Disney drove off a cliff and it is the fault of Hollywood-Right? The trouble brewing in the media and entertainment industry has become one of the most interesting—and truly perplexing—business stories in the world. How does everything seem so bad at the same time? The domestic box office is still in a recession. Pay TV is a nightmare. Streaming is a money pit. And actors and writers are on strike. How did this happen? And could it get worse before it gets better? Today’s guest is Julia Alexander, director of strategy for Parrot Analytics and a writer with Puck News. We discuss a brief history of Hollywood, how we got to this point. In addition, how Disney’s plight tells a story of how streaming has roiled this town. Furthermore, how the strikes fit into this picture, and what these companies should do now.
In the following excerpt, Julia Alexander breaks down the advantages of cable TV and why some digital streaming services are struggling today.
Derek Thompson: So, in the introduction that listeners just heard, I went on a little rant about how it seems like everything in Hollywood is collapsing simultaneously. Movies aren’t doing well. Pay TV is declining. Streaming is a money pit. The actors are mad. The writers are mad. I think it’d be useful to tell a story here of how we got to this moment, and I think that story begins in the years just before the Netflix streaming revolution, just before House of Cards and Netflix really establishing itself as a [distributor] for original programming. So take us back to the 2000s, right up to 2010. This is the peak of cable, the peak of pay TV. Why is that business, the existence of cable television, so important and so lucrative for the entertainment companies that are somewhat struggling with the Netflix revolution today?
Julia Alexander: There’s almost a two-pronged answer to this. I think in order to get into the second part, first we have to lay out some of the facts of the first part. If you look at the core of that business, this is a business that had EBITDA margins of nearly 40 percent on a weighted average basis. This is amongst the six largest cable companies.So when we talk about all these players that we’re going to get into within the streaming wars, the Disneys, the Paramounts, the Comcast within the NBCUni, they’re looking at insanely high EBITDA margins. This is in comparison, if we think about it, to about an average of 15 percent margins in the entire economy when we look at these different sectors.
The biggest part about this is that when you look at the extremely low capital intensity of the cable system. The cable bundle that was happening within these companies, the revenue that they were actually seeing compared to the investment—when you look at industries like oil, when you look at industries that have much, much larger investments based on what they’re trying to bring in revenue—cable is printing money.
I think this is extremely important, because when you think about why this was able to occur, which gets into the second part of this answer, cable was this beautiful, socialistic almost experiment, right? It was this idea that you wanted your competitors to perform extremely well. You wanted ESPN, ESPN2, and ESPN3 to perform really well, because that bled down to the lower average from demand, lower average from viewership, lower average from overall subscribers within the pay TV model. The more people that were taking in this $300 cable system, the less churn that you were seeing and the less you had to worry about each one of your single titles performing, because there was this security blanket of revenue coming in that was creating these extremely high profit margins but Disney drove off a cliff.
The thing that existed by 2009, 2010—and 2011 is the year that we really point to, because it was the year that ESPN had over [100 million] subscribers—it is the basis for Disney being able to do a lot of the acquisitions that it then ends up doing in the film space, and looking at where they are and monopolizing a lot of what became of the theatrical industry between 2012, 2013, and 2019. All of that started because there was this successful pay TV bundle that was able to give them the ability to even continue investing in these future avenues of revenue and profit that they wanted to explore.
Thompson: Let me pause there, because there’s something that you said that I think is really important, and I’ve said this before on the show, but people don’t appreciate the degree to which cable television was akin to a private-sector tax system. That is, basically every single household was paying into the same program. You called it socialism. I’m comparing it to the federal government. It’s kind of the same thing. This business where everyone is paying into the same cable ecosystem, paying out $7 to ESPN every single month, a dollar or two to TNT and TBS, these so-called carriage fees.
It’s just this fantastic way of bundling everybody’s money and then distributing it in a socialistic way to all these entertainment companies, just this unique combination of that which we might call socialism and that which we might call capitalism. As you said, it was three times more profitable than the typical business in the economy: 40 percent profit margins versus 10 percent to 15 percent profit margins for the typical business. This is an amazing business. It’s amazing. Why did it fall apart?
Alexander: I mean, in many ways, I think it’s a typical innovator’s dilemma. What you see start coming up in 2011, 2012 and really 2013, 2014 is Netflix. One of the advantages that we didn’t talk about just now within the cable system, but it’s really important, is that not only were the content suppliers being paid really well to sell their content, they were also in the distribution game, right? Disney had ABC. Disney had ESPN. They’re also producing content for those networks.Comcast was carrying all this, but they also had NBCUniversal.
