Tag: theaters

Most Important Story of the Week – 9 Oct 20: Movie Theaters…What Comes Next?

Seeing this Sonny Bunch tweet over last weekend was probably the most disappointing news I’ve seen in a while:

Is this the final nail in the theatrical coffin for 2020? Probably. So let’s once again check in with theaters.

(As always, if you want the Entertainment Strategy Guy in your inbox, sign up for my substack newsletter, which comes out every two weeks. Or connect on Linked-In.)

Most Important Story of the Week  – Movie Theaters…What Comes Next?

This seems to me like an unforced economic error. California and New York simply won’t reopen theaters or theme parks until an extremely efficacious therapeutic (meaning lowering death to below 1 in 10,000 for all ages) or vaccine is developed. And since California and New York are high-wealth and high-population states, it’s keeping studios from launching any films in America. And since America is at least 25% and sometimes 50% of a film’s gross, it’s keeping new films from launching anywhere globally.

So here is the specific news, if you didn’t see it last week:

– Jame Bond’s latest installment No Time to Die moved to 2021.
– Disney’s Black Widow moved from November 6th to May 2021. 
– Dune moved to 2021. 
– Universal then moved the next Jurassic World film to 2022.
Soul is going straight to Disney+.
– Wonder Woman 1984 hasn’t moved from Q4. (Yet.)
– Since those films are moving, Regal closed theaters again to all films. As of this publication, AMC and Cinemark have not followed suit.

Is this bad for theater chains? Yes. Most forecasts at the beginning of the pandemic said they could last for 3-6 months, and a few could survive to 2021 as long as some films started returning to theaters. The last quarter of the year was the backstop…and now that backstop is gone. 

The question, then, is what comes next? I haven’t seen that answered. Instead, I just see eulogies for theaters. Well, if you want a job done right, you got to do it yourself. First, some thoughts on the industry. Then the potential outcomes.

Thought 1: The Theatrical Distribution Industry is NOT Theater Businesses

The theatrical industry is made up of AMC, Regal, Cinemark and countless smaller independent theaters and smaller chains. But the industry will exist even if/after those chains go bankrupt or disappear. In other words, the business model is not the business, if that makes sense. We need to discuss two different questions:

– First, will theatrical filmgoing survive?
– Second, will the current theater chains survive?

We should keep those two questions separate as we forecast the future.

Thought 2: The smaller chains will have different outcomes than the giants.

Yes, AMC, Regal and Cinemark own a vast majority of theaters in the United States. But many smaller chains exist, and in some cases have better flexibility to survive in a post-Covid 19 world. In other cases, they have even tighter financials and will struggle to survive.

Thought 3: This is Disruption We’ve Never Seen

Meaning, I don’t have a lot of great comps for this business situation. Amazon disrupted retail, but that took years to take place. The internet disrupted daily newspapers, but again that took two decades to take place. Blockbuster was replaced by Netflix, but again that took years. (And Redbox and iTunes don’t get enough credit for their role too.) Same for cell phones, cable, and other disruptive technologies. 

I honestly can’t think of a business situation that compares to the situation facing certain industries right now. Thus, all forecasting is that much more uncertain.

Thesis: The Theatrical Industry will Survive.

In some form. I would bet heavily on this outcome and invest heavily if I ran a hedge fund, private equity or conglomerate with cash to invest in media and entertainment.

The logic is fairly inescapable. A good portion of customers want to see films. I’ve written before that theatrical filmgoing has been remarkably resilient. For all the “death of theaters” narratives, the data frankly doesn’t support it. 

Think of this like a Porter’s Five Forces analysis to ask if this is a good industry to enter. We just showed customer demand. Competition will wipe out some theaters, meaning competition is reduced. Meanwhile, theaters are unique buildings that don’t lend themselves to easy re-use. That means the land has a limited set of buyers. Plus studios still want box office. 

If you have customer demand, weak competition, low barriers to entry, and cheap supply, then that’s a market to get into!

To top it off, if you’re the type of person who wants an innovative new theater experience, you could do that too. I’m not sure what this will be and how much innovation is possible, but if tons of theaters are left vacant, a clever venture capitalist will have lots of inventory to play with.

(Is there a chance the model is fundamentally broken and we’ll just stream from now on? Maybe. But the competitive logic makes it very unlikely. As many have noted, the industry earned over $11 billion in America last year and $42.5 billion worldwide.)

What Comes Next for Theater Companies?

To repeat ground rule 1, just because theaters will survive, doesn’t mean the same companies will. This is where all the uncertainty comes in. When we’re uncertain, our range of outcomes should be wide. Therefore, this is a list of many potential. Some of these will work together, while others are contradictory.

  1. Bankruptcy. This is simple. Some theater chains will declare bankruptcy to survive in some form or sell off assets. A few of the chains have quite a bit of debt, so this could be the precursor to everything else which happens.
  2. The chains squeak by. Yep, it sounds inconceivable, but, some of the theater chains could manage to survive despite everything. As I showed before–and the theaters themselves mentioned–they’ve cut costs to the bone and a lot of their costs are variable and tied to the exhibition of films. The biggest fixed costs are leases, but if their lessors play hardball, then the landlords are cutting off their nose to spite their face. (If your biggest tenant leaves, it could depress revenues for months or years until a new theater chain takes over.) Still, banks could provide loans or new ownership groups could buy ownership shares to help survive this downturn.
  3. The government bails out theaters. (Sonny Bunch inspired me with this idea in his newsletter.) How likely is this? Who knows? This is the type of scenario that is wildly tough to estimate probabilities. On the one hand, bailing out theaters will be much cheaper than bailing out airlines. On the other, no one likes bail outs, especially to over-leveraged theater chains that are both monopolies and private equity playgrounds. Conversely, given that over 150,000 folks are employed by theaters, it could be a popular case.
  4. Studios buy the theater chains. That’s legal now, remember? If the price for say Cinemark drops to below a billion dollars, maybe Disney says, “Yeah, we’ll do that.” That would be a better use of their dividend than more streaming content, in my opinion. And you know Comcast will buy anything.
  5. A big tech company buys one. Big tech has bought 500 companies in the last 20 years, what’s a few more theater chains? The only caveat? The big tech firms are finally under scrutiny for monopoly power. (See context below.)
  6. Private equity buys a chain or pieces of a few chains. This seems as likely as anything. Once firms go into bankruptcy, they’ll need cash and private equity has cash to invest. Whether in whole or in part, this is likely.
  7. Smaller theater chains move up the value chain. Whether this is a smaller company like Arclight or Alamo, or a new company set up to buy theaters or something else entirely, the big chains could be replaced by a series of smaller chains. This could be powered by private equity too.
  8. A new theater chain is born. Again, if AMC goes bankrupt, its theaters across the landscape are suddenly empty. Depending on how many it actually owns versus leases, these are now assets to be acquired. While monied players are more likely to swoop in, a clever new business could buy the theaters and start a new chain with an entirely new business model.

