Tag: Film

The Great Irishman Challenge – The Specific Assumptions for The Irishman Part III

(For the last few weeks, I’ve been debuting a series of articles answering a question posed to me by The Ankler’s Richard Rushfield: Will The Irishman Make Any Money? It’s a great question because it gets as so many of the challenges of the business of streaming video. Read the rest here, here, here and here.)

Tomorrow, we start to get data for the Great Irishman Challenge. Well, we don’t, but it will hit screens everywhere as Netflix releases it and presumably places it front and center on everyone’s Netflix homepage. One of our goals with this project is to set our criteria ahead of time, this way we aren’t back-fitting the results to our preconceived notions about Netflix. 

Now that we have our models for valuing film explained and re-explained, it’s time to fill in the specifics. Today, I’m going to lay out what we know about The Irishman before it launches. I’ll update some assumptions on the model and revenue streams from some feedback. Then I’ll describe two key inputs for the streaming model—Customer Lifetime Value and Attribution of Subscribers. Plus, I’ll touch on how I plan to triangulate popularity after The Irishman launches, which may evolve as we get more data or potential partners. Finally, I’ll talk about the benefits for this model and how I plan to draw insights from it in December.

Assumption 1: Production Budget

Discussing with Richard, we think this is high. Super high. A pretty good summary of this is Jeff Sneider’s take on his Collider podcast a few months back (episode 11 specifically at minute 54):

“I’ve seen [The Irishman budget] figures from $125, $140, $150, $160, $175, $200 million for The Irishman. If you go on Deadline you can read an article that says the budget is $140 and then two hours later another writer is under a completely different impression and says it’s $200 million. No one is on the same page on the budget for this film. And let me tell you what that means. It means the budget is way f***ing higher than any of you are imagining.”

Gosh, that type of cynicism about PR efforts exactly matches my own. If you hear tons of different numbers that can’t seem to decide how much something cost, well the likeliest option is that it was WAY WAY WAY more. At a minimum, this is a $200 million dollar film. And I’m going to do some scenario modeling up to even $300 million. Which means I’ll split the difference and call it a $250 million dollar movie.

Is this ridiculous? Not so much when you think about it. Consider, what does it cost to get Martin Scorsese, Robert De Niro, Al Pacino and Joe Pesci (out of retirement) on a film set? Especially if you’re buying out all the backend, which Netflix had to do since there aren’t any second window revenue opportunities here. (Which is cool too because it simplifies my model.) If I told you between those four it cost $100 million in talent costs, would you blink an eye? Is $150 million too high? I’m assuming $125 million in talent costs.

Then we can add in the extra production costs. This was a very long shoot. (I saw 300 days somewhere.) And then it was as VFX-intensive as some Marvel movies due to the de-aging process, which also required extra work because initial versions didn’t work. (Sneider lays out this situation with great details in his podcast.) This film required a VFX push to get finished in time for launch at the New York film festival, meaning it ran up tons of overtime. Does that sound like $125 million in costs? Absolutely. If not more.

Assumption 2: Marketing Budget

The Irishman will have two marketing budgets. First, the initial roll out. I looked for estimates online and didn’t find a ton. That said, I’ve seen billboards, online ads and even commercial spots. Which screams definitely something, but less than a franchise tentpole roll out. I’d say it’s probably between $50-$100 million, and since I went high with the production budget, I’ll go low here.

(Also, to echo Richard Rushfield’s “see something; say something” if you know a better number for the marketing budget, shoot me a line.)

Then we have the Oscar budget, which is a little bit harder to disentangle. Already, Netflix has started their awards campaigning, but has specifically tied many of their films together, from A Marriage Story to The Irishman. We know from Richard’s reporting that Netflix likely spent over $50 million on Roma’s Oscar campaign last year. They look likely to beat that again. The question is, will they spend $50 million just on The Irishman, or split it with A Marriage Story? Both are getting rave reviews, and I think Netflix is desperate for a Best Picture win. I’m going to end up calling it about $40 million for The Irishman alone.

