

It’s business malpractice to point out that a flywheel helped Amazon to succeed if you don’t include AWS’s role in propping up the balance sheet!

I would add, many of the “flywheel” charts you see out there are often just describing a company with multiple business units. (I’ve seen this with Disney and Epic Games.) Every business can benefit from owning multiple business units, from lowering costs or providing learnings. That used to be called “synergy”. Now we call them “flywheels”.

Ecosystem

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My Unasked for Recommendations for Disney Streaming (2020 Edition)

Do you remember last year before Disney+ launched and I had this series of recommendations for how they could catch up to Netflix? They were…

1. Go dirt cheap on the prices. [Check]
2. Schedule weekly releases for adults [Check]
3. Bundle with other streamers [Check]
4. Get all your key library content on board. [Check]
5. Give it for free to all theme park attendees [No]
6. Release weekly ratings. [Hell no.]

You might have trouble finding that article. Why? Because I never actually finished it and published it. If I had, I could keep pointing back to it for how right I was. 

(Instead, I published an article worrying that Disney+ wouldn’t have the Marvel films or half the princess movies. Oops.)

Given that last week was a bit of big news for Disney+, I think it’s worth providing Disney another round of unasked for recommendations. Rebecca Campbell—the new head of streaming—definitely doesn’t need my advice, but everyone else might find it interesting to know what I would do if I were offering my strategic advice.

I’ll focus on streaming here, with the knowledge tha the entire Disney enterprise has a had a bad few months. It’s almost the perfectly designed disaster to hurt Disney’s business. But given that forecasting the course of a pandemic is pretty uncertain, I’ll wait to opine on Disney’s business model for a pinch.

Recommendation 1: Add a local streamer to your “bundle” overseas.

This was the “a ha” that got me to finally write this article. Two weeks ago, I called my biggest story of the week Disney’s decision to pause international growth plans for Hulu. In these cash strapped times, Disney is worried about the costs of Hulu internationally. Some of this is marketing, some is product, but most of it is likely licensing claw backs. Or foregone licensing revenue. 

As I wrote two weeks ago, I’m not sure a streamer built around the FX stable of content will be a huge winner internationally. American TV shows don’t travel as well as folks think, and really “prestige-y” type shows travel even worse. (This isn’t a uniform pronouncement. Some of the Fox TV studios shows will travel. Like How I Met Your Mother. Just not all.) The Fox movies will have some appeal too, though a lot of the best have been pulled for Disney+ already.

The challenge is that if Disney doesn’t launch Hulu internationally, it will lag Netflix for potentially ever.

What to do? 

Well, keep bundling. The bundle with ESPN+, Hulu and Disney+ has already been successful in America. Likely internationally it will have some appeal. That’s a no brainer.

Even better, though, is to add a local streamer to each bundle. If that’s Hulu’s biggest drawback—lack of local content for adults—don’t opt for the expensive proposition of licensing it all, just partner with a local streamer. Essentially make them the fourth pillar in a country-by-country bundle. Especially if ESPN+ isn’t launched globally for sports. 

Even though we in America don’t realize it, nearly every country has a local streamer trying to fight the streaming giants like Amazon and Netflix. Disney could look like a hero by bundling that content with its other shows. Hulu then gets to come along for the ride. And overall, my gut is this strategy would be cheaper than trying to license local content territory-by-territory. 

Consider this too, an extension of what’s already working. Disney+ was tied closely to Hotstar in India. (Which Disney got in the Fox deal.) They’ve also partnered with local companies for distribution deals like with Canal Plus in France. My pitch is to just take that strategy even further with more bundles in more territories. Even if it means giving local partners most of the benefit in the short term, in the long term this will help with adoption.

Recommendation 2: Seriously, give away Disney+ to anyone going to a theme park.

Let’s re-up my biggest recommendation from last year. It’s super expensive to go to the Disneyland or Disney World. Disney+ is very cheap. So just combine the two and if you buy two tickets to a theme park you get 3 months of Disney+ for free. Those free trials are worth it.

(Yes, parks are closed. They won’t be forever.)

Recommendation 3: Add another “F-BOSSS” Level TV Series. My pitch? Modern Family

Back in January, I coined the acronym “F-BOSS” for the big TV series that were being clawed back from Netflix or secured for multi-hundred million dollar licensing deals. (Friends, The The Big Bang Theory, The Office, Seinfeld, Simpsons, South Park) Now that the biggies are off the table, the smaller series are coming off the board too.

Disney, for its part, has mostly moved 21st Century Fox TV series to Hulu. Like How I Met Your Mother. However, 21st Century Fox has a big one coming up that isn’t as big as those others, but could be. That’s Modern Family. Which just ended its last season.  Back in 2013, Fox licensed it to USA network for a big sum. I looked but can’t see when that deal comes off the board. But when it does, either Hulu or Disney+ is its all but guaranteed landing spot. 

Of the two, I’d say that Modern Family should go to Disney+. This isn’t a no brainer by any means, but that’s because of how hard it is to fit content onto the Disney+ brand. The challenge is Disney+ content needs to be both family-friendly, but also adult-appealing. That’s a hard balance to strike.

I considered some of the older “TGIF” series like Home Improvement (distributed by Disney back in the day, and made by Touchstone, which is owned by Disney). Disney should get that series to Disney+, but it probably isn’t a game changer. It is too old to move the needle. (So they shouldn’t’ buy out whatever rights is keeping it off streaming early.) (The other series on TGIF like Full House or Family Matters aren’t worth it even to license from Warner Bros.) I considered some of the Fox animation series, but they feel too edgy. (It’s still funny The Simpsons made the cut when you think about it.)