This Process Won’t Be Pleasant

Let’s be clear about that. Going through bankruptcy, or needing a bail out or barely squeaking by means lots of economic pain.  Even if new companies buy theaters, that will cause immense disruption, hurting studio profits and closing many smaller theater chains too. And it could take years for the situation to shake out. 

Data of the Week – Sports Ratings Are…?

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Most Important Story of the Week – 2 Oct 20: Google’s New Chromecast (And Netflix Offer)

This week my head has been deep in the data of the streaming wars for my latest article for Decider. I reviewed multiple different data sources to sort through the content of the last two months. Go read that article if you haven’t yet to know who won September!

Overall, the political news of the week overshadowed major entertainment stories. But one story has intriguing long term implications.

(As always, make sure you subscribe to my newsletter, which goes out every two weeks. It’s the best way to make sure you don’t miss my writing.)

Most Important Story of the Week – Google’s New Chromecast (and Netflix Offer)

Google’s first Chromecast is probably underrated for its role in the streaming TV revolution. Instead of needing a fancy new box or “smart” TV, you could plug in a small device into the back of your television and stream Netflix to your living room TV. Even if a majority of cordcutters opted for a better solution long term (usually a Roku), I think Chromecast was the hook folks used to sample streaming on TV. (It was also cheap.) 

It’s been rumored that Google was working on a next generation Chromecast or TV device/operating system, and this week we got the announcement. Here are the key details, with the caveat that I haven’t actually used the new device, and am going off reporting on the announcement:

– Google TV is the interface built into the new Chromecast.
– At launch, HBO Max, Disney+, Netflix and Youtube TV are available, with Peacock coming soon.
– The ability to search for content is the pitched differentiator of this service.
– They are bundling the service with a Netflix subscription for one year.
– You will still need to watch content in the streaming applications themselves, like with Apple or Amazon. But the new Google TV app puts all the content in one place.

So what do we make of this? A few things. Here are my hot takes and some others.

Devices Are Key…

Thanks, Captain Obvious. 

In TV, someone is always going to be the rent seeker, placing themselves between customers and content. Previously, it was cable providers. But now Roku, Google, Amazon and Apple are playing that role. Hence why Peacock and HBO Max are still fighting to get on Amazon at terms they can agree to.

To truly grab the attractive profits, these device makers are desperately trying to control the user experience. They’ve all started with similar/identical abilities to search for content and have it all aggregated on the home page. While they tout it as revolutionary–Google pitching search–it’s still mostly the ability to search content from a variety of channels/apps in one place.

..but the True “Aggreggedon Scenario” Hasn’t Happened Yet

That’s the scenario where you watch The Mandalorian in Google TV and then Stranger Things autoplays right after without the user needing to leave Google TV. Why is this such a hurdle? Because it is the whole value proposition. And the streamers know it.

If Disney+’s content is branded with everything else in streaming, then given shows no longer build Disney’s crucial brand equity. If Netflix can’t have its algorithm sell on you another show, then it loses all the value of its honed algorithm. If Peacock can’t offer you their linear channels while you’re watching Parks and Recreation, then their value proposition takes a hit.

The big tech giants know this, and want to take all that value for themselves. The golden goose is to be the sole provider, which makes all the content providers simply commodity brokers. So far, Netflix, Disney, HBO and others have held off on this, and it will be curious to see how long it lasts.

Will Folks Criticize Netflix for Getting Cheap Subscribers?

They won’t. Though the narrative would be more accurate if they did.

Netflix has been as aggressive as Prime Video, Disney and HBO Max in courting subscribers with free subscriptions bundled into other services. (Notably T-Mobile for years, a subscription many customers didn’t know they had.) This is a bad thing for Netflix; without knowing the deal terms, my gut is Google is paying nearly full-freight on this deal because they have money to lose and market share to gain. If this helps keep Netflix subscribers stable through 2021, it’s a good idea for the streamer of record.

From Parqor: This is the Search Engine Interface

I like this take, because no one uses Google search data more than me. And while it isn’t perfect, it is a great signal for “interest” in a given topic. Moreover, Google’s extremely big advantage in search–over say an Apple or Amazon–they really could make a smarter search at driving to shows folks want to watch. As such, I’d give them a leg up over Apple in the smart TV race. (Though behind Amazon and Roku, who have been doing better for longer.)

Entertainment Strategy Guy Update/Data of the Week – Mulan’s Data Update from Nielsen

The other contender for most important story of the week was Nielsen’s SVOD Top Ten list this week. (Did I write it up? Yes. Will it be an article on Tuesday next week? Yes too.) 

Because one detail in particular shocked me:

Mulan made the top ten list!

(As a note, Nielsen delays their SVOD rankings for four weeks while they calculate. And no, I’m not a Nielsen skeptic. Their data is very useful.)

For a single movie to go up against shows with dozens of episodes really does show the demand of Mulan. On one hand, this matches the Google Trends data, which showed that Mulan was really popular. Look at this take from my recent Decider article, where Mulan is multiple times more popular than Enola Holmes, which is the current Netflix popularity champion:

Still, when I did some quick math (like LOTS of folks on Twitter), I got really worried. If 525 millions minutes were consumed of Mulan, divided by 120 minutes as the rough length of the film, then that means it was watched over 4.5 million times. If each household purchased it per viewing, that’s 4.5 million purchases, nearly 4 times what I calculated.

