THB #84: The 10 Myths Of Streaming (Pt 2)

(apologies if you are looking for the audio… my mouth and my brain aren’t connecting today. i will try to do the audio later, after some sleep. thanks.)

Part 1 included the following myths:

You Need To Ramp Up Spending Wildly To Attract An Audience
Acquisitions Will Fix What Ails Your Platform
The World All Looks The Same
Successful/Surviving Streamers Will Play On The Same Ground

And now, the conclusion…

Disney+ Is The Primary Streaming Key For Disney

The Q1 Disney quarterly report makes plainly clear what has been obvious for a while. Disney+ may be the greatest bait ever… but the real money in the move to streaming for Disney is in the rest of their platforms.

This last quarter, “Linear Networks” aka ABC and cable, generated the most money for the company, $ 7.7 billion, $30 billion for the year. This number is expected to shrink, though the shrinkage is going slower than a lot of people expected. It is generating a healthy profit and streaming is still a few years from projected breakeven. Linear will eventually become all “DTC” Direct to Consumer. But managing that transition is a major part of the responsibility of Bob Chupak & Co for the next 5 years and likely more.

But that is not the myth I am looking to bust here.

Disney has a lot of room for fudging in the way they lay out the numbers. So none of this is gospel. However… domestically…

Disney+ generated an average of $6.68 a month per subscriber.
Hulu generated an average of $12.96 a month per subscriber.
ESPN+ generated $5.16 a month per subscriber.

Disney really needs all of that $24.80 a month from 70 million domestic households to get to $20.8 billion a year from the domestic DTC business.

Currently, Disney+ is generating about $3.44 billion a year domestically. Internationally, it’s generating about $3.12 billion a year (not including India).

Hulu (just the SVOD product) is generating about $6.4 billion year and is a domestic-only product.

ESPN+ generates $1.32 billion a year… to their linear side, which generates a broadly estimated $9 billion a year, which has dropped each of the last number of years.

Disney+ is the sexy sell. There is no brand in the space that owns a niche with nearly this muscle. But it has a natural cap.

Bob Chapek said in the investors’ call that a broader range of content would be hitting Disney+. With due respect, this makes little sense. Weakening the Disney brand to chase the bigger number that they need to get to is just not a great idea. As many quickly pointed out, why have they been pulling along Hulu if they are going to abandon finding Hulu’s unique voice?

Moreover, although the top Netflix subscription is now $20, The Disney Bundle is also right there if you chose Hulu without commercials. One of the advantages Disney has over Netflix is that 3 distinct brands suggests a better value proposition… at least, if they can keep clarifying Hulu and building on ESPN+, which is the one brand directly competing with its linear (more profitable) self.

Disney+ is doing great and brings all the boys (and girls) to the yard. But it’s less than a third of the DTC business that Disney is seeking, first in the United States.

And the real ambition is to bring the whole footprint to the rest of the world at what will surely be a lower ARPU, but to as much as 3x the domestic audience. A worldwide business that generates over $70 billion a year.

The Netflix Streaming 3.0/4.0 Model Is Something Others Can Recreate

I believe we are at the start of Netflix 4.0. DVD was 1.0. Streaming was Netflix 2.0. Original Content was 3.0. And now we are entering the maturing 4th phase of Netflix history. Building a bigger subscriber base is always a priority, but being a consistently profitable company is becoming the bigger priority.

That said, the opportunities that Netflix evolved with and built on are not there for other streaming companies, legacy-based or otherwise.

Market valuation will never be as high, vs earnings or revenues, as it has been for Netflix.

The interest rate will never be as lower - can’t be lower - than it has been for Netflix through their primary period of building a new content base and library.

No one else can ever be the first mover, benefiting from being a breakthrough product in every market as well as with the media, which continues to smooch up to Netflix like a first love.

And Netflix has had a wide berth in creating its voice as a content company that others could recreate, but will be challenged in doing.

Legacy has been a dirty word in the early days of this inevitable shift of all television. But the reality is that all the streamers, including Netflix, have ridden the wake of legacy media and the perceived value of content and talent (on camera and off) developed in the legacy media system.

Shonda Rhimes did not spring whole from the earth when Netflix decided to pay her a fortune to join their team. Eighteen seasons of Grey’s Anatomy may signal a show near its end… but that experience is one no showrunner is having at Netflix. The company isn’t remotely interested in have hundreds of episodes of any recorded series. Could change. Probably will not. The Netflix equivalent of 18 seasons of a show is maybe 6 seasons and 60 episodes of The Crown (up to 4/40 now).

Netflix is a unicorn. No one else gets to wear the horn.