Assumption 3: Profit Sharing and other revenue streams

We have a few categories here, so let’s run through them.

Library Value? Yep. 

I added library value, assuming the retention model is the equivalent of the theatrical window. Meaning it sets the “price” of the film. Then, we can our theatrical financial model to value library windows. Meaning, the “value” to Netflix for the film after the initial release. To provide an example, Bird Box got most its viewership in the first month, but folks will keep watching it out on Netflix for years. That has a value, which is the “library” value. Using my theatrical model, I’m assuming library value of 25% of first window value. (Specifically, the 10% “digital” revenue for theatrical films is about 25% of the the free, cable, syndicated TV, pay TV and digital second window buckets.)

Box Office Bump? Yep.

If a Netflix film wins a Best Picture, or even gets nominated, that will result in boost in viewership. I’ve seen that for past film and TV series for major awards series. For most Netflix films, this isn’t worth a line in the model, but for this one it is. In this case, I’ll use a 25% threshold of the initial window for the Best Picture bump. This will have a “halo” effect on the library window as well.

Second Windows? None.

Since Netflix films are exclusive to the streamer, every other potential window from home entertainment to licensing to cable channels is a zero in my model. This simplifies our model.

Merchandise? None.

Mobster films don’t really sell a lot of merchandise. Especially brand new films without fan bases or cultural cachet. 

Distribution Fees? None.

Since there aren’t second window or merchandise revenue to shield from profit participation, I don’t need to model any Netflix distribution or marketing fees.

Talent participation? Some.

Initially, I didn’t have any profit sharing, but then I got a note that Netflix for super-duper-huge stars did put a bonus system in place for feature films. Basically, if you hit a certain viewership level, you get a 20% bonus in your paycheck. So I’ve updated the model with that assumption in place, assuming that 80 million views (or “one Bird Box”) is the threshold.

Assumption 4: Calculate CLV

It’s crucial have to a good estimate for customer lifetime value. These are calculated fairly often by other people (see estimates here, here, or here). My difference is I don’t factor in content costs because I’m trying to value the content itself. If I did factor them in, I’d be double counting content costs, and that’s a huge “no-no” in accounting.

So here are my inputs for CLV. First, blended average price per month comes from Netflix’s 10Ks. Customer retention estimates come from various sources, including Second Measure. Crucially, though, I have a much lower rate for international because I’ve heard the churn machine is very high overseas. Finally, I use other estimates of Netflix’s marketing spend for customer acquisition costs. All this leads us to:

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The Great Irishman Challenge – How to Calculate Feature Film Profitability? Part I

(For the last few weeks, I’ve been debuting a series of articles answering a question posed to me by The Ankler’s Richard Rushfield: Will The Irishman Make Any Money? It’s a great question because it gets as so many of the challenges of the business of streaming video. Read the rest here, here, here and here.)

Chatting with the esteemed Richard Rushfield a few months back—we share sensibilities on Hollywood and the (hashtag) streaming wars—he pitched me a straight forward question. Could we build a model that can answer this deceptively simple challenge:

Did The Irishman make money for Netflix?

It’s a good question because the buzz for The Irishman from critics has been so positive. From what I can tell—based on “film Twitter” reactions—this would be the greatest film ever made by man, except that with this masterpiece Martin Scorsese has elevated from mere mortal to filmmaking demigod.

It would be cool to know if Netflix made any money off it.

Which is pretty tough. I mean, we don’t even know the ratings for Netflix films…how can we determine if they are profitable? It will be hard, but to quote a famous president, we write these articles not because they are easy, but because they are hard.

So you know what? Richard and I are taking the law into our own hands. Yeah, we paint houses, with financial models and data hacks! 

Later this week, in The Ankler newslettersubscribe here for the must read newsletter—Richard will explain our purpose, reasoning and goals to start this project early. Today, I’m going start explaining how we’ll develop a “Feature Film Profitability Score”. In previous articles, I’ve pretty much built the models needed for this analysis. Now, I’m just combining them with a little special sauce. 