Yikes!

Calm down, calm down. See, like all things, we just need to get everything back to apples-to-apples. Nielsen is measuring minutes viewed, but we were estimating purchases. That’s essentially two different ends of the customer journey.

To think through it, it’s worth first considering the user behavior that influences how many folks actually watch a show. (Some of which I thought of, some of which users on Twitter pointed out.)

– First, customers have to buy it. That’s what we’re trying to estimate.
– Second, they have to watch it all the way through.
– Third, they can choose to rewatch it or not. If they loved it, they will.
– Fourth, they can share their account with others, who can also watch the film.

When I analyze data, I alway think back to the customer use case first and foremost. It helps ground the data thinking in the real world, as opposed to number cherry picking. In this case, all these factors could influence how much the 4.1 million viewers actually relate purchases.

The next step is understanding how Nielsen got to their number. They measure the average minute audience, the way they always have. Then they multiply that by the length of the film, and boom they get the total minutes viewed. 

But there is one more key: Nielsen estimates how many folks are watching a given minute of television at home. So if two folks are watching, that counts twice. (2 people watching 1 minute is 2 minutes viewed and so on.) (I reached out to Nielsen and they confirmed this analysis on background for this article.)

Combine these two and we have a way to estimate purchases. After we calculate the rating, we then estimate the completion percentage (which accounts for folks watching it multiple times or not finishing it) and then we estimate how many folks watched simultaneously. Here are my back of the envelope maths on it:

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Most Important Story of the Week – 25 Sep 20: We’re Heading for the (Almost) Worst Case Scenario For Theaters

Last week was a big one for me as I tore through a lot of Mulan data to produce my soon-to-be-biggest article of all time, “1.2 million Folks Bought Mulan on Disney+”. (It looks like it will dethrone the previous champion, “Netflix is a Broadcast Channel”.)

It’s been four weeks since I checked in on the health of theaters, let’s make that the most important story of the week.

Most Important Story of the Week – We’re Heading for the (Almost) Worst Case Scenario For Theaters

I try to think about things probabilistically. As Nate Silver would recommend. The world has lots of randomness, so events and different outcomes have different probabilities.

When I made my forecast of Coronavirus’s impact on theaters for a consulting client, I had a median case of theaters reopening in August. And it almost happened, but for a summer surge in cases. The worst case was that theaters would stay closed through 2020. We’re not quite to that worst case, but we’re close.

We’re partially opened in America as 70% of theaters are allowed to be open, but the studios are pulling their tent poles until the biggest markets reopen. Given that the US still accounts for 30-50% of a film’s total box office, America’s uncertain situation is scaring off all the big studio releases.

Which is a shame, because the rest of the world is doing much better. They’ve opened and after a few weeks most customers returned. Yet the US uncertainty (combined with global piracy, which is another shame) has held all the big studios from releasing their true tentpoles. The news of the last few weeks is that studios waited to see what Tenet would do, and found it wanting. 

Thus, Wonder Woman: 1984 moved to the end of the year (Christmas Day) and Black Widow moved to 2021. Though not all of Disney’s slate, as Soul is still holding onto Thanksgiving. And Universal moved up a few kids films to try their new PVOD strategy.

So I wouldn’t say we’re in the darkest timeline for theaters, but we’re closing in on it. November and December will have a lot of weight to pull to bring studios and theaters through.

Other Contender for Story of the Week – The Tik Tok Deal and Global Entertainment

Every newsletter I follow has been tracking the ins-and-outs of this story. But I waited. Would it be Microsoft? Or Oracle? Or Walmart? Or none of the above?Twists, turns and…we’ve ended up in almost the exact same place?

It’s like that quote from the Red Queen: you can run all day and end up in the exact same place. (Hat tip to the The Lost World novel for writing about that and logging it in my head from (is this right?) 25 years ago.)

All that has really changed is that Byte Dance has a new 20% owner of Tik Tok (Oracle) and it gets to keep operating in the United States. But it keeps its algorithm and presumably spy software in China.

Does this have implications from global entertainment? Assuredly, though let’s not go too far.

Clearly, China and America are headed for a new “Cold War” or “Bipolar” economic landscape. I’m not breaking news telling you that. President Trump has also escalated the situation with his proposed bans on TikTok and WeChat.

Not that this economic nationalism is unprecedented. China has banned US apps and companies for years. The biggest challenge for both EU and US companies and their nation-state champions is that there really is an unfairness in the global business situation. Netflix, Amazon, Google and others can’t operate in China due to protection laws. Yet, the EU and USA (and most OECD nations) pride themselves on allowing free and open markets. Which lets in Chinese champions.

This makes a seemingly unfair balance of power. (Though I could defend why China does it, and that reason is because US firms have definitely exploited smaller economies over the years. China has now largely avoided that fate. But this isn’t a politics website, I’m merely trying to explain why China is doing what they do.)

Where do we go from here? It’s unclear. Both presidential candidates seem concerned about China, so presumably restrictive measures could remain in place, with a Biden administration administering them a little more fairly/objectively. Long term, this could really hurt global business strategies with prominent Chinese ties.

That’s Disney, primarily, but really all the studios. One of the changes to my film model I’ve been thinking of making is to update the box office to: US, China and Rest of World. Since China is so protective, it keeps an outsized amount of profits in that country. (Only 25 cents of every box office dollar goes back to the studios. And even those can be hard to pull out.) If companies need to increasingly make “non-China included” strategic plans, that has lower global upside everywhere.

Entertainment Strategy Guy Update – The MLB-Turner Extend Their Deal with a 7% Year-Over-Year Increase

What? 7%? You saw the 65% jump in value reported in the press, didn’t you? 

