THB #159: Fisking Industry Analysis (Oy!)

I am, to be honest, sick of explaining the history and current state of streaming and legacy media to what seems to be a majority of media writers who don’t know it.

But I made the mistake of listening to a podcast featuring 2 of the people who speak the loudest and have no seeming interest in reality. So now, for the last time (PLEASE!!!), I will Fisk the conversation in an effort to make it as simple as I can. So simple that faux know-it-alls can catch up to reality. (Their quotes are in italics.)

“If you look at what’s happened over the past three decades in the entertainment business, there’s been a pretty solid business model built on the linear cable business, and everybody knows that that is not going to last forever.”

Okay… In the last 7 decades, there has been a business model based on broadcast television.

About 4.5 decades ago, cable came to town, widely, and a variety of models resulted, though fundamentally, it was a government-issued monopoly business by region, and a big part of the model was that cable had to make broadcast and other “must carry” cable channels available.

About 2.5 decades ago, the model started shifting, as instead of broadcast and cable fighting to be included, they became content and the cable/satellite companies started paying the channels to be on their services in an increasingly expensive way.

That model still is the biggest revenue stream in entertainment domestically. Cable/satellite fees alone (in just America) are still generating more than 3x what Netflix generates annually worldwide.

Now… what is true is that, eventually, the structure we have been used to for decades will be completely consumed by an internet-based delivery system. We are at least 3 years away from a majority of the country having quality internet to support cutting the cord and probably 10 years from cable/satellite being reduced to 20% and less.

But this is also true… consumers don’t really care what conceptual “wire” brings the content. Cable/satellite brought an expansion of content. And now, streaming allows for an even bigger expansion of content. So yes, consumers want more… always… as long as it doesn’t cost more. When cable came along, it was a $30 or $40 a month thing. Now it’s an $80-ish a month thing before premium channels.

Streaming offers the potential, both to new companies like Netflix and legacy media, to reset the relationship with the consumer, especially internationally. But the “legacy’s death is inevitable” is just a slogan… there is no serious idea behind it.

“Over the past five to seven years, you’ve seen all of these legacy companies completely discard their business model and chase these streaming customers”

Again… simply false. Disney+ launched 2.5 years ago. Disney has not discarded their business model at all. They have had a strong focus on streaming. Their linear networks alone will bring in more than $30 billion this year, with $6 billion net. (Netflix will bring in about the same.)

“There’s a real sense of dread and anxiety around Hollywood. Oh my god, what did we do?”

Oh, bullshit. There is always dread and anxiety around Hollywood. The Wall St. flip on Netflix (now over 2 quarters) is a return to reality, not some Armageddon. If you believed there were going to be a billion or 800 million or even 600 million Netflix homes by 2025, you were a fool, listening to ignoramuses like Always Wrong Rich Greenfield. Domestic is flat-lining because it is near capacity. And international is hard as hell. There will be a 400 million household streamer… but it’s going to take a while.

Should there have been as much focus and as much money committed to streaming? No. The other Netflix hypothesis - that roughly every $3 billion in revenue meant you should spend roughly another $2 billion on content - was stupid… from the start. Utterly unnecessary for legacy companies with significant library resources. And not really necessary for Netflix after they passed $12b a year… but momentum is hard to stop. Remember, the reason for all the Netflix spending was, from the start, about building a library to fill the content needs.

“We tossed aside a pretty good business to chase this bottomless pit of money that it takes to compete in the global streaming race.”

The “bottomless pit of money” notion has never proven to be successful. It’s a unicorn idea. If you believed it, learn to laugh at yourself.

“What if the promised billion subscribers that are supposedly going to be there, thanks to the Netflix model, what if those don’t materialize?”

They were never real. Netflix has been stuck between 190 million and 220 million for 2 years already. Stop hitting the snooze button and wake up.

“But the old model wasn’t particularly going to stay. It’s like saying ‘what about the print subscription, if this internet thing doesn’t work out?’”

NO!!! That is not a good analogy. A newspaper at your doorstep is less valuable for specific and real reasons… the time from news occurring to printing to delivery being the biggest one, followed by the 24-hour window between deliveries, followed by the lack of a need for classifieds.

The “old” model was putting TV shows out there and then having them available for streaming almost immediately… since there are almost no Luddites in the real world. The “new” model is really just a change in how the content is delivered and how you pay.

Yes, there is the binge system vs the weekly delivery. But that is not at the core of the issue of legacy vs streaming.

“You can’t just go back to the cable business, because everybody knows that that is ultimately going away. The problem is the cable business still throws off billions of dollars in profit each year. So there’s this push-pull among these companies, where they have this revenue generator, and they have this other business they know they need to be in, but the other business is not going to be as good as the current business.”

No one has left “the cable business.” Every major streaming and legacy company is still in “the cable business” and making much more money there than they will on streaming anytime soon.

This argument is 5 years old. It is why the legacy companies dragged their feet on streaming for so long… even though they did have Hulu.

There is no reason to “leave the cable business” because they are in the content businesses - whether production or content channels - and they are all already deep into the evolution of the revenue stream. They will take “the cable business” money for as long as it’s there and the streaming money when it becomes profitable and when their accountants see that there is a fiscal benefit to make the leap - if that ever happens - they will do it.