Moreover, we’re doing all this ahead of time. We’re not judging The Irishman based on preconceived notions, but based on its actual performance. Moreover, once we build this capability, we can leverage it for future releases on many streaming platforms.

Here’s what today’s article will explain:

– The specific profitability score we’re creating.
– The four models of film release in the streaming era.
– A quick review of the traditional film model.
– Some notes on competing theatrical film models.

The “bottom line up front” is that combining my methods for valuing theatrically-released films and streaming video, we can make a model of success depending on either box office results or streaming popularity. While the last seems unknown, using some publicly available data—mainly Google Trends, potentially other third party survey data, or even Netflix datecdotes—we can make guesses on popularity.

The Goal: A “Feature Film Profitability Score”

At the end of the day, the goal is to keep this project simple. So Richard asked if I could boil this down to one (1!) number for every film—streaming or theatrical—that determines, “How profitable was this?”

Well, I failed, but I have this down to 2 numbers. Let me explain why. The obvious start is that a film can make a lot of money. This is good. Making nearly $2 billion dollars on Avengers: Endgame, Avatar, or Titanic matters. That’s a lot of money. 

But you don’t just want raw totals. If it costs $1 billion to make $1.5 billion, that’s not as good of a value for investors as making a film for $200 million that makes $700 million. Same raw total, but one required less up front capital. This is a quick definition of ROI, by the way. The Joker is currently the ROI golden child of the trades. The all-time ROI club is films such as Blair Witch, Paranormal Activity, or Saw that still fill the dreams of indie horror producers everywhere. 

If you wanted a quad chart of success, you could see this:

IMAGE 1 Profitability Quad ChartEssentially, films in the upper right are living the dream. Films in the lower right made a lot of money, but not a great return on investment. Films in the upper left made some money (they aren’t all negative), but had great ROI, meaning they were likely cheap but just not as big as some other films. And don’t be in the lower left—though most films are—which means you aren’t making money period. The majority of films in the current climate end up there. Combining these two numbers—with other metrics I’ll explain—brings us to this scorecard we’ll give The Irishman:

Ankler Image - Feature Film Profitability ScoreBeside the two promised numbers, I have four “breakeven numbers” for streaming films in particular. That’s because “breakeven” is easy for feature films (make more money than you cost), but with streaming the challenge is “what is making money”. I’ll explain those in the last section, but before we get there, we have to explain why I needed to build a new model in the first place.

The Four Models of Film Distribution in the Streaming Era

It’s no surprise that film distribution is changing. And commonly, we say, “Hey Netflix is skipping theaters.” That’s decision number one: to go to theaters or not; Netflix opts not; Amazon (formerly) and traditional studios opt in. Financial modeling wise, that’s an easy decision to calculate.

The tougher part to keep track of—and it is neglected in the media coverage—is the second window and beyond distribution plan. (I’m calling everything from home entertainment to Pay Per View to TVOD/EST to linear licensing to streaming licensing “second windows” for simplicity.) See, a new streamer like Apple is going to put its movies in theaters, but then—from what I understand—release it to Apple TV+ directly, exclusively and forever. Amazon too from now on. In other words, all these windows get condensed into this one:

IMAGE 3 - Traditional Second Window vs StreamingThe cool thing is that all the companies I think of make these two choices, meaning we have only need four models for films:

IMAGE 4 - Future of feature Film dist(Two quad charts in one article? Probably my favorite article of the year. Well, after this one.)

The one variable is Apple TV+. I believe they are doing streaming only, but haven’t confirmed yet. With that understanding, let’s build our models. I’ll need a model for theatrical and streaming only to evaluate the Irishman.

My “Traditional” Theatrical Model 

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“Hurry Up and Wait” for the Streaming Wars: Netflix’s Q3 2019 Earnings Report

(Before you start, consider signing up for my newsletter! Yes I know you have too many already, but this is the best way to help support independent writers such as myself. Sign up here.)