Well, the key is context and the Entertainment Strategy Guy is nothing but context. When I see big splashy deals, my first question is the time period. In this case, a seven year extension. Then I take the two numbers and plot the CAGR. I put the average deal value in the middle of the deal (since leagues like to have revenue increase on a flat rate). Then I make my chart:

Screen Shot 2020-09-25 at 9.30.17 AM

As for the strategy, the next deal that shows a decrease in prices will be the first deal to show a decrease. Sports continue to be the source of programming keeping the linear channels alive, and the remaining linear players are paying a lot for them. And the bubble with 5-10% average increases in price each year has stayed on track.

Data of the Week – A Few Data Points on Subscribers (Peacock, NY Times The Daily and Shudder)

If “apples-to-apples” is the theme of the week, then I need to put the context right up front for these numbers. One of the numbers is “US only”. One is “US plus”. And two are global. Do not confuse them, since it really does change the denominator. (330 million versus 7 billion!)

First, Peacock, while explaining the increasing centralization of all NBC-Universal decisions under Peacock, Comcast let slip to the Wall Street Journal that they have gotten up to “15 million sign-ups” from the 10 million they announced in their July earnings report.

Next, Shudder, which is available in the United States, UK and some other territories, has reached the 1 million subscriber milestone.

Third, the New York Times “The Daily” podcast now reaches 4 million folks. Which is a huge number, but again don’t assume they’re all Americans.

The Athletic has also purportedly reached 1 million subscribers. While this is technically a global number, odds are it is driven much more by US customers. The caveat is that The Athletic has so aggressively discounted its business model that we don’t know what a subscriber’s actual ARPU is.

Other Contenders for Most Important Story

Disneyland (and Friends in California) Wants to Reopen

If you’ve been reading the EntStrategyGuy for any length of time, you’ll know that theme parks are a big part of Disney’s revenue stream. (Even more so than toys, which often get the credit.)

Hence, each week and month that Covid-19 keeps theme parks shuttered in California is a significant hit do Disney’s top and bottom lines. This week Disneyland, Knott’s Berry Farm and others publicly called on Governor Gavin Newsom to allow them to reopen. They noted that the reopenings in Florida and Europe haven’t seen accompanying surges in transmission, which surprised me. (Disneyland Hong Kong, however, was shut after reopening for having an outbreak.) 

Notably, some theme park-adjacent businesses are opening, like the Los Angeles Zoo. So curious to see when Newsom changes on this. 

DC Comics/DC Universe Staff Sees Layoffs

This is a few weeks old, but it is important enough news that I didn’t want to skip it. Warner Media is cutting staff at DC. If comic books can be the “R&D” department of a movie studio–and look at Disney, they are–then why would you cut the staff?

Of course, layoffs are complicated. Sometimes organizations really do have bloat. Sometimes they really do have redundant capabilities. But this seems like some creative executives were swept up in this part of the Warner Media reorganization. Meaning long term the cost cutting now could hurt the creative output of the future. Comic books will never be the cash cow that turns around AT&T’s fortunes, but having a strong DC could help grow HBO Max.

M&A Updates – Ion Networks is Acquired by EW Scripps

Some more merger action! This time Ion Networks is getting acquired by EW Scripps. I’ve long appreciated Ion Network’s business model. Ion Networks realized that if they owned a broadcast channel, cable and satellite providers must carry their programming. They bought up broadcast stations, and then ran cheap reruns. It’s been surprisingly successful for them:

image-1-estimates

Lots of News with No News – The Emmys!!!

I put less emphasis on The Emmy’s than anyone else. From a business perspective, I just don’t think they tell us much about what customers want or how businesses are doing. (They mostly tell you who spends the most on Emmy campaigning, as brutal as that sounds.)

The story was Schitt’s Creek, which went from nothing to something with a run on Netflix. Using the “Netflix is a Broadcast Channel” thinking, though, this makes sense. It’s like a show went from a small cable channel to running on NBC. Since it was good, naturally it had a boom in viewers.

Mulan vs Tenet: I (Don’t) Declare a Winner

At first, I was tempted to call “Mulan vs Tenet” the biggest battle of the streaming wars. Each weekend in September, we’ve eagerly awaited answers to the hottest questions in film: Will Tenet save theaters? Will Mulan blow up the model? Who is making more money? Who is WINNING?!?!?

It turns out that the answer to the first two questions is probably no. As for the third and fourth, well, that’s tricky to answer. But since it’s the logical follow-up to my article on Monday, I’ll do my best.

But I wouldn’t call this a battle. If anything it’s a “skirmish” on one end of the larger distribution battle. (The sort of way that Pickett’s Charge was one tactical engagement in the larger Battle of Gettysburg.) Just because it is a skirmish doesn’t mean it isn’t important. Skirmishes are what win or lose battles! (For want of a nail…) 

So after three weeks of data, let’s analyze what we know. Here’s the outline of today’s article:

– First, two lessons on data that set the terms of the debate.
– Second, an analysis of what we know about each film, including US box office, International box office, and PVOD sales to date.
– Third, thoughts on each film’s revenue potential after these initial windows.
– Fourth, a comparison between the two films and declaring a winner.

Kidding! I won’t do that last part because I don’t know the answer. Moreover, I won’t draw giant conclusions about what this means for the future of film. Because frankly two films won’t fundamentally change the landscape. But I’ll explain that point in future articles. For now, the performance of these films to date.

(Also, I found that I was linking to a lot of my articles explaining the business of film. To keep this article clean and not polluted with links, I put a “reading list” at the bottom.)

Bottom Line, Up Front

– Comparing the box office of Tenet to PVOD of Mulan is comparing two different windows to each other. That isn’t apples to apples.
– That said, we can’t know the future value of either film because both “inputs” are “n of 1” meaning so unique that we can’t build a model.
Tenet will likely gross $325-350 in global box office.
Mulan will likely gross $70-100 million in global box office.
Mulan will end up with likely $155 million in global PVOD (with a big range of $105-$270 million.)
– As for lifetime earnings? No one really knows, because there aren’t good comps to make accurate estimates.

Two Data Lessons: Apples to Apples and “n of 1”

My primary job on this site, as I see it, is to explain the entertainment business. You can find lots of places on the internet opining about the entertainment business; I’m trying to teach you why it works the way it does. And in the “Mulan v Tenet” debate, I see two major mistakes being made.

