Tag: NBA

Most Important Story of the Week – 28 Aug 20: Are Theaters Back?

This week started off slow, but man what a finish. Kevin Mayer left TikTok? That’s buzzy. The NBA players boycotted their games? Wow, that’s a big deal. But neither are the most important story of the week. That honor belongs to the theaters slowly returning to business. This is a $42.5 billion dollar industry globally and its survival is the story we’ve been monitoring all spring and summer.

Most Important Story of the Week – Are Theaters Back?

Of all entertainment industry topics, this one deserves the most nuance. The doom-and-gloomers are being too pessimistic. The sunshine pumpers are too optimistic. The truth is somewhere in the middle. Where precisely? Well, I’ll present both cases and let you make up your mind. 

The Optimistic Case

First, China has reopened it’s theaters. That’s huge and more importantly, they’re doing well. Harry Potter set some records earlier in the month, then the epic film The 800 had a huge opening weekend. With Tenet due soon, and then Mulan, the Hollywood studios could see some real box office grosses soon.

Second, Canada opened just fine earlier this month. So did South Korea. Turns out customers are fine to return to theaters. As this random study from Odeon Theaters says, customers are hungry for the theatrical experience. (32% of those surveyed tried to recreate the theatrical experience.) As a result, studios are slowly ramping up their TV advertising spend.

The current underlying all this is that so far the theatrical experience doesn’t seem to be a huge driver of sources of transmission. This point is key and may go against initial forecasts, estimates and guidance. It turns out that wearing masks and not talking/shouting can limit exposure, especially if theaters are only partially filled. And if a country has its cases under control. (We should know by now if theaters are causing superspreading events in China, but we haven’t seen it.) This tweet from Derek Thompson shows that theaters, depending on capacity, are either low to moderate risk.

Moreover, the theaters have a unified plan that should protect them somewhat from political blowback. In all, theaters can see a road back to profitability.

The Pessimistic Case

The pessimistic case is that it will be a long road back.

The first weekend of new releases in the US was “decent” at best and maybe even disappointing. Even though Unhinged opened in 70% of theaters–though not major markets like New York and Los Angeles–it only earned $4 million at $2,200 per theater. As IndieWire pointed out, that means there is basically a 75% “Covid-19” tax on new film’s box office. More ominously, Warner Bros trotted out a re-release of Inception, but didn’t tell anyone the grosses. Lack of numbers is always suspicious.

Meanwhile the most important market–the United States–still has lots of closed theaters. New York and Los Angeles remain shutterted and, as a result, the theaters never actually tried out a “rerelease library titles” strategy to get customers used to going to theaters again before the blockbusters could return. (Though drive-ins have done well with library titles.)

Thus, the studios are still fleeing 2020. The latest casualty is The Kings Man in the US which just decamped to February. As Scott Mendelson points out, essentially only a handful of films are going to try to rescue the fall and winter in the US: Tenet, James Bond, Candyman, Soul, Black Widow, New Mutants and Wonder Woman. And any of them could still move if Tenet underperforms. In my optimistic cases, I thought quite a few films would try to prop up the calendar and that isn’t the case.

As this analysis from Bruce Nash shows, theaters will see a slow return, then speed up and then slow down again. That prediction seems to be describing the Canadian and US return to theaters. As a result, it could be until February until things are back to normal.

In Summary

The optimistic crowd can point to a hunger to go back to theaters by customers. The pessimistic crowd can rightfully retort that sure some customers will go back, but it will take at least 6 months or more to get back to full capacity. That’s billions of lost revenue in the meantime.

Overall, I lean towards the optimists. Because I think theaters will survive this crisis. (Plenty have predicted otherwise.) As the evidence rolls in, it seems clear to me that movie theaters and streaming aren’t direct substitutes. They can be–you are choosing how to use your time–but really the theatrical experience is an experience. This is frankly why PVOD can’t replace theatrical either. That is much more like a substitute.

Does this mean theaters can relax? Nope. I hear from plenty of folks who don’t like or even hate theaters. Theater chains have work to do to focus on the experience. (Breaking them up into smaller companies would help here.) But there is room for optimism.

