THB #288: Years End 2 - What We Don't Know 1

The obvious place to start today’s newsletter is with the late, great William Goldman. He wrote the most quoted comment on Hollywood ever and, ironically, the most often misquoted.

The quote comes from Screen Trade, which should be the first book anyone who wants to understand the movie business should read. It is old (40th anniversary in 2023) and the discussion of movie stars will seem ancient… but the nature of the humans who run the show and want to run the show will never change. I reccomend all the books shown here and many by everyone from Lynda Obst to Sam Wasson to Mark Harris to David Puttnam to Soderbergh to John Gregory Dunne to Julia Phillips and beyond. But the first stop is still “Adventures in the Screen Trade.”

Nobody Knows Anything.

And the real context… no one knows what is going to work. It’s always a guess. It’s always a leap. It’s always a risk.

We are in an era of industry media over-promsing and under-delivering insight. It’s not because the writers are dumb, unskilled or uninterested. But we are stuck in the game of claiming that readers can know everything… and we have the answers.

As a result, not only don’t readers know everything. They often know less than they should. Because the foundations of what they believe are based on the mythology of answers that simply do not exist.

I have been spending a lot of time lately chewing on the idea that, in many areas of thought, that we, as a culture, choose to live in falsehoods because we so fear the weight of reality. The truth will not set us free, but put us back to work, trying to rebuild our perspective based on that. It doesn’t even matter what the truth is… maybe it creates an easier path. But changing ideas means rebuilding and that is work that people don’t feel they have the time to do.

I will not put words in Goldman’s mouth. But a lot of the work in his non-fiction books seems to me to be close to this thematically. The constant, passionate, serious efforts to create, micro issues to macro issues to mixtures of both, by people brilliant and stupid… constant measuring… money and art at war and peace… and the ultimate agony of the truth… at some points, that it is just magic… fate… nobody knows anything.

Which brings me to the crystal ball, trying to look into the future of the industry.

My answer remains the same, year in and year out. Anything is possible. Everything is impossible.

Everyone is trying to figure out what Bob Iger will do to “save” Disney.

Well, first of all, if you think Disney needs capital-S Saving, you are a dank moron. The $80 billion in annual revenues company could go into turtle mode tomorrow and be more profitable than Netflix ever will be.

That is not a slight on Netflix or an exaggeration. Unless China opens to Netflix and Netflix only or if they happen upon a shift in human experience that no one has yet conceived of, it will not be a company that generates any more than $50 billion a year gross anytime before 2050. This does not make them anything less than spectacularly successful. But it also doesn’t treat them like an imaginary friend who doesn’t live by the rules of physics.

Unless Disney’s parks get shut down as they were during COVID, permanently, the company is golden. $28 billion+ and $7.9 billion in net from that last year. Roughly the size of Netflix on that segment alone, with a bigger net.

The Disney Media & Entertainment side did $55 billion and netted “only” $4 billion. That is why Jim Cramer was melting down on TV, screaming for Chapek’s head like the Queen of Hearts.

Before streaming, Disney’s Media & Entertainment side (broken out quite differently) did $39 billion and netted $11 billion. They don’t have to regress to before streaming to get back to those kinds of numbers. They can just simplify it all and do things like selling off ESPN or ABC or Hulu or whatever.

But not if they want to be a growth company. Not if Iger wants to leave again with non-park revenues at $75 billion a year and net up to at least $15 billion net with room to grow.

Does he want to do that? Probably.

Will the math inside their company allow Iger to see this as a likelihood? Can’t know.

But if the ambition burns, the potential is there. There is risk. There is always risk. When there isn’t risk, you become Paramount. Ironic, given the risks of Babylon… now in theaters, highly recommended, sure to cause great fights over dinner. But one movie never made or broke a media company in the last 30 years. Not Avatar… not Babylon, which could easily be a breakout internationally.

But I digress…

What is the future of the Ad Market?

Nobody knows.

Everyone is guessing.

Here is the one thing that I believe we do know. The ad market is not going to expand significantly. That is the best case scenario.

As in almost all other things, the money doesn’t change… it moves.

From what I read (finding a consistent number is a challenge) the overall domestic television advertising market is about $85 billion a year. Digital Video spending, between search and social media is about $165 billion.

Some estimates for 2022 had National Broadcast/Cable/Satellite at about $41 billion, local TV at about $20 billion, and YouTube/Twitch at about $17 billion and Connected TV/AVOD at about $7 billion.

Now we have SVOD adding advertising tiers (in addition to the existing Hulu). So money needs to be reallocated. It is not reasonable to assume that the addition of advertising opportunities means there will a major increase in ad spending.

So where are those ad dollars going to come from?