Subscriber Figures Are The Key Stat That Matters

“Money don't matter tonight
It sure didn't matter yesterday
Just when you think you've got more than enough
That's when it all up and flies away”
- Prince, Money Don't Matter 2 Night

Romantic notion.

Not how businesses actually work.

We have gotten very used to the idea that Wall Street loves ideas more than it loves the ugly, grimy work of execution. It’s The Producers every day, intentionally or not.

I wish it was a more effective part of the Anna Delvey/Sorokin series on Netflix , Inventing Anna, but the willingness, even ambition to embrace The Next Big Thing, even when it makes no sense, is an epidemic amongst the rich. (The show ends up leaning much more heavily on the not-rich supporters of Anna.)

There are 2 separate ideas going at the same time, in terms of streaming. There is the ambition to be rewarded beyond all business reason, like they all see happening for Netflix. And there is the hard reality that if their models don’t become real and profitable businesses, they will be punished, by the market and everyone else.

There is a third idea, that is from another planet, that encompasses Apple and Amazon, for which streaming is a side hustle to a great extent.

Subscriber growth is very important, regardless of the model you are chasing. It is important for revenue and it will be of even more importance to take advantage of the AVOD business, where you are selling eyeballs to advertisers.

Subscribers are also important as we find balance in content matters. For instance, how many subs do you need before a day-n-date release of a “movie” is seriously undermined by your streamer. Netflix, which has taken a number of titles to as many as 800 domestic screens in the last few years, has yet to generate a box office gross worth telling the world about. On the other hand, were there enough paid Peacock subs to interfere with the release of Halloween Kills last October? And again… how much damage did Disney+ do to Encanto by promising a release by Christmas after a Thanksgiving week domestic theatrical release?

But I digress…

The key stat that will matter for streaming after the first 3 or 4 years of losses projected by every new streamer is… profit.

And again, our friends at Disney offered a perfect example in the last quarterly. India aka Disney+ Hotstar. 45.9 million subs. Biggest sub line for Disney DTC. But $1.03 ARPU.

Now, this may be the best that Disney or anyone else is going to get out of India. This will not be the last market with this kind of outlying stat. But $570 million a year gross from a market the size of of India isn’t making anyone in Burbank giggle with delight. Plus, there is a lot of talk that if Disney loses its cricket franchise (not Jiminy, the sport), that number will crater.

Point is, 35% of Disney+ subs generate a buck a month.

This is not the power stat moving forward. It’s just the first one we had.

Amazon and Apple Don’t Care About Making Money

They do.

Look at their financials.

The profits of Amazon, for instance, are not necessarily what you would expect. On the retail business, the operating income is less than 4% against net revenues. Internationally, it’s less than 1%. But AWS, their streaming services side, generates a 28% operating income on net revenues.

Amazon’s retail business is amazing… but it’s not exactly thrilling… even with $450 billion a year in net sales.

But the $50b - $60b internet business? Ka-ching!

Where does Netflix live in all this? Around 8% net on about half the revenues of AWS.

Apple? 28%.

It is absolutely true that Apple and Amazon (and Netflix and Disney, etc) will spend an enormous amount to build their businesses, with some amount of fat that could be excised. But the number of pieces being juggled by these companies is massive. No one line of spending really matters… not even buying MGM/UA… and that is the 2nd biggest acquisition that Amazon has ever made.

How many billion a year would Apple or Amazon need to be spending on their consumer-facing streaming businesses to be considered important to those companies? Probably 5x what either is now spending.

IP Won’t Fade Like Movie Stars Have Faded

We are still in the era of IP obsession.

Let’s take a step back.

When DVD launched, making home entertainment a sell-thru consumer product for the first time, it outstripped theatrical revenues pretty quickly. It would later crash, but that isn’t the conversation for here and now.

When DVD rose, studios took 2 tracks aside from selling new content. One was trying to resell every piece of library material on a DVD, the new delivery system. The other was to mine every bit of IP they could find a writer or director to embrace.

The most remembered conceit in the game was The Disney Vault, which, starting with VHS, put classic titles into the marketing place for a brief window, after which it would be taken out of circulation for 7 years. The genius of this notion was best exploited in VHS, for which a new window of children would be born to Disney AND VHS tapes would be completely worn out. DVD didn’t work as well for Disney because discs lasted longer.

In any case, after a couple of years of distributors mining their film vaults, they were mining the depths of their TV vaults, maintaining the illusion for a couple of years that everything was hunky dory in DVD World. It wasn’t.

Meanwhile, CG landed, particularly with Spider-Man in 2002. We had already been though 3 Batmen by then. The international theatrical business meant more and more product was going to focus on a piece of IP or concept, rather than a star.

