Tag: theaters

A Skinny Bundle Murder Mystery (And Knives Out Thoughts) – Most Important Story of the Week – 2-April-2021

Much like Benoit Blanc, the title character of a film series I’m about to write about, every week I find myself hunting for clues. Tidbits. Hints. Insights to answer one, yearning question: What was the most important story this week? This week required a bit more searching than usual. (I don’t interview suspects, I read news stories.) To pound the detective analogy to death, the most likely suspect was not the most important. So what is?

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Most Important Story of the Week – T-Mobile Shuts Down “TVision”

Let’s say you’re driving around Los Angeles. You see a gas station selling gas for $1 per gallon. What do you think?

You think something is going horribly, horribly wrong.

Why? Because gas is a commodity, meaning mostly it sells for the going rate because there is no competitive advantage to any one gas station’s prices. (Is Chevron with Techron a lie? Not really, but it’s also not really different from most gas.) Since Los Angeles has some of the highest gas prices in the US, if someone is selling you $1 gasoline, they’re either scamming you, selling stolen gas, or they’re trying to corner the gasoline market by selling goods under cost.

This hypothetical–with all attendant alarm bells–should be in everyone’s head whenever a new bundler is out there touting some bundle with remarkably low costs for cable TV. Youtube TV and Hulu Live TV both started this trend. AT&T then doubled wayyyyy down on it. Others followed suit. But inevitably, they all had to raise prices over time. In some cases nearly doubling the initial offered price. 

The logic is sort of clear and inescapable: cable channels have set prices negotiated over years by cable and satellite providers (MVPDs) and the cable channel owners. Virtual MVPDs (like Youtube TV and Hulu TV) pay lower prices per channel, but not that much lower. Otherwise MVPDs would demand much lower prices too. There is basically a floor for how much it costs to run an MVPD or vMVPD.

Just how did Youtube, Hulu and AT&T manage to offer lower prices? By losing money on each given sale to gain market share. They sold gas at $1 per gallon, in other words. The old fashioned, if-we-lose-$1-on every-unit-we’ll-make-it-up-in-volume-thinking. But in this case, losing sometimes $20-30 per month. Once customers were hopefully locked in, they would raise prices and keep the customers. 

The problem, especially for DirecTV/AT&T’s offering, was they couldn’t keep the customers. Unlike MVPDs, which tend to have very high switching costs and/or local monopolies, digital is very easy to switch. As soon as costs go up, customers switch providers. 

Which made the T-Mobile announcement last year of a new skinny bundle called “TVision” all the more surprising. The skinny bundle had come and been found wanting. At the time of the announcement, I was skeptical that this time would be any different. Indeed, last week we found out that T-Mobile was ending TVision, and instead partnering with Youtube TV (who is likely still losing money per subscriber, but funding it via an advertising duopoly and search monopoly) and Philo TV. And now customers get a whole $10 off each respective service.

Why is this the most important story? Because it shows that customers do want these services, just nowhere near the prices demanded by the current cable bundle. This story both shows the lingering customer demand, but also the inevitable pricing challenges. My guess is this won’t be the last time we see a skinny bundle, but they’ll face the same challenges. The bundle is dead, but it won’t stay that way.

Covid-19 Tracker – Godzilla Big Weekend

Listen, if this article is supposed to cover the news of the last week, then arguably this “news” didn’t happen last week; it took place over the weekend. To defend myself, we had good indications by Friday that Gozilla vs Kong would have a strong opening weekend, and beat box office expectations. And it delivered, along with a very strong performance in China.

This feels meaningful for at least a few trends. First, the death of cinema and theatrical attendance is far from certain. Every weekend the box office outperforms expectations is a step closer to the new normal for theaters in America, especially as more theaters reopen, increase capacity, and feature bigger films. It could take months to get back to where theaters were pre-pandemic–if they ever even get there–but all the available data says we’ll be much closer to $11 billion per year spent on theater tickets than “$0”, which some analysts forecast last March.

(To channel Debbi Downer, though, the recovery will take months. So lots of pain still to come.)

As for the simultaneous HBO Max release…hoo boy that’s a big topic. And one I won’t answer today. Because we can’t. We only have one piece of data so far–box office–so we’re really missing one side of the equation, the streaming ratings.  I’ll reiterate what I said last week: I think shortened windows are here to stay, but tend to think day-and-date streaming and theatrical is not. But numbers like these help the streamers’ case that day-and-date streaming may not hurt theatrical. But in today’s Covid disrupted world, Im’ not ready to make that case yet.

