No. 302: The Hundred Year Titan

The direct-to-consumer (DTC) era has yet to influence how we consume big budget, blockbuster films. To watch the latest Marvel Studios productionconsumers still have to endure the trip to the movie theater, eat the expensive popcorn, and pay the exorbitant prices for soft drinks. In a recent conversation with the Cofounder of AfterMarq and Executive Member Vincenzo Landino, I learned why the DTC era has yet to address the demand for big budget film premieres in the home.

The key questions:

  • Could AMC Theaters and Netflix partner to bring cinematic premieres to our televisions?
  • Why are theaters so reliant upon concessions for revenue?
  • Will ‘day and date’ releases be likely in the future?
  • Which studio is best positioned for the DTC era?

A day and date release combines theatrical release with a video-on-demand offering while the film is screening in the theaters. The length of this window is typically 60 days and there is a notable disparity in the price by venue. According to an Indiewire article from 2015, traditional VOD rental costs a consumer around 50% of the price of the theatrical showing. Traditional studios make more money on theatrical releases than VOD releases. Non-traditional studios (Amazon, Netflix) do the same, except their economics are reversed. Streaming is more profitable for them than theatrical release (though brick and mortar releases unlock awards season potential). We will see on occasion. Some recent examples include Amazon’s award-winning Manchester by the Sea or Netflix’s Roma.

Both, Manchester and Roma, are films produced by a streaming service. The films were provided a “day and date” release to improve their chances in award season. But we’ve yet to see a traditional film studio (Paramount Pictures, Twentieth Century-Fox, Sony, Universal Pictures, United Artists, Warner Brothers Pictures, or MGM) lean into a day and date release for a mainstream film. There is a significant reason for this. None of the major studios of the the time controlled the exhibition side between 1948 – today. Only Walt Disney’s Studios is in position to benefit from end-to-end control, today.

The market power of the studios is less than it was [in the 1940s].Per se offenses like price fixing and market allocation are still illegal. But other horizontal arrangements between competitors or vertical arrangements between companies and their partners are more likely to be upheld today.

Michael Carrier, an antitrust expert at Rutgers Law School

Long before the modern DTC era, movie studios did control the product from production to the theater house. This changed in 1948. The Paramount case, and its resulting decrees, changed the motion picture industry for decades. Between 1945 and 1948, the Supreme court mandated a separation between film distribution and exhibition by requiring that the major studios divest distribution or their theaters. It was a near unanimous decision to divest in the theaters and not divesting their distribution businesses.

Understanding the 1948 Paramount Decrees

When Netflix announced to shareholders that players like Fortnite gave executives more anxiety than rivals like Hulu, YouTube or HBO, they explained with this:

Our growth is based on how good our experience is, compared to all the other screen time experiences from which consumers choose.

This is an echo of a sentiment Reed Hastings, CEO of Netflix, told Fast Company in 2017 in an article titled Sleep Is Our Competition:

It’s 8:00 in the evening, you’re next to your TV–which remote control do you pick up: PlayStation remote? TV remote? Or do you turn Netflix on?

Understanding Paramount Decrees: research and breakdown by 2PM contributor Tracey Wallace.

It makes sense that Netflix views Fortnite as a primary competitor. For younger people, two years ago, the answer to Hastings 2017 question would have been Netflix. Now, that’s being challenged by gaming platforms or by subscription services like MoviePass or AMC Stubs A-List. While MoviePass remains on the decline, thanks to poor unit economics, AMC’s native service boasts a reported 600,000+ subscribers paying at least $19.95 per month. Services like AMC’s are bridging streaming media prices and the in-theater premiere experience.

Of course, Netflix has its own premieres like the acclaimed Bird Box or Bandersnatch or Outlaw King. Each featured a Hollywood-esque budget and at least one A-lister.

Netflix finished up 2018 with 139 subscriptions worldwide, up by 29 million from the beginning of the year. The incredible subscription growth clearly justifies hiking membership prices in the US. Netflix reported $4.19 billion in revenue, just under international forecasts of $4.21 billion. 

Netflix is experiencing a renaissance in audience growth and fanfare. What is stopping Netflix from implementing a direct to consumer approach to in-home blockbuster films?

