| January 13, 2020
Around a month after the launches of Disney+ and AppleTV+, the complexity of change continues to rear its ugly head all over Hollywood.
Don’t misread me… there have been very few days, weeks or months in my experience of the industry known as Hollywood that are not in a state of endless hysteria about the end of everything we ever knew. There is always hyperbolic passion for The Next Big Thing and an endless death march for Last Year’s Model.
But the reality of these businesses is always quite different than the heavy breathing, even when the screams are coming from inside the house.
Netflix is Netflix. There are real problems in their financial future, which they are addressing. But today, competition is not really an issue. The primary issue is how to significantly expand international household subscriptions. The production side is doing its job well. Marketing is going well.
Smartly, Netflix is a few years ahead of today, projecting the troubles to come. And maybe they will find a way out of the troubles. They are very smart. But are they really in trouble today? No. They aren’t at the stock market highs of this last summer, but at over $300 a share, they are the fattest entertainment stock in the world. And they always seem to float back to that.
The market seems to be turning negative on the stock, anticipating the wall that has already been hit overseas and the potential tools Netflix may employ to keep the subscriber number growing with lower and lower increases to revenue. But I expect a good quarterly or two before that shows up in the price in a significant way.
Disney is moving carefully into its Disney+/Hulu/ESPN+ platform. Hulu is already near 30 million domestic subs. Disney+ is claiming 10 million subs in the first day, now a month ago. ESPN+ was launched months ago and is kind of the tag-a-long. The combined trio of apps, with the Fox library added to the mix, is going to be much bigger than the Netflix offering. But today, it is not.
Disney also has the massive complication of worrying about cannibalizing their cable and broadcast businesses with their streaming availabilities. They are not as deep in as Comcast or AT&T’s DirecTV. But they are generating more revenue today from their traditional media platforms than they are ever likely to generate from their combined streaming platforms.
Meanwhile, Disney’s all-IP all-the-time movie side is entering its sophomore period after a truly remarkable and unique freshman decade. Marvel is post-Avengers. Pixar is post-sequel. Lucasfilm is wrapping up The Skywalker Saga. And the remaking of classic Disney animation as live action-ish films is near its end with Mulan landing and Little Mermaid on the way. (Snow White again anyone? Tarzan? Mo-Cap Chicken Little?)
Bur Disney’s biggest challenge will be raising the pricing on their three-part streaming package. And that is coming. It has to. The economics demand it. The Fox purchase demands it. But it’s an enormous challenge. The three-stream bundle is currently at $12 or $18 with commercial-free Hulu. Netflix is currently at $13 (most popular) and $16. So what happens if and when Disney’s bundle goes to, say, $15 and $21? The Fox film library should be enough to rationalize that price point in this market. But it’s an unknown until the price point is offered. And relevant to the Disney situation, the question of how many people are subscribing only to Disney+ and how many are subscribing to the bundle will matter a lot. With price pressure, many could be pushed to split their subscriptions.
On the flipside of all the streaming launches are Viacom and Sony, which are taking the strategic posture of being content salespeople and currently not building out serious streaming offerings of their own. Ironically, the two MPAA majors without any skin in the end of cable/satellite as the dominant delivery system are not getting in, while Comcast and DirecTV are.
However, there are big questions about the future of both of these studios. Viacom, reunited with CBS, has been quite public about using cost-cutting as a key tool in improving net income. This last week, word has come out that they are talking about selling Black Rock in Manhattan while just a few months ago, the CBS Hollywood lot was sold to a real estate developer.
On the potentially good side after a 2019 without a single title managing $100 million domestic, 2020 seems to be the first full test of Jim Gianopulos’ leadership. Sixteen movies currently on the schedule, seven of which are sequels or IP-based (four of which are kid-focused).
How will Paramount attempt to maximize post-theatrical revenues from their 2020 slate in the current environment? They won’t. They are stuck in a deal with EPIX until 2022. The going rate for an annual studio slate, licensed by the year, was $300 million-$400 million the last time we had one. Will that level of deal be available to Paramount when negotiating in 2022? What will the landscape look like by then? For now, Paramount will license their library of films that go out of EPIX rotation to the highest bidder at the time.
Over at Sony, the future is also cloudy. The film studio had a strong 2018, with six $100 million domestic titles. 2019, not so much. There were big wins on Spider-Man and Quentin Tarantino with a Jumanji reboot sequel about to arrive. But there were also three major misses (MIB: International, Angry Birds 2, Charlie’s Angels) and a handful of middling successes. They have a dozen titles on the schedule for 2020, seven of which are sequels or IP (including Lord/Miller as IP).
Sony, too, is taking the Licensing The Library posture and just got rid of their early-entry streaming TV platform, Playstation Vue. Are these choices connected? Partially.
The greatest tension of the evolution to a streaming future is between the cable/satellite financial infrastructure and the idea of a la carte.
Be clear. None of the people selling you content could give a good goddamn whether you are happy or not. What they care about is keeping as much of your monthly expenditure on entertainment in your home as possible. They don’t care if it is spent on one title, one app, one cable bundle or a predefined package of content only 10% of which you will ever engage.