This makes Modern Family the key choice. It’s got lots of episodes (250) for folks to binge—the main requirement—and both customer/critical acclaim. (High viewership for a long period of time and multiple Emmy wins.) It does touch on some politics, but overall isn’t controversial enough to cause too much hot water with family groups. (It’s on syndication nationally and on USA Network right now.) So for me, this is a big content priority.

Side Note: About the “Big 5” Pillars

I’m not sure they have a name, but the “Five Big Pillars” is what I’m calling these:

Screen Shot 2020-05-26 at 5.06.44 PM

These pillars are both a blessing and a curse for Disney+. Blessing because these pillars have shown that they can launch a streamer. Hence, Disney getting to 50 million subscribers and beyond. It’s an incredibly strong brand defined by these five pieces.

The curse is that they limit what Disney can do going forward. Already, The Simpsons is above the pillars in most applications because they don’t fit one of the four categories. Same for some of the Fox films like Ice Age. Is it Disney? No, but it’s somewhere on Disney+. 

But really the limitation crystallized for me in Disney passing on the Studio Ghibli content, that will appear on HBO Max tomorrow. Studio Ghibli movies are great, but where would Disney put them? I’m not sure they know either, and not saying it’s the only reason but they passed on it for licensing.

If Disney does add a big piece of additional content, like a Modern Family, they may need to rethink these five pillars. 

Recommendation 4: Provide a major product improvement

I probably use the Disney+ app more than other streaming app. My daughter isn’t allowed to use the iPad unsupervised, and we watch one short film before the bath. So I’ve scrolled the app a fair bit. Meaning I know it’s limitations and positives better than any other (iPad) application. (I caveat “iPad” because I don’t know if they are problems on other operating systems.)

So it’s time for Disney+ to roll out a new feature that doesn’t upend the entire user experience—folks hate that—but provides more functionality. My pitches?

– Make the Disney animated shorts their own section. And make it easier to scroll and search for new shorts to watch.
– Add a “Sing-a-long” version. And make it easy to find the songs to watch as their own thing.
– Fix the “additional content” to be more like a DVD-bonus features. 

Side Note: Disney Needs to “Proof Read” Its Content

If you’re a heavy user of Disney+, you notice little things. My guess is they are mistakes that are the result of automating the entire process. Which is key for a streamer to get launched, but sometimes a human touch can fix the errors. Meaning someone would need to manipulate the metadata to make sure the service is as accurate as possible. For example…

– The timing for the length of short films includes foreign language credits. Which means a Pixar short appears to be 9 minutes long, but four minutes are credits. That needs to be updated.
– A shocking amount of ratings claim that a given Disney short features tobacco use. (The only authentic one is Steamboat Willy.) I have no idea why this is the case.
– Some content still only has one version. For example, Mickey and the Beanstalk is only included in Fun and Fancy Free, when that version features a nigh unwatchable ventriloquism scene. So on one hand, they have this content. On the other, it isn’t the best version of it.

Recommendation 5: Get NFL Sunday Ticket on ESPN+ somehow.

NFL Sunday Ticket is the killer app that gets ESPN+ mandatory adoption. Will this be pricey? Yes. Will Comcast and AT&T still want pieces of the NFL? Yes. Is the least likely recommendation? Yes.

The NFL is the sports straw that stirs the content drink. As it is, ESPN+ doesn’t have enough reasons for folks to subscribe. Plus, Sunday Ticket keeps from cannibalizing linear views as Disney can pitch to MVPDs that it is just adding Sunday Ticket as DirecTV did before. 

The 2019 Star Wars Business Report – Toys

This is part III in a multi-part series estimating how much money Disney made off “Star Wars” in 2019. Go here for my larger series on Disney purchasing Lucasfilm in 2012.)

Introduction and Feature Films
Television

I started this series in January. Do you remember back then? Before the world turned upside down? Reflecting on how much money Star Wars made in 2019 feels almost like a waste of mental energy. Who cares how much Disney did or didn’t make in 2019 when the whole company may go bankrupt by the summer time? 

Perhaps, if we understand the underlying drivers of Disney’s business model, we can better understand how quickly they may go bankrupt or return to normal. And what they can do in the meantime to prevent it. Previously, I’d estimated the performance of the feature film and television business units in dollar terms. Today we move onto “licensed merchandise”, which is my term for toys, apparel, games, and anything sold in stores. 

I’ll discuss the narrative around licensed merchandise, review my top and bottom line estimates, and briefly touch on the impact of coronavirus on toy sales.

(Nomenclature: I’ll use consumer products, licensed merchandise and even “toys” interchangeably in today’s article. Yes, when I say toys I mean everything from shirts to furniture to video games to actual toys. Also, when I use “licensing” I don’t mean content licensing, but licensing for consumer products.)

Licensed Merchandise: The Missed Opportunity of 2019?

If Star Wars fans had a complaint in 2019, it’s that this little guy…

IMAGE 1 - Baby Yoda

…wasn’t available to purchase. I saw quite a few tweets speculating that this spectacular failure was worth potentially BILLIONS to Disney. (Don’t worry, toys are on their way…so long as Covid-19 shutdowns don’t delay them.)

Well, it wasn’t. Which you’d have known if you read my first article on “licensed merchandise” for Star Wars back in 2018. Star Wars on the whole generates between $2-3 billion total retail sales for Disney every year. (With a one time boost in 2015 due to The Force Awakens.) It’s unlikely that one—admittedly excessively “toyetic”—character would have doubled that. 

