Social Goes Hollywood and What That Means for Investing in Media & Entertainment

Several weeks ago, I discussed how the rapidly evolving digital landscape is changing traditional, and creating new, media and entertainment investment opportunities at Opal’s Family Office & Private Wealth Management Forum.

Digital audiences have shifted how and where they consume content, and streaming services have evolved into award-winning production studios. Possibly more important is looking at the consumption habits of younger demographics like Generation Z. This generation is bigger than the baby boomers, they are constantly connected to screens with access to content, and they have new ideas about their digital footprint. Generation Z chooses to spend a significant percentage of their time consuming content on apps and services such as Snapchat, Instagram and more. This tidal wave of disruptive channels is already encroaching on time spent on traditional media and entertainment channels (read: eyeballs), and the emergence of new platforms that seek to capture Generation Z audiences is showing no sign of slowing down.

Although Snap (Snapchat’s parent company) hasn’t been an over performer on Wall Street, as a company they understand how significant a part of Generation Z’s digital content footprint they’ve become. Generation Z Snapchat users have grown up creating, self publishing, and consuming friend and studio content side-by-side, without adhering to traditional lines of distinction. While it’s true that the majority of content on Snapchat to date has been user generated (UGC), Snap is aggressively licensing original short format video content, in large part through a partnership with investor NBCUniversal.

As reported by Cynopsis, “Stay Tuned,” Snapchat’s first daily news show from NBC News, has over 29 million unique viewers since its July 18 launch.* Alongside spinoffs of “The Voice” and “Saturday Night Live,” it becomes clear that what was once a social network has it’s sights on becoming the channel of choice for Generation Z.

In other words, Snap wants Snapchat to become Generation X’s seamless one-stop shop for content about friends, news, and entertainment. If Snap’s foray into original content is successful, Snapchat has the potential to become one of today’s primary tastemakers, much as MTV was for Generation X.

Update (8/24/17): Snapchat Shows plans to add their own scripted video content to the mix by the end of the year. While head of content Nick Bell stated that Snapchat is more of a complementary service to TV, he acknowledged that they are “capturing the audience who are not probably consuming TV at the same rate and pace of engagement that they once were.” This suggests Snapchat might become more of a direct competitor to broadcast, cable, and streaming services.

Investing in media & entertainment in the age of digital disruption


This presentation was given to a group of family offices interested in making investments in media & entertainment at Bloomberg‘s New York offices in October 2016, and focused on sustainable business investment strategies, including:
• Content creation and distribution platforms
• Emerging technology (e.g. TVE, OTT, AR, MxR, VR, etc.)
• Monetization (subscription, PPV, advertising, commerce)
• Data analytics and support systems

How Apple is About to Reboot the Music Industry

It was almost twenty years ago today…

While that admittedly doesn’t have the punchy ring of the Beatles’ original, it sets the time nicely for two entities, Apple Computer (still to become Apple Inc.) and Jimmy Iovine, who was already building toward a post-Napster world for the music industry from artist discovery through distribution.

But first, a little here and now.

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Apple’s 2014 acquisition of Beats, co-founded by Iovine and Dr. Dre, may have created the savior the music industry has been looking for since the late 1990s.  Earlier this month at WWDC, Apple unveiled the highly anticipated, and soon to be released, music service resulting from their acquisition.

In short, Apple Music strives to combine your music library with a subscription service in a single cloud-based offering. This pits Apple against Spotify, Rhapsody, Rdio, Tidal and others in the next wave of consumer acquisition being hailed the “Playlist Wars.”

Flashback to 1999.

In 1999 Jimmy Iovine, Chairman of Interscope Records, partnered with Doug Morris, CEO of Universal Music in a startup venture called farmclub.com. Farmclub was visionary in nearly every way. It was a three-sided website with the support of a weekly co-branded TV show on USA Network. The three sides were as follows:

  1. Unsigned bands could create pages to market themselves, upload their music and communicate with fans.
  2. Fans could discover bands, download and share their music.
  3. A&R staff could monitor activity to see where critical mass was forming in order to sign up-and-coming artists or route them to the weekly TV show.

