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An inside perspective on the Film/TV/Streaming Industry from a 30-year veteran seeker of truth.

THB #48: Streaming Like Monday Morning

Dec 6, 2021

10 Rarely Discussed Truths About Streaming

Streaming is television.

The international market is the PRIMARY reason for the television market to shift to a streaming-dominant model from the reruns-via-streaming model the networks have had in place for years.

Wall Street doesn’t give a shit about your one TV show or movie… or your slate, really.

No company with legacy roots will ever get the kind of valuation that Netflix has enjoyed as the first mover in streaming.

Most of the branded “original content” on Netflix is produced outside of Netflix. Noting wrong with this, just the reality.

Theatrical releases and Ad-Based releases are not the same in terms of revenue as subscription streaming releases . The basis for judging each is wildly different. There is no direct revenue created by a full subscription streaming release.

Gaming is highly volatile market and not any kind of easy addition. If it was easy to create the next Roblox, you would have created the next Roblox.

Gambling is a highly profitable market and is a somewhat easy addition (if you can get over the moral issues and how they affect your brand).

Whatever the spend, no one really knows what will be a hit with audiences and what will not… except in the case of repeated occurrences of highly successful IP (until it goes dry).

If you take a legacy company and try to chase Wall St whims and a higher stock price instead of building and rebuilding your company into a solid, stable business, you will fail and lose your legacy.

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The Current State of Theatrical & How It Can Return to Robust Health

The relaunch of the movie industry after a 15-month COVID hiatus, starting with May 28th release of A Quiet Place II, has averaged $79 million a weekend. 2019, the last COVID-free year, averaged $148m a weekend. That is the realistic difference in the theatrical marketplace we now have.

Why is this? Well, COVID obvious continues to be a concern. But I would say that the bigger issue at this point is that there were 143 first-run releases on 1000 screens or more in 2019 and only 97 in 2021 so far. Moreover, the Top 97 grossers (all wide-release) in 2019 played on an average of 3600 screens each. That number for the Top 97 (all of the wide releases released) was only 2427 in 2021.

These marketplaces are not reasonably comparable.

As for movies that flopped from major studios in 2019, there were plenty. The Sun is Also A Star, The Goldfinch, Motherless Brooklyn, Blinded By The Light, The Kitchen, Miss Bala, The Kid Who Would Be King, The Good Liar, and Charlie’s Angels… 9 titles that failed to hit $20 million domestic from major studios. This year, it was 52 of the 97 wide releases, 12 from majors. Not a bad number under the circumstances.

There is no reason why 2020 cannot see a weekend average of $100m per weekend or better. Reaching the 2019 average may require another year or two. It’s really up to the content companies and what they put into theaters and how they handle streaming post-theatrically. It’s not because the market died or some middle-aged reporter didn’t like paying too much for concessions and having some idiot kid text during the movie.

Moving From The “Jumping Through Hoops” Era to The Big Pot ‘o Money Era

Barry Diller will be explaining the misinterpretation of his quote about “studios being over” for years to come, his health willing. As remarkable as Netflix is, they still buy a large percentage - likely a significant majority - of their content from other producing entities, whether they put the “Netflix Original” tag on them or not. Who are they buying from? Legacy companies and “independent producers” supported by legacy companies.

It is 100% accurate for Diller to have said - as I interpreted it from the start - that the studio power of the past is not going to be what it was in the future. The ecosystem that was has been dismantled by the paradigm of streaming. This was also true, in smaller steps, when television arrived. Then when the cable arrived. Then the VHS. Then the DVD. And now, streaming.

What streaming has done and is doing is to uncouple the the pieces that made up the previous ecosystem.

How many steps did a TV show have to jump through to make a profit in the past? It started with the producing entity, which then had to get time with a broadcast or cable network, which then had to sell it to their advertisers and the affiliates, then sell the show to the public, then maintain that relationship with the audience episode after episode.

Netflix said, “We have a big pot of money from subscriptions and we will pay you for the show and a nice profit - not a massive profit - and you don’t have to worry about any of the steps except making the show. And as long as we are happy with the casting, we’re not going to hang over you like the Sword of Damacles. Have at it.”

Television has a long history of deficit financing. The cost of production was almost always greater than the revenue coming in from the network showing it and the profit was in either exceptional numbers leading to significant leaps in renewals for more shows or from international sales and syndication, the latter of which was considered to require 100 episodes as the basis for entry into that market.

And then Netflix topped even that, going worldwide and eliminating the need (or the option) for those worldwide sales… controlling every territory (aside from China) in pursuit of more subscriptions in every market on earth.

That is the domino that dropped the legacy companies into streaming. People like to think that they were forced by Netflix somehow. They weren’t. Netflix, as huge as it became even as it grew, was an add-on… is still an add-on. Legacy television has been more profitable than Netflix until recently.

A year ago, Disney’s broadcast and cable segment generated $7 billion with an operating income of $1.8 billion. Netflix as a whole generated $6.4 billion with an operating income of $1.3 billion.

In the most recent quarter, Disney’s broadcast and cable segment generated $6.7 billion with an operating income of $1.6 billion. Netflix as a whole generated $7.5 billion with an operating income of $1.8 billion.

So as you can see, Netflix is continuing to grow revenues and its net profits, now passing Disney.

However, this segment for Disney is primarily domestic and includes no streaming revenue. Streaming is not yet profitable for Disney, but it generated another $4.6 billion last quarter. The international buildout of the various Disney brands is still in it early stages.

The goal is not just to build Streaming/DTC into profitability and greater size, but to replace and then outgrow the legacy model of the last paradigm.

Say goodbye to network affiliates. Say goodbye to content being distinguished by whether it seeks ad revenue or not… all content will eventually seek both ad-based and subscriber-based revenues, the choice of which way to go being the consumer’s. Say goodbye to the idea that domestic market is the primary market.

Also remember… Disney is just one of the legacy companies in the television business competing in this arena with Netflix.

By now going after streaming as they are, the legacy companies have changed the dynamic again and are positioning themselves directly in competition with Netflix and leaving themselves - aside from a long, slow exit from broadcast/cable/satellite and all that goes with it - no other choices. Netflix will no longer be an add-on. It will be on equal footing and in better position than the others.

If you’ve been big enough to have a broadcast network, you are going to need to get your streaming/DTC platform to over $20 billion by 2026 or so. If you haven’t had your own network, you need to get your streaming/DTC platform to over $10 billion by 2026 or so.

Everyone is in because Netflix opened up the world market to them with streaming in a way that it was never open before, creating the possibility of growth by multiples instead of incrementally. And everyone is in trouble because they are now fighting against their own current interests in order to have the bigger win (like it or not) down the road 5 years from now or so.

One of the big corporate-minded opportunities of adapting to Netflix’s “Big Pot o’ Money” approach is that once they reach maturity, it leaves the door wide open to manipulating the cost vs revenue model in an extremely aggressive way.

We see Netflix starting to seriously wrestle with this in public, which means they have doing it privately for a while already. They aren’t talking (publicly) about spending less. But they are talking a lot about spending differently.

The major step in the maturity of all streamers will be cutting back the spending without losing the subscribers. You need a lot of subscribers before you get to this step, so right now, Netflix is the only one there. And they are there. But this reality is coming for everyone who will survive. The Pot is not bottomless, no matter how much media writers fantasize about it being so.