No. 325: Consolidation and Cable 2.0

The center of the home is still the room with the television. In that room, there is an arms race happening before our eyes. Streaming properties are adopting an end-to-end format that reflects the very nature of digitally native brands: own the product, own the channel, and you’ll own the consumer. But it wasn’t always that way and it may not always be.

This past weekend, my wife wanted to watch our favorite show. But in my parents’ market of Northwest Florida, that Sunday evening was disrupted. Their home was in a sort of in between, half traditional cable and half streaming services. But without HBO Now, we couldn’t watch the one show that we agreed upon. This situation was not without its irony.

Now-retired, Cleon Smith spent 30+ years as an executive in the cable industry. First for Time Warner, then Comcast, and finally – Cox Communications. It was within the walls of Time Warner that I interned with his upstart broadband internet department: code named “Road Runner.” As GM of the service, his market (the dense triangle of Houston, Dallas, and Austin) launched shortly after the test in Elmira, New York. At 14 years old, I watched his group tweak, market, and launch a product that would shape Texas’ future and then the nation’s. That broadband service, the first of its kind for the general public, would disrupt his company’s core business forever. Or so I thought.

I understood why the streaming industry took off but in the end, those consumers will yearn for simplicity of the good ole’ cable days. We sold a good product.

With the advent and widespread adoption of broadband internet, services like Youtube launched in 2005. And then, like a hurricane hitting an unsuspecting island of plywood homes, Netflix pivoted to streaming service in 2007. That did change everything.

Companies like Comcast, Time Warner, and Cox Communications began to innovate by introducing on-demand options and, eventually, the ability to login to Netflix or Hulu accounts to their OTT devices. But it didn’t end there. Each of the aforementioned properties were disrupted. First, by the Netflix approach to marketplace growth – an innovation that provided millions of cable, Dish, and DirecTV subscribers the incentive to “cut the cord.”

This is an example of a consumer household in 1995:

  • broadcast television: cable or satellite provider
  • basic: cable or satellite provider
  • premium services: cable or satellite provider

This is an example of a consumer household in 2012: 

  • broadcast television: cable or satellite provider
  • basic: cable or satellite provider
  • premium services: Netflix, iTunes

This is an example of a consumer household in 2020:

  • broadcast television: antenna, Hulu+, Sling, DirecTV Now, CBS All Access
  • basic: Philo, Sling, YouTubeTV, Playstation VUE, Netflix, Roku, iTunes
  • premium services: Netflix, Showtime (streaming), HBO Now, Prime Video, Vudu, Disney+

Between 2007 and 2018, Netflix worked to build a proverbial “mall” of properties by purchasing, licensing, or manufacturing intellectual property. It resembled elements of traditional cable but it emphasized the program, not the channel. Netflix Originals were purchased from independent filmmakers and marketed as Netflix’s own. Broadcast television properties like “Friends” and “The Office” were licensed for tens of millions of dollars per year. Hollywood A-listers and top directors were granted $300 million budgets for films meant to rival big studio releases. Yet, Netflix is currently trading at six month lows after news of: historic subscription losses, a small revolt after a $2 price increase, and the loss of two major properties. Industry analyst Andy Meek [1] on the matter:

Netflix lost 126,000 subscribers during the quarter, the first time that’s happened since the streamer actually started producing original content. Yikes. And then when you couple that fact, plus the quarter’s lack of new hit content and the imminent loss of shows like “Friends” and “The Office” with the forthcoming launch of rival streamers from Apple, Disney, and HBO’s parent company, among others — it’s a recipe for disaster and whatever the Streaming War’s version of hand-to-hand combat is, with everyone taking a piece out of Netflix, right?

As Netflix’s value erupted, an inverse relationship manifested: Netflix’s success and the commodification of the studios. The streaming industry increased their leverage by providing more consumer optionality and negotiation-by-wallet power to end users. In the process, cord cutting began to hurt studios as well. Not only are their cable contracts diminishing in value, their streaming payouts aren’t making up for the lost revenue.

Coupled with changes in consumer behavior, contract fallouts between studios and streaming channels, and the continued proliferation of speedier data services – you have the basis for the continued fracturing of the industry.