Even if he had done really well as a toy property, the whole “Baby Yoda” saga reveals some important learnings about toys in general and in the Star Wars universe specifically.

– First, toys in particular aren’t a quick game. It takes Disney (or any toy licensee) months to design, approve, and then manufacture toys. And then put them on a boat and sail them from China (mainly) to the United States. This is why even as Baby Yoda blew up, Disney couldn’t spin out new toys quickly.

– Second, toys (and lots of merchandise) aren’t as lucrative as the headlines usually suggest. Take those retail sales I just mentioned. Those become the “revenue” line for retailers. The toy companies only get the “wholesale” line, which is about half the retail take. Disney, on the other hand, only books 5-10% of the wholesale total. Which is still a lot! But an order of magnitude less than the total retail numbers suggest.

– Third, Star Wars merchandise had already burned retailers in the 2010s. Even if Disney had made Baby Yoda merchandise despite Jon Favreau’s desires, retailers would still have been skeptical. The huge boost in toy sales in 2015 when The Force Awakens came to theaters, burned retailers when Rogue One had anemic sales. I heard from quite a few retailers they were stuck with excess merchandise after Rogue One—when the $5 billion in sales didn’t repeat—so a lot of merchandise sat on store shelves. As a result, retailers dialed back orders for Solo and The Last Jedi.

– Fourth, is Star Wars merchandise for kids or adults? On one hand, kids. Obviously. Look at all the toys and young children wearing Star Wars shirts. On the other hand, look at all the adults wearing the shirts too. Adults are tricky for licensees, as I’ve mentioned before, because they aren’t as lucrative as children. And more finnicky/less reliable. Lots of folks speculated that the reason The Force Awakens generated such a one time boost in merchandise sales was because a lot of adults snapped up merchandise, but didn’t continue into Rogue One.

All of which leads into another “best of times; worst of times” summary of licensed merchandise. Star Wars is huge in the consumer product game, but it’s uneven and possibly trending downward.

Licensed Merchandise – My Estimates on The Top and Bottom Lines

Merchandise sales tend to be one of the harder business lines to estimate for a specific franchise or property. Studios don’t usually release the specific numbers, but the industry trade License Global does release an annual ranking of top content licensees, with some data for companies. Sometimes, specific franchises are called out. This historically happens in May, but last year was delayed until August. (It looks to be delayed again.) In the interim, I’m usually left to guess based on historical data.

The good news is that for toys and merchandise, they don’t have quite the lumpiness that you see in films for evergreen franchises like Star Wars. Other film-driven franchises like say Minions or Trolls see peaks and valleys for when new films come out or don’t. Non-film driven toy properties have similar steady state or peaks and valleys depending on whether they are evergreen or not. However, Star Wars has had a few decades of steady, multi-billion dollar retail sales. Its a safe assumption to assume that continues.

Thus, my toy model is fairly simple. Not a lot of bells and whistles and mostly extrapolating the trend line based on whatever has been publicly reported and then assuming it holds steady. There is still some uncertainty even in the publicly reported numbers because the inter webs have quite a few toy numbers for Star Wars, many of which are contradictory. (Wikipedia for example is wildly inaccurate.)

Let’s start at the top line, total retail revenue:

Screen Shot 2020-05-04 at 12.10.31 PM

First, there were quite a few estimates, as I just mentioned, that The Force Awakens saw a boom in retail sales to $5 billion. However, I lowered that number dramatically after reports that retailers were burned by Rogue One over-ordering. Indeed, even in Disney’s annual reports in 2017 and 2018 they blamed lower sales of consumer products partially on Star Wars.

 

The question is whether or not I think 2019, with The Last Jedi and The Mandalorian, saw a huge boost in sales. Based on the handwringing about Star Wars not resonating with kids, and the fact that another Disney property got most of the attention by stores (Frozen II) I think it did, but nowhere near the 2015 level. And yes, Disney said in their last earnings call that Star Wars and Frozen helped contribute to a big Q4. Hasbro—whose fortunes partially rise and fall on Disney’s fate—said the same thing. So we can’t untangle Frozen from Star Wars, but likely both were up fairly well.

Add it up and here’s my take. 

Screen Shot 2020-05-04 at 3.02.18 PM

The total revenue for retailers was likely around $3 billion dollars. I could see it swinging 20% either way. Of that, Disney likely took home $150-300 million. My estimate is towards the lower end—5% of retail sales—but some folks have said that Disney with its dominant position can demand better royalty rates on wholesale goods. More like around 10% of retail sales. So that’s why the range exists. The good news for Disney is that $300 million is basically a successful blockbuster domestic box office. That’s a great revenue stream to have! (And consumer products have pretty healthy margins as well. The costs are mainly for making the films and TV series in the first place.)

The worry, for Star Wars watchers, is how this fares going forward without another movie until at least 2022 (if not longer with the Covid-19 impact on production).

The Impact of Coronavirus on Licensed Merchandise

I should do a deeper dive like my other two looks at Coronavirus, but I’ll say quickly that I see two hold ups. First, if factories are shut down in China or elsewhere, that will delay toy production accordingly. Many toys have pretty long lead times, especially when bought in bulk, so I could see some delays impacting this process. This is even more true for plush or stuffed animals, that have stringent safety measures. Apparel can churn faster since laser printing has decreased run times considerably, and even on-shored a lot of US production.

Second, if films are delayed, their tied in toy sales need to be delayed too. This makes all the tricky scheduling complications even more difficult.

