12 December 2020

HBO Max and Warner Brothers Collapsing the Theatrical Window

The big recent development in the media and entertainment world was the December 3 announcement by Warner Media that the Warner Brothers Studios' entire 2021 theatrical slate, 17 movies, would be released simultaneously on HBO Max and in movie theaters. Typically theatrical movies play in cinemas on an exclusive basis for a period of thirty to ninety days, then enter other "windows" of exhibition -- pay-per-view, premium television (e.g., HBO, Showtime, Starz), broadcast television, basic cable, etc. The metaphor used to describe this financial system is a "waterfall" -- from the highest price/best viewer experience ($12+ ticket, uncut, no commercials, giant screen and multi-speaker audio) down to "free" media with smaller screens, edited to be advertiser friendly, and interrupted by commercials.  

The reaction from the people who worked on these movies was quick and unfavorable: the director of the upcoming Dune hated it, the director of the recent theatrical pandemic release Tenet hated it, the head of a huge talent agency hated it, the union of directors hated it, and the head of another huge talent agency hated it

To my eye, there are six issues that have been raised:

  1. Movies are meant to be seen first in theaters on the big screen. These movies are meant to be enjoyed first that way and only that way.
  2. This is a poor strategy financially, as it devalues the first tier on the waterfall, and that may devalue the subsequent tiers, and the value of these movie franchises in the future.
  3. The compensation that participants will receive will be lower with this approach.
  4. We were not consulted about this change; it was presented to us without our participation and that shows a lack of respect.
  5. The contracts that we have give us approval rights on distribution strategy and choices and you have ignored those rights.
  6. By selling the movies to your co-owned HBO Max you have engaged in self-dealing, rather than seeking out whether other streaming services might be willing to pay more for those rights.

The first concern is the easiest one to dismiss. All of these movies are being released to theaters, so those who want the full cinematic experience can get it. A movie doesn't play any differently to a moviegoer in the theater because it is on a streaming service on the same day.

Whether the second concern is true seems to depend on how things actually play out. One thing is certain, if these movies were released with exclusive theatrical exhibition windows, there is little chance that they would attract cinema audiences the same size as they might have absent the pandemic. A movie available on HBO Max at the same time it is available in the cinema might be expected to be less of a draw at the box office, although one notes that's not true of professional sports -- TV exposure seems to promote the live event business. Depending on how and how much these movies are promoted in the media, they might do more or less business than they would as exclusives. 

As to the third point and the subsequent points, the compensation of the participants is not a matter on which this writer can opine with public data available. If the participants will be getting less pie -- because the pie is smaller -- and the contracts they signed permit the studio to do this (which no one has contested yet), it seems like that's one of the issues talent face about having revenue or profit participation in the first place. If you don't want that kind of deal, negotiate for a flat fee. 

I do understand that scoring things are more complicated without apples-to-apples theatrical grosses to look at. To that I can only say, welcome to the new digital world, movies -- Netflix shows don't get apples-to-apples Nielsen ratings with cable and cable Nielsen numbers aren't 100% comparable with broadcast numbers...and everyone in the ecosystem has figured out a way to work together without relying on the historical currency. 

One participant beef that I am quite sympathetic to is that all of these arrangements contemplated a world where both sides had an incentive to maximize the theatrical window revenue. To the extent that Warners is now generating value for itself (via its ownership of the presumably more valuable HBO Max) and the talent don't get a piece of that, they have a fair concern, even if they may not have legal recourse via their contract (shame on their lawyers if the big fish didn't have it). The record labels shared the benefits they got in Spotify stock with their artists, whose work they licensed at lower prices than that work probably would have fetched without that "equity kicker".

That Neflix offered a big price for Dune, perhaps larger than what HBO Max will pay, is, to be charitable, not a good look for Warner Brothers living up to its fiduciary duty to its partners.

Regarding the lack of respect of unilaterally making such a change on their professional partners, I do understand it. Given that Warners probably knew this move would be controversial, they might have figured out that they had more chance to make such a bold move work this way than by having a lot of private conversations that would leak out. This follows the strategy of "better to ask forgiveness than permission", especially if you aren't going to be given permission. That said, I have little faith that AT&T is a particularly savvy understanding of Hollywood relationships or the value of distribution, given their substantial overpay for DirecTV.