First, Apples-To-Apples

That’s my simple term for comparing like-to-like. In some ways, statistics/data analysis/science is essentially the quest for comparing things like-to-like as much as possible. That way you can isolate the the true drivers of causality. (That’s why random controlled trials are random and controlled.)

Here’s a simple example from last week: folks saw that 7 Park’s data was much larger than peer analytics companies for Mulan’s debut. The key, though, was that they were measuring eight days of data, and not just the opening weekend. They were also measuring the percentage of folks who watched Mulan who were active users, not all subscribers. Once you accounted for this, their math (1.5 million subscribers), was close to other estimates (1 million at the low end for Antenna and 1.1 from Samba TV). Comparing things apples-to-apples solved the problem.

In “Mulan v Tenet”, the key question/claim at the center of the debate misunderstands this notion. Consider these major windows of movie revenue:

IMAGE 1 - Table Second Window Waterfall

The question I’ve seen written and been asked repeated is, “Is Mulan making more than Tenet?” We could reframe it based on the windows in question. Basically, “Is Mulan making more money in PVOD than Tenet in domestic box office?” That would look like this:

IMAGE 2 - MvT Current Debate

But this isn’t the right question. It’s comparing apples-to-hammers. (A Chuck Klosterman phrase.) Look:

Image 3 - MvT Good

This framing really sets the terms of debate better, in my opinion. Even after Tenet leaves theaters, it can go to US domestic TVOD and home entertainment. So even if the answer to the current question is, “Yes, Mulan has likely made more in PVOD than Tenet at the domestic box office,” the question doesn’t make sense.

(Since PVOD wasn’t a window when I first made this table, I added it above. And I summarized all digital/streaming the “pay windows” to show the timeline better.) 

Really the question is, who will make more domestic revenue? So we should fill in this whole chart, accounting for blacked out windows:

Screen Shot 2020-09-23 at 1.23.54 PM

And we can see that two big chunks of revenue for that are the same: who will make more in Pay 1, Pay 2 and library distribution? (That means all the future revenue implied by streaming (like Netflix), airing on premium channels (like HBO), cable (like TNT) and other places. Now that question is tricky because of our next data point.)

“n” of 1

I was inspired by the “n” of 1 after reading earlier this year an article in the Economist about the rise of “n” of 1 medicine. “n” is statistics jargon for sample size. If you poll 3,000 folks about the Presidency, your “n” is 3,000. If your sample size is all Americans, that’s a sample (population technically) of 300 million. “n” of 1 medicine is referring to treatments designed for one individual with a unique life-threatening condition. It means the “sample size” is so unique it’s a category by itself.

This applies to box office and film revenue analysis. When we make forecasts based on opening weekend performance, we can do that because movies are similar and we can account for the differences to compare things apples-to-apples. Hence, we use Marvel films to forecast how much money films based on superheroes will make, while accounting for the time of year of the release and various other factors. (Scott Mendelson at Forbes is my favorite analyst at this.)

Once we have box office, we can use its results to forecast all the other windows a feature film is sold into. That’s how my film forecasting model works. It’s a fairly accurate system. We can also do it for PVOD, TVOD, streaming, TV and any revenue stream. Once we have an input, we can derive the rest.

The challenge for both Mulan and Tenet is they are unprecedented. They are without comps in the United States because: 1. No other blockbuster film has released during a pandemic that closed 70% of theaters and 2. No other film released to Disney+ exclusively for a one-time $30 payment. 

Because of this, making any forecasts about profitability is perilous. Or should I say, highly uncertain. Meaning, while I know what Mulan did in PVOD—see Monday—I’m much more uncertain about what this means for future windows. Conversely, while I know how well Tenet is doing, I don’t know what that means for future revenue streams, since Tenet is only available in 70% of US markets, that account for about 40% ticket sales.

So let’s start with what we do know.

The Data: International and US Box Office, Mulan PVOD and Forecasts

The easiest data to find is domestic and international box office. Since Tenet has been out a bit longer, it’s getting easier to see what its final total will be. So I’ve included the likely final box office total ranges offered by Scott Mendelson.

IMAGE 5 - Box Office with Rnagers

Are those numbers good or bad? Well, we’re in the middle of a pandemic, so who knows? As Mendelson makes the case, for an original material sci-fi live action film, Tenet is doing really well!

Meanwhile, even the ranges on Tenet are fairly uncertain. I put $350 million as the likely ceiling, but if New York and California reopen theaters, there could be give it a late boost (and stronger “legs”) as folks go to see it. Or not! A recovery that happens quickly is also unlikely so it could stay middling. 

Meanwhile, we know from Monday about how well Mulan is doing on PVOD.

IMAGE 6 Mulan Summary PVOD

The wildcard of the Mulan PVOD numbers is the fact that Mulan wasn’t just PVOD in the United States, but globally where Disney+ is available. My analysis from Monday focused on US analytics firms since there aren’t a lot of estimates for global performance. It turns out Mulan was released in every Disney+ territory but France and India, which includes these territories:

IMAGE 7 - Territories and Price

You’ll note it’s also cheaper in dollar terms in other territories. Time to go to the comps. What I did was find the last five Disney live-action remakes, pull down their box office by territory, and use that as a comp for demand:

IMAGE 8 - Disney Live Action Comps

The way to read this chart is that the “Disney+ territories that have Mulan” tend to account for 43-75% of the box office of the United States box office. Great! That becomes our tool to forecast PVOD revenue in those other territories. My low will be 40% (slightly lower than the Jungle Book comp) and I made a high of 100% based on Scott Mendelson’s back-of-the-envelope estimate. I consider that the far outlier, but with this much uncertainty that’s okay. Here’s the results:

IMAGE 9 Mulan International

Of course, I had high case and low case forecasts from Monday, which we could combine. The worry with our estimates now is that we’re making estimates on estimates, which doubles the uncertainty. Which you’ll see in how big our range is getting:

Screen Shot 2020-09-23 at 1.27.19 PM

What do we know? We have estimates for how Tenet and Mulan both did in their opening “windows”, one of which was PVOD/theatrical, and one which was theatrical only.