The question is whether the coronavirus impacts toy sales more broadly, and that I have no clue. I could see arguments on both sides:

More toy sales. With kids stuck at home, parents buy them toys as a distraction element. And they’re still consuming content like they were before, just not feature film content.

Less toy sales. Well, the lack of birthday parties could be killing the toy industry. That’s where lots of toys are purchased. Plus, despite Amazon/Walmart’s dominance, the closure of retail sales isn’t completely offset by digital shopping. Add to that a potential global depression, and toy sales could easily be a victim. (Just losing 5% of sales is enough to really hurt the industry.)

Add them up and I’d be more worried about toy sales than optimistic. But like all my Covid-19 thinking, I am incredibly uncertain.

Consumer Products Impact on Brand Value

As a reminder, as well as calculating the money made in 2019, I’m putting it into context of the Lucasfilm deal from 2012, and the future brand value of Star Wars.

Money from 2019 (most accurately, operating profit)

Well, I just covered that. Another $225-300 or so million added to the ledger for toys, apparel, video games, and such. 

Long term impacts on the financial model and the 2012 deal

I will point out my “discounted time value” though, because it’s the part people forget the most often when saying, “Man, what a great deal for Disney.” It was, but not just because the box office was high. What I’ll point out is that, in terms 2012 dollars, making $225 million in bottom line revenue “only” translates to $142 million in 2012 dollars. In other words, about 3.5% of the total price of the deal ($4.05 billion) was earned back in toys just this year.

Moving forward, the fact that Star Wars won’t have another film until 2022 (at the earliest), could cause an even steeper drop off in licensing revenue going forward.

Brand Value

The last question is whether the merchandise business as a whole built brand equity or detracted from it. This is almost all value judgement, and I have to say I don’t think the brand was hurt by not having Baby Yoda merchandise. Did Disney miss an opportunity to build some brand equity? Yes, but that’s not the same as hurting the brand equity. 

A Final Caveat

When I put these numbers out there, I should put a caveat on how to use these numbers. These aren’t actual sales or profit and loss statements from Disney. If I had those, I’d say so. (And if you have them, please share!)

Instead, these are my estimates. Which some can and have dismissed as “just my estimates”. I can also imagine the strategy teams inside Disney saying, “Oh man, he’s so off on this or that number in the analysis.” Sure! Of course I am. Any estimates are more wrong than they are right.

My defense is that this is my strategic estimate. When I was doing military intelligence, it’s not like Al Qaeda in Iraq or Jaysh Al-Mahdi or the Taliban gave us their number of fighters and locations. Right? That’s for them to know and us to estimate, and plan accordingly.

This estimate is the type of estimate I’d hope—but doubt they are—big studios like Universal or Warner Bros are making about their competitor Disney. In the battle of franchises, it’s worth knowing who’s doing well and who isn’t. That’s the type of analysis I’m trying to put out here.

Final point: I also provide my estimates in real numbers, unlike some other prominent strategy voices. You win and lose on the bottom line, and that’s the estimates I’ll give you. Strategy is numbers after all.

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.

The 2019 Star Wars Business Report Part II – TV: Baby Yoda Saves Star Wars

Star Wars did so well in TV this year, that virtually everyone knew which character was the “symbol” for 2020: Baby Yoda!

We know Baby Yoda conquered the social landscape, but how does that translate to Lucasfilm/Disney’s bottom line? Well that’s my topic for today. If you missed it, read Part I for my methodology and the performance of Star Wars films. As I was writing “everything else” I decided that each business unit deserved its own article. It’ll make each article smaller and easier to read, while providing regular content for the site. 

We got a lot to cover, so like the Jawas escaping Sand People, we’ll move fairly quickly.

TV Series

Whether it’s only because of one adorable (non-CGI) character, or the authenticity of this latest series, or just drafting off of the popularity of Boba Fett among Star Wars fans, Disney’s new streaming service launched with one of the top new TV series of the year in The Mandalorian. As always, here’s the Google Trends data:

Screen Shot 2020-02-13 at 8.08.54 AM

Other research firms back up this popularity. Parrot Analytics awarded The Mandalorian its “most in-demand new series”. The service TV Time saw The Mandalorian surge in interest as well. So it’s popular. It’s a hit.

This is a big change to my model. I’d assumed a Star Wars TV series would do well. Sort of like the Marvel TV series for Netflix well: lots of doubles and triples, but no home runs. Instead The Mandalorian is a home run with a chance for a grand slam, if its second season sustains what season one pulled off. (Which is no small feat. Lots of great season ones fade quickly. The Black List. Gotham. Mr. Robot. The Man in the High Castle. The Handmaid’s Tale. Every Netflix Show that didn’t make it to season 4.)

So I have a few changes to my model then. (Here’s my article on TV from last time.) First, I increased the value of what I called “the Jon Favreau series”. I calculated the value of the series as a percent of the production budget because, for Lucasfilm, they are acting as a producer here. And this is what I think the series would be worth, roughly, on the open market. (As for their value to Disney+, I’ll discuss that in my last article in this series.) However, hits are still worth more, so in the event of a blockbuster TV hit, I tripled the imputed fee from 30% to 90%. (Meaning it went from 130% of the production budget to 190%.) Also, I lowered the number of episodes to 8, but kept it at a little more than $15 million per episode. (Which is the consensus cost.)

Screen Shot 2020-02-13 at 10.35.32 AM

As a result, here’s how the value of The Mandalorian changed from being a “hit” versus being just “another TV show”. 