Other Contender for Most Important Story – Netflix Buys Knives Out Sequels for $450 Million

I subscribe to so many newsletters on entertainment that I can’t keep count. (I probably could count them, but I won’t.) This allows me to see the story that tends to capture “conversation”, especially among the influencers, aspiring influencers, journalists and Celebrity Wall Street Media Futurists (trademark Patrick Crakes). This week, that story was pretty clearly Netflix shelling out $450 million to Rian Johnson and team (that part is important) for the sequels to Knives Out

I was as fascinated as anyone by this story. Though it clearly isn’t the most important of the week, it is the most “thought provoking”. So here are some odds and ends thoughts on it.

– I read all three trade articles on the deal and the biggest unknown is still all the unknowns. This goes from what exactly Netflix purchased (Sequel rights? Franchise rights? Fees to previous distributors? Distribution for the first film?) to how much they are actually paying. I’d break it down into three big areas: the rights for the sequels, the production/marketing costs for the films (with backend), and the rights for the franchise. If I could know anything, I’d love to know what those pieces are expected to cost and how long Netflix will own those rights.

– The best framework for looking at this deal is via risk. Yes, online we want to categorize things into “good or bad” deals. That’s easy. (And it fits the social media antagonistic mindset.) But in a probabilistic world–and if you don’t think we live in a probabilistic world, I’m probably not the website for you–no deal is all good or all bad. Instead, the better way to think about investments is how risky they are for the return. Likely, Netflix built a model. In that model, in some cases, they only make $200 million in revenue off this deal. That’s the bad case. But in some, very rare scenarios, they make a billion. That’s great! In some, they just make $400 million. In other words, you run all those scenarios, and the “expected value” of this rights deal could be, say, $470 million. (Again, a made up number.) If Netflix paid $450, then they expect to make about  $20 million on average in this deal. (Again, made up numbers for explanation purposes.)

– The deal is risky precisely because of that $20 million. (My guess, remember.) Whenever the price is sooooooo close to the expected value, the deal is by nature risky. And we know it is close because Apple and Amazon were aggressively bidding on it too. And since Rian Johnson and team likely chose the highest bidder, they probably got the deal closest to the “expected value” of this bundle of rights (remember, it could go from literally just the two sequels up to owning the entire series now). This is called, in economics, the “winner’s curse”. If you have a lot of bidders on something, the odds increase that the winner of the auction likely overpaid. To return it to the “risk” framing, the more bidders, with the more deep pockets, the riskier the deal will be.

– That is assuming the expected value is even positive. If you’ve bought a lottery ticket or gambled in Vegas, those are negative expected value propositions. Could Netflix and other suitors paid have been prepared to pay $450 for $400 million of expected value? Definitely. Because that happens in entertainment all the time. Especially when certain suitors can “afford” to lose money. (Though I hate that phrase.)

– It is also fascinating that it was three big tech companies that were the final three rumored bidders. If I could, I’d love a machine that would allow me to send news stories to analysts/opinion makers stripped of key details. (The dream would be for film criticism. Like you could send a film to a critic and say, “What do you think?” but they’d have no idea who directed it, do you think that would change some opinions?) In this case, I’m convinced that some analysts who praised this deal would have excoriated it, if they first were told it was done by Warner Bros or Disney. In other words, the same deal becomes a genius deal if a Big Tech firm does it, but disastrous if a legacy media firm does it. Obviously, I can’t prove this hypothetical, but in many cases I think it’s true. And bad analysis.

– Lastly, the main upside for Netflix seems to be the hoped for “franchise” play. Meaning that Netflix isn’t just buying two films, but a whole series of films, with potentially TV show spinoffs and international versions. Three quick thoughts on this. First, again after reading the trade coverage like a sleuth, I’m not convinced that’s the case. Given how enormous the paychecks were for keeping rights to the franchise, wouldn’t Rian Johnson and producing partner Ram Bergman have been smarter to keep those rights? I’d say so. That includes controlling international versions and TV rights. Is it really crazy to think that Netflix would pay $225 per film given that they paid that much for The Irishman? I don’t think so.

– Second, I saw some folks using franchise rights as a hand waive to say, “Well, it was worth it because you can’t put a price tag on owning a franchise.” Yes you can! I spent thousands of words explaining how Disney did that for Star Wars. And frankly, franchise rights are lower than most folks would guess. Basically, every film in a series is a chance to fail. And once a franchise fails, well, the sequels after it are much harder to justify. If you don’t believe me, look up The Hangover or Hobbit franchises. Or read my article on franchises here. It’s hard to make one good film. It’s even harder to make three in a row. (But the basic equation is the value of all potential franchise properties multiplied by the success rate of the franchise multiplied by the probability that you can make each one.)