Other Contender for Most Important Story: Joe Budden and the Downside of Exclusivity in Mass Markets

Joe Budden–a hip hop artist with one of the best pump up tracks of all time–has a wildly influential hip hop podcast. Thus, when Spotify decided to dive aggressively into podcasts, he was one of their first calls and got a major deal. (Though I still haven’t seen numbers. Note this.) This week Budden announced that he was (likely) not renewing his deal with Spotify.

What happened?

My guess is that Joe Budden is realizing the tradeoff of going all in on a single distribution platform. The subtle difference between mass distribution, selective distribution and exclusivity. Let’s talk about Budden’s situation in particular, then how his complaints can be extrapolated out to the rest of entertainment.

When it comes to Budden specifically, he appears to have two primary complaints. Here’s the key quote from Variety:

Screen Shot 2020-08-27 at 11.42.51 AM

Issue one, if you will, is that he wasn’t paid as well as other folks. He was one of the first Spotify deals, so likely didn’t have other deals to compare. Since then, Gimlet Media, Joe Rogan and Bill Simmons (via The Ringer) have all been acquired at huge pay days. (Joe Rogan, for example, knew what Simmons got paid.) Since Budden can directly compare his previous salary to the new deals, he knows if Spotify was paying him market rates. And clearly feels they weren’t. (And he was a top performer.)

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An Aggressively Moderate Take on Coronavirus and Sports

On Wednesday sports in America made their triumphant return! “The MLS Is Back” tournament declared that, well, the MLS is back.

This follows the June return for most of European soccer, starting with the Bundesliga and continuing to the English Premier League, the most popular global sports league.

Yet not all is sunshine and roses. The leagues are back…but the fans aren’t. And won’t be for the rest of the summer, if not longer.

So how should we think about Coronavirus and Sports? Well let’s bust out the EntStrategyGuy’s patented Covid-19 impact system to analyze it. We look at impacts on Supply, Demand and Employment (if relevant). We also try to separate what we know from what we don’t (and is usually guessed at).

(Curious for my “moderate” take on how Covid-19 will impact the rest of the entertainment industry? Here are my takes on…

The Entertainment Recession
Theaters
Pay/Linear TV
TV and Film Production

Supply

If you’d asked me in 2012 how sports teams made their money, I’d have told you extremely confidently that they made their money by signing huge TV sports rights deals. That’s what I kept reading in the news, after all. Then one day a famous NBA GM spoke at my school and disabused me of that notion in a way that’s stuck ever since. And understanding that explains the trouble for sports leagues over the next year or so.

Yes, the headline buzzy numbers about multi-year deals for TV rights are indeed true. Sports rights for TV have grown by about 4-5% per year for the last two decades. (Math here.) That’s tremendous growth! And hence why everything related to sports has also grown in value. (The price of teams, the salary of players, the size of sponsorship deals.)

But it isn’t the entire story. The second or first biggest chunk of revenue for nearly every sports team in America (and I believe globally) is ticket sales. That’s fans attending live games. It depends on market size, but not the way you think. Larger market teams like the Lakers, Dodgers, Golden State Warriors, Dallas Cowboys and Knicks have even more of their revenue as a percentage from local ticket sales than smaller market teams. This is because seats to sporting events are a constrained inventory for a popular product often in very economically wealthy areas. That’s a recipe for high prices.

This explains why the sports leagues, initially, were more willing to postpone the season than play games in front of empty arenas. Empty arenas meant permanently lost revenue and the NBA, NHL and MLB desperately wanted to avoid that happening. (This article says all live revenue is about 40% of the NBA’s total revenue.) They waited as long as they could, but now it’s clear sports in front of fans aren’t happening this year. 

And since it’s better to get some revenue than no revenue, the sports leagues–sans the NFL–have figured out how to bring competitions back without fans. (Good for them!) This means sports in America will be back on live TV soon enough. (Technically the PGA is already back in the US and as I said above the EPL and other European leagues are already back.) 

Still, this leaves the situation with ticket sales unresolved. The owners and commissioners desperately want that other huge chunk of revenue back.

Forecasting when fans can return to arenas or stadiums is fairly difficult. It’s worth comparing them to theaters because the different situations imply different economics. With theaters, I remain convinced that there are measures that can reduce transmission dramatically: have everyone wear masks, keep a checkerboard pattern in design, have a reduced congestion plan when leaving. (This is definitely a minority take not shared by public health officials, so take it for what it’s worth.) Moreover, with a new film, a theater can flex it onto many, many screens simultaneously, meaning you can support a checkerboard pattern while potentially achieving mostly the same volume of tickets sold.