The reaction to this news on the tech side was a lot more favorable. In its usual fashion, anything "disruptive" to "the old way of doing business" is good. I find that simplistic. Certainly, the movie studios didn't fully see Netflix streaming business model coming on as fast as it did. However, these studios aren't run by dopes. The system of windows that they have constructed may be frustrating to a viewer (where is that movie playing?), but it probably does a good job of maximizing revenue from the available buyers in the world of yesterday. If it didn't, it would have been jettisoned long ago as too complicated. That said, I'm less certain that's true for the world of tomorrow.

There are not a lot of other media products like big Hollywood movies. TV shows are windowed -- fetching one price for their initial network runs, then fetching another price in syndication. Most high profile books are windowed, released first in hardcover and later in less expensive paperbacks, but that's about it. Amazon doesn't complain that books are available free in public libraries. There have been a few examples of music that was released exclusively to one platform for a short amount of time, but generally that doesn't work well -- the industry is built around non-exclusive listening as a shared experience. 

The film business has mistaken the future engine of growth for an existential threat before.

"'I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone.' Jack Valenti [then head of the Motion Picture Association of America] said this in 1982 in testimony to the House of Representatives on why the VCR should be illegal. He also called the VCR an "avalanche" and a "tidal wave", and said it would make the film industry "bleed and bleed and hemorrhage". 

The winner in this is HBO Max. It has a lot of high profile content to attract viewers that it wouldn't otherwise have (or even be able to make given the way the pandemic shut down movie and TV production). Even if this year's slate is not very strong, it probably has some significant hits. If this moves HBO Max closer to being Netflix, that's a pretty important strategic step for the company to take.

It's not clear to me that the participants are going to be losers in this ultimately. First, it looks like the discussion about money hasn't happened yet and the participants have some cards to play in that negotiation. Second, it is unclear if the exposure the work will get via this release pattern will be better or worse than what would have happened otherwise. Some film franchises started on TV -- like Star Trek. If the participants in the theatrical revenue have the basis to make a legal claim (or lean on the relationship), they might get a bit more consideration than the minimum Warners might be able to get away with paying. It is often said that Hollywood is a relationship business. If that's still true, Warners will have to pay something more to fix/maintain/replace the talent relationships they have clearly injured.

Similarly, I'm not sure it is clear that the movie theaters are the losers with this change even though they think that they are and so does Wall Street. I'm not sure there were going to be any big movies for these theaters to show anytime soon, so they now have "access to product" and that's a plus at getting someone to come out of the house. And the cinemas are likely to get much more favorable splits of the COVID-diminished box office receipts because they don't have an exclusive window on these movies. With the growing competition from in-home entertainment options in general, the movie theater business looked challenging before "losing" its exclusive window...which is another way of saying that it was probably going to lose its exclusive window anyway. And, if theatrical exhibition exclusivity clearly makes the studios more money -- for example, if the vaccines are a success and everyone celebrates by going to the movies -- well, the empire can strike back as quickly as AT&T can fire its Warner Media executives (which it has already done a few times). 

The big loser in this are the ones not being written about in the press coverage. The more attractive streaming services like HBO Max become, the worse basic cable TV packages look. Basic cable used to be a great consumer value for in-home entertainment -- it offered more choices and quality content that broadcasters didn't provide at a reasonable price. But has cable prices have risen over the last four decades, now the value isn't so great. The significant innovations of the DVR and HD are effectively replicated by streaming platforms at a far lower starting ticket price. The cable resisters of the 1990s were older people; the non-cabled households of today are young people. 

Even before Warner Brothers' move, programming investment has been leaving the cable ecosystem for the streaming video ecosystem -- Disney has shifted programming investment from Disney Channel, ABC, and Freeform to Disney+ and so have all of the other big players in cable programming (NBC Universal to Peacock, Discovery to discovery+). If basic cable TV subscriptions are a declining business -- which they are, and have been for several years -- the basic cable TV channels could, probably will, become hollowed out services with less and less marquee original programming and more and more reruns (because they still have 168 hours to fill every week). Higher prices and less value could spell a death spiral.

