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.

Research and Report by Web Smith | About 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. 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.

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

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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. 264: Welcome Common Thread

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Pictured: The founders of Qalo

2PM has the privilege of working with a new corporate partner [1] for Q2 2018. Common Thread Collective is one of 2PM’s noted eCommerce agencies, notable for what they are doing on behalf of digitally vertical native brands. Demand generation for eCommerce is an oft-discussed topic on 2PM. There are three styles of content x commerce strategies. The most talked about models:

(1) publishers who are building an eCommerce as a revenue source:

(2) vertical brands who insource content-publishing to bolster organic traffic, improving net promoter score (NPS):

There is a third way that brands interact with top-of-the-funnel consumers. And it centers around connecting brands to influencers, using messaging to develop content that resonates with prospective buyers. From there, it’s about harvesting first-party data to develop one on one relationships with consumers. Here is a highlight from a recent 2PM Executive Member Brief that should provide context for you:


Member Brief No. 3: The Attention Stack

First-party data (FPD) is information compiled and stored by by DNVB’s, media groups, and marketplaces. FPD describes your brand’s visitors, customers, and loyalists. Because companies with FPD have a prior relationship with their customers, they are in a position to use the data, to include names, addresses, email, demo, and gender — to communicate directly with them. First-party data is what is stored in your brand CRM. The attention stack is what your brand and data-minded operatives work to build by harvesting this data.


There isn’t just one way to approach the attention stack or the collection of first-party data. Here’s a look at one of Common Thread Collective’s methods.

  • Step one: understand the brand’s existing and potential customers.
  • Step two: recognize who influences the brand’s potential customers.
  • Step three: configure the most efficient and effective approach to reaching potential consumers with the influence that CTC has cultivated on behalf of your brand. Invite them to engage with your brand.
  • Step four: drive them to conversion or re-engage and retarget with the previously engaged consumer with dynamic product ads.

Given the importance of building the eCommerce sales funnel (i.e. the attention stack), I sought out an agency partner that would allow 2PM to observe their work with DNVB’s and mainstream retailers. Over the next three months, 2PM will examine the processes that have worked for their brands.

As Facebook begins to address their data controversy, agencies like Common Thread Collective will be the first to adjust, better serving their brand partners who are dependent upon Facebook’s marketing data to drive numbers at the bottom of the sales funnel.

Why should you know Common Thread?

Their approach to optimizing a brand’s attention stack is working and it’s working well. On top of this, their culture is truly unique. Prior to settling in on agency life, the group of managing partners focused on two areas of business that remain pivotal to their work: product entrepreneurship and professional athletics. The CTC partnership includes the former founders of Power Balance and are the existing owners of Qalo. Common Thread’s key clients are:  Diff Eyewear, QALO, Theragun, 511 Tactical, 47 Brand, and Owl Cam.

Many of CTC’s influencers were introduced to brands through the partners’ personal network for professional sports contacts. And influence is vital because CTC’s approach to bolster product sales is driven by social proof. There are two reasons that the average American consumer purchases a product: (1) low pricing (2) recommendations from someone that they trust.

We believe social networks are fueled by human interactions and video content, so to be great at social advertising you have to be able to create human content. We create content and activate influencers in unique and scalable ways. 

Taylor Holiday, Managing Director

Growing their own eCommerce brands, in house, is an additional datapoint that sets them apart. The founding team operates a holding company of micro-brands under their 4×400 incubator umbrella, to include: Slick Products, Opening Day, and FC Goods.

By building an attention stack for their own brands, it provided them with a deeper understanding of the economics that determine paid media’s best practices at scale. Common Thread Collective has skin in the game and proving sales efficacy on your own products is not often seen in the agency space. And their work is serving them well, Common Thread Collective’s typical return on advertising (ROA) ranges anywhere between a 4.06x to 8.3x ROA.

Elephant in the room: Facebook changes?

The success of digital ad buys depends heavily on the troves of data that Facebook has on consumers. Given that Facebook could face regulation, this could spell trouble for retailers who are dependent upon Facebook’s ability to influence product sales. The common fear is that Facebook will begin to roll back some of the data collections that allow the best brands and agencies to do their work.

My top priority has always been our social mission of connecting people, building community and bringing the world closer together. Advertisers and developers will never take priority over that as long as I’m running Facebook.

Zuckerberg, Testimony before U.S. Congress

Considering that greater than 70% of Common Thread Collective’s ad money under management is with Facebook and Instagram, Common Thread will be at the forefront of  the agencies tasked with managing these potential changes. We’ll continue to discuss those developments here. In the meantime, learn more about Common Thread by clicking the logo below:

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Read more of the issue here

By Web Smith | Web@2pml.com | @2PMLinks