THB #54: The New Math in Hollywood

The answer to many questions about the current rules of Hollywood come down to a simple idea… math is no longer the guiding force of the industry.

Building working businesses, making more money over time, is no longer the goal. It’s stock price or bust… or “somehow we are going to get Netflix’s 9x annual revenues market cap.”

That would make Disney’s Netflix-ified market cap about $585 billion instead of its measly $278 billion.

NBC/Universal alone would be worth about $180 billion, whereas the total market cap for all of Comcast is now $221 billion.

Not gonna happen.

Netflix may be valued by Wall St. like a tech stock, but it isn’t a tech stock. They are now an entertainment stock. Tech may improve their results somewhat. But they are selling content to subscribers. That is the business.

There is no unlimited future for Netflix. What they have done is stunning and worthy of college courses. But the number of households on the planet (outside of China) willing to pay for content by subscription has a cap. And the streaming industry is bumping into that cap throughout the world these days. They haven’t maxed out. But the idea that there is a 500 million household future for Netflix or anyone else is a fantasy.

The new wave of executives in “Hollywood” have convinced themselves, by and large, that if they somehow obsess on streaming above and to the detriment of all other areas of their business, Wall Street will wake up and start treating them like they are their own Netflixes.

So they are in this uneasy dance between successful operations with a long history and the fantastical behaviors that Netflix built into their unique model.

Most of these companies are in their honeymoon phase with streaming. They should look at Netflix more closely, where for all their success, they are getting the 7-year itch.

One more…

Why won’t streamers release details about their audience participation? Because they are paying NOT to do that.

The model for streaming is not ratings driven. That doesn’t mean that each streamer is not using that information to make decisions about programming, but rather that Netflix created a pay scale that is not directly connected to the math of success that has been the norm for decades.

Streamers, starting with Netflix, are paying talent to neither engage in risk nor reward. They are buying in bulk. And they don’t make their money by reselling the product. They make their money by charging people to come in and eat all they want. They don’t care how much you eat, so long as you keep paying to be in the room with all that content.

One hit = Twenty flops.

Obviously, that has not been the specific scale for Netflix. But only because the “flops” aren’t really all flops. Some are. Many are modestly successful filler, filling appeal to each of the many demographic groups that subscribe to Netflix.

But it is the variety of content and the handful of real breakthrough shows each year that drive subscriber loyalty. No one knows, no matter how cool their algorithm, which shows are going to be the breakthrough shows. So back up the giant truck of content and let the viewers sort it out.

Of course, just like ol’ network TV, Netflix will have to pay extra for more seasons of those breakthroughs. But not nearly as much as sharing the backend with talent cost those networks, who held onto series driven into unprofitability in their closing years, loss leaders carrying viewership that is no longer driven by time slots.

It wasn’t the $60 million to pay the three co-stars of Seinfeld a million a week (or whatever it was) for the last season that dented Sony’s wallet… it was the $1.5 billion or so (or more) they’ve sent to Seinfeld and Larry David on the backend.

Netflix is paying creator talent like Shonda Rhimes a massive amount annually not to have to pay for the hits and to kick what doesn’t work to the curb before it hurts. Will that math keep working? Is it working with Ryan Murphy? These are the questions that try execs’ souls. But it is not a new question. These kinds of deals have a long and wildly mixed history.

Someday, streamers may revert back to the old financial system for content. It won’t be a sign of success, but of caution. Putting aside the “return on investment” question about streaming math, sharing the burden is what content companies do when they aren’t sure of the content and don’t want to extend themselves.

It’s not as easy as it looks. 20th Century Fox lost nearly a billion of what would be profit on Titanic and Avatar when they flinched on both, late in the game, on budget overruns and general fear.

People see Netflix as the apex predator right now, but you know who could have bought Squid Game from them for $100 million before it was released? Anyone. I’m not saying they were looking to sell. But if someone offers you significant upside and freedom from risk, there is almost no one who won’t take it.

Netflix has given that magical pair of incentives to talent for a while now. Things have gotten comfortable. And now agents are wanting another bite of the apple. Audience details are powerful ammunition in this fight. Eventually they may get it. But Netflix and others will keep their cards right up against their vests until they see doing otherwise being in their interest… not by a little, but definitively.

Until tomorrow…