The The Paramount Decree, a 1948 antitrust law, prevents it.

In this landmark US Supreme Court  case, it was determined that movie studios could not own their own theaters or grant exclusive rights to preferred theaters. At the time (1945), film studios like Paramount owned – either partially or outright – 17% of the theaters in the country. This accounted for 45% of American commercial film revenue in 1945.

The 1948 decision caused a massive recession in movie studio revenues, lasting more than two and a half decades. In 1972, the release of The Godfather became the first modern blockbuster and the first project to increase movie studio revenue to pre-Paramount Decree levels.

The ruling is also considered a bedrock of antitrust law and is often cited in cases where issues of vertical integration play a prominent role in redistricting fair trade. But in 2019, Netflix boasts 139 million subscribers worldwide and produces a handful of their own minor premieres, turning our living rooms into intimate cinemas. Fortunately for Netflix, the Department of Justice recently announced that it would review the 1948 decree that prohibited Hollywood studios from pursuing a DTC approach to owning and operating theaters.

The review of the 1948 antitrust ruling, and its potential reversal, would give major distributors, exhibitionists, and streaming service providers –  like Netflix or Disney – real power to run more like direct to consumer entertainment brands. The revision of the ruling would allow Netflix to seek partners with companies like AMC Theaters (or the aforementioned studios) to co-brand in-theater and in-app premieres.

It’s unlikely that Netflix and AMC Theaters will partner when the time comes, but the line in the sand is marked deeply. Once those antitrust laws expire, these two companies stand to gain a lot from cooperating with studios. But not the most. 

The 100 year titan in waiting

Buena Vista, a subsidiary of Walt Disney Studios (Revenue, 2018)

Netflix is the dominant streaming service with over 139 million paying customers. AMC Theaters has the best prospects in all the cinema-side of the film industrial complex. The company has successfully navigated the Moviepass economy by instituting its own growing movie-watching program ($19.95 / month). While heavily dependent on revenue driven by concessions and alcohol, the membership program grew to over 600,000 users in its first year. It’s dependence on external revenue (concessions) is the program’s flaw.

While it is fun to envision a world where Netflix offers an AMC Premiere package where at-home consumers pay $50 for the rights to rent a big budget blockbuster on its opening day, AMC remains the middle man. According to Matthew Ball, an analyst and former Head of Strategy for Amazon Studios:

[AMC] owes 55-67% per ticket [to distributors], with floors. [Concessions] are a big priority because of confection economics. Like gym memberships, these subscriptions only work if predicted use is <x%.

According to CNBC: in the past year, Disney has lost nearly $1 billion in its streaming business between its investment in Hulu and its work with BAMtech, the technology behind ESPN+. But DOJ’s reversal of the 1948 decree could change everything for Walt Disney Studios, a company that began just 25 years before the 1948 decision. And was but a blip on the Hollywood radar, at the time.

Disney is hoping that, over time, millions of paying customers will subscribe to Disney+ for its new original content and library of Disney movies and TV shows. Pricing hasn’t been disclosed. Netflix, which announced its quarterly earnings on Thursday, has 139 million global subscribers and just informed them that it’s raising prices by 13 percent to 18 percent.

Alex Sherman for CNBC

Disney is best-suited for the DTC era. There is organic demand, loyalty, and the mechanisms to deliver it to your doorsteps. When the company announced an end to its streaming deal with Netflix, the writing was on the wall. The Disney+ product is slated to be the exclusive home for Disney films, television projects, and other original programming. According to Bob Iger, Disney’s CEO, the streaming service is the company’s priority in 2019-2020. He’s also assured the press that major releases (Marvel Studios, Star Wars, etc.) will not go straight to the streaming service.

But through the lens of the Paramount Decrees being overturned, it’s smart to consider the implications of Iger’s words vs. Disney’s impending actions. When the US Department of Justice reviews and amends these decrees, Disney will have the power to stream one of the highest grossing films in history into your home on the night of its premiere. And they will. Disney will be able to command a fee that is more lucrative than traditional day and date releases and at margins far greater than their streaming competitors (Netflix), marketplace vendors (Apple’s iTunes) or cinema competitors (AMC Theaters). Before Walt Disney Studios’ 100th anniversary, you will be able to stream a blockbuster premiere on your devices. With respect to the overturning of the Paramount Decrees of 1948, this is Walt Disney’s end game.