20 May 2020

Since we were so rudely interrupted, a summary of the last year's developments

The impact of the coronavirus and the changes to daily life in response to trying to slow the spread of it need no further discussion from me, hence a short list:
  • movie theatres closed
  • sports suspended at all levels
  • lots of people at home
  • much more online shopping
  • nearly complete shutdown of typical professional television and movie production
In my professional neck-of-the-woods, there's three big things to talk about:

  1. The continued ascension of non-linear Internet-delivered video
  2. The resultant continued demise of "cable TV" (a/k/a "pay TV" or multichannel subscription video) be it delivered by a cable, satellite, telco or "non-facilities-based" provider like Sling TV
  3. Perhaps the most interesting -- how the coronavirus lockdown has forced experimentation with new forms of video production

Streaming video

These last fourteen months have shown continued big subscriber growth by Netflix, and much bigger growth since the pandemic was declared, but that's just the start of the streaming video developments.

Disney+ launched on November 12, 2019 at a price of $6.99 per month (less than Netflix's cheapest plan) and showed better-than-expected take-up right away. Disney programmed the new streaming service aggressively. Its billion dollar first year original programming budget is considerably more than an entertainment basic cable network would spent. And that expenditure showed up right away to consumers in the form of Star Wars spin-off The Mandalorian, a project that in earlier times would have found its way to theatres or home video or ABC. Disney+ was marketed aggressively as was expected. The consumer take-up with strong right out-of-the-box with 26.5 million subscribers by December 28. Less expected was the Black Friday discount offer $60 for one year. 

The quick take-up of Disney+ thoroughly demolished the theory that streaming is a special business that the incumbents cannot be competitive in. In retrospect, perhaps it shouldn't have been a surprise -- none of the tactics that Disney employed were significantly outside its core competence in marketing movies and cable TV networks.

Hulu joined Disney with a very aggressive Black Friday discount offer -- $1.99 per month for 12 months (versus regular retail of $4.99 per month).

AT&T saw Disney's successful launch of Disney+ and looks to be following its playbook. It started with aggressive pre-launch pricing by HBO Max -- $11.99 per month for 12 months (versus typical retail of $14.99 per month for HBO alone). As noted in Multichannel News, this is $1 per month less than the most popular Netflix service package. It probably puts a lot of pressure on incumbent cable operators, as it offers more content than the cable version of HBO at what is in most cases a lower retail price. As we get closer to HBO Max's launch on May 27, we'll see if AT&T manages a programming splash as big as The Mandalorian. It doesn't look like any of their launch shows have that kind of profile and the shutdown of production due to the pandemic is probably part of that.

Part of the success of Netflix is that it has expanded the range of its offerings. It has had significant success expanding into unscripted entertainment - lowbrow, middlebrow, and high(ish)brow: Tiger King, Tidying Up with Marie Kondo, Salt, Fat, Acid, Heat. As a Netflix subscription is a household subscription, having a greater variety of programming should lower churn, as dropping the service affects more people in the household (and/or the children away at college who use the household login).

Amazon made its number of Prime subscribers public in 2018 (100 million! considerably more than analysts had estimated) and by year end 2019 it was over 150 million. At a retail of $119 annually, that's an annual revenue stream of nearly $19 billion dollars. By media standards that's a lot of money, even if most of its value for customers is in free shipping, rather than video. However, for some perspective, in 2019, Comcast's cable unit had just over $22 billion in video revenue, and that represented a slight decline from the prior year.

Pulling back, the big advantage that Netflix and similar streaming services have with consumers relative to cable TV is that they are, still, much, much less expensive than the incumbent service. The big basic cable package provides good value to a household that wants and uses all of that programming, but at $75 or so, it's price dwarfs Netflix at $8 (for a single person household). No one has time to watch all of the programming on Netflix, so the greater volume and variety of basic cable is simply expensive overkill for many households, particularly those of young people, who, at least in the recent past, go out a lot. Add in an antenna (or Locast) to get the major broadcasters and that's a very attractive offering for young adults or households that don't highly value cable exclusive national and regional sports services like ESPN/Fox Sports 1/NBCSN and YES/NESN/MASN.

It's unclear if the availability of these streaming services on computers, tablets, and phones is a big deal or not, but it is certainly a plus.

The Achilles heel of these services was thought to be bandwidth caps from Internet Service Providers (typically the cable operator), but these haven't shown up that widely or onerously. As the cable operators know better than anyone, steaming video helps sell a fast Internet connection and their business delivering that service is far more valuable than the legacy business of delivering packaged video services as it has both faster growth and higher margins.

Changes with cable TV subscriptions

Continued video subscriber losses by MVPDs (multichannel video programming distributors a/k/a cable and satellite TV providers). It is ugly. vMVPDs growth slows, then the leaders, DirecTV and Dish's Sling start losing subscribers. One analyst described the possibility of "a rapid death spiral for the category", with the category being "linear subscription TV".