This is not the case with sports. If you’re an NFL team, you only get 8 home games. NBA team gets 42. MLB gets 424 (it feels like). And so on. You can’t surge it into more stadiums or games. (The very thing that drives up prices in the absence of coronavirus hurts the sports leagues here.) Moreover, unlike theaters, stadiums are filled with choke points where people will crowd. (You’d have to have folks arrive 2 hours early or more to avoid crowding at ticket entrances.) Not to mention, a checkerboard seating pattern won’t make sense because you’d have to rearrange nearly every season ticket holder. Yikes.

This means that to have sports return with live fans, you are much closer to needing a full therapeutic cure or vaccine before sports can safely resume.

When will that happen? Well I don’t know. And it’s the biggest variable–and potential hit to the bottom line–for sports teams. However, if you assume we will one day cure or eradicate coronavirus, the supply problem will eliminate too. In the meantime, I expect players, owners, stadiums and all adjacent dependents to take a hit to their salaries and values.

As for the “Bubble” situation, I’m reasonably confident the leagues will find ways to play the games in largely safe ways for the players. It will evolve and folks will get sick, but the revenue draw is too high to avoid.

Demand

Here’s the good news: all signs point to sports fans clamoring for the return of their favorite sports. The Michael Jordan documentary did blockbuster ratings for ESPN. Same for the NFL draft. Even golf is breaking ratings records!

Everyone is trying new things during this quarantine. Some habits may change. But abandoning sports doesn’t look to be one of those things.

Of course, the flip-side to the above supply scenario is that maybe fans will abandon live sports for fear of the coronavirus. This is a risk, but feels low probability. First, sports will likely be constrained by having a therapeutic or vaccine before they return. Unlike theaters, which will test audience demand for their product, I don’t see live sports in arenas this year. 

Second, I don’t think coronavirus has turned us into a world of shut-ins. If anything, folks want to flee their homes more than ever. Admittedly, this is my opinion. It’s an unknown and I could be wrong. A pessimists could say it’s as likely fans flock back to stadiums as they abandon them in perpetuity. Where specifically it lands on that spectrum is up in the air.

As fro demand for live-sports on TV, again I expect it to be high. If folks are in perpetual shut downs with concerts, live-sports and many outdoor gatherings prohibited, live sports rights should be widely consumed. Not to mention, the slow down in TV and film production has meant fall will be light on new content. Sports can instantly step into that void.

Employment

I do see lingering pain the labor market related to stadiums staying closed. Entire ecosystems are built around attending live sporting events. Everyone associated with working that from ushers to security to restaurant staff will be hurting until sports return.

Even the players, as I mentioned above, will likely see a lot of pain. As long as salaries are a percentage of basketball related income, then the players will see cuts if fans can’t comeback in 2021. 

Overall, I’m less worried about the impact on the economy from sports compared to either TV/film production or movie theaters, both of which employ a lot more people.

Bonus: The Breaking of the Bundle?

The one variable that is neither “supply” nor “demand” is whether the absence of live sports will cause a further deterioration of the cable bundle (and maybe satellite bundle in Europe) that props up the current exorbitant sports rights fees. I’ve seen this thesis floated out there fairly commonly over the last few months. (If not directly, then via the rhetorical question headline.)

If prices to be paid are any indication, the answer is no. The prices for live sports rights haven’t decreased even during coronavirus–they’ve continued to go up actually–meaning sports will definitely be the anchor propping up cable and satellite providers in the near term. I’d recommend considering this mostly wild speculation. Folks have been predicting the end of TV since the beginning of this decade. And it’s still kicking.

However, the true test will be the upcoming earnings season. After all, the bundle won’t die because companies let it, but because customers finally opt out. That will be the true final test.

The 2019-2020 NBA-to-Entertainment Translator: The Update

Basketball, in my opinion, is a great testing ground for theories on strategy, valuing assets and data analysis. That’s why I developed my ownValue Over Replacement Executive” theory last fall. Or why I used the NBA to explain the misleading statistics here. Or compared overall deals to NBA trades here. Or why I’ll roll out the “four factors of streaming video” in a few weeks. 