Table 3 - Mandalorian

Are these numbers reasonable? Probably, with just a pinch towards the high end. As you can see, if you take my “high case” as a “revenue per sub”, I basically think it’s worth $11.40 per subscriber. Which on it’s own is huge, but more a function of how few subscribers Disney+ has right now.

The next change was moving the Obi-Wan series back a year. And this brings up the biggest risk for Disney, which is getting these TV series out on time. Frankly, The Mandalorian has done a great job at releasing a season 1 and having season 2 ready to go later this year, only 12 months a part. However, the Obi-Wan series recently switched showrunners and won’t be out until 2021 at the earliest. As a result, I moved back a few of the series.

The last change I tried to make was to move my “imputed license fee” model to an “attributed subscribers” model. But I utterly failed. Why?

Well, I just don’t know enough about Disney’s finances. I took a guess at “customer lifetime value” of Disney+ subscribers, but the pieces we don’t know are too huge to make it reliable. For instance, we have no data on the average number of months we expect a customer to subscribe because it hasn’t happened yet! I also have a guess on marketing expenses per subscriber, but it’s all a guess. (We know revenues were $4 billion in the last quarter, so assuming 20% marketing expense on that, and you have about $800 million. But even that could be low.) About the only thing we know is that the average revenue per subscriber is $5.50. 

Moreover, trying to attribute subscribers is nearly impossible. Because we don’t know how many folks actually watched the Mandalorian, let alone subscribe to it. Also, given that Disney+ is growing so much, it too tough to attribute subs to Mandalorian versus all the other content. Unlike HBO or Netflix, this is far from a mature service to judge.

The final change I did make was to eliminate my “low case” model. Frankly, I think Disney would really have hurt the Star Wars brand to release anything less than five TV series over the next decade or so as they launch Disney+.

As a result, here’s my current base case model:

Base

You can see how I value kids content as well, which is I only count it as a production cost. If the upside for kids TV series is selling merchandise—which is a simplification, but not entirely wrong—than I’ll calculate the upside in the “toys and merchandise” article.

KidsAnd the “high side” case:

High

Money from 2019 (most accurately, operating profit)

So the The Mandalorian is huge. What is that worth? Well, less than you think, especially compared to the films. If the feature films are Executor-class Super Star Destroyers, hit TV series are regular old Star Destroyers. Still huge, but look at the size of Super Star Destroyers!

Thus, in my model, The Mandalorian, in success, is about a $95.5 million dollar profit engine this year. Which pales in comparison to Rise of Skywalker, but that’s because films just have much higher upside in success, due to multiple revenue streams. Next year will be a bit higher, though, because I think Disney will monetize The Mandalorian in more non-toy ways, potentially even via home video. 

(What about potential Baby Yoda toy sales? That will be covered in the “licensing” section. And yeah, Disney didn’t have any available anyways!)

Long term impacts on the financial model and the 2012 deal

As for the future, I’m not ready to change my basic model going forward. Repeating huge TV hits is a tough business, and with the wrong showrunner, the Obi Wan TV series could be as middling as anything. Indeed, that series is cycling through showrunners. As a result, through 2021 we’ll still only have one Star Wars TV series. 

However, the upside case is now higher for TV. If the Lucasfilm folks can generate just a few more hits, than they’ll be able to drive subscribers to Disney+ and a lot of potential value. The key is getting more huge hits. Even though costs would stay about the same in both my base case and high case, the revenue could jump from $5.6 billion to say the $8 billion over 8 years. 

Brand Value

In this case, we can tell that The Mandalorian helped revive any lingering doubts Star Wars fans had about the direction of the franchise. The buzz around Baby Yoda led to countless articles singing his praises. As a result, if you take my critical acclaim chart, you get this:

Screen Shot 2020-02-13 at 12.10.23 PMLook at that! The Mandalorian is the most critically acclaimed of any Star Wars property. (With the caveat that since it isn’t global, the overall number of ratings is fairly low compared to the films.) If you want to know how to make Star Wars, this is it.

Recommendations

I didn’t have recommendations on the film side, but TV really did have one for me. And that recommendation is one person’s name: David Filoni.

He’s been the showrunner on every Star Wars animated projected and he executive produced The Mandalorian. I’m ready to give him a heaping doses of credit for The Mandalorian given that his animated series are fairly well regarded by the fandom too. In other words, if Disney is looking for their Greg Berlanti, this is it for Star Wars.

From an operational perspective, I do think they should ramp up to one Star Wars series per quarter. This seems crazy, but the universe is clearly big enough to support that many stories. Especially if one is a kids series and then you have three adult series and/or limited series filling out the gap.

(And I’ll repeat it until I die to wish it into existence, but if you want a killer limited series, turn the book series Tales from Mos Eisley Cantina into a series. You can thank me later.)

91YK2vwbfZL.jpg

Most Important Story of the Week – 7 February 20: Why Timmy Failure Launching on Disney+ Spells the Death of Mid-Budget Films

With the Oscars airing on Sunday, it seems appropriate to join the crowd asking, “What will happen to the mid-budget theatrical film?” This seems to always come up this time of year as folks–usually critics–bemoan that Hollywood doesn’t “make these types of movies any more”. But what types of moveis? And for whom?

So let’s dig in.