2PM Data: The Macroeconomics of Streaming

Subscriber losses for selected cable companies in the U.S. 2018 | Source: Leichtman Research Group
Pay TV penetration rate in the United States from 2010 to 2018 | Source: Leichtman Research Group
TV services used as substitute by cord-cutters in the U.S. 2017, by viewer type | Source: Nielsen
Monthly time spent watching OTT services in the U.S. | Source: comScore

The final graph is, perhaps, the most interesting. Disney-owned Hulu has begun to close the gap between their offering and Netflix. With Disney’s properties growing in popularity, analysts anticipate Hulu will continue narrowing Netflix’s lead.

Netflix planned to be the modern consumer’s iteration of cable television – a model that depended on a critical mass of content and viewership. That critical mass had to remain greater than the sum of all potential streaming competitors. For a time, the Reed Hastings-run media company had enough of what America needed: great classics, go-to films, syndicated sitcoms, game-changing originals. And then the ecosystem began to fracture. Properties like “Friends” left for WarnerMedia’s streaming service while “The Office” prepared to depart Netflix’s content menus for NBC’s streaming equivalent. Becca Blaznek on why “The Office” has left Netflix [2]:

Among them is NBCUniversal, which owns the rights to The Office. On June 25, 2019, the company released a statement that they will not be renewing their deal with Netflix, instead bringing the “rare gem” to their platform beginning in 2021. According to the Hollywood Reporter, this will not affect international viewers for the time being.

Like the consumer categories that went vertical to compete in a new economy, so have the studio brands competing for the mindshare of cord-cutting consumers. This had an unintended effect however. While modern consumers prefered streaming over traditional broadcast or service providers, the traditional consumer still prefers their traditional television over other devices for streaming media.

The DTC Evolution

Sales of OTT devices | Source: Strategy Analytics

As media fracturing continues, contract negotiations between studios and existing streaming services will only intensify. This will result in added subscription costs for consumers. The promise of the cord-cutting age was two-fold: (1) improved household economics and (2) accountability. Consumers wanted to avoid the pages of unused television programming that went neglected. Today, it’s typical for a cord-cutter to maintain subscriptions to 5-10 monthly media services to accomplish the same consumer tendency: availability irregardless of usage rate.

Today’s consumer is submitting to this dizzying dance of “subscription / login / password recall / and idle subscription” but without the convenience that consumers found with traditional cable providers.

As such, the disruptor is due for disruption. And in this way, an earlier inference may have been mistaken and my dad could end up right. With cable and data providers like Comcast, Cox, and AT&T controlling the pipeline and studios increasingly at odds with new-age streaming services, the momentum is tipping in the favor of tradition. While OTT boxes like Roku and Apple TV have made subscriptions and programming search infinitely easier, the 1:1 connections between consumers and streaming agents continues to subvert the innovation’s original intent: ease, consistency, and value.

It’s likely that the traditional media consumer has reached their limit. Cord cutting was an economically-driven phenomenon. Foregoing the streaming economy in exchange for returning to traditional cable is a question of programming availability and ease of access (try logging into Netflix on a relative’s cable box).

Streaming services will be bundled. It’s likely that we’re near the point of OTT carriers marketing the opportunity for consumers to purchase pre-negotiated, economically-friendly bundles of streaming services packaged. With no-login, one collective price, and less of a fear of missing out – the past has become the present. Disney’s streaming offering may be the sole victor here; their value and reach may outlast a shift back consolidation. For all others, the fracturing market of streaming video on demand (SVOD) has begun to cannibalize the direct to consumer opportunity that was the initial appeal.

In this manner, there is similarity between retail’s DTC cost-elasticity and SVOD’s elasticity. For online retailers, CAC has risen as digitally native brands flooded the market (performance advertising inventory remained constant). For streaming media companies like Netflix, CAC has risen as studios flooded the streaming market and costs to feature their properties became prohibitive. While Facebook and Google’s ad inventory’s limitations have resulted in price elasticity, the SVOD parallel is slightly different. The streaming consumer’s spend is nearing its point of elasticity. And the end game may be consolidation, a result of the yearning for good old cable days.

Read the No. 325 curation here.