But you now see the intense focus on AVODs (ad-based streamers), which is a streaming variation on “the cable business.” It’s so hot that Warren Buffett is betting on Paramount Global.

Don’t be too surprised when streaming looks a lot like cable has for a while. Ads for people who can’t afford or don’t want to pay for no ads. And you know… it may turn out that selling ads makes more money than no-ad subscriptions. If that happens, guess what? Ad-free becomes the niche, no matter how well it is liked.

So when you look at something like Netflix, what replaces it? What is it? Apple which has come in, they bought “Slow Horses.” They seem like they have a little bit of momentum and endless cash.

What makes anyone think Netflix is being replaced? They lost less than 1% of their subscribers after 2 years of COVID-driven growth and a price raise.

This thing where everything must be #1 or it must instantly be replaced is just so idiotic. These are not restaurants in New York or L.A. You can remain a massive success while also not being the singular focus of the aging hipsters.

Why does we think that Apple is interested in building a massive, segment-leading streaming business? They haven’t shown that interest as of yet. They seem to be interested as far as it supports their walled garden of hardware and connective software. Could change. But if it does, it will be a change.

“I don’t want to say a vanity play, but it really is. I saw Eddy Cue and Tim Cook at the Oscars, at the Governors Ball, right after the show, when they won Best Picture, and the look on their faces was we’re in the game. We’re players now, and like that intoxication is very powerful.”

Only to gossip columnists who fantasize about being important and aging men desperate to sleep with actresses and models.

Apple has been spending hundreds of millions of dollars on content. Are they getting a return on it? They seem to be interested in spending more. We don’t know.

At least there is the wisdom of actually admitting not knowing. Unfortunately, the previous comment suggests that this person doesn’t understand what the intended return on content is for Apple… and what it is not.

Ultimately, they may be playing the long game, saying we have a valuation that nobody else can top. So we’re just going to spend to be the ultimate winner in this space.

But they haven’t. And there is no reason to think they will… anymore than they are chasing being the ultimate winner in the music space.

“They’re trying to be HBO. They’re not trying to be CBS which is what Netflix ultimately was trying to be.”

Making this up. Whole cloth. Netflix has shown no interest in trying to be CBS or any other broadcast network. Not their content model. Not their financial model. Not interested in sports or news. Obviously, there is the Sarandos quote about becoming HBO before HBO becomes them. But push that aside. Netflix has shown zero interest in being what broadcast networks have been. A comment that came out of his ass and went right to his mouth.

“The second thing is that the actual winner — Apple and Amazon are trying to become the gateway for all content online. They want the interface to not just be where you go to watch Apple TV Plus and “Severance” or “CODA.” They want you to go there to get any channel, any movie, anything on the internet.”

I wish this was true. I have called on them to chase this for years. They have not. Not seriously. Apple has a $150 streaming hardware product. Amazon has what has been an inferior product to Roku.

I actually think a company like Roku is pretty well positioned. Roku has been known as dongle company, a connectivity to streaming services. And they’ve really been hit hard because all of these other companies are now coming up with their own connectivity. Roku is pushing into the content space as a differentiator here and trying to create real shows and library of content. And I think that’s probably the best strategy for them, because they could be a real player here.

Sweet lord. I wonder if he knows that DirecTV had their own content channel for years… and no one watched it. Not for concerts or showy originals. Roku is a dongle company that is ripping every owner of their cheap but efficient dongles off by charging the streaming companies a percentage for every subscription. Double-dipping. That is why their stock went nuts.

At one point, last summer, Roku’s market cap was $63 billion. Insane. The company has never earned $3 billion in a year. Even at the current market cap of $13.3 billion, it’s a bit overpriced.

But if anyone wants to make a hard push to control the device market, buying Roku would be a great start. If Apple was serious about this, they could buy Roku and have a 2-tier offering of the $35 App-oku and their $150 AppleTV 4K (which should drop back down to $99).

That said… the money for Roku will never be in original content. It’s in taking their cut off the top and, potentially, controlling some of the advertising on the way to the content that their customers want (preferably with an uninterrupted path).

“You were talking about lost moviegoers. I am one of those, I suspect, except for “Top Gun.”

“Well, you’re a perfect example, because you are a lost moviegoer, except for the big franchise movie.”

No. The 59-year-old parent of 4 children under 20 is not “the perfect example” of anything when it comes to the entertainment business. They are a perfect example of someone without the time or energy to go to the movies for anything other than the few must-see titles that they make the effort to see each year.

There are no “lost moviegoers” that can be measured in any clear way. There is some sense that the over-60 group is still dragging their feet about going to the movies. But if you look at the box office success for family films, teen films, and 25-40 films right now, this weekend, you know this is just a phrase coined to get attention.

And now… here they talk right past the actual important metric because they are convinced that it is not the real issue…

“We’re seeing a third fewer movies in theaters this summer than in 2019. That is gigantic.”

“And the numbers are down significantly.”