If you ever found yourself in the armed forces, you may be familiar with the phenomenon of “hurry up and wait”. It worked like this. A dignitary is coming in. Say a three star general. So your two star general plans a division parade. Which means the Command Sergeant Major sets it up. Scheduled to start at 1000 (ten hundred in parlance), the Division Sergeant Major tells his Brigades he wants them in position by 0930, so of course that means standing in place at 0915.

Woe to the unit that is late, by the way, which is why everyone is “hurrying”.

Here’s where the fun starts. The brigades don’t want to be late for the 0915 “time hack”, so they have their troops show up in formation at 0830, to be ready 30 minutes early too. Then the battalions say, well, “Let’s be ready 30 minutes before that.”

And so on. With companies, platoons and even squads.

Eventually, you have thousands of soldiers leaving their houses at 0500 in the morning—and skipping PT— so that they can stand in formation for 3 hours doing nothing. Hurry up and wait.

That’s my feeling for Netflix’s latest earnings report. If I can speak for my fellow Netflix hawks—be they bulls or bears—we had this date circled since July. Will Netflix miss subscribers targets again? Could the stock tank? Or will Netflix crush estimates? And what will Reed Hastings and Ted Sarandos have to say about the “streaming wars”, which start next month? 

No kidding, the (hashtag) streaming wars made it in the shareholder letter.

IMAGE 1 - The Streaming Wars

After all the waiting…we didn’t learn much. Netflix hit almost all their targets on the dot and Hastings/Sarandos didn’t reveal any ground breaking news.

Instead, we hurried up, but we’re still waiting for the streaming wars. Sigh. Still, we learned a few things in the latest earnings report. Let’s start with strategy, touch on the specifics and end with the subscribers/financials. Oh, and meta thoughts to conclude.

Strategy: Focused, but Narrow?

When it comes to strategy, Netflix probably has the clearest plan and simplest business model of all the streamers. They sell subscriptions and they plan to dominate all scripted and reality viewing. If you want to know their strategic advantage, it’s that. They know what they are, and they’re extremely focused on that.

And they still have a big goals: they want to take over TV all over the globe. If you want Netflix’s global upside for share price, it’s all this. Honestly, “Netflix bears” like myself probably neglect how much additional revenue can come from this global conquest.

But it isn’t cheap, of course. Netflix is spending $10 billion in amortized and $15+ billion in actual cash each year (from 10K) to get those new subscribers. Worse, the most valuable subscribers are in the United States, then Europe, then Japan and then descending down the GDP per capita income ladder. And those most valuable markets are nearing Netflix saturation. (Meanwhile some, like China, remain off limits.)

The most interesting observation, for me, was about the content strategy. Here’s the introduction to the content section of the shareholder letter:

IMAGE 2 - Content Strategy Summary

This content strategy manages to be both broad and limited, at the same time. Broad because Netflix is competing on film and TV and scripted and unscripted for kids and adults and everyone. 

And it’s limited because that’s all they are competing on? If “live TV” isn’t an option, that means  events, sports and news just aren’t in the cards.

In other words, for all the growth in content spend, many TV consumers will want a TV service that provides news and sports. If Netflix can’t fulfill someone’s entire TV demand, that means customers will have to watch other options too. If you value Netflix’s stock price as “becoming TV”, well you’re seeing a company that knows it won’t be that. Sure, it has a chance (that is becoming smaller every week) of “become all scripted and reality TV”, but that will be a pricey fight.

My view is that as long as customers need to have other TV services, Netflix is increasingly likely to be churned out of someone’s regular diet.

Nor does Netflix have the capital to branch out into a large new business like either buying DAZN or Roku or even a Lionsgate. They could merge with any of those, but any new venture that has huge upfront costs will stress their cash flow even further. Apple, Amazon and Disney don’t have those hindrances. That means Netflix needs to be perfect on everything decision from here on out to maximize that share price. That’s tough. 