– What about international adaptations? Well, sure, Netflix could make those, and distribute them to their platform. But, wait what? Isn’t the whole power of Netflix that they can make a film in India and make it popular globally? Why would a local audience want to watch a Knives Out remake if Netflix is already offering them the original? If you need to make local adaptations, that would seem to negate that advantage? Maybe the power of global distribution doesn’t actually work out as well as touted. (Indeed, Netflix is making Money Heist for South Korea.)

Other Contenders for Most Important Story

Let’s do some quick hits and wrap this thing up.

NBCU Is Considering Another Streamer?

To use my recent classification, is this “actual” news or potential? Well, the next three stories are all “potential” stories. In this case, there are rumors from a well connected reporter that NBCU is considering launching another streamer, maybe Universal branded, to pair with Peacock. If this happens–and it is a big if–we’ll have lots of strategy thoughts to roll out. But let’s wait until it happens.

Comcast Weights Pulling Universal Films From Rival Streamers

Same for this story. If Comcast, via Universal, keeps selling box office blockbuster juggernauts–like The Minions films or Fast and Furious series–to streamers like Netflix, Hulu or HBO Max, they really need to reconsider their strategy.

NCAA Case at Supreme Court

Lastly, we spend way too much time in political reporting guessing what the Supreme Court will do ahead of time. But it is fair to point out that the NCAA court case on amateurism could have huge ramifications on college athletics in America.

Why I Think Theaters Will Return in May: Forecasting When Society Can Reopen

A character in The Sun Also Rises described going into bankruptcy as happening “gradually and then all at once.” This apt description has been applied to everything from debt insolvency to failed democracies. 

The US recovery from Covid-19 will likely feel the same way.

Right now, most of the coverage I read is fairly pessimistic and cynical. On one hand, I get it. The US just had an awful winter. Covid-19 will claim 500,000 deaths in the US alone, and that number is growing. Even positive coverage is framed with caution:

IMAGE 1 - Calm Variant Storm

IMAGE 2 - Experts Still Worried

IMAGE 3 - Reopening v03

On the other hand, doesn’t the US have a lot of good news on the Covid front? Is this pessimism still warranted? Forecasting doom and gloom could be as inaccurate as forecasting sunshine and roses. Where are we really headed as a society? Given the huge implications for the economy, this is a tremendously important question that very, very few people are answering:

When will society reopen after the vaccine rollout?

For my purposes, a lack of forecasting about the future is particularly painful. While lots of entertainment is consumed at home (TV, streaming, video games) lots more is experience live and outdoors (theaters, concerts, sporting events, theme parks). As I usually do when I can’t find an answer to a question I need to know, I tried to answer it myself. 

So here’s a report on what I found. The outline of this (long) article is roughly:

– Bottom Line, Up Front
– The Problem: the legal/regulatory thresholds for society to reopen
– The Assumptions/Inputs: the key assumptions/inputs to build a reopening model
– My Hypothesis: Effective vaccines widely distributed will crush the death toll
– The Model: My results!
– The Key Metrics To Track Going Forward

Let’s get to the results.

Bottom Line Up Front

I’m optimistic that theaters will be open by May 7th across the US, including New York and Los Angeles, the day Black Widow is set to premiere in the US. Black Widow itself may not premiere on that date, though whether or not it moves dates in the next few weeks will be driven by uncertainty, since Disney will have to make the call in about four weeks.

After building a vaccine distribution model (with three scenarios), I’m confident that by early May, between 33%-44% of the population will be fully vaccinated, and up to 61% will have had a first dose. Given the initial data that even one dose provides nearly full efficacy, this level of vaccination will likely decrease deaths and hospitalizations by 76% or more.

It is much more uncertain what the volume of cases will look like by May 7th. The key metrics to focus on, for studios and other entertainment companies, will be the pace of vaccinations, the current case loads, and the rate of death.

(Initially, I had a series of caveats to this controversial article. I can hear the skeptics, “You’re not an epidemiologist so why should we listen to you?” To save space, I’m moving those to their own future article. To address the key caveat, yes, I’m not an epidemiologist. 

Frankly, most companies cannot afford to hire epidemiologists to forecast disease outbreaks. And even if they could, as we’ll see, their models have their own uncertainty. Instead, many companies will likely have their strategy teams doing this analysis themselves and/or rely on models from companies like McKinsey/Goldman Sachs, which are, you guessed it, put together by people like myself. The difference is I make my models/methodology public.)

The Problem: When Will Theaters Open Specifically?

