10 Things I Actually Know

An article this weekend by A.O. Scott at the New York Times and a thread on Twitter by Ted Hope got me riled up. The Scott article is a mélange of consumer and critic judgements about the theatrical experience combined with assertions of how theatrical is seen within the finance of the industry, with almost all of the business assertions either misguided or wholly false.

After thinking on my responses, I moved to my computer. The ground is shifting like it is the ocean and, still, there are things we do know, even as they change monthly, weekly and even daily.

So what do I know on October 18, 2020?

1. I know that Netflix is heading into its sophomore streaming years, even as everyone else in streaming in a large way is either just buying clothes for freshman year (Disney+, Peacock, HBO Max) or is being held back in freshman year (aka, being revamped conceptually after being around… Amazon/Hulu).

What nobody really knows and what no writers I read on the subject seem to seriously consider is what Netflix’s maturity means—not only to Netflix but to everyone else.

The next Netflix quarterly drops this week, but in the last year (ending with Q2 2020), Netflix grossed $22.6 billion. They netted $2.68 billion for the year. 

That has not deterred Wall Street. In the year between the date of their Q2 reporting last year (July 17) and Q2 2020 (July 16) the market cap of the company rose from $156 billion to $216 billion.

That year of market cap growth alone ($60 billion, 2019-2020) is almost 3x the gross of the last year ($22.6b) and more than 25 years of annual net income for the company. (And Wall street has already added another $18 billion to the market cap since the July quarterly.)

I know that although the media and much of Wall Street has convinced itself that this is THE ongoing business model, it cannot be. Hollywood is already awash in complaints, public and private, about how the wild spending is drying up. And the places where Netflix is ramping up production are where it is much cheaper to produce (international content) and will have less appeal to the American home base than English-language content.

2. I know that the “new” streamers have, with the exception of Apple, chosen not to budget original content for streaming at anything close to the scale that Netflix has been operating for the last five years. They are all spending a lot… just nothing close to Netflix’s spend.

It was a historic event, recently, when Amazon bought Coming 2 America from Paramount for a December release instead of Netflix buying the film. Netflix isn’t shy about spending, but they have grown past their drunken-sailor spending stage. (They didn’t buy Greyhound either.)

3. I know that for all the endless writing about how everything is, or everything that’s being produced should be moving to streaming, this makes no sense financially. The world becomes too simple if the goal is to maximize revenues.

For instance, in 2019, Disney generated $25 billion in TV and cable and $11 billion in studio movies. That’s 1.6x as much revenue as Netflix, before getting into parks or merchandising.

And do you realize that Disney+ will generate less than $3.6 billion in 2020, even with a remarkable 60 million-plus subs generated in this first year, with only a minor number of international locations? 

The rarely mentioned key for Disney in streaming is the packaging of Disney+ with Hulu and ESPN (and eventually ABC). Hulu has almost 40 million subscribers. But it costs, without live TV, $11.39 a month compared to Disney+’s $4.62.

200 million worldwide subscriptions at $180 a year ($15/month) is where Disney needs to take streaming in order to get to the 2019 idea of breaking even with the current model.

Netflix hasn’t hit 200 million worldwide and the average subscription is under $11.

Will Disney or Netflix ever to get to $36 billion gross revenue with streaming as the mostly exclusive home of their content? Unknown.

Meanwhile, theatrical alone grossed over $40 billion last year, returning just over $20 million in net dollars to the distributors.

And there are other significant revenue streams that will, at least in theory, disappear, with an all-streaming world. 

For instance, the pay-TV window. It’s one thing to get a good price from Netflix or HBO or the others… but when all you are able to do is to move money from one corporate pocket to another, how does that math fit into your thinking?

Physical distribution (Blu-ray and so on) is on its last legs… but that $5 billion a year still counts.

International television has been a cash cow forever. But if every home that can afford it in the world is a five-streamer home, that is very close to over.

Disney and the other studios – and the power position changes and surely, it will for Disney and their IP Mania – avoided getting into streaming for 5+ years, letting Netflix take the risks and the leadership, because the numbers didn’t add up for them until recently. And really, they all know they are going to take losses on the transition. But streaming is a new and likely forever paradigm shift and eventually they all had to jump.

They would all love to believe that they are going to make a lot more money in streaming than in the older systems of distribution. Plus, they get so much more control.

But we haven’t begun to imagine what will happen when any one of them muddles through for a couple years and can’t see how the money will ever accelerate to be equal to what they had in 2015-2019. Put aside theatrical for a minute. Just the plain competitive business challenge of multiple companies getting and keeping 100 million to 200 million streaming subscribers.

We are already seeing bundling by Amazon and Apple and (who invited them?) Roku.  Just like the bad old days.

Bundling may solve your number of subscribers issue… but it also takes money out of your pocket on the subscription side. (“Keep on swimming… just keep swimming…”)

4. I know that no one has a real way of measuring the value of any one program/series/movie on a streaming platform.

You can pull one out of your ass. And you have to… it’s business, dahling. But there is no real way to measure. You can measure popularity in views (real and two-minute imagined), but that really isn’t the question.

The ONLY question when it comes to streaming is, “Are they staying subscribed?”

We are, public and industry, about to spend the next three-to-five years sorting out what serious fishermen have been succeeding or failing to figure out forever. Where are the fish? Are we better off with more fish coming to market or do we depress the market when we offer too much bounty? How dangerous is it to go out looking for the expensive fish? Are we better off landing cheap fish more safely?