What don’t we know? What comes next.

The Comparison: Mulan v Tenet

Here’s a rough look at the current revenue of both Mulan and Tenet. As in how much each film has brought their studios as of this (rough) moment, roughly through their first month of releases:

IMAGE 11 Current Revenue

To answer the question I said you shouldn’t ask up above, yes Mulan globally has made more money than Tenet as of this moment. Crucially, the presumed 90% net take beats the 50% domestic/35% international split of theatrical. (Though I think that Disney’s split with PVOD partners like Apple, and Amazon may actually be lower than 90%, but don’t know for sure.) Here’s the look at the question I said we should ask:

IMAGE 12 Lifetime Estimate

I love this look because it clarifies how much we don’t know. Which is frankly how much Tenet will make on TVOD/DVD, how much Mulan will make in home entertainment, how much more Tenet can make by going to premium cable, and how much both will make in streaming.

Why not try to estimate it? 

Because I don’t believe the Tenet or Mulan numbers are good comps for forecasting. 

If Tenet’s US box office is depressed because of Covid-19, then it’s home entertainment could make as much as Trolls: World Tour or Mulan at home. Meaning it could have as large a window as Mulan had since 60% of theatrical attendees couldn’t see it. It’s rumored that Mulan will go wide on TVOD (including iTunes, Amazon and maybe even Pay-Per-View), but I don’t know if that viewership has already been cannibalized by this PVOD experiment. If it hasn’t, it could add 33% more revenue as Trolls: World Tour did when it went cheaper on TVOD in July.

Meanwhile, Tenet will eventually be on HBO and likely HBO Max. But Mulan will stay on Disney+ exclusively? Could I calculate that exclusivity value? Nope. Because I still don’t know enough about Disney subscribers to conclude that this PVOD experiment drove subscribers or that Mulan will have good replay value on the platform. (Unlike Netflix, who we have multiple years of US-only data to parse.)

This is the “n of 1” problem I discussed above. There are so many conflicting variables that my usual methods of forecasting are out the window. Same for the studios. They’ll basically have to collect the revenue and see what shakes out.

Thus, at $35 million dollars difference between the two, I’m calling this a push. It’s as likely Tenet makes more money for Warner Bros. as it is Mulan makes more money for Disney.

In short, we’ll never really know who “won” this skirmish since our numbers are close enough to call it a draw. I’d add, using one proxy for demand, Google Trends, it looks like Mulan peaked higher, but Tenet may last longer.

IMAGE 13 G Trends Tenet vs Mulan WW

As for how demand shifts from here, we’ll see as they release on additional platforms.

Reading List

Really, this article is a continuation of this series I started in December on “Should You Release Your Film Straight to Netflix? Part I” and “Part II” In that series, I explore the economics of taking a film straight to streaming.

Previously, I built a model on how to forecast “revenue” for straight to streaming titles in this series, “The Great Irishman Project”. It’s fairly tricky to forecast streaming revenue, but definitely possible. (Netflix does it!) See my methods explained here.

I also built and explained a film finance model for feature films released traditionally, which I first explained back when I launched the site in a series evaluating the Disney-Lucasfilm acquisition.

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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Read My Latest at Decider “AMC Theaters and Comcast Declared a Truce: What does it Mean and What Comes Next?”

Well, I promised you takes on AMC Theaters and Comcast’s big new deal to launch feature films on “Premium Video on Demand” 17 days after release, and it’s finally up at Decider. What does that mean for theaters? Studios? And Streamer?

I explain in my latest along with some explanation for why this deal got completed.

Should You Release Your Movie Straight to Netflix? Part II: The Streaming (nee Netflix) Counter-Arguments

Last December, I started a series whose goal was to valiantly defend the theatrical distribution model. This doesn’t come (only) from some soft spot in my heart for theaters, but from the economics of making movies. Studios can earn a lot more money by releasing their films theatrically. I’ve taken to calling this the “Booksmart Conundrum”.

Nevertheless, the question I asked last winter—“Should you release your film straight-to-streaming (Netflix) or to theaters?—is as relevant now as ever. Indeed, it’s almost quaint to imagine an article from last December is still relevant, given all that’s happened:

– Coronavirus came and closed theaters.
– Comcast (via Universal) released Trolls: World Tour straight-to-video.
– Disney put Artemis Fowl straight to Disney+, and later Hamilton.
– Netflix bought the rights to countless films and put them straight on its service too.

Does all that news invalidate my article series? Far from it. Here’s the plan. I’m going to continue my Q&A as I had it planned last December. Then, I’ll dedicate an entire article to the post-Coronavirus landscape and it’s implications. 

So let’s do it.

Question: Seriously, you’re going to pretend “Covid-19/Coronavirus” never happened?

Not at all. Obviously the immediate impacts are real and I’m monitoring them in my weekly column. (Example of my latest back in June, here.)

But the core economics of releasing films in one streaming window versus multiple windows starting with theaters hasn’t really changed. They may have been tweaked given some of the new behaviors—but you know I’m skeptical on that—but Coronavirus is the “Asterisk Extraordinaire” of our time. The more confident someone is in predicting the future impact of Covid-19, the more likely they are to be wrong.

What matters for studios in the immediate term is when traditional theatrical releases restart. I still maintain that will happen before the end of the year, and likely in August. And when that happens 90% of the model will be intact. So that’s what we’ll discuss in this series.

Question: Fine, can you remind me where we were?

Sure, because I had to do it myself. To start, I finally built a straight-to-streaming financial model for films. This means that via Netflix Datecdote I can estimate how much money an individual film made for Netflix. How cool!

You can read how I built the model, why it works, and the results for The Irishman here. I built this model at the behest of the venerable Richard Rushfield for his Ankler newsletter, and showed how I can use this model very recently when I calculated the results for Extraction on Netflix too. I would add, Nina Metz at the Chicago Tribune did a great write up on my methodology too.