It works because basketball—and really all sports—are a controlled environment, with standardized statistics and clear winners and losers. That makes it a great laboratory to test out a lot of theories. The challenge for entertainment executives is understanding that the data is a lot messier in business than sport.

My favorite basketball-inspired series was from last fall where I rolled out my “NBA-to-Entertainment” translator, comparing each NBA team to its analogue in the crazy world of the Hollywood. I did this in three articles:

Part I: The Eastern Conference

Part II: The Western Conference

Part III: The Rest

In honor of the return of America’s 2nd (or 3rd) biggest sport, I’m going to take a gander back at what I wrote last year. I won’t hit every team/company, but will call out some of the biggest hits, misses or just fun teams/companies to write about. 

(By the way, this is an exercise in narrative building fun, not an accurate, data-crunched analysis. With essentially each “input”—either team or company—being filled with thousands of variables over the course of a year, I can pick and choose to build mostly any narrative I desire. Which makes for a fun read, but should be a sneaky lesson for those of us crafting strategies.)

The Walt Disney Company is…The Los Angeles Lakers

Call: Biggest miss

Let’s not pull punches, fellow Lakers fans. While Disney was having arguably the greatest year in theatrical performance in its history—Avengers: Endgame, Captain Marvel, Toy Story 4, The Lion King—the Los Angeles Lakers were tanking. It wasn’t the worst season in team history, but it wasn’t great. And we had Lebron James on the roster!

Lebron—who I also called the “Marvel Studios” of entertainment—was still Lebron. And the same way that Disney put together superstar studios (Star Wars, Pixar, Marvel), the Lakers added Anthony Davis in the off season. That’s why I have to keep this pairing for now. The Lakers added a superstar and Disney is about to add Disney+. Plus, cynically, both Lebron and Disney have ongoing China business that clouds their moral judgement, so that feels appropriate.

Netflix is…The Golden State Warriors

Call: Biggest hit

Wow, does anything capture Netflix’s last year—continued global subscriber growth, but one earnings miss tanked their stock price—than Golden State making the finals, but losing to Toronto? Emotionally, those feel identical. Other similarities: Golden State lost Kevin Durant, and Netflix is losing all the Disney movies. 

As we gaze towards the future, both Netflix and the Dubs face competing, viable visions of the future. In optimism, Golden State gets back Klay Thompson, De’Angelo Russell becomes a super star, and by next year they’re competing for championships. In pessimism, it all falls apart. In optimism, Netflix gets its costs under control, keeps growing globally, and takes over the world. In pessimism, it all falls apart.

This is a fun one to keep watching.

Amazon Prime/Video/Studios is…The Toronto Raptors

Call: Close miss

One could squint and make the case that Amazon crushed it in 2019. An Emmy win for Fleabag, the super hot Marvelous Mrs. Maisel (also winning awards) and then you have The Boys being a sneaky popular series! Amazon has the hardware and so too do the Raptors.

But it doesn’t quite capture Amazon’s year. For all the TV success, Amazon had a string of movie misses from Booksmart to Brittany Runs a Marathon. Those misses feel like not re-signing Kawhi Leonard. Most importantly, for all its talk about 100 million global subscribers, no analysts really think that the Prime Video service has taken the crown from Netflix. As for Twitch, it’s huge. But how huge? We don’t know.

HBO is…The Houston Rockets

Call: Hit

How can you have the biggest show on television, and feel like your company is falling apart? By having every executive leave and your corporate parent trying to change who you are. The Rockets have the greatest scorer in the NBA, but they didn’t make the Western Conference finals because of a poor regular season, sort of how HBO’s slate outside of GoT is very “okay”. 

The future isn’t terrible, with another polarizing superstar—Russell Westbrook aka The Watchmen—joining the crew, but definitely filled with question marks. (Will the GoT prequel live up to the hype? Will Westbrook and Harden co-exist? Will HBO Max ruin the HBO brand? Will Harden come through in the playoffs?)

While we’re here, we may as well knock out the rest of the AT&T/Time-Warner conglomerate.

Warner Bros is…The Milwaukee Bucks
AT&T/Time Warner is…The Los Angeles Clippers
Dallas Mavericks is…Turner (CNN/TNT/TBS)

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