Most Important Story – Why Timmy Failure Launching on Disney+ Spells the Death of Mid-Budget Theatrical Films

If you’re looking for the canary in the coal mine for mid-budget films–again, hold on a moment for a definition of that–don’t worry about the Oscars or Sundance. Instead, look at this:

Timmy_Failure_Mistakes_Were_Made_Poster.jpeg

Disney, not Netflix, is the place to watch for the future of movies. If even Disney abandons theaters, then all hope is lost. (They won’t; the economics don’t work as I’ve written before. Many times.) But just because Disney will keep major franchises in theaters doesn’t mean mid-budget films have the same hope. 

The traditional narrative goes that fortunately, even as mid-budget films abandon theaters Netflix will swoop into save them. Sort of like Disney+ with Timmy Failure. 

But will they? I don’t know. So let’s explore this issue fresh. I’m going to ask a few questions to myself to figure it out. (Consider this a mini-extension of this series on releasing films straight to streaming.)

Definition: What is a mid-budget film?

As a business writer, I tend to find a lot of articles about Hollywood tend to play fast and loose with definitions. Take, for example,  “independent film”. Most indie films are made or now distributed by giant studios. Which is hardly independent! Instead, we use “independent” as a catch all for “prestige” or “award-contending” films. This makes data analysis tough.

Defining “mid-budget films” has the same challenge. I can probably tell you what is too high to count, anything over 9 figures in production costs. And too low. Anything below $10 million.

But a range of $10-$99 million in production costs seems too big. And likely some films around $75-100 million are still big budget films, just slightly cheaper than others. If I had to pick a number, I’d say production budgets of $40 million is what most people are thinking of as “mid-budget”, with a range of $20-50 million. (This isn’t an exact science.)

What does the narrative say?

If you search for articles on mid-budget films, you’ll find critics or reporters saying they are dead, dying, returning or thriving. So it depends on how you define mid-budget, what you consider success and really whether or not a mid-budget film (Get Out, Knives Out) has come out recently or not to provide an anecdote for the author. 

Instead, let’s turn to…

What does the data say?

Well, I don’t have it. Why not? Because no website tracks production costs in easy to download tables. Or in ways that I trust. Wikipedia usually has estimates, but those are often unreliably sourced. Since I don’t have a data set to manipulate, I can’t figure out the answer for myself.

Sleuthing the internet, I did find one data based article by Stephen Follows. I’ve used his data before and I love this work. He used IMDb data and the answer turns out, like it often does, to be complicated. The number of “mid-budget drama” films is actually fine. He tracks the percentage of films that have production budgets between $15 and $60 million and he finds virtually no change in the percentage of mid-budget films. 

He did find, though, that drama budgets have been declining. And so have budgets for romantic comedies, action films or comedies. This–combined with lack of box office success compared to franchises, sequels and remakes–does support the thesis that mid-budget films are dying. Of course, data can only tell us what happened. For what will happen, I’d argue we need to turn to the models.

What do the models say?

Well, they do sort of make the case that studios should make fewer “mid-budget” films. By models, I mean this distribution chart of box office:

Chart 2 Movies AgainIf you learn nothing else from the Entertainment Strategy Guy, learn “logarithmic distribution”. That’s the shape of the table above. In other words, a few films earn outsized returns whereas everything else fails. On its own, though, the performance of films doesn’t quite tell the whole story.

Instead, the key is the correlations between budgets and performance. Blockbuster budgets and campaigns (which means franchises, sequels and remakes) are highly correlated with higher box office. Again, look at my hit rate from my recent Star Wars series:

Table 7 PErcentage with buckets

Unfortunately, I don’t have the data to compare blockbuster franchises to comedies, dramas or rom-coms. If I did–this is based on my personal experience–I’d tell you that those other categories don’t have as high of ceilings as fantasy, sci-fi or super hero films. They just don’t.

This means—and this is what I mean by using the model–that you may as well make your comedies and dramas for as cheap as possible to get the greatest return on investment. But if this is the case, why did we have so many mid-budget films in those genres in the 1980s, 90s and 2000s?

What are the forces hurting mid-budget films?

I see three major forces, and they aren’t the ones usually mentioned (which is just “streaming!”:

  1. First, the death of home entertainment. Physical home entertainment had some of the best margins in the revenue stream. The rule of thumb in the 90s was a film could make it’s production budget in box office, then home entertainment could pay for the rest. While DVDs aren’t completely dead, like music they are way below their peak.
  2. Second, the decline of median incomes. Subscribe here to read my Ankler guest post, but my theory is that the stagnation of American income has stalled theatrical revenue growth.

unnamed

  1. Third, the blockbusters are getting bigger. This is because digital distribution in theaters means that a theater can now expand a movie to every available theater if its a huge, huge hit. So when Avengers: Endgame came out, it set a record for the number of theaters showing it, which means all the mid-budget films got crushed. Counter-programming sometimes works, but often doesn’t. 

The multi-billion dollar question, though, is can streaming offset all those forces? In other words, can streaming revenue replace the lost mid-budget theatrical movie. 

How does all this impact Disney/Disney+?

Which brings us to the House of Mouse. And Timmy Failure, a film very few of us probably heard got released. Unless you went to Disney+ this weekend. As with any film, I like to use “comps”, meaning a comparable film. In this case, not only can I find a kids movie that Disney released for families, I can find one about another Tim:

The_Odd_Life_of_Timothy_Green

They both are mid-budget films (Failure was $40 million; Green was $25 million), both based on preexisting IP, both targeted at families. But one went to theaters and made $53 million; the other went straight to Disney+ last week. Hmmm.

Or take films about Alaska featuring canines and aging A-List actors. Togo was a Disney film costing $40 million and it went straight to Disney+ last December. Meanwhile, Call of the Wild comes out at the end of the month. The difference? It cost $109 million.

