Tag: Film

Most Important Story of the Week – 17 January 20: The Optimistic and Pessimistic Strategy Cases for Peacock

With that, the final major entrant of the streaming wars has called their shot. (Besides SuperCBS. Is holding on to CBS All-Access and Showtime really their entire plan?) So we didn’t have to go very far to find our…

Most Important Story of the Week – Peacock Announces Their Plan

Investor day presentations are the ultimate in needing to see through the flash for the substance. In data, it’s all about “signal versus noise”. In presentations, the noise is deliberate. It’s designed to confuse, overwhelm and mislead to get you to invest, support or buy. (Which is why I think most biz presentations internally should be in black and white. Let ideas stand on their own merits, not the quality of powerpointing.)

From that angle, I’d put Comcast-NBC-Universal’s Peacock debut above HBO Max and Apple TV+, but still lagging Disney+ (who knocked everyone’s socks off). They leaned into the “30 Rock” angle, which is smart branding. This is all the more reason we need to wear our skeptical glasses to look for what NBC-Universal didn’t tell us, or what Comcast overhyped.

Overall, my gut take is more bullish than when I first heard of “Peacock”, with some huge lingering caveats. Reading my draft today, I found the positives more compelling than negatives, which surprised me. I’ll dive into this area in three parts: The upside case, the downside case, and implications for (selected) competitors.

The Upside/Bull/Optimistic Case for Peacock

Strategy: Zigging while others zag means becoming the “broadcast streamer”

By the time Peacock is fully launched–while April is the target date, it won’t go national until July–it will be the last streaming platform to the party. NBC’s logic seems to be, if you’re late to the party, be free. 

Not a bad plan!

Then that way all the already spent wallets still have room. Since broadcast has always been “free”, you just pay with your time, there is some justification in saying, “We’re the broadcast platform of streaming.” I’ve always felt that NBC-Universal had the most broadly appealing cable channel offering. They have sports, news, dramas, comedies, and reality. Now it’s all coming to one platform.

Really, the way to look at this isn’t that Peacock is a slow follow of Netflix, but a fast follow of Pluto/Tumi/Xumo. Since I think those companies really do fill a customer need, I like the idea. Moreover, they have a differentiator, as they themselves pointed out, Peacock is essentially the premium FAST

Screen Shot 2020-01-17 at 1.18.25 PMWhile I respect the “zig while others zag” approach to business, it doesn’t work if you don’t have a strategy. My initial take is Comcast has a strategy here.

Customer Targeting: Latinx viewers

A natural part of business analysis is to assume everyone is like you. Avoid this temptation. In entertainment, this means I, for example, have huge blind spots in international viewership. This even applies to the US, where I lag in coverage on Spanish language programming. Comcast has owned Telemundo for a bit now, so they don’t have this blindspot:

Screen Shot 2020-01-17 at 11.42.07 AMCredit to Peacock for seeing this customer need and serving this demographic. (Netflix does serve this too, and entered Latin America very early on.) The “Spanish Language Streaming Wars” are probably worth a deep dive article.

Company: A surprising willingness to be innovative.

Consider this an extension of the “zigging while others zag”, but I had a genuine worry that Peacock would end up as another clone of Disney+, Netflix, Prime Video and HBO Max. (Mostly the same product and similar content profiles.) 

Except Peacock is definitely trying out a few new things, which shows a commitment to change we don’t usually see. Specifically, the “live channels” approach, which only furthers the “fast follow of PlutoTV” thesis. If you know what you want to watch, the UX will have on-demand video. But for everyone else–or the folks who just want something on in the background–Peacock will have live/streaming channels. Will this work? Maybe, maybe not, but at least it shows some innovation. (For example, nothing in the Disney+ launch was innovative to that platform, just more streamlined than Netflix.)

Content: Pretty darn strong, especially in TV.

Peacock helpfully provided a list of the shows they plan to air. (Probably not an exhaustive list.) And it’s pretty strong. I’m as impressed as I was during the HBO Max roll out. (Also credit to NBC PR for making the document available and hence easy on journalists to absorb.) Here are some specific content pieces I think will be strengths:

The USA Network Shows: This is the bread and butter that built Bonnie Hammer’s career–former head of NBC Universal Cable Productions, she now runs content for all NBC Universal–so naturally a lot of these shows will be on Peacock including Suits, Covert Affairs, Monk and Psych. It remains to be seen if they are “exclusive” digitally, but still a good slate. USA Network is historically underrated because it’s popular in middle America, not one the coasts.

The big broadcast shows: Everyone knows about The Office, but everything from Cheers to Brooklyn 99 to Frasier to Everybody Loves Raymond to Two and a Half Men will be on Peacock. That’s a hefty dose of rewatchable series. And lots of rewatchable procedurals in Law & Order and Chicago series.

Bravo/E! tentpoles: One of the strengths of NBC-Universal, I’ve always felt, is that they have a broad reach of channels to draw content from, for example, the unscripted reality space. At first, I didn’t see these shows on the list, but a lot of them will be on Peacock. While most reality doesn’t fare well in bingeing long term, some does.