“Absolutely. The first quarter was down 40 percent. Now, that was Covid-impacted. The summer, this is being called the first post-Covid summer.

It’s not really, because the studios are still pretty squeamish on what they’re putting in theaters.”

Can’t they hear themselves? We are seeing 1/3 the number of movies going to theaters this summer and this year.

If there is less product to sell… there are going to be lower sales. Movies in almost every segment are showing that audiences will come out for them in very similar numbers as the past, even if there are shorter windows for digital. (No need to have that argument again right now.) But they aren’t putting the movies in the theaters. Exhibition can’t have similar numbers with this many fewer titles to sell. Nothing to do with “lost moviegoers.”

Studios aren’t being squeamish. They are being stupid and short-sighted.

And then… the “My world is the entire world” myopia…

“Oh, no way. It’s not even going to get (back to a full theatrical business) — that’s just made up. I’m sorry. My kids do not go to movie theaters, not for nothing. They watch everything on the big screen at home.”

“Even Marvel?”

“No. Don’t care. Don’t care, and all their friends don’t care.”

Yeah… it was all middle-aged cinema obsessives that generated $572 million domestic for Spider-Man: No Way Home and $225 million domestic for Shang-Chi and the Legend of the Ten Rings and $269m domestic for The Batman and $300 million in 10 days for Dr. Strange 2… not to mention $62 million for Dog or are pushing Everything Everywhere All at Once to $50 million.

This is the equivalent of “I don’t like cow milk… no one drinks that anymore… my kids all drink nut milk.”

Duh.

Theatrical has been the niche delivery system for at least 20 years since DVD. But the ARPU on an individual ticket sale is higher than most streamers charge for one month for a full household of people. It’s not about, as television is, maximizing eyeballs. It’s about revenues. Pretty basic.

“There is some sense of AMC just putting one foot in front of another in trying to get people back to miserable, filthy, old theaters seems very, very difficult, but I don’t know. I do think the cultural pendulum is swinging.”

Sorry… but your ignorance about movie theaters in America is showing. Most of America’s movie theaters are newer than 30 years old and many are under 10. You may have checked out, as middle-aged people tend to check out of theater going… but speak for yourself. People didn’t leave moviegoing for any reason other than COVID. Stop selling your 2018 BS.

“I mean, it’s pretty clear the United States is over screened. There are too many movie theaters in the U.S. for the product that is out there. So there needs to be a thinning of the herd of these low performing, bad, dirty, awful movie theaters.”

Few entertainment writers and gossips know much at all about theatrical. This guy is particularly lacking in detail. The reason we have $100m+ openings is not just that distribution has pushed hard to front-load theatrical runs, but because theaters adapted to allow the big titles to be on 10,000 - 25,000 actual screens (not just venues) on opening weekend. That is what creates the “start time every 45 minutes or less” of it, which brings in more ticket buyers because they are no longer afraid of sellouts.

The exhibition business has, essentially, been back in starting-to-be-normal business since October 2021. Eight months. After 19 months of being almost completely out of business. Studios, obsessed with streaming, have withheld a number of titles that would clearly have been very successful in theatrical, particularly Disney.

Theaters will thin if this continues. And distributors will rue the day.

In a 10,000 screen American theatrical market, the biggest movies open to $60 million and never gross more than $200 million again. How’s that work for you, Mr. Chapek?

Meanwhile, take your “low performing, bad dirty, awful” schtick back where it came from… when your parents chastised you as a child.

“I think it’s very clear at this point that the day and date strategy — which means you release the movie on a streaming service the same day it’s in theaters — that is not a sustainable business for big budget entertainment in Hollywood. It’s just not. You need that window of exclusivity.”

How many hundreds of times did execs have to tell you this before you decided you didn’t know better? If you were paying attention, you would have known this at least 6 months ago… not just after hearing it 100 times at CinemaCon, where you started the week by making fun of the fact.

Disney rose in the stock market throughout the pandemic, because investors were convinced that the Walt Disney Company, a 90-something year old media company, was now a tech player. So they’ve really had a correction based on that.

Who tells him this crap??? Disney stock dropped with COVID and didn’t return to the pre-COVID stock price until November 2020. The stock went from $140 to a high of $197 a share. That was not a tech valuation. That was DisneyWorld being open and, at the high, the announcement of DisneyLand reopening.

Yes, it is clear that Chapek was dreaming of Disney stock being treated like Netflix stock. And sadly, that came true… just not in the way Bob II was thinking. Thus, the correction.

I think there’s going to be some real hard looks at the models that these companies have been on, and they’re going to fall back on a more diversified strategy. Meaning yes, we want a global streaming platform, but we’re not going to pay through the nose to create one. We’re going to have our different businesses.

Again… finally coming to your senses. Been writing this for over a year. The idea that every company in streaming had to have the same strategy was profoundly stupid every time it was repeated.

The people who said this stuff are not idiots. They just have very bad ideas of what is happening in this industry. We all have to get off the merry-go-round of absolutism and the need to have a hero story and a loser story every single day. It’s not that simple. Rarely is. It’s not about opinions. It’s about getting the facts right and basing opinions on that.

You have significant platforms. Do better.

Until tomorrow…