What do I take from all this? Well, when it can, Disney is deciding that mid-budget films are going straight to streaming too. Even it has started to skip theaters. If you want to know why this is the most important story of the week, here you go. 

What about Netflix?

Who started skipping theaters altogether? Netflix. That’s why there are so many articles about how they’ve killed theaters and/or changed cinema for good

This narrative is both obviously true and frankly also unknown. On the one hand, yes they clearly decided to launch a stream of mid-budget films from their Adam Sandler films to their summer of rom-coms to Bird Box. 

On the other hand, are those mid-budget films? In some cases, I think their budgets may actually be more equivalent to low-budget films, especially the rom-coms. In other cases, say any film with A or B-List talent, I think they may blow past my $50 million threshold. (As we know The Irishman did.) So how many “mid-budget films” Netflix actually makes we don’t know. 

For a good take on this as well, and partly the inspiration of this series, here’s The Netflix Film Project on a recent Netflix mid-budget film, The Shadow of the Moon that no one is talking about. It’s cool they made a mid-budget film…but if no one sees it did it matter?

Which brings us to the crux of the issue. So Netflix is making mid-budget films? Are they working for them? Or for Disney?

The Implications (and huge worry) for Mid-Budget Films Direct to Streamers

Is anyone watching mid-budget films on Netflix? Or Disney+?

We have no idea.

A point I’ve made over and over and so has half of the journalists covering Netflix. 

But I’ll say this. My models that show that you may as well either make huge tentpole movies or small films that cost nothing has the exact same logic on streamers. If you’re going to spend $50 million making a film, you may as well spend $100 and quadruple your viewership. Or decrease spending to $10 million and get about the same viewership for a quarter the cost. What you don’t want to do is get stuck in the middle. 

As long as profit and making money don’t matter, then mid-budget films are fine to draw in talent. Why not? It’s not like Wall Street cares. If that changes though, it’s hard not to see mid-budget films as the first casualties in the content budget.

In other words, if you want mid-budget films, don’t hold your breath for streamers to be your savior. They are now, but the forces that decreased the budgets of theatrical mid-budget films (they didn’t die) are coming for streaming. At some point.

Other Contenders for Most Important Story

Hulu’s Big Week

Meanwhile, the biggest “event” news story was the departure of another CEO from Hulu, with the consequences that Hulu is now reporting in to Kevin Mayer at Disney. The Disney consolidation of Hulu is nearly complete and combined with Disney+ this gives Disney their both shot at disrupting Netflix globally.

When will that happen? Sometime in 2021. Disney is going to roll out Disney+ internationally, learn it’s lessons, then roll out Hulu (backed by FX content) next year. Which is a smart strategy.

Earnings Report Summary – Disney+ gets to 28.6 million subscribers.

This week’s buzziest story was all about the Disney earnings report. But, like Netflix, it’s really a tale of two numbers for me. The headline number is the Disney+, ESPN+ and Hulu subscribers, which were all up in big, big ways. Obviously, this was driven by their aggressive pricing and discounts, but it worked:

Screen Shot 2020-02-04 at 1.44.49 PM(Yes, Disney+ is available in Canada, Australia, New Zealand and the Netherlands. Even if you subtract 25% from the Disney+ total, it’s still likely Disney has more “subscribers” than Netflix by the end of the year if not the next quarter.)

If I had a caution, and it’s the same one I have for Netflix, it’s that these costs are being born by Disney in the terms of declining free cash flow. Disney in 2018 Q1 made $900 in cash; in 2019, that dropped to $292 million. In other words, they are on track to lose $2.4 billion in free cash flow this year. Just like Netflix! 

Screen Shot 2020-02-04 at 2.11.32 PM

Pay attention to this story as HBO and NBC join the money losing crowd this year.

Data of the Week – Youtube Earnings

I’ve long had the wish that Google would disclose Youtube’s financial numbers. Well, it must have been my birthday because I got my wish. The headline numbers are that Youtube makes $15 billion dollars a year, has 2 million Youtube Live Subscribers and 20 million Youtube Music and Premium subscribers. In other words, Youtube is the behemoth we thought it was. 

M&A Updates – 2019 Off to a Slow Start

That’s the headline of this Financial Times article and it matches the broader feeling of the landscape. I still think the fundamentals mean that M&A will likely stay slow for the foreseeable future in entertainment. (My series on M&A provides a good long term look at M&A in entertainment, without some of the hyperbole you see.)

Screen Shot 2020-02-10 at 12.52.49 PM

EntStrategyGuy Update – Checking Back in with Luminary/The Ringer

When a company launches as the “Netflix of Podcasting” you have my attention. In a negative way. I was skeptical folks would pay more than Disney+ for access to a few exclusive podcasts. (And I’m also skeptical of companies founded by the children of billionaires with access to capital.) Sure enough, Luminary has lowered their price

The biggest worry, though, has to be Spotify’s continued gobbling up for podcasting companies, the latest being Bill Simmon’s The Ringer for $250 million.

Lots of News with No News – Super Bowl Ratings Are Slightly Up

The ratings for the Super Bowl were up year over year for the first time in five years. Why is this not “news”? Because any one year’s ratings can be noisy, and despite being slightly up are still in line with the historical average. My recommendation? Check out Wikipedia for the charts that tell the best story:

Screen Shot 2020-02-11 at 3.37.39 PM

So while I’d love to tell you this means the Patriots are bad for ratings, I can’t in good faith do that. (Though I was glad I didn’t have to watch them again. Sorry Boston fans.)