Late Night: Premiering their two Late Night shows in the primetime window is a great change for customers, such as myself who usually watch tape delayed. This feels smart to me, as more and more content gets time shifted.

Content: New categories to one streaming platform: sports and news.

HBO Max won’t have sports; Disney is pushing all sports to ESPN+, and Netflix refuses to even consider it. Thus, NBC steps into the breach and says their streaming platform will have sports in the same interface. (Amazon, of course, has toyed with sports for a while and offers a few sports channels as add-ons, plus one NFL game in America.) Thus, ignoring the type of content, NBC may have an advantage here. ESPN+ and DAZN remain separate apps which could decrease engagement, except for hardcore sports fans.

But we can’t ignore content forever. The question is whether English soccer, NHL and two weeks of Olympics every two years is enough to sustain sports. I don’t think so, which is why I think Comcast could be a buyer for additional sports rights, be it more NFL, NBA, MLB or college rights. (The great pitch too is that this is both digital and physical, keeping both windows. I think professional leagues are rightfully scared of a “digital only” approach that risks losing viewership/fan engagement overall.)

As for news, the best thing about news is it’s much cheaper than sports to get into. Plus, NBC has a fairly strong brand, if titled toward one side of the political aisle on cable.

The Downside/Bear/Pessimistic Case for Peacock

Read More

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

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

Slide2

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

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

The Facts

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

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

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

Top 10 tablesThat just leaves the why…

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

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

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

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

But it’s a bad habit.

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

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

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

Thought 3: Netflix Avoided Total Hours Because of Kids Content

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

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

Insight 4: Licensed content still made it on.

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

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

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

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

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

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

Read More

Most Important Story of the Week – 10 January 20: The Most Important Question of 2020

Welcome back to my weekly column. My attempt, usually, to select the story in the business of entertainment that will end up being the “most important” for leaders, strategists and companies. Not the story that is the most buzzy or interesting—though it usually is—but the story that will have true importance.

Having stepped back from writing for holidays—and mostly disconnected from the web—I’m busily digesting a stream of year-end and decade-end articles. Which I promise I’ll get to either here or in the newsletter. Instead, this week, I’ll talk about the question I’ve been thinking about for the new year.

The Most Important Question for 2020: What is the Same and What is Different?

At family gathering this holiday season, a relative used a phrase that has stuck in my head:

“in the new economy”

It’s actually so common to use nomenclature like this, that I think bolding that singular word is important to highlight its truly revolutionary implication.

Embedded in the idea that we have a “new” economy—and you could call this digital disruption, the technology revolution, or any of dozen other buzz words—is the idea that something has fundamentally changed in how the economy works. Not just that the situation is changing. That always happens. But that the economy is different; there was an old economy, now there is a new one. And fundamentally they are different.

Let’s key in on that word “fundamentally”. This doesn’t mean on the surface. But a deeper level of core fundamentals. Imagine if we had a “new physics”. Would that be the equivalent of Albert Einstein replacing Newtonian physics? Not really. Einstein didn’t dispute Newtonian physics, he provided a model that explained more than Newton’s version.

When it comes to the new economy, we’re not refining, but overturning! Futurists hyping the new world say that something has changed in the model itself. It’s as if we woke up one day and suddenly Plank’s constant had changed values. As if the speed of light raised or lowered its speed limit. As if the hydrogen molecule suddenly had a different atomic weight.

For us to truly have a “new” economy, it means that technological changes have invalidated or upended fundamental principles of economics. As if net present value, charging more for products than they cost to make, and creating value for customers are somehow no longer applicable to the business landscape.

My challenge when writing about the streaming wars is that I’m temperamentally conservative by nature. Despite futurist claims to the contrary, while things change and evolve, I don’t think they overturn core, fundamental economic principles. Technology and globalization change the situation and require adaptations, but economics is still economics. Strategy and business are still strategy and business.

But…

I do think the perceptions we are in a “new economy” illuminate the greatest challenge for business leaders (and myself) in 2020, the year the streaming wars become a hot war. Even if the fundamental principles of business, strategy and economics haven’t changed, well a lot else has. The key challenge for strategists is figuring out what has changed and frankly what hasn’t. In my opinion, the broad media—meaning everything form mainstream trades to social conversations to podcasts—does a great job at hyping all the change, and a much worse job at explaining core economic principles/fundamentals that still matter. (Even if they can seem to temporarily hibernate.)

A theory for what really divides the bears and the bulls on Netflix.

If the streaming wars have a psychological battleground, it’s debating Netflix’s future. You have the bulls on one side who see no end to the upside; and the bears fiercely contesting them on the other. Mostly on Twitter, but also spilling into the business and trade press.

Partly, the debate is so fierce and competitive because of this question. My theory is that how you feel about Netflix boils down to how you feel about what is different and what is the same in business, economics and entertainment. We don’t really disagree on the facts, we disagree on what they mean.

Take what is different. On-demand content. This is something no bear can argue is not a fundamental change to how TV is consumed. The idea of having a programming executive filling in a grid every week is gone. That part of the business has irrevocably changed. (Well, maybe. The rise of ad-supported streaming means someone or algorithm needs to program live TV!)