Исследование и отчет Веба Смита | Около 2PM

Additional reading: (1) Member Brief: The Netflix Report (2) Monday Letter: The Hundred Year Titan (3) This wonderful thread by Nate Poulin that further contextualizes this report.

No. 315: The Digitally Natives

Native

Aggregation defined an era. The aggregation throughout media, retail, and service platforms determined the economic viability of many in the vendor-class throughout the modern digital economy. Uber began as a luxury black car service. Spotify streamed music. Youtube published silly videos. Amazon began by selling books. And Netflix rented films by DVD. Imagine a world without these companies as aggregators. Companies grew market share by adding products and services, rendering their analog competitors incapable.  Like the inevitability of westward expansion, the aggregation theory continues to move certain platforms towards critical mass.

The theory is akin to the digital version of Manifest Destiny. For a time – platforms maintained an advantage, much like physical retailers possessed an early advantage over e-tailers. In the traditional retail model, individual product brands were less important than the shelves that they were marketed on. Consumers came for product selection, ease, and the universal checkout process. The one stop shop was the draw; product loyalty was a secondary feature.  In this way – content publishers, product brands, and services were merely value-additives for existing platforms. Few learned this hard lesson like popular musicians at the beginning of the streaming era. Podcasts seemed to have learned from those difficult lessons.

Gaining leverage is the mission.

The market-making opportunities that began with early digitally vertical native brands (DNVBs) began to influence adjacent industries as that sales model had its success. For decades, it was nearly impossible to achieve critical mass in retail without partnering with a brick and mortar retailer or a department store. To defend against what seemed (for a time) to be physical retail’s Manifest Destiny, digitally natives circumvented the infrastructure and went direct to consumer (DTC). This meant that they had access to increased margins, efficient customer acquisition, access to data, and stronger relationships with the consumer.

With little access to mainstream consumer channels, physical brands launched native channels with the help of platforms like Shopify and BigCommerce. It’s unclear whether or not the intent of the DTC industry was their indefinite independence from big box retail. I’d argue that it wasn’t the goal. But, regardless, the result of the last ten years has been palpable: product brands have never possessed more leverage than they do right now. Even if that leverage is temporary.

As newer platforms go to market, vertical brands are beginning to notice a shift in leverage from platform to the vertical. This is an untimely shift in momentum for platform companies, businesses that once had the leverage to act indiscriminately.

DNVB-speak in digital media

In early April, comedian Russell Brand was interviewed by the host of the Joe Rogan Experience (JRE), a wildly popular podcast that covers everything from combat sports and geopolitics to archaeology and sociology. It’s important to note that JRE is consistently ranked in the top five of the most downloaded podcasts. Toward the end of the discussion between the two men, Rogan prompted Brand to promote his business interests. And though it was a subtle promotion, this is where things became interesting.

Luminary is the premium audio publisher and content aggregator that has set out to become the Netflix of podcasting. Founded in 2018 by Lauren Sacks, the company raised $100 million from New Enterprise Associates. The funding equipped Sacks and team to recruit several sizable podcast networks and high visibility media personalities to include: The Ringer, Guy Raz, Trevor Noah, and Wondery Media. Wondery is the last remaining podcast network known for its original programming and Ringer, a successful podcast network in its own right, is still in search of Barstool Sports-level network effects. In hindsight, Spotify’s acquisition of Gimlet and Parcast were as defensive as they were offensive developments.

In the episode – Russell Brand promoted his latest venture, a podcast with Luminary. The elevator pitch had somewhat of a dual purpose: (1) use one of the most influential platforms in audio to promote a business interests and (2) recruit Rogan into the fold of the Luminary-faithful. The second part did not work, the jury is still out on the first proposition. But the effects of that conversation were immediate. Within 72 hours, JRE was pulled from Luminary’s catalogue. From Hotpod News: 

The [JRE] team explicitly cites licensing issues as the reason behind the intent to withdraw. “There was not a license agreement or permission for Luminary to have The Joe Rogan Experience on their platform,” a representative from the team told me last night. “His reps were surprised to see the show there today and requested it be removed.”