Read your No. 302 curation here.

Report by Web Smith and Tracey Wallace | About 2PM

No. 301: Influencers and Transactional Authenticity

Just when we believed that we reached peak influencer, we are surprised yet again. We’ve favorably covered the “first family of influence”, in the past. And quantifiably, there isn’t a media conglomerate that comes close to the influence of the Jenner / Kardashian family. This week, one of them reached a new level by “bravely” discussing acne – the presentation and build up left a fractured audience in the wake of the brand partnership announcement when it was revealed to be a paid deal.

A day before the reveal, Kris Jenner, the model and entrepreneur’s mother, teased the reveal of her “deeply personal” issue on Twitter. Tabloid speculation run its course. The roll out was optimized for social media but many were left asking: is this really what’s become of influencer-driven advertising? Vox Media covered the advertising “bait and switch” in depth here

2PM Contributor and Founder of Doris Sleep: Tracey Wallace

Proactiv’s recent partnership with Kendall Jenner was a test of authenticity. It also may have been a watershed moment for influencer culture. Yes, it’s the most recent example of the status being used to present a vulnerable issue. In this case, adolescent acne. But authenticity is a currency all its own and volume of audience doesn’t always equal magnitude of impact.The controversy around Proactiv’s newest advertising campaign is an early sign that consumers may be beginning to discount command of advertising’s most influential family. Consumer skepticism is the antidote to influencer culture and it seems to be growing.

The focus on influencer authenticity comes as brands have begun to use more “real people” over models and entertainers. Brands are beginning to highlight people just like us but without the modelesque lighting, the photoshopping, or the narrative embellishment. Just scroll through the feeds of Andie Swimwear, Flamingo, or Chubbies for quality examples of this type of visual marketing.

These brands are succeeding because of, not in spite of, their focus on authenticity.

  • Andie Swimwear: Swimsuits made by women, for women.
  • Flamingo: We make body care, starting with hair.
  • Chubbies: The Weekend Has Arrived.

For influencers, the understanding of how partnerships like Proactiv and Kendall Jenner’s come to life diminishes empathy and therefore trust in an ad’s authenticity. This is especially the case in the era of Netflix and YouTube, where star power (influencer marketing) is used to efficiently monetize audiences. Consumers want authenticity.

The successes of influencer marketing is saturating the market. From celebrity influencers to micro influencers, consumers are being inundated by influence. Some influencers are faking brand deals to gain credibility:

Transitioning from an average Instagram or YouTube user to a professional ‘influencer’—that is, someone who leverages a social-media following to influence others and make money—is not easy,” writes Taylor Lorenz for The Atlantic. “After archiving old photos, redefining your aesthetic, and growing your follower base to at least the quadruple digits, you’ll want to approach brands. But the hardest deal to land is your first, several influencers say; companies want to see your promotional abilities and past campaign work. So many have adopted a new strategy: Fake it until you make it.

There are sincere and authentic influencers who are not embellishing their lifestyles or influence. Often enough, these are the media personalities who are slowest to launch merchandise or product lines. Figures like Youtube’s Casey Neistat or pro surfing legend Kelly Slater are having to contend with a very cumbersome question:

How do you build an authentic advertising or commerce model? And how do you do it without ostracizing long time fans and newcomers?

As 2PM has previously covered, there are businesses that focus specifically on partnering with influencers and digital publishers to create, market, sell, and distribute merchandise. We’ve compiled a list of notable commerce partners:

CompanyEstimated Rev. RankLocationFocusLead FoundersEmployeesTop PartnerFully vertical?
Teespring1CaliforniaCreatorsWalker Williams652Lucas The SpiderYes
Amazon 2WashingtonMedia Jeff Bezos 267,723BuzzFeedYes
Red Bubble
3AustraliaCreatorsMartin Hosking777N/AYes
Spreadshirt4Liepzig Creators Phillip Rooke296N/ANo
Rivals / Merchline5FloridaCreatorsNathan Murray17Dude PerfectYes
Merch Table