A big part of this depends on what the offerings from the various SVOD companies are. As we have already seen, the low-end offering from Netflix under-performed expectations (not mine).

What makes this so very complicated is that The Streaming World has multiple purposes as they add advertising opportunities while The Advertising World has the same goals they have always had.

Streaming wants/needs money and more subscribers, who can lead to… more money via AVOD, they hope. They have been running loose and free for years, answering only to the churn.

Advertising is trying to sell stuff in the cheapest, most effective way.

It is exciting to think there is a brave new world of SVOD-to-AVOD and FAST money waiting to get mined. But we already have some of the answers and while they appropriately add to the bottom line, they are not earth-shattering.

Paramount Global’s PLUTO, the #1 FAST service on earth, probably did about $1 billion in ads last year. That ain’t nothing. But CBS did about 8x that, as usual.

Amazon has an operational FAST service, now called Freevee. Let’s assume Disney, Netflix, and Comcast start their own. (I don’t see Apple going there.) That’s 5. Let’s say they all can get to an average of $2 billion in ads a year. Great!!! That would actually be remarkable. It is probably unlikely. But let’s be hopeful. It’s $10 billion a year. That ain’t nothing. About half of what local TV generates now.

I assume some of you have watched PLUTO… and MeTV… and whatever other “Classic TV” channels exist in the world. What ads do you see? Not stuff appealing to the under-35 demographic.

So where is FAST really headed? Seems to me that it is a really nice piece of the puzzle and that a lot of people will get paid. Everyone with a ton of content that is valuable but not that valuable should have one. But the fantasy that it is The Pot o’ Gold is a long, long way from seeming remotely realistic.

(For the record, I feel similarly about Theatrical Exhibition… the difference is that the revenue is not ad-based. A part of the consumer base is willing to pay a uniquely high amount per view to have the theatrical experience. It does not make it the highest revenue producer for any of these companies. But it can be a big chunk of additional revenue that cannot be created in any other way. It also has a status value that no one has been able to recreate on other ways. But I will write about this in more detail another day.)

Circling back to Netflix and their single-tier AVOD offering… everyone else has the same problem they do. What is the “perfect” balance between the cannibalism of offering the same tiers they offer by subscription and the revenue that can be generated to make up - and hopefully supersede - the Average Revenue Per Unit?

Nobody knows.

And so Netflix toe-dips in a way that is unlike them… or the perception of them.

Except for Hulu, which was in the ad business before Disney acquired the second third of the company from Fox, almost no one has committed to a specific level of aggression in the ad sales part of things. Disney+ launched their ad tier just 3 weeks ago with 4 minutes of ads per hour… no insight to how that is going at this point. HBO Max will follow in the spring.

Even after we know what the offerings are going to be, it is going to be a long while - at least 6 months, more like one year, minimum - before we know how to measure potential value of these ads… we will be having a lightly more educated version of this conversation at this time next year.

Whatever money movies to the AVOD versions SVODs, where will it come from? Local TV? National TV?

No one knows what Amazon Prime is getting per minute for its Thursday Night Football games. We know that in every NFL game, there are about 60 minutes of commercials. Reports suggest that Fox, which has Thursday night NFL last season, generated about $680 million. Other reports suggest that when Prime took TNF over, they were offering guarantees of similar ratings as Fox had and asking for the same ad prices… and that ad buyers balked at the pricing. Prices were then reduced. Reports suggest that ratings have been lower than promised and it’s not clear how Prime has handled this.

But the question for me is… if the ratings were exactly the same, would advertisers be willing to pay the same rate they paid for the same show on Fox?

Nobody knows.

Well, maybe somebody does. But whatever the answer in specific, the door is open to it all changing, in virtually any direction.

Personally, I think ads on Prime’s Thursday Night Football, isolated on their app, are worth more than broadcast football because switching channels during ads is not an easy option… you end up watching more of the ads without changing channels. But I am not the one making these decisions for my ad buying clients.

The more complex analysis will be whether an exclusive 4 minutes on Emily in Paris or Loki’s next season or whatever new streaming hit there is will be of more value than 8 or 12 traditional ad minutes on Law & Order. And as that decision is being made, will NBC and Peacock adapt to different kinds of exclusivity on the network and on streaming reruns for their hit shows, twisting things further?

Nobody knows.

Everyone is guessing. Some have skin in the game. Some are just tourists (like me!). But there are careers and corporate success and billions of dollars in play. Someone is going to have to pay because they landed on Park Place with 4 hotels on it and someone is going to keep rolling the dice and missing all the dangerous spots on the board.

Knowing who is who will become easier in time… when there is actual evidence and not just guessing and hoping and rooting, for and against. In this year, the next, and for many years to come.

Until tomorrow…