Pushing the industry further from the star system was the increasing price of star talent caused by the aforementioned DVD business. There was so much money in DVD that agents had figured out how to squeeze that money out of the studios before (and without regard to) the DVD release. That was the period when $20 million stars were the norm. But while we were being dazzled by the increased paychecks, the DVD market was fading from competition with itself and too many shelves filled with DVDs unwatched.

It all came to a head with 2006’s Mission: Impossible 3, when Sumner Redstone used Oprah couch-jumping as an excuse for separating from Tom Cruise, when the real issue was that Cruise took home $60 million - which factored in DVD in a big way - and the net from the theatrical release and the initial DVD sell-thru still left Paramount in the red.

Why tell you all that?

Things ebb and flow.

Netflix paid an insane amount for the next 2 sequels to Knives Out. This was new turf for them, as they bought the franchise off the surprise success of the first film. But one of the reasons the company’s IP game has been seen as weak is that they have previously invested in flailing IP… like Adam Sandler. Now they have a Madea movie coming. They got Cobra Kai after it failed on YouTube Red, which has worked out.

The standard for success of Netflix or on other streamers is not what it once was. It may seem unfair to say that the bar is lower… but the bar is lower. You are pushing product to a captured audience of paid subscribers who see the internal promotion for shows over and over and over again. Show tourism by viewers is encouraged.

As a result, IP should work for Netflix, at least in terms of getting sampling over and over.

Netflix had 7 series that are on other networks or were on other networks that have been more viewed in 2021 than any Netflix Original series and 3 more in the top mix that are newly minted as Netflix Originals. But once you get to the Netflix hits, 5 of the Top 6 are not established IP. They are truly original… in that way. Squid Game, Virgin River, Bridgerton, You, The Crown.

Adam Sandler is nowhere to be found amongst the top streaming “movies” of 2021. He is still a good value play for Netflix. He has a solid audience that is happy to watch his new content as part of their sub experience.

Whatever bait you want to use to draw an audience, movie stars or IP, ebb and flow… ebb and flow.

Launching Original Movies On Streaming Pumps Up Sub Numbers

This is one of my pet peeves because there just isn’t evidence - at least public evidence - that this claim, used endlessly in the last 2 years of pandemic fun, has any basis in reality.

Disney has 11 of the Top 15 streaming movies in 2021 according to Nielsen. 8 of the 11 were not offered for free with subscription, day-n-date, by Disney. 5 of those 8 were released in theaters before Disney+ even launched.

Jason Kilar, at Warner Media, continues to claim that putting Warner Bros movies on HBO Max, day-n-date, was what built the streaming channel by 5.3 million domestic subscribers in 2021.

Estimates of how much was spent on HBO original programming in 2020 and 2021 and moving forward vary dramatically. We don’t really know. But how many billion did Kilar spend on HBO Max for original content if the WB movies are responsible for all the growth? Why spend it?

But this is a digression really. The question isn’t about nitpicking the past. It is about what the future will bring.

What the numbers suggest with the top Disney movies from the last year (inc early 2022), Luca and Encanto, is that the 2nd week of release is when they draw the biggest crowds. This jibes with Netflix, particularly on Squid Game. It’s similar to a theatrical hit. Opening is important, but word of mouth is what builds a real success.

So how do you best establish word of mouth? This is the debate of 2022 and 2023 to come.

One of the interesting things about Kilar’s Folly, aka Project Popcorn, is that Warners spent lavishly on marketing, even as they undercut their theatrical. All 18 of those movies at least had the spend to make it theatrically. Half of them got to $50m or more at the worldwide box office.

The two real hits during Project Popcorn Were Godzilla vs Kong and Dune. Both did just over $100m domestically in theaters. GvK did $368 million internationally and Dune did $291 million.

But what could they have done domestically without day-n-date and would the subscriber growth have been more positively affected by a greater theatrical success before the films showed up on HBO Max after a window, whether 45 days or longer?

Then the next question, whether I like it or not, is whether another $20 million or even $50 million at the box office really matters?

But then, the biggest question… does a movie with weeks of theatrical success have an even bigger impact if it hits streaming after that?

Remaking the Pay1 window that used to be on cable 9 months after theatrical release (it used to be longer) makes sense. It will cannibalize physical media sales, though those have become marginal. It costs you the outside revenue from whoever had the old Pay1 window. So all that is really left is the streaming window. And how we value that is an ongoing debate.

So the question remains, what is the audience interest value in a traditional theatrical release vs a release directly to streaming? We may not get that answer for a long time. But as of now, there is zero proof that dumping original movies meant for and of high enough quality of wide theatrical release drives and holds subscription numbers any more so than other, much cheaper, original content or library content that still drives a lot of views.

Until tomorrow…