The 2019 Star Wars Business Report – Part I: The Economics of Star Wars Films

If I didn’t have a little Padawan join my family in November, one of my goals was to update my massive “How Much Money did Disney Make on the Lucasfilm Acquisition?” series. That delay actually helped because I wouldn’t have been able to get that article up before Rise of the Skywalker came out. Meaning I would have had to guess on a billion dollar variable!

And since I didn’t have to guess, we know that Rise of Skywalker joined the caravan of Disney billion dollar box office film in 2010s. Still following Lucasfilm/Star Wars in 2019 had a sense of dread. For every good news story there was a bad one. So how do we truly judge—from a business sense—how well Lucasfilm did in 2019?

We use numbers. Strategy is numbers, right?

Since Disney doesn’t release franchise financials—why would they?—I have my own estimates. I last updated these in the beginning of 2019 (with films updated in 2018) so I’ll do a big update to the model to learn what we can about how well Lucasfilm did in 2019. I’ll break it into two parts. Today’s article will cover movies; next week, I’ll review the rest of the business units, TV, licensing and theme parks. Previously, I only focused on the price Disney paid compared to their performance. Today and next week’s article will instead act as a report card on how 2019 impacted Lucasfilm and Disney’s business/future.

What this Analysis is NOT

There are so many cultural takes on Star Wars, especially since The Last Jedi, that I feel it’s important to clarify what I’m NOT doing here. (A UCLA forum I follow, for example, had a 60 page “debate” on the latest two films.) 

To start, this isn’t my “fan” opinion on the franchise. My opinion is just one person’s opinion, so whether or not I “loved” the latest film, or the one before it or “the baby of the same species as Yoda” doesn’t matter. In the aggregate, Disney does and they track this via surveys and focus groups. But lone individuals online? Whether they love or hate recent moves? Not so much.

To follow that, this isn’t a “critical” perspective either. I haven’t been trained in the dark arts of cultural and film criticism, so my opinion again just doesn’t matter. (Does Disney care about the critics? Controversially, I’d argue not really.)

What this Analysis IS

Instead, I’ll focus on three areas per business unit for Star Wars (read Lucasfilm):

Profit from 2019 (most accurately, operating profit)

In my big series on the Lucasfilm acquisition, I was looking at a specific question about the value of Star Wars vis a vis the price Disney paid. But if you’re Disney, that deal is now a sunk cost. What matters for Disney strategists or brand managers is how much money the franchise is making now. That’s the focus.

Long term impacts on the financial model and the 2014 deal

Since I have a gigantic spreadsheet filled numbers that I can update putting this all in terms of the $4 billion (in 2014 dollars) context, I may as well update how the model has changed. Further, some decisions Disney makes now will directly impact how much potential profit they can keep making on Star Wars. So I’ll update that too.

Brand Value

This last part is the hardest part to quantify, but is crucial as well for putting the above two decisions into context. See, a brand manager doesn’t just care about making money this year, they care about making money next year and the year after and so on. And there are ways to make money in the short term that damage a brand in the long. Threading the needle of making money while building brand equity, not just drawing it down, is crucial for a brand manager. 

This is admittedly a tough section to quantify, but it still feels particularly important. (Again, the goal is not to sneak in my opinion, but use data where possible to figure this out. Though narratives will likely figure in.)

With those caveats, let’s hop into the most important business unit, the straw that stirs the blue milk, films.

Movies

As of publishing, Rise of the Skywalker grossed $1.05 billion, with a 48% US/Canada to 52% international split. In my model—which I’ll repeat is a lifetime model, meaning all future revenue streams—I’d expect Rise of the Skywalker to net Lucasfilm $798 million, nearly identical to Rogue One. (As I clarified before, my model is a bit high compared to Deadlines’ model. There are a few reasons, but mainly I calculate lifetime value.) So that’s the first building block for how Star Wars did in 2019. In my framework of films, I’d have called this a “hit”. Here’s a table with Disney’s 5 Star Wars films in the 2010s:

Table 1 - First Five Windowing ModelBut what does this mean?

Star Wars Feature Film Trend Lines

That’s where things get tricky. The key question for me is context. If we were using “value over replacement” theory, and you looked at the last Star Wars in “value over replacement film”, well it does terrific. Very few films get over a billion dollars at the box office!

However, I’d argue that’s the wrong context. This is a Star Wars film. So how did Episode IX do in “value over replacement Star Wars films” context? Not very good. To show this, I updated my giant “franchise” tracker through 2019. 

Let’s start by just charting Star Wars film performance. First by category, separating “A Star Wars Story” into their own category. Second, by release order by decade.

Chart 3 - Star Wars v03

Chart 2 - Star Wars v01

The worrying issue for Star Wars brand strategists are the trend lines. This isn’t a series trending upwards or even maintaining consistent film launches. If Disney wanted to reassure themselves, they could say it isn’t their fault, lots of franchises lose their mojo over time, like Lord of The Rings, Transformers or Pirates of the Caribbean. Here is the chart I made in 2018 for franchise performance, updated through 2019 launches. They show the US adjusted box office and how series have trended over time:

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

Is content is king?

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

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

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

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

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

Disney+ Value Creation Model

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

That’s how I personally felt about Disney+.

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

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

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

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

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

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

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

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

Upside Theory: The Simpler User Interface – Decluttered

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

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

Downside Theory: The Nostalgia Factor Wears Off

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

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

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

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

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

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

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

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