Today, I’m focused on the movie theater problem. (Hopefully, I’ll get to sports and concerts in future updates.) The problem for big studios is distribution: when they release a big tentpole film, they want it widely available. Specifically, this means Los Angeles and New York, and other big cities. They’d ideally want theaters at 100% capacity, but would likely accept 50% capacity constraints.

Thus, the question is whether those specific cities (and America broadly) will be mostly reopen by May 7th, which is when Black Widow premieres. (Or Memorial Day weekend, 28-May-2021 when Fast 9 is set to premiere.) The studios will need to make this call about eight weeks prior, so that they can schedule promotional advertising campaigns. Disney has said they’ll likely make the decision on Black Widow in the middle of March.

To reopen theaters, local counties will need to have Covid outbreaks under control, using whatever guidelines local states have established. In California, for example, this is a series of “tiers”, of which Los Angeles is firmly in the first, most restrictive tier. From the Los Angeles Times:

IMAGE 4 - Reopening v01

And our status under those definitions:

IMAGE 5 - CA Status LA Times

(Though, like all things Covid-19, there is actually a more restrictive tier of “stay-at-home orders”. California’s stay-at-home order was lifted in January.) 

Tying this to theaters, in California, “red/tier 2” counties can have theaters at 25% capacity or under 100 people, whichever is lower. “Orange/tier 3” counties can have 50% capacity or 200 people, whichever is lower. “Yellow/tier 4″ presumably would be fully open.

Covid Act Now, uses a different set of guidelines, and you can see how various metro areas stack up:

IMAGE 6 - Covid Act Now Metro

No matter which numbers you use, the same basic correlation is the same: The lower the number of cases, the more indoor businesses which can be open, which includes theaters.

As cases decline, so do deaths, after about a three week lag. Crucially, as vaccines are widely distributed, deaths may decline even further and faster than cases. If deaths drop and stay low, even if cases come back, some folks could argue that the values of reopening society outweigh the risks of disease spread. (In short, if a pandemic is raging, but no one is dying, is it a pandemic?)

So really there are two scenarios for reopening. One is the “public health” requirements, which means eradicating cases. The second is the “demand side” requirement, which is that deaths and hospitalizations are low enough that society wants to reopen.

The Key Assumptions/Inputs

The reason I couldn’t build a model before 2021 on Covid-19 was that forecasting the pace of the disease was nearly impossible. With so much uncertainty and unknown variables, most models have failed to effectively forecast what will happen in the next two to three months. 

Vaccines, on the other hand, are an easier modeling challenge. We have fairly reliable data sets on distribution and fairly robust (and growing) knowledge about how effective they are. Let’s explain those inputs/assumptions.

Input 1: The pace of vaccination is increasing in the US, and could accelerate further.

No matter how you slice the data, the rate of vaccinations is growing in the US, and it’s a story that most outlets mention, but with the pessimistic caveat that everyone wishes they were even higher. (Yes, we do.) But they’re getting higher every week. In a few weeks, they will be shockingly high. Here’s Our World in Data’s look:

IMAGE 7 - OWiD Vaccine Rate

Or take Kevin Drum’s take, looking at peaks:

IMAGE 8 - K Drum Update

The US was able to double vaccination capacity in ten days starting in January 4th (350K per day, seven day average) to January 14th (700K). I start with January 4th, since that’s when most healthcare workers returned from Christmas break, and all state and local governments focused full-time on the vaccination program. Then, it took 26 days to double again (from January 14th to February 9th). Depending on when we get to 2 million doses, it may have taken only 30 days to have doubled from 1 million doses to 2 million. (We’re currently at about 1.7 million per day.)

We will likely be delivering two million doses per day, as this week the Biden administration committed to delivering 13.5 million doses to states at a minimum. On top of this, the Biden administration is delivering two million doses directly to pharmacies and one million doses to community health centers. If all those doses are used next week, we’ll exceed 2 million doses administered per day. Further, the CDC expects 200 million total doses distributed to states by the end of March, which implies a daily rate of 3.5 million doses per day in March.

Input 2: One Vaccine Dose Begins Providing Protection

The initial data from the UK and Israel shows that even one vaccine dose provides a high level of protection. This does not mean individuals shouldn’t get a second booster shot. They clearly should. Very likely, though, the first dose provides immediate impacts on infections, hospitalizations, deaths and even transmission. More and more data is coming out which supports this conclusion.

Input 3: The Covid-19 vaccines work. Extremely well.

It seems crazy to have to repeat this, but it should be noted that the vaccines work really, really well. You probably saw this tweet from Brown epidemiologist Dr. Ashish Jha, but it’s worth repeating:

Moreover, studies conducted in the United Kingdom and Israel on vaccine roll outs confirm the efficacy of these vaccines. In addition to preventing symptomatic illness, the vaccines also drastically reduce hospitalization and death. Finally, initial data also suggests that in addition to preventing death, it looks likely that the vaccines prevent transmission to other individuals.