If this sounds lackluster or like standard fare by today’s standards, consider 1999 carefully:

  1. AOL was the biggest consumer ISP (still via 28k and 56k dialup modems, not broadband)
  2. The iPod wouldn’t debut for another 2 years
  3. MySpace didn’t launch until 2003 (nearly 4 years later)
  4. Music-oriented reality programming like American Idol was still 13 years away (2002)

What Jimmy had going for him was the vision, second-to-none artist-focused music industry experience and a legitimate, mainstream cross-media outlet for artists. What he had working against him was that MP3s were still geek chic, no consumer-friendly plug-and-play handheld tech (the Rio was state-of-the-art), and an uncontrollable consumer experience (it took ~10 minutes to download a single song IF you didn’t lose your connection and have to restart the process).

Back to the future… and that much needed reboot of the music industry.

The Internet heralded in an era and consumer mindset that has been called the “end of the album.” For historical purposes, it’s important to realize that even The Beatles started out in a what was then a singles driven business. While the “death of the album” is a fun debate over drinks (after all, who doesn’t want to talk about how life-changing “Wish You Were Here” was?), it’s a wasted argument from a business perspective. We’ve come full circle and are now in a world led by singles again.

Partially in the face of declining sales of digital singles, numerous “all-you-can-eat” subscription services have emerged. Tech companies in spirit, many have played to their strengths, focusing on playlist models created by algorithms or social curation.

It’s no secret that Apple has had an interest in the music industry for a long time and, while on the surface this could be seen as a defensive play to protect the leadership position of the iTunes ecosystem, there’s a lot more at stake than continued consumer acquisition and market dominance. If Apple Music is successful, it could be the much needed reboot of the music industry.

If Apple Music, by way of its parent company and iTunes ecosystem were a Big Mac, Jimmy Iovine is most definitely the “secret sauce” the competition should be most concerned about. In addition to Jimmy having worked with artists that includes John Lennon, Bruce Springsteen, Tom Petty, U2, Gwen Stefani, Lady Gaga, and Iggy Azalea over the past 40+ years, this isn’t his first foray into the post-Napster world.

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Here’s why Apple may not only lift their bottom line, but the entire industry in a way that their competition cannot:

  1. Jimmy: He’s a veteran insider with a music first and an artist forward perspective, not a tech startup focus, doing it from the “outside.” He has the industry weight, credibility and track record with artists and labels to get buy in across the industry. He’s spent nearly 20 of his 40+ year career learning, experimenting and getting ready for this play. While he was brave enough to fail with Farmclub, now he has the power of Apple behind him.
  2. Apple: The #1 paying customer base and paid digital music ecosystem, and history and credibility with record labels and artists which includes the highest royalty percentage in the industry.
  3. Subscription: In a move that harkens back to the days of FM radio, Apple Music is betting on trend-setting music tastemakers, DJs who curate playlists out of music epicenters New York, Los Angeles and London. This expert-driven music subscription with physical homes in cultural epicenters steeped in music history is their bet on the future. In addition to the aforementioned streaming services competition, paid radio service Sirius / XM also better watch out.
  4. Artists First: Apple retracted their initial plan (via tweet by Eddie Cue) to be royalty-free for the first three-months, during which the service will be free to consumers. While this was, at least in part, due to a letter Taylor Swift sent to Apple, it demonstrates that Apple is willing to be open-minded about the need to support artists.
  5. Social: Apple music provides a system that allows up-and-coming artists and unsigned acts to not only market themselves and engage with fans, but to convert to revenue, something that has been elusive for artists on social networks like Facebook (and once upon a time, MySpace).
  6. Your Music: Icing on the cake is that Apple Music is a one-stop-shop. In addition to the subscription service, all your music is also accessible right from the same app.

Although I’m skeptical that Apple will allow direct integration with my Sonos system, I’m looking forward to the free 3 month trial that starts later this month… and what’s to follow for Apple and the music industry as a whole.

For context and transparency, I led the development and delivery of farmclub.com on the Internet for Jimmy Iovine and Doug Morris in 1999-2000.

Originally published on Digital Surgeons’ blog on 6/23/15.

Is Customer Experience Cable’s Biggest Advantage?

 

2015 is looking like it will be the beginning of a tipping point in which US consumers will be able to subscribe a la carte to television networks over-the-top (jargon free, that’s HBO, etc. without a cable subscription).

Tabling individual feelings about this inevitable shift, cable companies have certain significant advantages over the networks that are about to go direct. This is independent of the apparent consumer desire to “cut the cord,” and it’s the networks that need to be careful in how they transition to include a new, direct-to-consumer, model.