Take what is the same. Losing money is bad. This is something that even the bulls know needs to change for Netflix. The question is how much money they can lose and for how long.

Everything else is up for debate. This is what makes the debate and coverage of Netflix so difficult. On one hand, Netflix is a binge-releasing, algorithmically driven, streamer up-ending business models. Disruption! On the other hand, they are still just making a bunch of TV shows and movie and distributing them to customers who pay by subscriptions. Traditional!

How you feel about Netflix is about these edge cases and asking, is this the same or different? Is skipping theaters revolutionary, or foolishly passing up revenue? Is binge releasing content revolutionary, or needlessly avoiding building anticipation? Does Netflix’s data really help them program the channel, or do they still have teams of development executives doing the same jobs they always have, just with bigger check books? Or lots from column A and B?

The Streaming Wars

I could apply this to the entire streaming wars. What do you think has fundamentally changed in the entertainment business? Technology, certainly. Digital distribution means new ways to send consumers content. But the business models themselves…are still business models. And the same rules apply.

Sure a bunch of traditional entertainment companies are launching their own (money losing) streaming platforms. They need to catch up with Netflix and Amazon and the others who disrupted their business. The question for streaming, really, is what is truly revolutionary, and what isn’t. At the end of the day, collecting subscription revenue from customers is something cable companies and premium channels have been doing for decades.

Anyways, welcome to the new year! We’ve got a lot to explore, understand, explain, discover and more and I’m happy to have you along for the ride.

Other Candidates for Most Important Story of the Week

College Humor Laying Off Employees

The demise of the early generation of video websites such as College Humor and Funny or Die is, in my opinion, directly tied to the rise of Facebook and Google as an advertising duopoly. Potentially advertising share that should be going to publishers is getting captured by them. In total, this decrease in competition is bad for customers and consumers in the long run. And the whole economy, really.

Twitch Doesn’t Make a Lot of Money

Priya Anand of The Information is out with the scoop that Twitch—Amazon’s live TV service—made a whopping…

$300 million 

In 2019. And only $230 million in 2018. 

Those numbers are…bad. For context, just CBS TV network earned $6.1 billion in 2018. Just CBS. You can imagine the rest of cable TV and even Youtube. Likely Twitch isn’t profitable for Amazon, which means that five years in Amazon has only gone further into the $1 billion whole. Assuming just a 15% cost of capital, for tech that’s not bad, and they’re going to need to dramatically scale to make back the investment. That’s my gut thinking on the deal.

The challenge for observers of digital platforms is that we don’t hear the details of companies like Twitch, just gaudy user numbers that have been and are inflated by bots, fake views, and a host of other issues. As a result, advertisers clearly don’t trust the platform and there really isn’t as much money being made as it seems like it should.

I’d be especially worried for those hyping esports leagues. (Which is subtly different from folks making money by being celebrities on Twitch.) Most esports leagues have gaudy projections and financial numbers. But if all of Twitch can only generate $300 million per year, that’s a small pie to split a dozen or so different ways.

Data of the Week – Scripted Series Grows to 532

According to FX’s John Landgraf. To get a sense of all these titles, and the deluge of reality and children shows, I recommend All Your Screen’s running tally. The NY Times has a good visualization of FX’s data. Also, Variety used their insights platform in December for a similar look. My one other caveat is I’ve never seen a good clarification on whether or not this includes  international originals, which I feel is slightly misleading, as those TV series were always being made, just not in the United States. 

Lots of News with No News

The Golden Globes

The Ankler probably blew up this annual awards show best. When nominees can and do invite the entire voting body to their house for a birthday part, well, that’s tough to take the results seriously. Meanwhile, as a driver of buzz, the Globes success. It does generate publicity for the streamers, the question is whether the juice (buzz) is worth that squeeze (awards campaign costs). 

As for the Oscars, if the Globes, guild award and BAFTAs are a sign, I think we’re still on track for a moderately unpopular Academy Awards best picture field. Not the worst, since Joker and Knives Out did well, but not as good as it could be if they had nominated the deserving super hero movie of the year, Avengers: Endgame.

Quibi, Quibi, Quibi

Quibi had a big presentation at CES, which was covered everywhere. Besides a specific launch day and confirmation on price ($5 with ads and $8 without), I’m not sure there was a lot of other news here.

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

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

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

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

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

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

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

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

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

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

Bottom Line, Up Front

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

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

Avengers: Endgame.

Q: Okay, explain.

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

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

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

Q: Excuse me, oil?

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

Image 1 - Economist Oil 20171223_XMC600_weblarge.png

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

871878e86165ef98858ea0235551942d

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

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

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

Q: And can we quantify that?

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

Image 2 - Financial Waterfall Historically

And here are my recent assumptions:

IMAGE 3 - Financial Waterfall Now

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

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

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

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

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

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

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

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

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

IMAGE 4 - Netflix Film Comps

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

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

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

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

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:

Read More

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 

Read More

“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.

Read More