Input 4: Covid-19 is most severe for older individuals, who the US is prioritizing in the vaccine rollout.

While the coronavirus can and does kill all ages, one of the more clear trends is that the virus disproportionately kills older individuals. Here are a few looks at this:

IMAGE 9 - Deaths by Age

IMAGE 10 - Deaths by Age v02

Fortunately, in January, after vaccinating healthcare workers, the CDC changed guidance to focus on high-risk (meaning older) populations. This means the impact of effective vaccines will be even greater than general distribution because it will decrease hospitalizations and deaths of those most likely to be hospitalized and die. 

If we can achieve high levels of vaccinations in those groups (say 80% of a given age population vaccinated) then the results will be dramatic. Vaccinating 80% of individuals over 75 will lower total deaths by 48%, individuals over 65 will lower deaths by 65% and vaccinating individuals over the age of 50 will lower total deaths by 76%. (And if we can achieve 100% vaccination in the most at risk groups? We’d lower total potential deaths 95%!)

Input 5: The current lockdowns are having a dramatic effect.

Meanwhile, as the Covid Tracking Project’s data show, the number of cases are plummeting in America. The declines are dramatic:

IMAGE 11 - Covid Tracking

Whatever the cause—lock downs, seasonality, growing natural immunity, some vaccine prevention—this is very good news for the United States. It means cases are trending down, right when vaccine distribution is ramping up.

Input 6: Case rates by population

To understand the impact on cases, beyond deaths, it is important to know how cases are distributed in the population. Unlike deaths, cases are fairly well aligned with the population. Meaning, folks will test positive for Covid-19 roughly correlated with their percent of the population. 

IMAGE 12 - Case and death and population

This is important because it could mean that as vaccines are rolling out to younger populations, the case rate could flatten or even increase, but deaths will not. There is already evidence that case loads are dropping in certain age groups in the UK, Israel and US, but as you can see that may not impact the overall case load significantly.

My Working Hypothesis

Add these inputs together, and this is my working hypothesis:

If current lockdowns can drive down cases…
Which will drive down hospitalizations/deaths…
And if the United States can vaccinate the highest-risk groups…
And if we can continue to increase the vaccines distributed per day/week…
Since vaccines prevent deaths and hospitalization…

Then once we get the current hospitalization rate down, it will stay down until the next flu season (next November or December). If hospitalizations are down, deaths will stay down as well.

This will allow states to reopen, including theaters.

The Model

So that’s the working theory. Let’s turn this into a model.

Step 1: Vaccine Distribution

To start, I sketched out some vaccine distribution scenarios. To start, I drew a linear model in vaccine distribution to see how it was growing. Then, I made a simpler second model based on potential vaccine supply. This weekly model uses big round numbers, but is more aggressive than the linear model and based on CDC guidance about distributing 200 million doses by the end of March. Lastly, I made a very conservative model based on plateauing vaccine supply at 2 million per week starting in February. 

First, here’s the linear model to show the logic:

IMAGE 13 - Scatter Plot

Here’s the table of doses by week:

IMAGE 14 - Table per Day

And a chart of that…

IMAGE 14 - Chart

That’s a lot of number, so here is a summary by month of the “reasonable” model.

IMAGE 15 - Chart

The monthly model confirms that vaccine makers could indeed hit the aggressive targets. I built the conservative model based on misreading the director of the CDC Rochelle Walensky estimating that we’ll have 200 million doses by the end of March. (I thought she had said 200 million by the end of April.) At a rate of 200 million doses by the end of March, the CDC is basically forecasting that we’ll be vaccinating 3.5 million people per day at some point in March. That’s my “reasonable” but aggressive model.

Step 2: The number of vaccinated individuals

So that’s the first step. We can reasonably forecast how many doses we’ll have distributed by future dates. Yet, some folks will insist on distinguishing between shots and those who’ve been fully-vaccinated. I went further and also calculated those who will be two weeks from their first dose, since data shows this too provides quite a bit of protection. Specifically, we need to know these dates by the start of May, our presumed launch of Black Widow, 

Here is my rough counts for those, and to put them into context, the percent of the population over the age of 18 who would be covered:

IMAGE 16 - Numebr Vaccinated

IMAGE 16 - Chart

(Why over 18? Because the vaccine is only approved for those 16 and over, and Covid-19 has very little impact on ages younger than that. Plus, frankly, it is about 250 million individuals which is a nice round number.)