The Joe Rogan Experience wasn’t the only big name in podcasting that removed content from the platform. Spotify denied Luminary access to their shows and the New York Times pulled The Daily. PodcastOne, Barstool Sports, Endeavor Audio, and many others followed suit. From No. 304: In-app audiences:

The pending acquisition of Gimlet Media is about more than building a direct-to-consumer podcasting powerhouse, it’s about monetizing DTC audio in new ways. Spotify doesn’t own the music that millions of us listen to, they license the rights from three music labels: Universal Music Group, Sony Music Entertainment Group and Warner Music Group. With Gimlet’s pending acquisition, Spotify is positioning themselves squarely as the Netflix of audio. And Gimlet’s portfolio of audio properties could be another tool that Spotify uses to convert casual subscribers to premium, paid users.

And here’s Luminary CoFounder and CEO Matt Sacks:

We want to become synonymous with podcasting in the same way Netflix has become synonymous with streaming. I know how ambitious that sounds. We think it can be done, and some of the top creators in the space agree.

Spotify and Netflix were exclusively aggregators before they began to pursue their modern subscription growth strategy. By acquiring popular properties (like Gimlet and Parcast Network) or by investing in the development of  the native properties that Netflix is now known for, both companies moved further away from aggregation and closer to becoming digital natives. For Netflix, this was timely. Media companies like Disney have begun to pull their properties to develop their own digitally native businesses. Another sign of aggregation theory’s diminished role for newer companies.

Perhaps, the age of aggregation is nearing its maturity. According 2017’s Defining Aggregators by Ben Thompson:

Aggregation Theory describes how platforms (i.e. aggregators) come to dominate the industries in which they compete in a systematic and predictable way. Aggregation Theory should serve as a guidebook for aspiring platform companies, a warning for industries predicated on controlling distribution, and a primer for regulators addressing the inevitable antitrust concerns that are the endgame of Aggregation Theory.

Two years later, we’re witnessing a war over proverbial land rights. As platforms have begun to lose leverage over specific verticals, they’ve heavily invested into the development of their own properties (private labels / native brands / native media projects). In some cases, like Spotify’s acquisitions – they chose to acquire the properties to move consumers along the content-to-subscription funnel. For Luminary Media and their Head of Partnerships / Business Development Meaghan Quindlen, the stakes are much higher than they would have been 3-5 years ago.

She has an unenviable job; she must convince alienated podcasts to work with them by communicating her vision, by employing a new licensing compensation structure, or a combination of both. Even Spotify and Apple Music had their own similar episodes. But with $100 million in funding and grandiose aspirations – Luminary will have to out-Spotify Spotify on its way to becoming the Netflix of podcasts – a title that the first audio platform to achieve 100 million paid subscribers wants all to itself.

Who is to say whether digital media properties returns to the types of  platforms that were once required for growth; there is now a dueling loyalty between independence and potential reach. This contradiction didn’t exist a few years prior.

Digitally native retailers are open to working with big box retailers (the original aggregators) as long as they can maintain a unique in-store appearance with access to some form of consumer data.  In this way, DTC retail is a decent enough analog for what’s happening in podcasting today. Product and media brands now hold the levers – they’re the draw. Consumers walk through the door, proverbial or otherwise, for their beloved brands. Aggregators must learn to operate in a world where the leverage exists with digitally natives. At the very least, aggregators need to learn to develop real symbiosis.

Luminary may need to raise more money.

Report by Web Smith | Join the Executive Membership

Memo: The Hundred Year Titan

330UeJCU.jpg

The direct-to-consumer (DTC) era has yet to influence how we consume big budget, blockbuster films. To watch the latest Marvel Studios production, consumers 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 co-founder of AfterMarq and Executive Member Vincenzo Landino, I learned why the DTC era was coming to big budget film.

A day-and-date release combines theatrical release with a video-on-demand (VOD) 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 time controlled the exhibition side between 1948 and today. Only Walt Disney’s Studios is in position to benefit from end-to-end control.

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 divest 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 partnerships 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

j5qJDowo.jpgNetflix 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. Its 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 in which 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 – though with time, even that will change.

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 upcharge for a blockbuster premiere streamed into your home. 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 rent a blockbuster premiere through your Disney app. With respect to the overturning of the Paramount Decrees of 1948, this is Walt Disney’s end game.

Report by Web Smith and Tracey Wallace | About 2PM