First, it’s important to simply summarize the business model of each based on the customer (who’s paying) and the product (what’s being sold):

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These business model differences are the core of where the advantages lie for cable companies:

  1. Customer Service: Because the cable company customer is the consumer, they already have robust systems ranging from automated and live phone support systems to online chat in place for resolving a wide variety consumer service issues quickly (While consumers often complain about cable company customer service, it’s important to distinguish the difference between resolving service related issues and dissatisfaction between the pricing of subscription packages).
  2. Quality of Service (QoS): Cable companies generally own and maintain their own physical networks, meaning they provide television services end-to-end from the facility where they receive network satellite feeds all the way through the last mile to the consumer’s television. As a result, they have very consistent uptime and can troubleshoot, and resolve, service related issues anywhere down the line, from their facilities to the individual consumer’s home.
  3. Program Guide: It may sound antiquated in a world rapidly transitioning from live to time-shifting to on-demand, but one of the things that’s lost on all over-the-top devices is the discovery of programs by way of a cross-channel guide (and queueing by way of recording) . This is especially important for networks’ fall lineups, which have precious little time to build an audience, and to older demographics resistant to any change in how they find or watch programs.

So, what are the networks’ primary challenges?

  1. Brand Awareness: Networks have two levels of branding, corporate and program franchises. Networks deeply care about their corporate brands, but consumers primarily care about programs. From a viewership perspective, removing the layer of a guide by going direct forces a change to a “network first” mentality in order to find programs that consumers may not embrace (Consider how well record label websites did in the late 1990’s when they tried to circumvent Tower Records and HMV).
  2. Customer Service: Networks have always fielded calls from consumers in the form of complaints about programs, but they’ve never had to directly support a consumer customer base. Going direct means they have to be staffed and equipped to resolve a world of issues including account authorization / verification, payment processing, connectivity, crashes and more for the first time. This isn’t trivial, and can have a direct impact on customer perception of the corporate brand.
  3. Pricing: The cost of a top-tier network subscription isn’t likely to be less than the ~$8.00 / month a Netflix or Hulu Plus account currently charges. In addition to a live feed and on-demand current programming, networks will need to have substantial and desirable back catalogs to both draw consumers and minimize churn. Additionally, if a lower overall bill proves to be a primary driver for the consumer, networks may end up having to compete for consumer dollars like CPG companies before they even have the opportunity to compete for eyeballs.

While networks definitely have the opportunity to be successful in a direct distribution model if they scale accordingly, it’s hardly a “doom and gloom” scenario for cable companies if they leverage their significant strengths in Customer Experience.

Hulu’s Creating a Phoenix From Someone Else’s Ashes

 

Hulu already has an interesting position in the market, often airing shows the day after they appear on broadcast television. For consumers who are no longer tethered to broadcast schedules because of time-shifting (DVRs, etc.) or other means, Hulu has become a big piece of the cord-cutting puzzle.

While the television industry is known for its impatience with new program franchises taking time to build audiences, there’s relatively little risk for Hulu to leverage the smaller audiences of shows cancelled mid-season considering its non-linear streaming model. Over the past month or so as the list of fall lineup casualties has become clear, Hulu acquired the rights to the remaining unaired episodes of at least two shows:

  • “Selfie:” Average of 1.5 18-49 rating
  • “Manhattan Love Story:” Average of 0.7 18-49 rating

While the ratings weren’t strong enough to save them from the itchy trigger fingers at ABC, that’s a combined total of 7.3M viewers in a highly desirable demographic, which can be quite a windfall for Hulu. Even a dirty top-down conversion of 1% would mean 73,000 new customers, which is $584,000 in monthly recurring revenue or $7M annually. And Hulu plans to release episodes weekly, effectively “setting the hook” to go beyond their 30-day trials for new users.

Although this is a good way to capitalize on what were once considered valueless assets, short-term customer acquisition is probably not Hulu’s endgame. With Netflix and Amazon in the original content game, and broadcast / cable networks starting to announce plans to deliver content over-the-top in 2015, the writing is on the wall, and Hulu is laying a very strategic foundation for the future.

They just got two programming franchises with built in awareness and interest (admittedly too small for broadcast), without incurring production expenses, that they get to test with their total customer base. If one or both franchises perform well enough, Hulu can be in the original programming business without having taken on the expense or risk of R&D using a variation of Netflix’s “Arrested Development” model.

As an added bonus, Hulu likely has the program acquisition fees categorized as a marketing expense since they are officially about customer conversion. Since Hulu can track individual streams by customer account, even if neither program goes back into development, this is still a very measurable marketing program with the high probability of having a positive ROI. That’s a pretty compelling worst case scenario.