In the worst case scenario, by the time Black Widow premieres, only 30% of the population will be fully-vaccinated. 

However, in the best case scenario, if you include natural immunity, one dose vaccines and count folks who are two weeks from their first shot, then up to 69% of the population will have immunity to Covid-19. So we’ll be on the verge of herd immunity by the end of April!

Let’s be clear on these assumptions:

– Some portion of Americans have already had and recovered from Covid-19 acquiring natural immunity to it. This floor is at least 27 million confirmed cases. (About 10% of the population.) The high end is unknown, but Harvard epidemiologist Michael Mina’s forecast is 40%. Let’s split the difference and call it 20%.

– I used the date five weeks prior since Moderna is three weeks, then two weeks to be fully effective. Yes, Pfizer is four weeks, but again this difference is minimal overall.

Step 3: The number of deaths prevented. 

Again, the impact of Covid-19 is not equal across the population. It is very much tilted towards older individuals. Meaning, when they are vaccinated, the odds of dying from Covid-19 decease by 92% or more.

To figure out how to vaccinate the right folks, I simply took the CDC data and 2019 census information, and assumed an 80% vaccination rate:

IMAGE 17 - Deaths and Cumulative Distribution

In other words, to prevent 76% of deaths, we need to vaccinate 80% of everyone over the age of 50. The key assumption is that we can achieve 80% full vaccination by group. Most surveys put vaccine hesitancy at 70% of the population, but only about 10% is hard core obstinacy to any vaccine. So I took a number in the middle.

So how many people do we actually need to vaccinate to get to that 3/4th decrease in total deaths going forward? Well, here you go:

IMAGE 18 - % Needed to Vaccinate

Of course, not all doses will go to healthcare workers and individuals over the age of 65, especially as counties and states begin vaccinating more essential workers. (Like Los Angeles, who is moving onto food workers, teachers and remaining public safety officials after those older than 65.)

Given the vaccination rates above, we can see that it is very, very likely we’ll have fully vaccinated 40% of the population with either one or two doses, including most healthcare workers and folks over 65. A big portion will also likely be those 50 to 65. If we include people getting only 1 dose of Johnson & Johnson, then we’ll almost certainly have vaccinated all high risk groups.

My model forecasts that by May 7th, we’ll have lowered the ceiling of potential deaths by 76%. If this widespread vaccination results in decreased case loads and transmissions, the actual death rate could be much, much lower. This is essentially the “ceiling” of deaths.

Step 4: The Los Angeles Specific Model

This model, so far, has only addressed vaccinations and deaths. What about cases?

As I set up in the problem, the primary criteria to release Black Widow (and other big studio films) in theaters is whether or not the coastal cities are reopened. To answer this, ideally, I’d build a model forecasting cases in both of those cities. Given that I live in Los Angeles, I pulled the numbers there to see how far LA is from reopening. I’m assuming that Los Angeles and New York are roughly correlated with each other, and their outbreaks are also roughly correlated with national outbreaks.

(This assumption is both fine and could be horribly wrong. The “summer surge” mainly took place in “Sun belt” states, whereas the first surge took place in north Eastern states. However the last surge took place in every state simultaneously.)

I showed Los Angeles’ current performance on state re-openings, but it’s worth noting that most metrics are tied to case loads. If it goes down, ICU capacity, case positivity rate and the equity will trend downward as well. Here’s the current case trend line:

IMAGE 19 - Case Trend Line

Now the question is can we model how vaccine distribution could impact case levels going forward?

And no, I don’t think we can. 

I’ve done a lot of forecasting so far, but every number is from a fairly reliable source. The vaccine distribution plan is fairly well reported, and its growth is easy to forecast. (Again, look at that straight line!) The impact of the vaccinations is also fairly well known. Thus, we can confidently predict a coming drop in deaths that will stay low, if we vaccinate the most at risk groups.

Cases, though, are a different ball game. 

Just look at US trendiness in the past. If you started in the middle of October, and just extrapolated forward, you’d have missed the December spike. Or if you started in the middle of January, you’d have forecast cases to stay high. This actually happened with the CDC forecast. In the middle of January, their model of models forecast 1.5 million cases by the middle of February, with a floor over a million.

IMAGE 20 - Forecast

Instead? Cases are currently at 600K and falling.

IMAGE 21 - Cases Feb

I don’t blame the CDC. Modeling seasonality, societal behavior and mostly a brand new virus is incredibly tricky, and these epidemiological models have trouble with it. Again, no blame here from a fellow modeler. I’m just acknowledging the limitations of modeling.