The most useful part of a model, though, isn’t the results but what the model tells you about how the world works. That’s the point of this series: take the model and use it to draw insights about streaming versus theatrical business models. In Part I, we focused on how much money a film makes in the various “windows” it transitions through. No matter how you cut it, theatrical distribution is a huge part of that window. Over 30% easily, but that’s actually rising as home video declines. (Also don’t neglect how home entertainment, TVOD, EST, and premium cable can add to the bottom line too.)

Another key insight is how much better the margins are better for theatrical viewing than they are for viewing at home. As a result, if you don’t release in theaters, you’re giving away potential revenue. Did I calculate this specifically for Netflix? I did, and found out, under a pretty reasonable scenario, they could have easily left $750 million dollars on the table in 2019.

Question: Three quarters of a billion dollars? Why would Netflix do that? If you were making the strongest pro-straight to streaming argument, what would it be?

The folks at Netflix aren’t crazy. They can build these models too. And the folks at Amazon tried to release their films in theaters. The most generous explanation I can give would go like this:

When a film goes to theaters first, it risks being viewed as unpopular if it flops. That would destroy the value on the streaming platform. Moreover, by going straight-to-streaming, Netflix and others have the added value of exclusivity on the platform, driving new subscribers. This is really the point of putting films on streaming anyways, to acquire and retain subscribers.

That’s really two explanations in one. First, failure at the box office destroys value and second that exclusivity raises value.

Q: Is this a strawman, or do you have someone making this argument explicitly?

This is the argument Scott Stuber—Netflix head of film— made to Variety at their conference. His quote:

IMAGE 1 - Stuber to Variety QuoteEssentially, he’s more afraid that film will bomb at the box office than it won’t perform on his service.

Well, I have a two word answer for him:

Late Night.

Q: What does Late Night have to do with it?

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Read My Latest at Decider – Why Is Comcast Declaring War on Movie Theaters?

I finally cracked why Comcast is doing all the things it does. I explain it over at Decider, but quickly:

  • They can’t buy any more cable companies, so they money needs to go somewhere.
  • If you become a tech company, you can get a higher valuation. 
  • Also, Brian Roberts loves buying things.

So how does this relate to fighting theaters? Because tech titans hate the whole idea of “windowing” and sharing profits with others. Comcast is just the latest to get in the game.

So head to Decider and check it out.

Most Important Story of the Week – 13 Mar 20: Love (Films) in the Time of Coronavirus

The most important thing in this time of crisis is to focus on staying healthy and being good citizens. So don’t hoard food, avoid public gatherings, and try to donate blood.

Still, the economic consequences will quickly become as real as the pandemic ones. This is really what we pay CEOs for; not how you govern in times of booming stock prices, but times of crisis. 

For the next few weeks, since Coronavirus will dominate the news coverage, it will dominate this column too. I plan to run through how all the parts of the traditional and digital video value chain could be impacted. 

Image 7 Video Value WEb

Emphasis on the “could”, because in times of crisis there is a lot more we don’t know then do.

Most Important Story of the Week – Hollywood Pauses Production; Theaters Begin to Close

In my last weekly column, I speculated that the Coronavirus Pandemic had finally reached the “economic consequences” stage. Arguably, I was too late to make this warning very useful. But if any doubters remained, last weekend cinched it. Every big film moved out of the Q2 time period and nearly every major sporting event was cancelled. This week—I’m dating this for the 13th of March, but posting on the 17th—most major theater chains have closed.

Still, I hedged. Especially about predicting what would happen to entertainment companies.

Indeed, I tried to commit to the position that I wasn’t going to forecast the future. Why? Well, it’s impossible.

Which hasn’t stopped folks of course. Within the swarm of actual news came the opinions you’d expect, usually verging on the apocalyptic. “This is the death of theaters” being a typical example.

How do movie studios banking on theatrical releases handle that uncertainty? Well, they have quite a few strategic options. Given that theaters are the most visible part of the video value chain, we’ll start this mini-series there.

Before that, though, a rant…

Probabilistic Scenarios vs Narratives

The biggest “narrative” impacting actual stock prices goes like this…

…the impending quarantine will leave Americans (and the globe) stuck at home.
…Americans (and the globe) like Netflix.
…Therefore, they will binge a lot of Netflix.
…So Netflix wins the coronavirus sweepstakes.

Um, maybe?

Like most things “Netflix” when it comes to the narratives the only thing larger than the impact of the narrative is the stridency of the belief. Once the “Quarantine and chill” narrative started, it quickly went from “hypothesis’ to “thesis” to “inevitable outcome”. 

But consider this: if all the studios have to freeze productions, and Netflix is a studio, then they will have to freeze productions. While that could definitely help Netflix’s near term cash flow, it also would kill the new content used to bring in new customers. Speaking of cash flow, if credit markets freeze up, then getting new high yield debt could be tricky. 

Or consider this. With the impending budget cuts, cable MVPDs may aggressively cut prices to keep customers around in a pandemic-cause recession. They know folks are stuck at home; don’t let the recession kill your business.

Or this. Free, ad-supported streaming TV service (FASTs) may actually take up viewing. They have the same volume as Netflix for a better price: free. Or Twitch. Or Youtube. Both free too.

Which one of those scenarios will happen? I don’t know. Maybe all of them. Or none of them. We’ll need to set up good metrics to measure the signal of what’s actually happening with customers, not the noise of social media.

Which is my point. While narratives feel good, they don’t tend to make good strategy, since they tend to reinforce stereotypes and biases instead of generate insights and understanding. We need a more systematic approach. Which is what I’ll try to provide. (And I’ll get to Netflix in the streaming article.)

My Tools for Understanding Coronavirus Impacts

To try to think about Coronavirus strategically, I ended up pulling out three tools that I’ll use together.

– Supply, demand, and employment: The impacts of the coranavirus are unique in that they impact both supply and demand, making this a unique crisis.

– What we know; what we don’t: In times of crisis, it’s often good to separate what you know from what you don’t and what you believe from what you assume. Otherwise, you’re likely just building a narrative that reinforces existing and preconceived biases.