There’s this idea of vertical integration that was really helping to create this flywheel effect that was really, really strong. What they started noticing in about 2011, 2012, 2013 was the average viewership on linear started to decline, and it started to really increase on the digital side. At the time, this included SVODs like Netflix. Hulu was barely a thing. CBS All Access was definitely …
Thompson: You said SVOD. I just want to just spell out the acronym.SVOD is essentially just streaming video on demand, right?
Alexander: Yeah.This was a service that was really based around the idea of subscription, this idea that you were paying $10 a month, and you’re going to get access to the Netflix catalog.This was really picking up. We had increases in YouTube. This was the moment the YouTuber economy that we think of starts, in about 2012, 2013. Millennials, not even Gen Z yet but millennials, are pivoting their attention to the internet in many ways, for both their premium content [and] for their unscripted creator-led content.Most importantly, in 2007, 2008, the iPhone launches.[In 2008], I would argue more important than the iPhone launch, the App Store launches, and all of a sudden, you have this mini entertainment system in your pocket that has access to the internet. You’re not actively looking at TV as a way to get your entertainment. You’re splitting your attention. Your attention is no longer focused on this one box. It’s going elsewhere.
The advantage to Netflix was they picked up on the need for both. They picked up on the need to be the go-all home for everyone. That’s why you see their subscribers really start to take off. We don’t talk a lot about the fact that by the time Netflix decided to go all in on streaming, they had hit the point of that tip-over where they said, “OK, we can pivot our DVD business to this without really taking on too much concern about what this is going to do to our core business, because we know that our core business is effectively being eliminated, and this is where we’re seeing the future going.”
That was the brilliance of Reed Hastings. It was this moment of, “We have the subscriber base to do it. We have the cash flow to be able to do it, and we really think we need to pivot into this, and we’re going to take on some additional debt in order to do it.We’re going to really see that this is the future.”They also had the advantage of two things at their feet. They had the advantage of Wall Street, who believed in it. Even if there were some bears, there were a lot of bulls. And two, they had one of the best systems of almost a 0 percent interest rate when it came to borrowing money. This was an advantage that Netflix was able to use but Disney drove off a cliff.
When we look at the legacy companies, they’re stuck with this innovator’s dilemma. Do we look at Blockbuster and say, “Are we risking us becoming this if we don’t pivot forward?” At the same time, they need to figure out how to get into digital, so they do two things. They start licensing to Netflix, which is problem no. 1, but it was really strong for their revenue. They licensed to Netflix. Two, they leaned into digital with these TV-anywhere apps, right, TV everywhere.
The problem with TV-everywhere apps was that you made it much more cumbersome or much more problematic for the actual consumer. If they wanted to watch ABC, they had to get the ABC-everywhere app. If they wanted to watch CBS—so now you’re saying that, almost like Pokémon, you have to collect all these different apps, and you have to open all these different apps. The beauty of Netflix is that Netflix said, “You want to watch Friends or you want to watch high-prestige, HBO-like programming, like House of Cards? You’re going to get everything you need in one app over your internet, on your phone, whatever it might be, on your iPad”—remember when the iPad app for Netflix was a big launch—“all within one place for a very cheap fee.”
I think the misconception that a lot of these legacy companies took was they looked at that and said, “Therefore, there is strong demand for our content as well on our own individual apps.” But they didn’t actually learn from the TV-everywhere, TV-anywhere situation, which was consumers don’t want a lot of apps. They want everything in one place, and they’re willing to pay for it. This was the beauty of pay TV. They didn’t necessarily want Bravo or they didn’t necessarily want ESPN. What they wanted was enough of it that they were willing to say, “Yeah, OK, we’ll give you $200.”
If this sounds familiar, it’s because it’s comparable to newspapers, right? This idea of, “I don’t really want sports, but I am really interested in business, so I’m going to pay for the entire New York Times bundle in order to get access to it.” I think what you’re seeing happening to the legacy entertainment companies is really similar to what we saw happen to a lot of the newspapers. In addition to all the digital media companies of the early 2000s. Now, it’s just playing out on a different type of stage, but it’s really easy to draw those similarities.
Disney drove off a cliff
See the original story here – https://www.theringer.com/2023/7/19/23800849/hollywood-drove-its-business-model-off-a-cliff-disney-streaming