Add it up, and I won’t forecast the case rate/total cases in Los Angeles by the beginning of May. There are too many unknown variables. Indeed, I think both the best case (cases stay very low, due to natural immunity and expanding vaccinations) and the worst case (case rates rebound after widespread reopening, potentially driven by more transmissible variants) are both possible by May. The only thing I am fairly confident (as steps one though three show) is that deaths will stay down. 

At best, what we can say is that as vaccinated rates go up, the peaks of the worst metrics will be limited. Think of it like this: the infection rate is the number of people an individual with symptomatic Covid transmits it too. If it is 2.5, that means one individual gives it to 2.5 individuals. If half of all the people someone meets are protected from Covid-19, then the max number would now be half of that, or 1.25. 

The Key Metrics Going Forward

Notably, I haven’t provided any probabilities thus far. If I apply probabilities to events two months out, my error bars would need to be very, very wide. Those probabilities wouldn’t be worth much more than guesses. 

Instead, I’m going to provide a scorecard of key metrics. The higher the scorecard, the more confident we can be that society will returning to normal. You can apply your own probabilities based on the numbers. These metrics will have three parts: vaccinations, deaths and case loads. 

Screen Shot 2021-02-18 at 5.02.44 PM

I plan to think on these metrics a bit before I do an update, hopefully next week. As I said, I won’t provide predictions, except for the vaccine roll out, but will color code which metrics are moving in the right directions.

As I said at the start, if you read all the way down here, as vaccine distribution picks up, the Covid-19 pandemic will end gradually, then all of a sudden.

In the meantime…

Please do whatever you can to prevent the spread of Covid-19, focusing on the best practices at preventing spread. 

1. Wear a mask. In fact two, or the highest quality you can afford.
2. Avoiding indoor gatherings until you are fully-vaccinated.
3. By all means, get vaccinated as soon as you are able to.
4. Help older relatives get their vaccinations by whatever means necessary.
5. Spread positive news about the efficacy and safety of vaccines and that they will enable our society to reopen. Vaccine hesitancy is driven by vaccine skepticism, a large amount of which is coming from the media. This includes skepticism about how vaccines prevent hospitalizations and death. Do your part to spread the good news and not Covid-19 hysteria.

Sources

I linked to most data I used to put this together. However, a few websites provide regular updates. I recommend…

Our Wold in Data
Covid Act Now
The Covid Tracking Project
The Los Angeles Time
Bloomberg Vaccine Tracker
Nate Silver’s Twitter feed, who close followers will recognize a few tweets from.

Price Discounts Continue in the Streaming Wars and Other Contenders for Most Important Story of the Week – 22 June 21

As The Stranger told The Dude, sometimes you eat the bear and sometimes the bear eats you. 

Such was last week’s weekly column for me. (By the way, check out this great article on the origins of the quote above.) I had a lot of thoughts percolating about the most popular topic in streaming–rightly Netflix–so I went long trying to tamp down expectations just a pinch on what Netflix’s big 2020 means in context. But Netflix wasn’t the only news story of the week. So here’s my quick run through of what else happened in entertainment last week.

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Other Contender for Most Important Story – HBO Max and Apple TV+ Extend Discounts/Free Trials

The news: Apple TV+ is extending their one-year free subscription, which started in November of 2019 to July of 2021. HBO Max, meanwhile, is extending their price discount of 22% ($11.50 per month) until “mid-2021” as well.

If you want to know why Netflix is the king of streaming, it’s these contrasting pricing decisions. In late 2020, Netflix raised prices. It’s competitors, HBO Max and Apple TV+ , are going the opposite route. They are still in all out growth mode, whereas Netflix has locked in a huge chunk of customers. So it can increase prices  and still see a growth in the US/Canada region of 800K customers.

The fun question is, “Who is this a worse sign for?” and I’d have to opine Apple TV+. HBO Max’s price discount is actually just explained as the easiest way to avoid the Roku/Fire TV/Apple TV 10-30% deal tax on streamers that devices/operating systems charge when you sign up through their application. The industry leader (again) is Netflix who doesn’t let you sign up via your TV, and basically forces you to their website. But they have 67+ million subscribers in the US, so they can get away with that.

HBO Max needs subscribers, but it also doesn’t want valuable, multi-year subscribers forever locked into the Roku or Apple or Amazon payments, so they offer a discount for folks signing up at their site for 6 months or more. That makes sense. 

Apple, on the other hand, just may not be able to get people to pay for their TV offering. Frankly, at $5 per month for only originals, it’s clearly the most expensive service in terms of content for price. At this point, it’s more likely that Apple extends the free price point until the end of 2021 than that they finally start charging customers.