The mighty power of Netflix is/was that it was an expansion of the household spend. $10 more a month—as it was—is not nothing. Most people are very conscious of what they spend on cable/satellite, internet access, cell phones. More than half the households in the country have added Netflix and that $10—now $12 or $16—which is significant given that the average cable/satellite spend is about $90 a month. Disney is now pushing that extra spend another $7 a month with Disney+ or $13 a month for their bundle.
A year ago, cutting the cord looked pretty attractive. You could get Netflix, Hulu, Amazon Prime, HBO, Showtime and a small bundle of streaming cable services for about $95 a month. But since then, the providers of the small bundles have raised prices or, like PS Vue, gotten out of the business. $50 seems to be the new low bar for small bundles, except on Sling, which is holding at $30, although the broadcast network access is spotty.
At the same time, DirecTV is talking about raising prices again in January, after doing so last year. And the rumor is that discounted plans, which they have offered to keep customers, will be discontinued. We shall see.
Again, the key point. They don’t care if you are happy about the price. They only care about whether you will or will not pay for it and maintaining the old infrastructure for as long as possible.
There are advantages to being an AT&T customer through their entire chain of content and delivery businesses, for instance. The balance between the cost of offering these benefits and the benefit to AT&T is all about keeping customers in all their product bins. If a customer leaves any segment of DirecTV/Cell/Home Internet/Home Phone, the likelihood that they will shop the other segments increases exponentially.
All of this speaks to how AT&T’s WarnerMedia division and Comcast’s NBCUniversal are approaching their streaming products due in the spring. They are leaning on making free access contingent on being a subscriber to their traditional product base or, probably, pricing them higher than Netflix from the start for those who aren’t already in the fold.
Adding to this balancing act, Comcast has already announced that their “Peacock” will be ad-based and Warner Media has announced that HBO Max will launch ad-free in 2020, but will have an ad-based version available in 2021.
Back on Wall Street, there has been a call for Netflix to convert to an ad-based model.
The thing is, math.
There is no mathematical equation that makes the streaming future of everything everywhere make sense.
50 million domestic households is $7.2 billion a year.
100 million international households is about $11 billion a year.
That’s $18 billion with future upside of, say, another 15 million households for a cap around $20 billion a year.
NBC, NBC Cable, and Universal currently generate about $28 billion a year.
Comcast Cable, as a provider, generates about $28 billion a year.
ABC, Disney Cable, and Disney theatrical generate about $36 billion a year.
Warner Media generates about $33 billion a year.
DirecTV generates about $46 billion a year.
Do you see the problem now?
Before we even get into how the revenue is spent and how much profit there can be, these companies are all looking at the bucket of cash getting smaller if they were to convert completely to streaming.
Even if you believe the cap on streaming services is higher… say, 75 million domestic households and 150 million international households, the gross revenue is still somewhere around $30 billion. Still not enough to replace the current system.
So you have Netflix, which is truly independent, but building debt annually.
You have Disney, which is independent of a cable provider business, but which has a lot to lose with a broadcast network and a strong cable division.
You have WarnerMedia and Comcast Universal, both of which have multiple conflicts with a simple streaming future.
You have network-free, cable-provider-free Paramount and Sony, with minimal direct conflicts, but both seek to ride the waves of the others.
AND… you have The Public.
We all know what The Public wants. Not which new shows or what reruns will catch fire, but overall what they want.
The Public wants everything. And They want to pay nothing. This never changes.
Netflix offered the sense of the ubiquitous as a subscription DVD shipping business and the feeling followed them to streaming. Prices on existing content went through the roof, so Netflix began to produce its massive volume of shows, meant to become the primary library, supplemented by reasonably priced licensed content. At 22 years and counting, this is a mature company.
All the mature companies have to figure out how to make this transition work without destroying their value.
It would be so much easier if they could just take the $300 billion a year or so earned by film and television and cable and slice it up between all the relevant companies, allowing each to fly its flag as they like.
Disney might get two or three slices, while others would take less. Would Netflix be happy to instantly get to $30 billion in revenues a year in order to stop pushing the others like a maniac? Thrilled. Paramount and Sony would be more valuable than they are now. WarnerMedia and Comcast’s NBCUniversal could move forward with much more confidence.
But that isn’t how it works. Everyone but Netflix has a complicated series of conflicting ideas to navigate. (Netflix has only their own self to navigate.)
The sky isn’t falling. This is a massive pot of money with which the film and television business, on screen and off can continue to thrive. But the process is now endless, constant measuring of where things are and how they are moving.
No one—Netflix excepted—will know how its going for a few years. And those years of experimentation will exhaust us all. It’s gonna be interesting.
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"Remember that every time a man commits a violent act it only takes one or two steps to figure out how it’s a woman’s fault, and that these dance steps are widely known and practiced and quite a bit of fun," writes Rebecca Solnit. "There are things men do that are the fault of women who are too sexy, and other things men do that are the fault of women who are not sexy enough, but women only come in those two flavors: not enough, too much, and it is the fate of heterosexual men to endure this affliction. Wives are responsible for their husbands, especially if their husbands are supremely powerful and terrifying figures leading double lives and accountable to no one. But women are now also in the workforce, where they have so many opportunities to be responsible for other men as well."
January 16, 2020
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