So let’s get into those specifics.

Content: Some Selected Datecdotes Tell Us Some Things

Let’s start with the headlines you did not see yesterday. And the “null results” because I want to place in your easily available forebrain the idea that most shows aren’t doing well on Netflix. Or they are and it behooves Netflix to keep them secret. (I guess.)

Headline one: 

Of 162 original launches in Q3, 93% did under 29 million viewers. They were bombs.

Fine that is a bit provocative. Technically, I don’t know how many series really had less than 29 million viewers. Just because the lowest Netflix datecdote was 29 million doesn’t mean some other movie secretly did more than that, and Netflix just didn’t say. (Which, why hide that?) How’s this:

We don’t know how 93% of Netflix originals performed last year.

It’s crazy to consider that’s how many launches Netflix had in Q3, but according to my data—which means sorting this long, long list from All Your Screens Rick Ellis—that’s accurate. And given that when we do get inadvertent leaks—Steven Soderbergh said in an interview High Flying Bird had 8 million views—they are much lower, I’d bet that most other content releases were much lower than the leaks.

On to the datecdotes (explanation here) we did receive. These are both higher and lower than it seems. On the high side, I counted 12 datecdotes (authorized or leaked) since Q2. No seriously, four movies and 8 TV series. The challenge is that four of these datecdotes apply to two series (Netflix released 7 and 28 day numbers for both Stranger Things and La Casa de Papel.) And three of the TV series releases didn’t actually have numbers just “biggest TV series in the country” (Sintonia, The Naked Director and Sacred Heart.)

Since I’ve done feature films the last two times, I’m going to try to draw out some conclusions from the TV side this edition. Here’s my summary table of the data:

Screen Shot 2019-10-17 at 4.28.29 PM.pngAnd now some implications.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Antithesis – Make Increasingly Popular Films

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

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

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

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

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

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

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

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

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

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

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

But…

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

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

Other Quick Thoughts

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

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

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

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

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

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

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

Oh, one more thing.

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

Also, just rewatch this trailer:

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

Other Contenders for Most Important Story – NBCU Reshuffle

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

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

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

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

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

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

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

Entertainment Strategy Guy Update

TV Ratings Updates!

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

Overall Deals

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

Management Advice – Email

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

Cal Newport Quote

Read My Latest at Linked-In: “Predicting Independent Film Sales in 2020 and Beyond”

Sometimes, it turns out you can’t predict the future.

Which doesn’t stop us from trying, all the time, whether we realize it or not.

That’s basically the theme of my latest article at Linked-In. It shows how small sample sizes and a lack of data make some efforts at predictions essentially impossible. (I’ve been trying to build my profile over there as well, so consider a follow/connection on Linked-In if you use it as your default social media source.)

Specifically, I looked at film festivals, using Sundance sales from past years as stand-in for all festivals. This is also a great example of how people are predicting things—how likely it is they can sell their film—without realizing it—at best folks predict if the market will be weak or strong, rarely with any numbers to it.

Take a read. Even if you’re not a fan of independent film, you can learn more about…

— A brief history of the rise of prestige/independent films.

— How the streaming wars have boosted prices in independent film.

— A history of Sundance sales looks over the last five years…in numbers. 

So check it out!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Task – Forecast Netflix Subscriber Growth in the United States

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

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

The Data – Netflix Subscriber Counts Over Time

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

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

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

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

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

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

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

Well, library content, of course. 

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

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

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

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

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

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

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

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

Let’s dig in to explain why.

What We Know about Disney+

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

IMAGE 1 - Variety Quote

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

IMAGE 2 My Capture

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

Disney+ Film – By The Numbers

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

IMAGE 3 - Est 2020 Film Smales

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

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

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

IMAGE 4 - 2010 to 2020 Film Slates

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

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

The Value of those Disney+ Films

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

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

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

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

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

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