6Kansas Indie Bands Sean Ingram 42Rufus Wainwright
Yes
Homage7Ohio LicensingRyan Vesler122The NBAYes
BreakingT's

8North CarolinaSportsJamie Mottram 7Donovan Mitchell
Yes
Design By Humans9CaliforniaLicensingJeffery Sierra48Star WarsYes
500Level 10TexasLicensingBrett Williamson20Kevin DurantYes
Amplifier 11TexasCreatorsJoel Bush65Glennz TeesNo
Represent

12CaliforniaInfluencersBryan Baum46Pewdiepie
No
Bonfire13VirginiaCauses / Justice Kevin Penney55Together We CanYes
Rage On14Ohio
CreatorsMike Krilivsky 41Hello KittyYes
Moby Dick Unlimited

15Ohio InfluencersBrandon Fuss-Cheatham10Logan Paul
No
Everybody.World16CaliforniaConcert GoersCarolina Crespo12Gurls TalkYes
Memberful17FloridaMedia GroupsDrew Strojny4StratecheryNo
The Loyalist

18New York AthletesMaxwell Ritz10Alexander Rossi
No
Merchbar19California CreatorsEdward Aten9Donald GloverNo
FanFiber

20HollandCreatorsAlbert van den Broek20Dashie XP
No
Cotton Bureau

21PennsylvaniaCreators Nate Peretic / Jay Fanelli9MKBHD
Yes
FanJoy

22CaliforniaCelebrities Chris Vaccarino17Jake Paul
Yes
Manhead Merch23TennesseeBandsChris Cornell17Fall Out Boy
Yes
Merchcamp24CaliforniaMedia GroupsKenneth Borg4Tinder

No

There is such a demand for appealing to influencers and influential moments that an entire industry has address demand.

Taking a page from the eCommerce playbook

As DTC analysts David Perell and Nik Sharma have often cited, the most resilient brands are audiences. And for influencers to maintain their audience, there must be an evolution from the existing structure of often-gimmicky merchandising and advertising via third-party transactors. And to a method that achieves an authentic experience bolsters user experience and belonging.

The technology seems to be mature enough to address this new standard. Headless Commerce services are offered by BigCommerce, Shopify, Adobe, and ElasticPath. These services are helping to define the possibilities of fully-integrated, content-driven commerce.

Alecia, an early headless commerce pioneer, has taken a first step in this direction with their proprietary video platform. From 2PM Member Brief – Headless Commerce:

Alecia is a company that films and streams original content, letting you shop what you see. The app and the site offer a seamless content and commerce presentation for the viewer. As the product appears on the screen, it is offered (in limited quantities) along the right side of the broadcast. If you’re logged in, purchasing is essentially a two click process. Consumers aren’t clicking to an eCommerce site or an external cart. Instead, the shopping cart is a component of a headless operation, an API call to the cloud-based shopping platform that is external to the featured content.

To date, no such solution exists for influencers on major platforms like YouTube, a place where it could have the most value. way content and commerce in media has begun to alter our understanding of which publications have the most loyal audiences. From 2PM No. 280:

The digital landscape is changing beneath our feet. For publishers to continue building organic readership, they must become brands. Operating as a source of content is no longer enough. To do that, efforts can no longer be siloed, the traditional factions of legacy-styled newsrooms must fall.

It’s no longer just about eyeballs and what influencers can charge for their collection of them. Optimizing for transactional engagement could have a positive effect on the influence ecosystem. In order to earn actual transactions, consumers – more often than not – must sense sincerity, community, and loyalty. By improving bottom-of-funnel operations, influencers can address the needs of community members (potential consumers) without disrupting their experiences.

Ready for increased interactivity?

Millennial audiences are ready for built-in video interactions as evidenced by Netflix’s recent success with Bandersnatch, the “choose-your-own-adventure” augmented film powered by remote or mousepad. These types of media experiences shorten the length between watching and interacting.

But Bandersnatch is more than just a blurring of games and TV. Such interactive adventures could easily become a new revenue source, too, through super-powered product placement and eCommerce. With interactivity comes a new slew of data, and the ability to layer in products, product information and ways to buy. You can bet Amazon is figuring out how to ties its billions of dollars worth of programming into its vast e-commerce operation. And just maybe so are Disney, Apple, Warner Media and Walmart.