– What could change permanently versus what is temporary. This ties back to my “question of the year” I speculated before we started. The question was, “With streaming, what is the same and what is different?” This same question applies to the Coronavirus: what is a temporary change in circumstances, and what could lead to a permanent change in how we consume content and entertain ourselves?

Along the way, I’ll try to call out the biggest narratives I see emerging and I’ll conclude with my tentative strategic recommendations. These are the strategies I’d pitch to CEOs if I worked at a theater or a film studio.

Theatrical Film Going – The Narratives

Theaters hold a special place in the entertainment industry’s heart. For as much as it is being displaced by streaming it still has that “je ne sais quoi” embodied by the Oscars every year. That experience of going to a theater to see a film with a bunch of strangers on opening weekend. And for my money, big budget epics just look better on the big screen.

But how will the industry fare in the Covid-19 times?

I’ve seen a few narratives. Most prominently, is the “This is the death of theaters” theory. Theaters had merged for several years, then spent significantly to upgrade the experience (better seats; alcohol). Meanwhile, theaters have always been a low margin business even in the best of times. While those are true facts financially, the narrative piece seems to be the prediction that somehow customers will turn against theaters as an experience. 

Will being stuck inside for 8 weeks really prove to Americans how little they enjoyed going to theaters in the first place?

Let’s dig in. 

Supply

What we know: Supply gets hit in two ways. First, theaters themselves are now closed in Los Angeles and New York. This will likely spread to other states and cities. Obviously, if folks can’t go to theaters, they can’t see films in those theaters. As of this writing, most major chains have gone dark and most films scheduled for Q2 have been postponed or moved to VOD.

As for release calendars, we know that studios are now getting creative. Some films have moved back to later in the year, some to 2020, some up to VOD and some indefinitely. As a result, we can say that the end of 2020 and start of 2021 will likely be fairly crowded release calendars.

What we don’t know: How long theaters will have to stay closed. As of two weeks ago, it looked like April was gone. Then last week, most would have predicted though the end of May. Now June and July and beyond are on the table. But this crisis is moving quickly, so if by the end of April cases start declining, who knows? Maybe June is available.

The bigger unknown is what happens to the release window now. While Universal has “broken” the theatrical window with Trolls and The Hunt, they have a pretty damn good explanation: theaters are literally shuttered. It’s not breaking a window that doesn’t exist. Some studio chiefs likely would like to experiment with smaller theatrical windows like NBC, while others, especially Disney, like things the way they are. I personally wouldn’t be confident predicting the future of the window in either direction.

As for release calendars, even these are pretty unknown. A few weeks back Richard Rushfield wondered aloud if any big budget films would venture to streaming. There are big financial differences between VOD—which has great unit ecnomics—and straight-to-streaming, which doesn’t. But more than anything none of these moves sets a precedence. 

Meanwhile, studios will be desperate to get films in theaters. Especially blockbusters. Studios make roughly $5 billion from domestic releases alone. You can’t remove $5 billion and expect the same level of production. Globally tosses in another $15-20 billion. And remember, the economics are much better in theaters than even VOD.

Demand

What we know: Honestly? That folks like going to big budget movies. But we also know that America is afraid and as a result no one is going to the theaters. 

What we don’t: How folks will feel about movies in the future. This is a classic narrative you can build to support both sides. Maybe the Coronavirus creates a new normal where Americans decide to permanently live sheltered in their homes. Streaming satisfies all their filmgoing needs.

Or maybe after a two month quarantine, stir crazy Americans flood back into theaters to escape their home. Maybe the theater experience really does have something to it. (Most theater attendees have Netflix right now!) That feels more likely to me. But when and how and if this can happen we don’t know. And how theater attendance fares in a potential extended slump is another unknown.

Meanwhile, if theaters do go bankrupt in the quarantine, the impact on demand could be felt in the death of super hero films. Frankly, without home entertainment and theatrical releases powering billion dollar grosses, major studios will have to cut special effects driven films. What type of content will replace those films, if anything? Will folks miss super hero content when the next round of streaming series don’t have quite the same budgets?

Employment

What we know: Well, theaters employ lots and lots of people. From staff taking tickets to contractors cleaning the theaters. If there are no show times, there are no jobs to be had. And unlike sports teams which could choose to keep salaries going for the foreseeable future, theaters run much tighter margins.  

What we don’t know: What happens to these workers in an extended slowdown. 

My strategic recommendations

Since I started writing this column last Friday, things have already changed. The headline of headlines being that Universal broke the theatrical window.

1. Get creative. The Troll World Tour move to VOD makes a lot of sense. (I’m honestly surprised the price isn’t higher.) I’d recommend this for lots of films that are in this window; triage for what can go to theaters later, what can go to streaming now, and then theaters later and what will go to VOD never to emerge.

2. Be prepared for a “summer snap back”. If the virus is under control, I think August could shatter records as folks desperate for distraction seek entertainment out doors. This requires a lot of things going right, but seems on the table.

3. Assume a government intervention. Or reach out directly. Part of the reason I don’t think the window is irrevocably broken is that thousands of theaters going out of business would put tens of thousands of folks out of work, which would exacerbate the impending recession. If you can get a bail out for lost blockbuster revenue, VOD seems more attractive. 

Other Stories

Well that was the big story, but some other new stories were there too.

Netflix Biz Model Keeps Evolving

First, Netflix ended 30 day free trials in Australia. If I had to speculate? Well, churn is the name of the game. Second, Netflix is expanding their very cheap $3 plan to new territories. If I had to speculate? Subscribers are the name of the game.

Pixar’s Onward Stumble

If I’d gotten this column out on time last week, I would have noted the soft weekend opening of Onward. The most obvious explanation? It was Covid-19 worries. But the film felt like it had soft buzz even before it came out. Why is this big news? Well, I’m monitoring Disney Animation/Pixar for the first sign of stumble post-Lasseter exit and that was Onward. One is a data point, so we’ll look to Soul for a trend.

Fox Sports Brings Back Written Content

The “pivot to video” may be the worst strategic decision universally adopted by media since the dawn of the internet. And no surprise Fox has slowly reversed itself. Now if only ESPN would make their website more functional to read their great writers.

 

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.)

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(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.