Netflix doesn’t know.

They think they know. And they know a lot.  But they have built their empire with very little competition for years. Suddenly, every massive player wants not only what they have, but double what they have.  And we are only at the beginning of that war.

Do you think HBO Max or Disney+ or Amazon or Apple know? Gee, Amazon and Apple don’t even know what they want to be when they grow up!

It’s no insult to say that estimating the tipping points of over 50 million consumers is anything approaching easy. It’s not. But that is the game. The advantage of selling a large portfolio of content is that you cover a lot of the field. Netflix started streaming with the advantage of people seeing the DVD business that they began with as ubiquitous. Every movie seemed to be available (even if many were not). Going into streaming, the same felt true, although it certainly was not. But as more competitors expand the field, especially in this period when so few people have dropped the expense of cable/satellite, the more the idea of comparing how one values each $10/service grows.

Some percentage of the viewership will jump from streamer to streamer, sucking up something new or just all the content they can for one paid month then switch. Others will pay for all of them and not give it a thought. even after they stop watching and the credit card continues to get charged. But what most people want is everything for nothing, and never to learn how to navigate a new site. And the closer a streamer can come to that, the more stable they will be. For now.

Studies show that cable subscribers watch two or three percent of the channels they get in their bundle. Likewise, I’m sure very few people get through even .05% of what is on Netflix (or other apps) in a given month. Unlike the old Peter Guber story, no one has to figure out whether a show will work before it’s done at these streamers. They know. And then they have to figure out how much and how much of their audience cares.

5. I know that only a relatively small percentage of art (if you will) by the many, many incredibly talented people in The Industry will be any good or popular in a significant way.

Bad news. Film and TV are both still crapshoots. Nothing about streaming changes that.

6. I know that claims that there is no business in theatrical for anything but mega-movies and that they are everything that keeps exhibition alive are bullshit.  

I can’t answer the negative. (“If it weren’t for Marvel and Star Wars and other massive franchises, how would grosses keep going up annually?”) But I can tell you that exhibition has faced many paradigm shifts and many “inevitable threats.”

Before the collapse of the classic studio system in the late 1960s, this was a very different business. Of course, there were many real threats to the existence of theatrical in the decades before then. But television was a gamechanger. You could, for the first time, have a visually entertaining experience in your home that didn’t lead to a baby nine months later.

One of the key studio adjustments was making content for television. Not snobbery. Business.

The world-changing wide release of Jaws that many use as a historic landmark? 409 screens in 1975. (Total Domestic Box Office – $1 billion)

VHS arrived just after Jaws, becoming the first real way to watch and control movie entertainment in your home.  But the pricing was high ($79 and up, early on) and that led to Blockbuster and the movie rental. (Total Domestic Box Office – roughly $1.5 billion)

VHS sell-through became a thing, led by the first Burton Batman. (Total Domestic Box Office – $4 billion)

DVD arrived in 1997 and the industry decided to make it a sell-through product… bring it home for $20. That led to massive revenues that swamped theatrical. This also led to Netflix and, in time, the dominance of the subscription model for DVD. (Total Domestic Box Office – $6 billion)

Titanic. (Total Domestic Box Office – $6.7 billion)

Mostly Digital Star Wars: The Phantom Menace. (Total Domestic Box Office – $7.4 billion)

Spider-Man. The first mostly-digital superhero. The first $100 million opening. (Total Domestic Box Office – $9.2 billion)

The Avengers. The first $200 million opening. (Total Domestic Box Office – $10.8 billion)

Avengers Endgame. The first $300 million opening. (Total Domestic Box Office – $1.3 billion)

So… yeah… Mega-movies.  Big business.

I can’t explain why Box Office Mojo is about $7 billion short on their Worldwide chart for 2019… but of the $33.7 billion in worldwide box office they have recorded, 21 movies that each cost over $150 million to make grossed $17.8 billion and the 755 movies that cost under $150 million (almost all under $40 million) grossed $15.9 billion.

If you are wondering, the top 21 “middle movies” grossed $7.2 billion. The only ones with budgets over $60 million were Once Upon A Time … in Hollywood, 1917, and Shazam! Three were Chinese. Ten of the 21 would be considered “originals.”

In other words, there is more money per-film superheroes and high-end CG and pricey sequels… but there is also a need for movies like Knives Out and Little Women and Rocketman that make a fortune in theatrical before taking a haul in pay-TV/first-streaming and eventually become highly valued pieces of a streaming library.

7. I know that we won’t know how the massive libraries of Warners, Fox, Universal, and others play out until the streamers roll out a bigger chunk of the catalog. That’s going to take a while. And even when it happens, the studios could mute their value by being restrictive in their use. Like so much of this evolution, there will be many experiments, some that the press loves and some they won’t even notice.

8. I know that a large percentage of American cinemas will reopen sometime in 2021. But I have no idea in what month.

9. I know there are no absolutes when it comes to cinema. Quality matters. But so does marketing and publicity. And when the two meet… you still don’t know.  We live in the most interesting moment in the history of cinema because there are so many possibilities. But more possibilities means more ways to unintentionally screw it up.

10. The schizophrenia of artful ambition and fiscal ambition will always be at the heart of this industry. One is not the hero and the other the heel, as they are symbiotic. Movie after movie after movie tells the story of how the conflict was engaged and how conflict turned into fate.