David Bloom for Forbes

One company that went unmentioned in Bloom’s rundown was Google. Google has the most to benefit from engineering a headless commerce solution for YouTube. Consumers and creators would both benefit from an experience that allows consumers purchase from the screen without an external redirection.There is one thing that YouTube has built into its platform that Netflix, Disney, Warner Media and Walmart do not: intuitive user control.

Expect to see a continued shift towards interactive formats; while headless commerce opportunities are further down the line – consumers are already being molded to welcome them. But the media engine of this age is the widely beloved influencer. We’re suggesting that we should reconsider how they’re influence is measured. No, influencers shifting to a headless commerce operation won’t immediately prevent media moments like the Proactive “bait and switch.”

Moving influencers away from optimizing for media impressions, social mention volume, and traditional publicity could alter things if and when creators see what can be accomplished when commerce transactions are closer to the starting line. Commerce relationships develop an authenticity that advertising doesn’t quite need. As interactive video technology continues along its adoption cycle, influencer-creatives would stand to gain a lot from building stronger relationships with their audiences.

By moving transactions closer to the top of the top of the funnel, fans and potential consumers won’t be left wondering: what’s the gimmick? Headless commerce can present that solution in a subtle but effective way by leaving the opportunity to transact to the viewer. Consumers demand authenticity from their influencers. This, especially as the lines between genuine interest and earned media continues to blur. 

Read your No. 301 curation here.

Report by Tracey Wallace and Web Smith | About 2PM

Tracey is a 2PM Executive Member and Contributor, the founder of Doris Sleep, and the Editor-in-Chief at BigCommerce. 

No. 300: Content Before Commerce

DTC growth efficiency and paying it forward. There’s a relatively new documentary on HBO called Momentum Generation. The short film chronicles a group of young surfers who were pursuing the dream of monetizing their craft (turning pro). They wanted to become professionals at a time when Americans weren’t making a living off of the sport. There is a key point in the documentary when one of the surfer’s mothers professes her appreciation for providing an informal shelter to the motley crew of young men. In her home, they wouldn’t have to worry about food or a roof over their heads. These comforts allowed them to focus on honing their abilities and building their audiences. But it also provided outsized commercial opportunity that wouldn’t have otherwise existed.

If you’ve ever followed action sports, you may recognize the names: Kelly Slater, Rob Machado, Taylor Knox, and Shane Dorian. These are but a few of the household names from that home of then-amateur surfers. The group and its household was credited with defining a sport for an entire generation. They pushed each other, they collaborated, the competed, and they complimented each other’s talents and abilities. It was the perfect storm of opportunity.

Everyone who paid attention to surf media in the 1990s will have heard of Momentum, not because it was artfully made—it wasn’t—but because the 1992 film’s screechy punk/metal soundtrack and hyper-aggressive slash-and-aerial surfing really did announce the arrival of a new generation of young dudes who shredded waves into way smaller pieces than the reigning old dudes. 

Momentum Generation is Postmodern by Accident

What’s the point? We are entering a phase of online consumerism that makes it ever harder to sell, grow, and retain customers effectively. Costs have risen and attention spans have dwindled. One solution that brands often ignore is long tail and risky: building an audience early on. Curating a community and then selling to it. From Issue No. 277 – The Law of 100:

Without a strong group of early adopters, you will not efficiently achieve the attention of the masses. The first 100 are the foundation. Without the support of the 100, the masses will not adopt. Made famous by Simon Sinek, heed the diffusion of innovation theory: the early majority will not try something until someone else tries it first. Brands are judged by this early majority.

A deeper dive into the hysteria around the pioneering group of surfers and you may recognize that this well-done HBO documentary doesn’t get made without the incredible b-roll and spare footage from the shooting of the 1991 short film and 1992 short film, “Momentum.” Produced, shot, and directed by one of the surfers themselves – Taylor Steele, he wanted a way to broadcast the lifestyle. Steele was just 20 years old at the time. His early film work catapulted his household of friends into relative stardom. And then the endorsement deals, media partnerships, and merchandising opportunities followed closely behind.