Other Contenders for Most Important Story – The Latest Round of Theatrical Delays

Coming to a theater near you…not new films in Q1.

The news started dropping at the end of last week that the latest round of films due for 2021 are moving. The biggest casualty was probably A Quiet Place 2. Frankly the studios are not optimistic about theaters being open through March. This isn’t unexpected, and the biggest wildcard for theatrical exhibition is when the pandemic finally abates. Personally, the five numbers I’m watching are these, from the Covid-19 Tracking Project and Our World in Data.

IMAGES Covid

IMAGES Covid 2

You could be optimistic or pessimistic on these numbers, depending on your constitution. On the negative side, we have a long way to go before deaths drop to zero. And that will take weeks and weeks.

On the positive side, the drop in cases is the fastest yet of the pandemic in the US. Further, I think we’re going to see the impact of mass vaccinations on the US/EU accelerate faster than the general consensus thinks. (Most public health officials are providing what seems to be very cautionary/conservative estimates of vaccination rates.) The US is now giving out 1 million shots per day, and the rate of growth is doubling about every 10-13 days. For example, the US has already tripled the amount of shots it can give per day in January, and the month isn’t done. If we can see the same growth in February, the US could be vaccinating 3-4 million per day. At which point vaccine production becomes the next bottleneck to smash.

The current date to watch is May 7th for Black Widow. Disney could stand to gain by being the first film to “reopen” theaters and theaters would be hungry for a known commodity, like an MCU film. But we’ll they be open? Remains to be seen.

In other theatrical news, as expected the global cinema industry lost 32 billion dollars due to theatrical closures down from around $45 billion in 2019 for a $13 billion box office year in 2020

IMAGES omdia-cinema-

That’s a good number to keep in mind that if streaming ends all theaters long term, that’s a lot of revenue that streaming may never make up. As Omdia itself point out:

Screen Shot 2021-01-25 at 10.17.57 AM

In other words, theaters declined by 71% and lost 32 billion, but streaming only made up for a fraction of that, increasing by 30% with 8 billion in gained revenue. So that leaves studios/producers down 8-12 billion (minus 35-50% roughly for the split with theaters).

Entertainment Strategy Guy Update – The Pac-12 Fires Larry Scott

It turns out that the presidency wasn’t the only office changing hands last week. The Pac-12 fired it’s long-term commissioner Larry Scott. Normally, conference hirings and firings don’t rate a spot in my column, but this gets an exception for two reasons. First, as a fan of a team in the “Conference of Champions” this could help the Pac-12 return to glory. Second, I wrote about whether the Pac-12 made the right call in not signing a strategic partnership for Athletic Director U last year. This is a super mathy, but fun look at opportunity costs, valuing strategic options and decision making.

Patrick Crakes on Twitter laid this out more succinctly here:

Other Contenders for Most Important Story

And now for the quick hit stories that caught my eye…

Disney Leads in Indonesia

One of my more controversial positions in the streaming wars is that we should analyze the war battlefield by battlefield. While global numbers are easy, they often obscure smaller trends that matter. To change a famous political aphorism, all streaming is local.

Take Disney+. They’ve already taken a lead in India and, according to a new report, Indonesia. How the smaller countries and regions fare going forward is a fascinating, and under covered, element of the streaming wars. 

The CW New Shows Headed to HBO Max

A few years back, The CW signed a big deal that delivered all their current shows in the “Pay 2” window to Netflix. (Pay 2 is after a one year holdback.) This deal was mostly a win-win, with The CW getting a billion dollars per year, and Netflix getting a lot of content that repeatedly made their top ten list in America (and likely around the world) including Supernatural, Riverdale and the Arrow-verse shows. Last year, we noted that the CW was ending this arrangement, because in the steaming wars you can’t arm your competitors, and the question was where does the content go, Paramount+ or HBO Max? The answer is the latter. (Read my story of the week on this here.) 

Assuming the price makes sense, this is another good content decision by HBO Max. Pairing more CW shows, HBO, and Warner Bros content will increasingly make the HBO Max library one to envy. It’s deep. Few customers will switch to HBO Max for these shows on their own, but it could help HBO Max keep folks in the ecosystem. And that’s the name of the game: keep folks on the platform to reduce churn.

Caveat: Batwoman had already gone to HBO Max last year, but this announcement confirms all new CW shows will end up on HBO Max through 2021.

Last caveat: Netflix will continue to air shows that started under their old deal, which could incentivize The CW to end shows sooner than they would have otherwise. That will be a subplot to watch.

Paramount+ Launches on March 4th

The name change officially starts on March 4th, with a new product roll out announced the week before. Expect that to be the story of the week when it happens.

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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