Given that people are spending much more time at home and are bored, these should be the best of times for cable TV. So, why the potential death spiral? Cable TV has always been positioned in the market as a premium product -- something you buy if you want more/better than what you can get free over-the-air. Now, it is considerably less premium on two fronts:

First, new high-profile programming by cable networks is being cut back (because of declining numbers of cable subscribers) and a lot of those marquee new shows are...going to streaming instead. Television producers see streaming providers (Netflix, Amazon Prime, Apple TV+, HBO Max) as a more attractive destination for a new show than cable network -- they may pay more in license fees and they definitely support the shows with a lot of off-air promotion (e.g., billboards in NYC). 

Second, losing sports is painful. It is a key driver of the cable bundle's value and there may be no good programming substitute. We'll see how the Korean Baseball Organization fares on ESPN. Even if the games are compelling, it's hard to imagine there's a way to instantly have a country develop a rooting interest in the Korean teams. Baseball, among all major sports, is the one whose interest falls off the most below the top professional level. College football is nearly as popular as the NFL. College basketball and the NBA have a similar relationship, but that's far from the relative popularity of college baseball or minor league baseball relative to MLB.

What have we learned?
  • Stock market valuations of streaming (i.e., Netflix) created huge economic incentive for Disney and others to get into streaming, even if it will cost significant short term profitability, the public markets will reward it. 
  • It is unlikely that net-net that Disney will come out ahead during this crisis since coronavirus may have a great negative impact on so many of its lines of business (theme parks, movies in cinemas, sports, and advertising). No other media and entertainment company may be hit on so many fronts, as Rich Greenfield of LightShed describes very well.
  • Retransmission consent fees may be going up dramatically -- mostly from deals negotiated over the preceding years, but the decline in multichannel subs is a threat to that revenue stream
  • Locast's free broadcast TV service is still operating and has expanded into new markets. It has also finally been sued by broadcasters and sued back. Its existential question remains: will it win its case or lose and suffer the fate of Aereo?
Changes in video production

To me the most interesting development in the TV industry in the last fourteen months is less what we don't have, than the new things that we have gotten. We've had a crash course in new ways of producing television (at home instead of on a set in a studio, using a webcam or phone in lieu of a multiple pro camera setup) and most of it is pretty OK. Local news doesn't seem to suffer a lot by having their anchors at home instead of bantering at a desk. And that's also revealing -- making a more personal relationship between viewer and "talent", as noted in Vogue (with its first link from this blog).

The NFL draft, which for years has been in a dogged pursuit to amp up its production values -- they were planning to use boats to ferry the picks to the stage this year, really -- actually got some great reviews of its home-based draft this year, probably in part to the fact that the stars of that show are regular people (as far as TV skills go) and seeing them in a home environment made them more relatable to the audience, especially NFL Commissioner Roger Goodell who appeared largely human. This fascinating Forbes article, by my friend and former colleague Howard Homonoff, describes the very interesting and innovative video production tech the NFL used.

Seeing musicians perform at home had much that same charm, irrespective of the genre of the music. Billie Eilish in her bedroom with her brother from iHeart's concert of pop stars to a show tune reconceived for Zoom in broadway.com's Sondheim concert.

    full clip of Billie's performance is no longer available on YouTube, sadly

    full disclosure: that's my office chair that Ann Harada is sitting on in this clip
The music videos produced during this period -- I'd put forward CHVRCHES "Forever" (Separate but Together) as an archetype -- remind me of the simple and fun music videos of the early video age...and we get to see the artists in their homes (or something like it) and that's often fun.

There will be a huge impact on commercial production as well. Given the upheaval in consumer's lives, the advertising messages suitable for before the coronavirus are often ill suited to our lives now (sometimes frighteningly so).

Producing new commercials without the usual camera and sound crew creates new challenges. One actor of my acquaintance shared that she was being asked to film herself at home -- for a national commercial with a DSLR or other similar high end, but decidedly consumer video equipment. (Having the performer supply more of the means of production, apologies to Karl Marx is nothing new -- newspaper reporters don't have to go into the office to type up their stories on the newsroom computer system, and many, perhaps most, audio books are made by voice artists working in home studios. The costs are much lower and the quality difference is much smaller than it once was. Workers' might be a step closer to...emancipation with this ownership.)

So, what's new with you?