Content Before Commerce

Neistat’s intentions are largely similar to Warhol’s, albeit updated for the digital age. He laments that NYC has no real community for creators, and what it does have, frankly, “sucks.” Its his contention, however, that this is not due to a lack of energy or creative prowess, but a lack of a central location, a hub of creativity. 368 Broadway, he hopes, will fill that void. “What if,” he says, gesturing to his newly acquired fortress, “this can become the space for all creators?”

On the 368 Project

Brands should consider launching their media and community operations long before their first products hit the shelves. Whether intentionally or not, 368 is doing just that. Founded by Casey Neistat and Paul Leys, 368 is a new age spin on building the creative center of New York City and beyond. With a capable Director of eCommerce and headless commerce capability, 368 has the potential to build a customer acquisition engine. The entire organization is built to systematize the serendipity of its community member; it is a flywheel for creation, content and (eventually) commerce. And it’s an organization that many to-be entrepreneurs in the DTC space should observe.

368 on Twitter

@overtime brought 🏀 to 368 last weekend. They also brought Rachel and Larry.

When you walk into the New York building operated by Casey Neistat, you’ll feel a sensation of serendipity and opportunity. 368 is just a shared workspace to many observers, many of whom view the YouTube star’s business acumen through a skeptical lens. But it serves as more of a creative haven – a place born when its creator believes that the end is more important than the growing pains of its means.

Beme was Neistat’s venture prior to 368. This time last year, CNN and Neistat decided to part ways and you could see the anguish on his face in Neistat’s farewell video. It’s no coincidence that 368 operates within the same walls of the now-defunct headquarters of Beme. Neistat isn’t one to back down from psychological challenges. But the decision to heavily invest in 368 wasn’t just about the physical space; the space is home to competition, collaboration, and community. From our recent Member Brief, The Pivot to Tradition:

For DNVBs to position themselves for scale, it helps to have a built-in audience. Consider the successes of Fenty Beauty (Rihanna’s audience), Kylie Cosmetics (Jenner’s audience), Fashion Nova (Cardi B and 13 million Instagram followers), and Glossier (Into the Gloss).

368 has the make up to duplicate the successes of several of the top 30 community-driven brands in direct-to-consumer industry. One trait that the aforementioned brands share: they are driven by personality and relationships, not performance marketing. As such, paid marketing and advertising costs are relatively inexpensive for direct to consumer retailers like Kylie Cosmetics, Fenty Beauty, Fashion Nova, and Glossier – several of the foremost examples of DTC brands that run without the constraints of skyrocketing customer acquisition costs (CAC).

Wilson Hung on Twitter

1/ The golden era of DNVB is over. The times of inefficient growth enabled by first movers advantage & low ad-costs are over. Rising ad-costs will require brands to focus on operational excellence to maintain strong LTV:CAC ratios to sustain growth.

Adjusting to a dying era

Glossier is the child of Into The Gloss, the website Weiss started in 2010 to chronicle what women had in their beauty cabinets. It may sound simple, but there was a time when nobody curated their collections. For most, a bunch of (mostly expired) products took up all the shelf space.

Woman Made: Emily Weiss

There is a bit of irony in the story of the surfers of the “Momentum Generation”; they didn’t expect the appreciation for their lifestyle to leave the boundaries of their niche. But the content was superior and the lifestyle was appealing, even to those who’d never touch a surfboard. They validated their brand before ever selling a product, sponsorship, or media deal. A casual observer could say the same about Neistat and his 368 team. There is a $90 million / year retail operation that is ready and waiting to exist.

It’s not uncommon for early-stage DTC brands to raise $3.5 million before their first product is sold. These early-stage retailers are often in stealth mode for up to a year, developing product lines, establishing partnerships, and refining their online branding through agencies like Gin Lane, Wondersauce, and Red Antler.

Savvier brands will take this opportunity to build their own flywheels of content, community, and momentum. In doing so, founders have the opportunity to address one of the greatest limitations of this era of eCommerce – head on. Instead of buying an audience, brands should consider investing in growing authentic digital communities around their interests and product categories. Both options – paid CAC v. organic CAC – have their complications; but paying it forward offers sustainability, predictability, and an efficient path forward.

Read the No. 300 curation here.

Report by Web Smith | About 2PM